Technical Analysis of Financial Markets: 5 Strategies for Success

Technical analysis of financial markets is a fundamental tool for traders of all levels. Its purpose is to study the market in order to gain information about price trends, perceiving the trend and its strength, and intercepting any reversals in time. It is undoubtedly a useful tool, but it is also the subject of continuous elaborations, resulting in an extremely complex offering of techniques and strategies. This is also because there is no single method of analysis. Rather, they adapt to the various objectives a trader may set and even to trading styles. However, some techniques, methods, and strategies are more widespread than others. In this article, we present five of them. One clarification: they are not mutually exclusive. In fact, if possible, try to use them all together. These are common-sense approaches, and their effectiveness is also demonstrated by traders' experience.

The path of simplicity

Technical analysis of financial markets, particularly Forex, is carried out using specific tools. These are called indicators. Indicators are the crystallization of statistical models capable of reading the market in a different way than can be done with the naked eye. The underlying rationale is to identify "specific" conditions, which serve as clues for trend confirmation, reversal, the beginning of a sideways phase, etc. Usually, they are integrated into the platform or provided by brokers. Fortunately, the trader does not have to calculate anything, but only set and read. Now, there are various indicators. All of them have a certain effectiveness. Therefore, the first instinct is to use as many as possible. After all, if it's true that two heads are better than one, it must also be true that multiple indicators work better than just one. However, the truth is quite different. Of course, using a single indicator is very limiting and leads to a high probability of facing defeat. However, the opposite extreme also represents an approach to avoid. Using many indicators simultaneously is dangerous. First, because it increases the likelihood of encountering false signals. Second, because contradictory signals will be acquired, further confusing the trader's ideas. Finally, there is another consequence to consider: using many indicators at the same time takes up a lot of time. Time that could obviously be spent on a leaner analysis or simply planning orders. Therefore, choose the path of simplicity. A couple of indicators are enough for you to effectively analyze the market. Of course, it all depends on how they are chosen and used. This is a common-sense rule, but one that is often disregarded by inexperienced traders. The reason is simple: the use of many indicators, at least initially, provides a sense of control. In a way, the path of complexity is more of a fetish than a real possibility. Specifically, a fetish that allows to keep anxiety under control. However, it is only a feeling, which often presents the bill in terms of trading effectiveness.

Integration between multiple indicators

This approach is closely linked to the previous one. We said that using many indicators is harmful because it confuses, generates conflicting signals, and takes up too much time. However, this should not lead to an approach aimed at excessive savings. Indicators are important in a trader's life, and they are when used at least in pairs. Obviously, you need to know how to choose them, combine them in a certain sense. In this way, you can lay the foundations for a good technical analysis of financial markets, intuit the price trend with a narrow margin of error, and trade accordingly. The rationale behind the combination discourse is easily understandable. It is the principle of counterevidence. Anyone who does technical analysis knows for sure that the risk of encountering false signals is always high. An eventuality that is far from rare yet catastrophic, capable of literally leading astray. So, what to do? Simple, adopt the principle of counterevidence. One indicator, almost structurally, should act as a counterevidence to another, in order to verify the accuracy of signals and avoid the risk of false signals. Therefore, choose indicators from this perspective. For example, the combination of MACD and RSI should be considered. The former is a price indicator that provides signals by analyzing the interactions between multiple moving averages. The latter is a strength indicator. In this way, one tool somehow refutes or confirms the other, and together they guarantee a certain reliability. Of course, this is just an example; there are numerous combinations. As a price indicator, Bollinger Bands could be used, perhaps in combination with any momentum indicator.

