Technicals are a complex web of patterns and shapes.One has to be trained and should have a proper understanding in order to decipher these patterns and predict market movements. All chart patterns are based on previous movements that has already taken place.
In short we can assume the success of technicals is based on the fact that history will again behave in a similar fashion. The formation of a chart pattern helps and guide us in predicting future probable price movements in the extremely volatile and unpredictable financial markets.Patterns and charts helps us in reducing trading risk but is not a tool which guarantee’s sucess in trading.
It may not work every time and could become a case study for future trading pattern.One should always remember important movements in the past and its pattern in chart for guidance and clues for reducing your trading risk.Trading can erode your hard earned money so one should be alert and attentive in order to implement chart based trading. The most difficult question for a technical trader can be timing.After identifying a chart pattern the trader has to be very selective in entering or exiting a trade.If we look at tecnicals than one of the major attributes of charts is to recognize a reversal.We should study previous decisive major break out in trading pattern.If and when the prices are near to it or the same basic formation appears in charts than one can buy or sell in accordance with the break out.If it breaks that price or pattern than a reversal pattern can be formed and one can enter into trades with a strict stop loss of that level.
A formation of Head and shoulders or double and trple bottom up or down should be looked at closely.While making a chart one should draw trend lines, support and resistance so that the person’s predictability of supporting trades is high and consequently failure to earn money through trades low.If the break out in trend line is very decisive than the price movement can be sharp and a reverse trade should not be attempted.
One of the important aspects of chart based trading is to calculate percentages.We can simply take a specific period where there has been a resistance or support and measure in simple percentages.
We can calculate the corrections and convert that into percentages.A 50 % retracement of a trend is very common.On an average the maximum and minimum retracements can be Two thirds from the highs or the lows.
We can also watch Fibocanni retacements which is 38.2 % and 61.8 %.Moving averages are a very important tool for the determination or assuming a reversal or continuation pattern.It can be effective for day traders and a close follow up can give you a decisive lead in determination of price movements.We can follow the day trading patterns with 4- Day, 9- Day, 18-Day, 20-day or 40-Day moving averages.For a longer term trend one must follow 100 and 200-Day averages.
Trading in financial markets can be very rewarding but one should always understand that there are no rules or process that guarantees profits in this market because of the unpredictable nature so one should be very careful before investing !