the basics of technical analysis and money management

This educational article aims to recall the principles of technical analysis, risk management, money management as well as the rules of good conduct to adopt on the stock market and in your trading.

Technical analysis is the study of market action through the use of charts or indicators to predict future price scenarios.

Theanalyze technique is based on three basic principles:

  • Market action includes everything
  • Prices change in trends
  • The story repeats itself
  • Market action includes everything

The technician suggests that everything that can have an influence on prices, any fundamental, political, psychological or other factor is in any case reflected in the price of the market studied. Therefore, only the study of price action is necessary.

The technician claims that the price action shouldindicatechanges in the components of supply and demand. He will therefore indirectly study the fundamentals of supply and demand according to prices. Stock charts don’t make markets go up or down, it’s the underlying force of supply and demand that causes bull or bear markets, in other words, economic fundamentalss.By studying charts and technical indicators, this allows us to know in which direction the market has every chance. statistics slabr.

  • Prices move in trends

The trend concept given by Charles Dow, in his articles from wall street journal, is essential to the technical approach. Markets move in trends (hhawser, band Ilateral). Trend Following consists of identifying existing trends and following them in order to operate in their direction. An ongoing trend will continue until it reverses.

LTrend followers are often right, it is always more dangerous to trade against the trend.

Based on the principle that the market has a memory, the study of graphic figures and recurring patterns reflect the bullish or bearish psychology of the market. As these structures have performed well in the past, we assume that they will potentially continue to do so in the future.

Psychological biases such as greed or the pride of stakeholders is basednt on human behavior and impactent market prices. Lhe key to studying the future lies in studying the past, Thus the future is only a repetition of the past.

We have a confrontation between two schools, on the one hand the technical forecasts and on the other the fundamental forecasts. Technical analysis focuses on the study of market action while fundamental analysis focuses on economic forces that cause markets to rise or fall.

The technical and fundamental approach attempt to solve the same problem, that of determining the future direction of prices. Most fundamental managers will refuse to give credibility to technical analysis, associating it with “shorttermism” and to non-sustainable management over the long term.

These two approaches are often presented as conflicting, however technical analysis can act as a filter and aid decision making in fundamental management.

In other words, Ifundamental analysis tells you what to buy, technical analysis when to buy it. UOnce the choice of stocks has been made by fundamental analysis, turn to complementary decision-making tools turns out to be pertinent.

To sum up, thetechnical analysis is a toolbox that allows you to spot patterns and qualify the trend. It is therefore essential to master certain concepts in order to invest intelligently and serenely.

Chartist figures are patterns that can be classified into different categories and have predictive value. There are two main categories:

  • The reversal figures
  • Continuation Patterns

In a trending market, it is relevant to notice and analyze continuation patterns. HASassociating figures with complementary elements such as volumes proves to be judicious and profitable. Ethey allow too set a theoretical price target. Dwithin the framework ofstrict management ofmoney management, it is necessary to place a Stop-Loss and a Take Profit.

Here is a list of the most famous figures:

The Japanese candlestick chart is a type of visual representation for looking for repeating patterns (patterns). Candlesticks are combined in many ways to try and read the buying and selling behavior of traders and investors to create good setups to optimize the risk/reward (R/R) ratio in trading. All traders should have a thorough understanding of these charts to maximize their chances of success.

Japanese candlesticks have been around since the 18th century, when the genius trader Munnehisa Homma of Sakata City traded in the rice futures market. His method is known as “Sakata’s method”. While many traders speculated on the price of rice, Munehisa considered the psychology of the market to make his decisions. His book, San-en Kinsen Hiroku, was the first to suggest that traders’ emotions influence prices.

Subsequently, this technique was popularized in the western world by Steve Nison in his book titled “Japanese Candlestick Charting Techniques”.

  • Bearish candlesticks

Trading: the basics of technical analysis and money management

  • Bullish candlesticks

Trading: the basics of technical analysis and money management

  • Candlesticks of indecision

Trading: the basics of technical analysis and money management

  • The principles of money management

Moneymanagement consists in managing its capital while controlling the risks.Our capital is our working tool, protecting your portfolio by preserving our capital is vital.

Knowing why we trade: what are the objectives? Are the financial means sufficient? And especially tosee a trading plan !

It is therefore necessary to apply and follow the main basic principles, knowing that there is not just one type of money management. Indeed, each investor will act according to his profile and personality. Mastering your losses is one of the secrets of a winning and regular account.

The management of stops is undoubtedly the most delicate and the most important to have a good money-management :

  • Place your stop according to your objectives in order to respect the principle of R/R.
  • Raise your stop when the flow goes in the right direction.
  • Perform a pPartial profit increase.
  • Limit the size of losses and the number of positions.

But hasBefore embarking on a trade you must:

  • Set stop level.
  • Determine the maximum loss amount by adapting the position size.
  • Define the potential gain of the title.
  • Set the gain threshold from which to secure the trade at breakeven.
  • The main errors in the stock market

Trading: the basics of technical analysis and money management

  • Trade based on sEmotions (see graph above)
  • Do not use stop loss.
  • Change your stop loss.
  • Trading too large positions (leverage).
  • Practice the overtrading.
  • To be against the trend (youhe trend is your friend).
  • Not having a trading plan.
  • Let your losses run.
  • Strengthen a losing position.

Le trading is practice. He is iIt is impossible to succeed without being in the field and without learning as you go. You have to experience it yourself and above all your own experience.Most of our success in the stock market comes from our discipline which allows us to follow our method.

The disciplined trader has of a great semotional stability ; write a trading plan (key to success)applied at the letter the rules of his trading plan and Ntake out its strengths and weaknesses.

Nota Bene :

  • Choose the right position size for each trade / investment.
  • Do not be afraid of entry signals.
  • Don’t be afraid to lose money.
  • Cut your losses quickly.
  • Think about long-term success.
  • Keep moving forward.
  • Be persistent.
  • Do not abandon.
  • Be patient.
  • To win !

Quotes of the month: The key to trading success is emotional discipline. If it was intelligence, there would be many more winners. » Victor Sperandeo

Here is the link ofsubscribe to our monthly newsletter: https://www.ig.com/fr-ch/subscription-newsletter-mensuelle

Leave a Comment