We all know that Technical analysis is the most effective way to trading success. But there are a couple additional key points that some leave out when it comes to using technical analysis. Without these insights you may find it difficult to use technical analysis to your advantage.
Here are 5 steps that can help get you to the next level when it comes to technical analysis.
1. Simple is better – Only use a few indicators
These days there are hundreds and hundreds of technical indicators out there. This can make technical analysis an ocean of conflicting signs for you. Instead, you should focus on four to five indicators to make a trading decision. Some of the popular ones include Moving average (MA), Relative Strength (RSI), MACD, Stochastic, etc.
2. Test, test, test and test some more
Look back in time and see if the indicators you are using give clear signals for entering and exiting a trade. The more testing and analysis you do, the better. If the indicator seems to work then put a small trade on using that indicator and see if you like the results. If it’s not working then scrap the whole thing and move on. It’s not worth breaking the bank over just to get right.
3. Paper trade using your trading system
Another possible candidate for number 1 on this list is Paper Trading. I personally STILL have a paper trading account and try out new strategies and techniques all the time. Why on earth would I want to try something new with real money when I can take it for a test drive without losing my shirt. You should spend at least one month testing your system before using it with real money.
4. Set a proper stop loss
No matter what you trade or how you trade, you should always set a stop loss point. Don’t be an idiot on this one. I have seem multiple times a trader make a good trade he “thinks” will make a profit, just to see the stock turn on a dime and go against his “can’t fail” technical indicator. Nobody is good enough that we don’t need to set a stop loss and minimize our risk – nobody. Besides stop loss orders can also help you lock in profits on the way up.
5. Keep your emotions out of it
Thinking is very bad when it comes to trading options and stocks. Thinking keep you in longer than you should or gets you out earlier than you should. Thinking makes you act irrational and emotional which leads to huge losses and margin calls. As much as possible, make your technical analysis system based on checklists and guidelines. One example may look like this: “If RSI and STO are below 20 and turn higher, then take a long position with a 2-3% stop loss.” This removes the biggest treat to your trading success – YOU!
What are some other bits of advice you can offer?
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