Do you Understand Technical Analysis? – What Are Technical Indicators?

If price charts fully represent a chain reaction of relevant economic data then, wouldn’t it be possible to forecast future price movements?

In theory it should; but the amounts of unpredictable variables will dent any future forecast. As far as we know, there isn’t any proven method that works 100% of the time.

None of the technical indicators available to retail traders will precisely indicate when to buy or to sell. Technical indicators subjectively suggest possible price action consequence. Somehow, technical indicators are seen as a tool to predict future prices and this is a concept that most than nothing could be misleading.

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Technical indicators should be viewed as what they are, a derivative indication of price action. Technical indicators help to translate the price chart of a security, commodity or currency pair. But traders must ask the right question; instead of asking where the price is going to be? A trader should ask, what is the indicator telling about the price? Are prices declining or increasing? Is there a disconnection between price and technical indicators? Traders should focus on present situations and not plot or bet on future possibilities.

When doing a technical analysis it is possible to identified buying or selling opportunities – economic factors and unforeseeable future conditions can quickly change – Therefore, when buying or selling on an identified opportunity, a trader have to acknowledge the end of that opportunity, which typically ends with price reversal.

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Don’t always stick to your technical analysis

Read the following situation and answer the poll below

The price chart is in a downtrend and has formed a support level which typically signals a possible reverse to the nearest resistance level, the trader sees this as an opportunity to buy at support level and profit when the price hit the resistance level. He is using MACD technical indicator which is about to cross over,  a signal that indicates that prices are likely to move higher. The trader open a long position but soon after the price breaks below the support level and MACD turns negative again. What should the trader do?

What should the trader do?

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Before preparing a trading strategy it would be essential to recognize that technical indicators are not more than an current indication of prices compared to past events. It is important to recognize that not always past events identically repeat themselves.

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