Trading Using Technical Analysis Patterns
Contents
Frightening to say, but people see
only what they want to see, and
hear what they want to hear.
In this article, we will discuss trading strategies based on technical analysis indicators. It is extremely important to understand that in trading, they are connected. In international financial markets, where there are no clearly defined laws (for example, there are dozens of different concepts of the “trend” definition), anything that works works.
A trading system is like a weapon in the wild market forest. It brings you profit. Just as hunters use traps, shotguns, and bullets of different calibers, traders should constantly think, observe, explore, and combine working variations of different trading strategies. If you “catch” a trend, follow it for as long as possible. If you make a profit after a strong pullback, that’s great. If you find yourself on the right side of the market when important news comes out, that’s even better. You have freedom in your choices.
Interesting Facts About Technical Analysis Figures
George Soros, for example, who operated positions worth billions of dollars, often relied on … back pain. If his back suddenly hurt, he needed to exit the market. If he felt normal – he should hold his position. His associate, and later a successful independent investor, Victor Niederhoffer (see his excellent book “The Education of a Speculator”), also paid attention to signals from his own body (slightly different, stomach pains), as well as took into account, when buying stocks or currencies worth hundreds of millions of dollars, the opinion of a wanderer acquaintance in different countries. And it all worked.
Origin of Technical Analysis
Another legendary trader with a 50-years of experience and phenomenal results (showing 11,000% annualized returns at the 1987 championship) is Larry Williams, who recalled that in the early 1980s, followers of technical analysis were not taken seriously by serious companies and investors. Some strange people, enthusiastically talking about “heads and shoulders,” “cups,” “flags,” and other incomprehensible things, sometimes caused a smile, and sometimes suspicion of fraud. Since the founding of the New York Stock Exchange in 1792, for almost 200 years, investors and traders have used only fundamental analysis.
Although brilliant stock players, such as Jesse Livermore, at the beginning of the 20th century already began to use some elements of what would now be called technical analysis. Livermore’s memoirs discuss “lines of force,” “anchor points,” and several other elements he learned to see on market price charts. This allowed him to earn millions.
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Parallels with Astrology
In ancient times, people used to speculate about the influence of constellations on human life. Since then, not much has changed, we hear every day about fishes that are awaiting an unexpected encounter today, or about scorpions who should be careful when signing important documents.
Just think about it, and it becomes clear that constellations do not exist. There are no Aquarians with Sagittarians in the starry sky. There are just stars, located far apart from each other, and it is human imagination that connects them into lines and figures. Technical analysis figures also exist only in imagination. All these “head and shoulders,” “double tops,” “triple bottoms,” “cups,” and many others, the search for which occupies traders all over the world, are nothing more than a product of imagination.
Test it yourself. Find any chart (open a live chart) not related to market quotes: a chart of air temperature changes throughout the year, a chart of voltage fluctuations in an electrical network – anything. If the chart is detailed enough, and you are attentive enough and familiar with at least the basic figures of technical analysis, you will find many “heads and shoulders” and other “cups” easily.
However, market charts will also work. By switching timeframes from M1 to MN, you can find dozens of cases where there were no occurrences on the chart of “pennants,” “flags,” “diamonds,” or anything else.
Can Technical Analysis Figures Be Profitably Applied in Trading?
Oddly enough, after all that has been said above – not only can, but must. The question is in the correct usage. If you have identified any figure – be prepared for a strong price movement, because other market participants see the same thing. And they open deals as they were taught, for example, expecting a trend reversal.
The action plan is simple: see a figure, and be prepared for a strong movement. To a movement in any direction, not just the expected one.
In the illustration – we recognize the reversal pattern “Head and Shoulders” on the chart, and expect a strong price movement, which happens – the price sharply goes down.
Trading Using Technical Analysis Figures
Buying a CALL Option
To buy a CALL option using the trading strategy with technical analysis figures, you need to:
- Study the extended charts on various timeframes, from M5 (five-minute) to MN (monthly), selecting an option (for example, a currency pair).
- Identify a long-term bullish trend.
- If, upon the final “drawing” of the figure, the price strongly moves upwards – buy a CALL option.
Buying a PUT Option
To buy a PUT option using the trading strategy with technical analysis figures, you need to:
- Study the extended charts on various timeframes, from M5 (five-minute) to MN (monthly), selecting an option (for example, a currency pair).
- Identify a long-term bearish trend.
- If, upon the final “drawing” of the figure, the price strongly moves downwards – buy a PUT option.
Tips for Trading Using Technical Analysis Figures:
- Remember that figures are what they are. And they owe you nothing.
- Do not consider yourself smarter than others. The “head and shoulders” pattern you see on the chart is also seen by several million traders and analysts. It’s a feature of groupthink, as crowds tend to think remarkably alike.
- Trading is about working with probabilities professionally. The appearance of figures on charts increases the probability of a strong price movement – this is exactly what traders profit from, volatility.
- Do not try to see something in the market that isn’t there. Nobody doubts your imagination, but it’s unlikely to add profits to you.
Strategy of Using Figures at the Pocket Option Broker
To purchase an option in the terminal of the Pocket Option broker, follow these steps on the pocketoption.com website, and prepare the option by specifying:
- Asset: EUR/USD,
- Expiration: 5 minutes,
- Stake size: $50,
- Predicted price direction: UP,
- Click on the “Buy” button and monitor the market.
To purchase a PUT option in the terminal of the pocketoption.com broker, follow these steps on the pocketoption.com website, and prepare the option by specifying:
- Asset: GBP/USD,
- Expiration: 10 minutes,
- Stake size: $50,
- Predicted price direction: DOWN,
- Click on the “Buy” button and monitor the market.
Risk Management
Before entering the market, you should know how much each tick (minimum price movement) will cost you. If the price goes in the direction that you predicted, how much money will you make? If it goes against your prediction, how much will you lose? Do not rely on your memory and intuition. They have failed many people. Get used to making brief calculations and taking notes. You don’t need advanced mathematics, just basic arithmetic. This will really help you in trading.
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