When you look at a past chart, you could easily
find support and resistance areas, find the trend, add some indicators, and think about
how easy is to use technical analysis. But in real time, when the next bar has not
been printed yet, things are much different! Today we’ll talk about the realities of
technical analysis and how to correctly approach trading. So if you could, like, subscribe to the channel,
and stick around for the full video. The “perfect” patterns are seen only in
trading manuals If you are striving for perfection in trading,
you’re going to have a hard time. Consider trend lines and support and resistance. If you are expecting the price to turn right
at an exact point on a chart, and base your trading decisions on that exact line, good
luck with that. These perfect, right to the pip patterns,
are seen only in trading manuals. In real time, price movements can be quite
messy. If the price dips a little bit below a support
line, it doesn’t necessarily mean that the support has been broken. Remember, in a market there are buyers and
sellers. There is stop hunting, liquidity, short squeezes,
momentum spikes, shock events. The price action doesn’t have a mind of
its own, it is the collective mind, the push and pull of supply and demand, created by
emotional, rational and irrational players in the market. The market isn’t perfect, so don’t expect
the movements of a price to respect some perfectly straight line. Let’s analyze this chart:
• Where does the breakout really occur? • Where is the resistance? • Is it at the very strict, straight line,
or is it somewhere between these lines that grow wider over time? The point is…if you were to make buying
and selling decisions based upon a thin line, you might get faked out by a move that goes
above or below, thinking the line has been violated, when in reality, it has not. Don’t expect perfection on the charts that
you trade. This is one of the reasons to trade small
and use proper position sizing, so you can give the trade some flexibility to “breathe”. A market does not just stop and turn on immediately
in the opposite direction In technical analysis, “market reversal”
is a well-known concept, and the basis of many trading strategies. But many traders don’t actually know how
to analyze a reversal. Price action does not just stop and turn on
immediately in the opposite direction. This is a rare case. The market always has momentum and will almost
always continue beyond the candle or candle pattern which is signaling a potential reversal. The problem with many technical traders is
that they often became very excited whenever they see a trading signal, and they enter
a position immediately, only to see the market continue on for a while before the signal
was validated. Let's take this example of an uptrend where
the market was increasing over a period of several up candles. At this point you begin to see signs of potential
selling coming into the market. The buyers are being overwhelmed by the sellers. However, they are NOT overwhelmed immediately
within the price action of the candle. The market never stops dead and reverses. It always takes time for all the sellers or
all the buyers to be wiped out, and it’s this constant movement which creates the sideways
congestion price zones that we often see after an extended trend move, higher or lower. Accumulation and distribution zones, in Wyckoff
terms. The moral here is not to act immediately as
soon as a reversal signal appears. The reversal will come, but not instantly
from one signal on one candle. Technical Indicators are useful, but distract
from what's important Have you ever waited for a trade, the setup
was perfect, where everything was exactly as you wanted, all indicators on the charts
are telling the same thing, and then you enter…only to find out that you waited too long and most
of the gains had already occurred? This happens to me and I’m sure it happens
to you. You overlay technical indicators and then
look in the past on the chart to see how obvious the buy and sell signals were. But they weren’t so clear and perfect at
the time though. When you wait for the exact perfect time…
when every indicator perfectly aligns in your favor, more often than not it is too late. If your technical analysis process consists
in just clicking buttons because a few indicators said it was time to buy or sell, you’re
doing it wrong. Relying solely on indicators without first
learning how to read price action is a mistake. I’m not saying that technical indicators
are not useful. The issue is that many traders abuse them. They add 2 moving averages and take crossover
signals without understanding the process. They don’t even know why they’re buying
or selling. You can add one or two indicators, but not
until you fully understand what’s happening with the price action on your chart. Otherwise, you won’t know if they’re actually
adding value or if you just like them because they look cool on the chart. Price Action Or Trading Indicators? There is often a huge argument underway between
technicians who think price action is the best way of analyzing the markets, and the
traders who think using technical indicators is the best way to trade. Price action technicians say price action
is better because it doesn’t lag behind the market action. Indicator traders state that their method
is simpler, because it’s a more objective trading style. So which one is better in technical analysis? First, you already know that most indicators
are lagging. An indicator takes past price action and then
visualizes the result after applying a formula to it. Thus, what your indicator shows you is a result
of past price action. But at the same time, price action signals
can also lag, or better said, can offer late signals. Trading price action is not as easy as it
sounds and lots of components often get overlooked, such as the size of candlesticks and the price
swings, how they compare to previous price action, the component of momentum and volatility
in wicks and bodies. Don’t make the mistake of trading price
action because it looks simple; a trader who doesn’t understand the nuances of price
