This is how you streamline your technical analysis to give you a better chance of making money in the stock market. The principles are easily applicable for regular stocks or options trades.
1. Use 2-3 Technical Indicators.
There are hundreds of technical indicators to choose from. From MACD to RSI or Bollinger bands to Variance, using every indicator can work against you. It will waste your time or create analysis paralysis if you had to look through all of them.
So what we want to do is simply select a few that you are actually comfortable with, then neglect everything else. The point of these indicators is to help investors determine if it's a buy or a sell. They all say the same thing but in their own way. So it's important to work with what you are comfortable using and throw away the extra fluff.
2. Create an Easy-to-Follow Technical Analysis Based Trading Plan.
Just like any plan of action, your trading formula needs to be straightforward. Take each trade in your arsenal, figure out when it's best to use them, identify key events that need to occur to set the plan in motion, and write down how you are going to act.
In short form it's a) understand how your trades work, b) figure out when it is best to use them, c) identify those key market events / indicator events, and d) implement your trade / look for another opportunity.
3. Have an Exit Plan Created Before You Enter The Trade.
Prudent investors always have an exit plan before they enter a trade. Whether it's a sell stop or adjustment strategy, it should already be thought of before the trade starts.
If you are the type of trader that does not want to be glued to the computer all trading hours of the day, then this is a necessary step to achieve that goal. Even if you do decide to stay at the computer, you still want to have these stops in place to protect you from quick and sudden moves.
It is a recommended to set a stop loss a few points under a natural support level. In fast moving market, trailing stops are not recommended due to the volatility.
4. Back Test Your Trading Plan.
Once you have a solid trading plan in place, it needs to be tested accordingly. There are no fail proof trading plans due to the random walk nature of the market. Therefore, it is important to run several tests to ensure your trading plan can succeed in most market environments.
Positive results of your trading plan does not guarantee profit, but certainly gives you the best chances to obtain it. However, negative results from your back test will almost guarantee that the trading plan will not work.
During your back testing, it is important to run your plan through all types of markets (crashes, booms, periods of high inflation, periods of stagflation, periods of deflation, world events, various seasons, etc). Test every situation so you are certain you have a solid plan to commit to.
5. Paper Trade.
With your newly created trading formula, let us see it in action. Use your favorite paper trading software, identify trading opportunities that fit your strategy, and place your trades diligently.
It is important to not be reckless with your paper trading account because it's supposed to simulate real life trading. If you would not do the trade with your real money, then don't make the trade at all. This is important because those trades that were made frivolously can really screw with your mindset when you do decide to trade with your own money.
Stick to the plan and don't waiver from it. This is important because you are testing your strategy and will have to make tweaks to in in the event that it doesn't work for you. You want to be able to make the tweaks during this stage before you actually begin using real money. That is not to say, that you can't make adjustments when you are trading real money. It's just best to make the adjustments during this stage.
6. Trust In Your Technical Analysis.
Once your trading plan passes the back-testing phase, you can start trading with your own account money. Everything should be the same except during this stage we introduce investor emotions. Fortunately for us, we are robots and we can run our trades without any distractions.
So look for your trading opportunities and make 1-2 trades while being cognizant of the exit plans. See your trades through and don't waiver from the plan. The faster you can separate emotions from trading the better you are.
Once your trade is done, do a post-trade analysis. Either tweak out your plan some more, scrap it, or continue using it.
And that's how you streamline your technical analysis process.
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