Wednesday, June 1, 2011

Problems of plenty - The Technical Analysis popularity

The mass movement toward some sort of technically based trading style has been of epic proportions. One reason may be that so few technical traders were hurt during the 2008 bear market. In fact, many traders made money and protected their investments during the bear run. and many more produced stellar returns.

As technical analysis becomes more popular, most commonly known patterns may begin to lose their predictive value. When any technique or signal becomes widely used, its effectiveness is sure to wane. Those traders who have diligently worked to stay two steps ahead of the typical retail trader are the ones who stand to gain the most.

Define your strategy

The first step is for a trader to define his or her style. This includes the consideration of which markets to trade, timeframes, risk parameters, stop limits, profit targets, available equity and myriad other “house cleaning” issues. There is absolutely no way to be successful at this venture without a detailed business plan—a map for navigating the perilous waters. This step must be as specific as possible and be in writing, otherwise it is merely a dream and not an action plan.

Understand patterns in play

The bottom line is that there are just too many eyes on the same patterns in play for them to hold as much fire
power as they once did. In time, traders will develop a feel for what is working and what is not. Trading is not a cut and-dried science where one can take a chart pattern from a book and then expect to mint money each and every trade. With so many pairs of eyes watching the exact same indicators, those who survive in this arena will learn to digest the emotional makeup of other traders and front run their decisions.
 
[Adapted from an article by  Quint Tatro, author of the book, Trade the Trader]

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