Technical trading, or technical analysis as it is more commonly known, is trading based on numerous technical aspects of a stock, currency, or cryptocurrency. Instead of simply looking at how a currency pair is doing at the time, technical analysis breaks the performance apart to give traders a more holistic view of things.
When it comes to building a strategy around technical analysis, there are a number of things to consider. If you are a new trader or looking to become more technical with your trades, here are the most important factors to consider when building a strategy.
What Is Technical Analysis?
As mentioned, technical analysis looks at each and every factor that has influenced is influencing and will influence an asset’s performance. This includes candlestick analysis, resistance, support, etc.
Many platforms, such as TradingView, offer the tools and indicators you need to perform technical analysis and, therefore, make better trades.
1. Resistance & Support
The first thing you need to understand is resistance and support. In simple terms, support is when buyers tend to overpower sellers, and resistance is when sellers overpower buyers. The support level is where the price drops and bounces back, while the resistance level is where it stops.
Understanding this will give you an idea of the range you are working with, as well as the risk involved in the trade. Several parts make up support and resistance, and it is arguably one of the most crucial factors in trading.
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2. Understand The Trend
The next factor in understanding is trends. An asset can either move up, move down, or stay flat, with the movement of the trend dictating the value. While it may look good to get in on an asset trending down as the value will be down, you can lose money if the consistent trend has been downwards.
Understanding trends also include different time frames, as how long an asset has been on a particular trajectory will determine if it is due to bounce back or not.
3. Anticipation vs. Confirmation
In trading, anticipation and confirmation are both approaches that have their pros and cons. If you anticipate, you think an asset will increase in value and can therefore get in at a good price; however, there is little certainty.
On the other hand, confirmation requires you to wait for the asset to go up in value, confirming what you thought. You can’t open a position at the best price, but you will have more certainty over its movements.
4. Use Different Timeframes
In a technical analysis and when building a technical strategy, it is always important to include multiple timeframes when analyzing an asset. If you are looking at an asset in its entirety, then how it has performed over certain periods is important.
A basic example would be seeing an asset that has been trending up over the past week; it is sitting at $5, which you think is a good price. However, if you were to look at its performance over the past year and see it was once at $50, you will see that this is only a slight improvement on an asset that has become substantially weaker.
5. Volume
While an asset’s price is important, its popularity is arguably more important. The volume of an asset shows how much or how little of it is being traded. If it has a high volume, it means there is more liquidity and popularity, making it easier to sell.
6. Use The Indicators You Need
While indicators are necessary for technical trading, don’t get caught up in filling your screen and charts with every single indicator available. Indicators are there to assist you and give you direction, not confuse you.
If you are only looking at certain indicators for a particular trade, get everything you don’t need off your charts. If you are trying to drive to a new restaurant, you aren’t going to use your car’s GPS, the Maps app on your phone, a paper map, and a compass; rid yourself of unnecessary and redundant tools and indicators.
7. Don’t Forget Broader Market Trends
While technical analysis of an asset is vital, broader economic and market trends also play their parts. Assets don’t perform the way they do in a bubble; therefore, it is essential to know what is happening within their economic sphere so that you understand the general market sentiment at the time.
8. Balance Risk & Reward
Finally, understand risk and reward and when you should and shouldn’t take a risk. Technical analysis will give you all the information you need to make intelligent choices.
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