Integrating technical analysis

This is an unfortunate truth: technical analysis of financial markets may not be enough. In fact, in many cases, it is not enough. For example, when the market becomes volatile and essentially unpredictable due not to normal trading dynamics but because of what is happening outside. Not to mention the fact that, even when the market is not suffering from external upheavals, the context may be too complex to be read by just a couple of indicators. Therefore, something else may be necessary. Let's start with the discourse on the intrinsic insufficiency of indicators. Often, an additional verification tool may be necessary. Or, better said, a tool that can initiate more complex analyses, which can therefore represent a first level of analysis, a first warning bell. This tool is graphical analysis. Actually, it is a branch of technical analysis. The real big difference compared to the classic variant is that, in this case, indicators are not used, but candles. Exactly, it is the candles of the chart that generate the signal. Specifically, when they form specific figures. They can suggest a trend confirmation, rather than its conversion or the beginning of a sideways transition. Another tool for integrating technical analysis that cannot be missing is fundamental analysis. In this case, the paradigm changes completely. What generates signals is not the study of the market but the exact opposite: everything that happens outside the market. Indeed, many events are capable of impacting prices, and they generally always do so in the same way. Understanding, for example, what data will come out of an institutional meeting means intuiting the reaction of investors and, consequently, the price trend. Paradoxically, despite calculations, mathematics and statistics having little to do with it, fundamental analysis is more complicated than technical analysis. Also because skills such as interpretation ability, foresight, and synthesis ability are necessary.

The importance of others' analyses

The trader, after all, is a lone man. It is he who personally manages his capital (except for special programs and services), it is he who decides how much and how to invest. Obviously, it is he who produces the analyses that will guide him in his trading choices. However, this profession of solidarity presents some exceptions. In certain cases, the trader is called to come out of his shell and rely on others, especially when it comes to technical analysis. No, the reference is not to particular services like copy trading, nor to participation in one or more communities. The reference is to the opportunity to study institutional analyses, i.e., classic analysis papers. Analysis papers are usually written by institutional bodies or, more often, by large commercial banks. By default, they are created for the use and consumption of clients. However, they are almost always made available to the general public, also because they can be used as a marketing tool. In any case, the trader has access to analyses carried out by a bank or a large broker of which he is not a client. Complex and very useful analyses. First, because they are done by professionals. Secondly, for the approaches with which they were developed. What goals can be achieved by studying others' papers? Of course, they are published regularly but never in close succession. Usually, every three months. Therefore, if you are looking for an in-depth analysis but in the short term, papers are not for you. However, they are incredibly useful for acquiring contextual notes, for having an exhaustive overview of the medium term. Many papers, in fact, produce estimates that span two or three years. Understanding the context, looking at the market by broadening the field, are fundamental steps to produce, perhaps autonomously, short-term analyses that are functional to setting up even daily trades.

The usefulness of routine

This is more than a strategy; it is a real piece of advice. Also because it can be perfectly associated with what has been written so far. Routine, so to speak, goes well with everything. But what is meant by routine in trading, and specifically by routine in technical analysis? The meaning does not deviate from that which characterizes the collective imagination. It is about doing the same things always in the same way, perhaps every day and at the same time. Routine may seem boring and also determine a feeling of rigidity. However, if well planned and better managed, it can represent the real turning point. Why is routine effective? Answering is relatively simple: because human beings are essentially creatures of habit. Of course, curiosity and the search for adrenaline are also part of their nature, but it is in routine that they find a source of empowerment, an enhancement of their abilities, a rapid and exponential improvement in performance. In any field, and therefore also in trading, routine means efficiency. In practice and repetition, almost always, lies the secret of success. It may seem like a disappointing truth, while to others it will seem obvious and taken for granted, but it is nevertheless indisputable. How are routine and analysis linked, in a nutshell? First, you need to dedicate the same part of the day to analysis and, if possible, the same amount of time (which can also be hours, it's up to the trader to decide). Secondly, you need to always use the same tools, and in the same way. Of course, all this must not translate into rigidity at all. The trader must be able to change, if necessary. Even to bend the routine and modify it, if the situation requires it. These are, in any case, emergency events, or the classic exceptions that confirm the rule. As a general rule, the routine can be maintained as such, in fact... It must. The hopes of analyzing the market well and setting the conditions for a lasting and profitable trading activity also depend on it.