Technical Analysis One of the few methods that people use for stock analysis and other financial assets such as cryptocurrencies, commodities, and bonds.
The most common method of technical analysis is Use of technical indicatorswhich are based on mathematical calculations.
There are indicators for every scenario, such as trend trading or reversal trading, and many of them can serve multiple purposes. Some merchantsbut, depend a lot When they use them and end up losing part of their account.
In this article we will explain what you need to know about indicators and show some tricks to help you use them at a higher level.
What are technical indicators?
Technical indicators are tools On the basis of mathematical calculations Which provide traders with the signals they need when they enter positions.
There are thousands of indicators out there today, some of the most popular are:
- Bollinger Bands
- Volume weighted average price (VWAP)
- Moving averages
Bollinger Bands are calculated by finding the moving average of the asset and then finding its standard deviation. He. She three linesThe moving average and two standard deviation are mostly used in trend following.
On the other hand, moving averages are calculated by finding the rolling average of an asset over a given period. Examples of moving averages:
- Weighted size
Among other things. Other common technical indicators are relative strength index (RSI) f Random oscillator among others.
Do technical indicators work?
A common question is whether technical indicators work well in the market. the opinion about this mixedas many investors argue do not work. Many day tradersOn the other side, Believes that These indicators are working very Good.
The correct answer to this is that technical indicators do work though There are caveats. A good example to show that some indicators work is in the chart below.
In it, we see that Apple’s share price has remained above the 100-day exponential moving average while it was climbing.
However, the truth is that many of the technical indicators that exist today do not work at all. So should you Be very careful When you use these tools in your day trading.
Disadvantages of technical indicators
There are several drawbacks to technical indicators. Let’s see some of the most important bottlenecks that you need to know.
The indicators are based on historical data
The first major challenge with technical indicators is that they are created using historical data. For example, moving average It is calculated by taking historical data and Divide it by the relevant period.
Similarly, Bollinger Bands are calculated by first solving the moving average followed by the standard deviations.
So, Precision of these indicators It always depends on the data used in their accounts. Importantly, in many cases, these numbers do not take into account the news and economic data of the day.
So the biggest drawback of technical indicators is that They don’t necessarily predict what will happen in the future Because they use historical numbers. They simply do not take into account the events of the day.
Pointers can be used incorrectly
Another disadvantage of using technical indicators is that they are It can often be used incorrectly or the ways they were not meant.
A good example of this is the indicator known as the Commodity Channel Index (CCI), which is a popular oscillator. The index was initially used to analyze commodities such as corn, wheat and soybeans. Today, it is commonly used to analyze all assets, which can lead to false signals.
Therefore, you can eliminate these risks by making sure that you use your technical indicators well. For example, you should Take your time to learn More about these indicators before moving to a real account.
Indicators can be subjective
The common challenge with technical indicators is that It can be very subjective. In most cases, what the indicator tells you can be very different from what it says to someone else. The common reason for this is that The indicators show different signals when using different timeframes.
In most cases, the moving averages of the stock can show a bullish cross on the daily chart. They can then show a bearish cross on other charts. Another example where the Relative Strength Index (RSI) is showing mixed results.
A good example of this is in Moelis’ inventory below. On the hourly chart, we can see that the Relative Strength Index (RSI) is moving upwards. In the daily chart on the left the reverse is happening.
How to use technical indicators well
Now that we have finished listing some of the common disadvantages of using technical indicators, you might be a little intimidated. but, There are some solutions You can do to make your trading work well.
Backtest your indicators
The first thing you need to do is backtest your technical indicators in a demo account before switching to a real account.
In the process, you will spend a few months deciding which indicators to use in your day trading And the best periods to use.
Some traders prefer to use the 25 and 50 period moving averages on the 4 hour chart. Other traders prefer to use two moving averages on the daily chart.
Combine technical analysis and fundamental analysis
The next thing to consider is Collecting with tech Fundamental analysis. Fundamental analysis is the process of using economic data and news to predict the purchase or sale of an asset.
For an example of fundamental analysis in the stock market is to look at company news like earnings To determine if you want to buy or sell shares. In this case, you will use the technical indicators to identify the key levels to watch.
Good understanding of the indicator
Finally, you must have a good understanding of the indicator you want to use. We recommend that you take the time to learn more about how the indicator works and the best conditions for its use.
At DTTW™, our TraderTV traders focus on the Volume Weighted Average Price (VWAP) indicator to make their trading decisions.
In this article, we looked at how technical analysis works and some of the main drawbacks to using it in day trading.
We have also highlighted some of the most important tips to use when using these indicators in your day trading and creating your plan.
The rule is Known How do these work? backtest them, and then Collecting With fundamental analysis strategies.