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This is a special issue around the topic "what is technical analysis" and "is trading based on technical analysis profitable?"
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Hallo, Sylvain Vervoort with technical analysis part 18. This is a special issue around the topic "what is technical analysis" and "is trading based on technical analysis profitable?" Pay a visit to my website at stocata dot org and have a look at my new book “Capturing Profit with Technical Analysis”. The purpose of this video series is to teach you how to trade successfully applying technical analysis techniques.
Lets start with my definition of what I consider is technical analysis of financial price data. Technical analysis is using graphical charts to identify buy and sell patterns every possible way. With statistics proving that making use of these patterns gives a better chance for successfully trading the stock market. Let's look at some examples.
A first basic pattern is the breaking of a trend line and is a very powerful indication that the trend is reversing. In this example you see the closing price breaking a downtrend line. This is generally a confirmation that the last turning point is a trend reversal.
A second basic pattern for buying or selling decisions is the breaking of a resistance level or a price turning at the level of a support line.
A third possibility is making use of more complex reversal and continuation price patterns like in this example where you can see a triangle and rectangle continuation pattern, confirmed when the closing price brakes out of the pattern to the upper side.
A fourth possibility is using the Eastern candlestick chart instead of the normal Western bar chart. Candlesticks show a number of bottom and top reversal patterns and some continuation patterns that can be used successfully for entering or exiting a trade. Here you can see a bottom reversal with a bullish engulfing pattern, confirmed with an up gap in the price.
A fifth possibility is counting Elliott impulse and correction waves. Ideally you can enter an up move just after the start of a medium to longer term impulse wave 3, after the ABC correction wave for the creation of correction wave 2. The red wave count has an extension in wave 3 with another 5-impulse wave up. You would now be looking for the top of intermediate wave 5 and the red wave 3, expecting then red correction wave 4.
A sixth possibility is using oscillators and indicators looking at overbought and oversold areas and specifically at normal and hidden price/indicator divergences. In the example here we have lower bottoms in price with higher bottoms in the indicator, pointing in the direction of a price up reversal.
Can you imagine the decision making power you have for buying or selling a stock combining all of these techniques? Look at the example how on July 14 every possible pattern technique points in the direction of an up reversal after finishing the correction move to continue the previous uptrend. Let me inform you here that my book "Capturing Profit with Technical Analysis" teaches you all these techniques. But there is more.
Before we can answer the question, is trading based on technical analysis profitable? We have beside the use of technical analysis to define entry and exit points, the need for good money and risk management. First let's talk about money management. Personally I prefer the method presented in my book, showing the best results in every test I made. That is using a limited fixed number of stocks where every stock gets an equal part of the capital at the start, but there is no profit or loss sharing between the stocks. It has also the big advantage that it is so much more easy to follow-up just a small number of stocks with detailed technical analysis.
Risk management makes sure that the risk-to-reward ratio is in favor of the reward. Opening a trade you must limit the risk and make sure that the first reward target is better than the risk. Future price projection techniques will give you an estimate as to where price can go. Once an open position, you must also use a trailing stop method to make sure you keep the profit and that you will close the trade if your normal technical analysis fails. Buying on July 14 in our example here gives you an acceptable loss level at the turning point of wave 4 and the closest target at $6.5. A longer term Fibonacci projection and a short term historical Fibonacci projection, together with a pitchfork channel in line with the latest price move, gives you some future price targets.
Watch how price reaches the median line of the pitchfork and continues to move along that line, reaching the projected target levels. The initial stop at $4.55 was not broken by a closing price. From the buying date we are using a specific trailing stop method, the red curve here, which up to now is not broken.
It should be clear by now that the pure technical analyst does not look for fundamental data about the stock he is trading. You could basically leave out the name and even the time period from the chart and the technical trader will still be able to do the job. Because price data moves in a fractal way you can basically trade with the same rules in any time frame, from bar charts using minutes, hours, days or weeks. Look at this E-mini 2 minute chart where we are using the same technical analysis techniques.
So, the big question again, is trading based on technical analysis techniques profitable? YES it is! The easiest way for me to prove this is using an automatic trading system based on technical analysis to buy and sell. The SATS2 auto-system I am using is now about 2 years old, does not use any optimizing and is still giving good results over the last 7 months before today's date of October 27, 2009. Since the start of the simulated test period on March 13 and closing on October 23, 2009, or about 7 months, it generates a profit of 156% using my own 38 US stocks selection that I am following-up closely and using a simulated account.
Let's have a look at just one of those stocks. Here you see the buy, the first green bar after a red bar, and the sell dates for AMP. Looking at all the 38 stocks, it is clear that making manual buy and sell decisions should still give a much better result. But I just wanted to make my point here that trading based on technical analysis is profitable. Let me repeat that all the technical analysis techniques, money and risk management, together with a complete trading method called LOCKIT is available for you to learn and apply in my book "Capturing Profit with Technical Analysis".
This is the end of this special video where I a tried giving you an answer to the question of what is technical analysis and is trading based on technical analysis profitable. Next video we will continue our basic series with candlestick continuation patterns and we will also talk about some candlestick trading techniques. Tell your friends about these videos and while visiting my website you may want to order my book “Capturing Profit with Technical Analysis”, with a complete reference and a complete trading system based on technical analysis. See you in my next video!
Risk Disclosure: Futures and forex trading contains substantial risk and is not for every investor. An investor could potentially lose all or more than the initial investment. Risk capital is money that can be lost without jeopardizing ones’ financial security or life style. Only risk capital should be used for trading and only those with sufficient risk capital should consider trading. Past performance is not necessarily indicative of future results.
Hypothetical Performance Disclosure: Hypothetical performance results have many inherent limitations, some of which are described below. no representation is being made that any account will or is likely to achieve profits or losses similar to those shown; in fact, there are frequently sharp differences between hypothetical performance results and the actual results subsequently achieved by any particular trading program. One of the limitations of hypothetical performance results is that they are generally prepared with the benefit of hindsight. In addition, hypothetical trading does not involve financial risk, and no hypothetical trading record can completely account for the impact of financial risk of actual trading. for example, the ability to withstand losses or to adhere to a particular trading program in spite of trading losses are material points which can also adversely affect actual trading results. There are numerous other factors related to the markets in general or to the implementation of any specific trading program which cannot be fully accounted for in the preparation of hypothetical performance results and all which can adversely affect trading results.
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