action can easily read charts in the wrong way. The same is true when trading with indicators. If you apply 10 oscillators and ten moving
averages to a chart, you can quickly clutter up your screen. Remember that trading indicators are derived
from the past price action, so they don’t show you information based of what’s happening
right now, they show you information based of what has happened in the past. The truth is that traders who make all of
their decisions using indicators will always be late in reacting to changes in the market. But in this age of algo trading and expert
advisors, indicators cannot be completely ignored. The most common issue is that they are lagging
but, this can be taken care of if you know how to combine price action with indicators. Indicators are still useful because they provide
reference points on plain charts. And decision making becomes harder with no
reference points. Indicators take out the guesswork by providing
information that is totally objective. Especially beginner traders or traders who
are struggling with discipline can benefit from indicators. Context and confluence is what matters in
technical analysis Some indicators work best in trending markets
and others work best in range-bound action. Using a trend following indicator is a recipe
for disaster if prices are bouncing back and forth between clear support and resistance
levels. Trending markets tend to offer a very high
number of overbought or oversold signals on indicators designed to trade directionless
markets. This will put you on the wrong side of the
market and you usually won’t get a reversal signal until losses have become very significant. And here lies the problem. Most traders never look at the indicators
they are using and they don’t even know the formula the indicator uses to analyze
price. Then they use their indicators in the wrong
context and wonder why they don’t work. If your technical analysis consists in waiting
for an indicator to go into the overbought/oversold area, or if you just wait for a cross-over
on your MACD as a signal, indicators will not work for you. Indicators are tools you use to analyze price
information and, as the name suggests, they indicate certain aspects about a chart situation. Listen to what the price is tell you If you want to identify potential, high probability
trade scenarios, you must learn to listen to what the price is tell you. • Who is in control right now? • Are buyers or sellers pushing price up
stronger? • How do trend waves relate to each other? • Is momentum gaining or losing strength? • How is the price reacting around previous
highs and lows Those are all important clues that will help
you understand the buyer and the seller dynamic. A divergence on your RSI, for example, just
tells you that the most recent price move was not as strong as the previous one, but
it’s not a signal to go short immediately. A bearish engulfing pattern just tells you
that there was more bearish activity than previously, but it’s not a guaranteed n
automatic sell signal. A head and shoulders pattern just shows you
that the magnitude of highs and lows has changed and that buyers weren’t able to push price
to new highs. But it does not mean that you have to short
each head and shoulders pattern you come across. Context and confluence is what matters in
technical analysis. Collecting clues and combining them in meaningful
ways is the way to go. Hunting for signals is not what trading should
be. Predictive vs reactive technical analysis There are two types of technical analysis
predictive and reactive. Predictive technical analysis tries to see
what the market will do in the future based on the current patterns on the chart. Reactive technical analysis uses current signals
in the price action or indicators for buy and sell decisions, to create good risk/reward
ratios and to go in the direction of the current trend. Predictive traders will establish a position
when a technical price level is reached (a Fibonacci extension, moving average, a pivot
point for example), regardless of the price action that occurs at that level. In this example, a bearish candle formed just
above an increasing 50 SMA. In this area we also have a pivot level. Many predictive traders established long positions
there because an increasing moving average and the pivot level provided a level of buying
pressure. The next day price moved up and closed higher. There was no buy signal there for a reactive
trader. That’s the difference between reactive and
predictive technical analysis. Reactive traders don't try to anticipate and
predict. What they do is try to react very quickly
when price begins to move or they get a signal. Reactive traders also try to beat the crowd
but they try to time their entries and exits with much precision. Reactive traders have a desire for quick action. They want their money to be as active as possible. It requires a much more aggressive approach
to be a reactive trader. When using technical analysis, you need to
contemplate about the difference between being reactive and predictive. What kind of style you’re using? If you have a bias in one direction or the
other, try to understand why you prefer that way. Art.. Not A Science Many people tried and are still trying to
quantify technical analysis and turn it into a science. But the reality is that price charts are open
to interpretation by the observer. One technical analyst will think a particular
pattern is bullish, while another will see it as bearish. You know the classic joke: "If you ask three
technicians what the price is revealing, you will get four different replies!”. Despite many efforts to make technical analysis
objective, it remains a subjective endeavor. Charts are open to interpretation and are
not objective. And that’s the beauty of technical analysis
and the reason I enjoy trading: each person is free to use any approach, anyway they want. If you found value and learned something new,
leave us a like. This way we’ll know if you'd like to see
more videos like this one. And check out our academy program if you want
to further level up your trading. Until next time.
