A better understanding of technical analysis
It seems people who have a little bit of experience in trading are often stuck in the nascent stages of their trading journey without accumulating enough knowledge to move past the beginner level. And there is a big need to understand how one can improve in trading to fight yet another day in the financial markets, especially during the highly volatile covid era.
Although you should always be prepared to spend time reading books on investing, trading strategies and indicators, you should also understand that most of them fall short in teaching you something very primitive to technical analysis: current price action and how it relates to past price action, and future.
Someone with little skills in technical analysis should be able to quickly grasp and utilise the concepts needed to analyse and develop a trading system for an entire portfolio of assets, whatever the asset or market.
So, for those of you who wish to become involved quickly and benefit greatly from distinguishing trading setups with high probability, read along!
Why The Technical Analysis You Know Is Not Sufficient to Master Trading
If you think you use the right tools and techniques to predict the future price of an asset, look no further than your trading record.
Let's take as an example the famous RSI (14) reversal strategy.
According to this traditional technique, when the RSI is overbought above 70%, that's a signal for a reversal trade. But, does this mean that the trend ended and a reversal is in play, or that a short-term pullback is?
Does it mean that prices will continue up when the RSI gets oversold? And what are the price targets for both the countertrend and the trend trades?
Some, if not all, of the above questions cross your mind with the speed of light when you are looking for pertinent information to validate a trend, its longevity - in both price and time -, and generally speaking, each and every trade. And that is not only true for the aforementioned strategy, but also for all.
If you do know how to answer the above questions before entering a trade, then well done. Consider yourself a master! But if you don't, you're going to need some ground rules to follow. And you're also going to need some basic market analysis to get your journey to mastering technical started.
The first step is to learn the basics of price action and how fractal patterns can improve your trading decisions, thus skills.
Price Action and How It Can Improve Your Trading
With several trading strategies that incorporate numerous technical indicators proven as somewhat ineffective, the best indicator to understand market behavior is price.
Price and price only will show you fractal patterns as it is the only true reflection of mass psychology at work in the markets.
So far, watching price action has probably allowed you to identify a breakout, support or resistance, a trend, and perhaps slight pullbacks seen following a significant move towards one direction or another.
If you are an advanced trader, you have most likely been able to tell between trends, mean reversions and reversals accurately, and even managed to be successful with some profits. And despite feeling like there is nothing for you to gain, well, the main purpose of learning to combine current and past price action patterns, rather than looking at the present only, is to project, with high probability, future prices.
Putting the above into practice requires you to learn Elliott Waves.
We are certain that any average trader would have already been able to spot at least one of the 8 Elliott Wave price patterns, like triangles, for example. However, what's no so certain is that average traders can identify all the rest; from 5-wave impulses and simple zigzags, to ending diagonals.
Simply put, Elliott Waves are not like any other indicator where one can assume lagging signals and thus generate trading ideas. They are actionable patterns, highly accurate, and full of meaning.
The Benefits of Observing the Markets in Waves
There are more than ten ways that wave patterns can help you improve in trading, but in this article, we will focus only on two: how to identify trends (their shorter or larger end), and how to project price targets.
One might ask, why is identifying the trend and project price targets important?
Well, firstly, when a position has been opened in the direction of the trend rather than against it, then the path chosen is the one of least resistance. You want to be in that trade. Similarly, shorter-term countertrends are important to identify for (re)-entry points in the direction of the larger trend - where the trend resumes.
Secondly, wave patterns containing identical structures within them allow traders to recognize whether there is longevity to the trend or not. And that serves traders in two ways:
1) money management -> adding to a trend trade, and,
2) risk management -> closing a trend trade.
Finally, such wave patterns tell you whether a certain structure is likely to fail following a trend or a countertrend move. And that is achieved in the form of some rules. For example, in a 1-2-3 move upwards, should wave 3 be smaller than 1, then this can be labeled a countertrend move when wave 3's start is penetrated by price - and highly accurately - rather than a trend direction move, as wave 3 can never be the shortest.
When it comes to projecting prices, well, who wouldn't want to know the common objectives for each pattern and wave they see on their charts? And those are not just highly accurate because they've been observed to reoccur again and again, but also because they're based on mathematics and are true in nature; Does the Fibonacci sequence ring a bell?
Is it Worth Learning Elliott Waves?
Although it is up to each trader to design their trading system to extract value from the financial markets, traders who choose to learn Elliott Waves are likely to find them more effective than naysayers might think.
One might even suggest that the best way to master the markets is not correlated to patterns and waves but to master one's emotions. Besides, no indicator can ever tell you what to trade, especially when you're following a hunch on a trading idea. Indicators should just tell you what to risk instead.
So hear us out. When you learn how the emotions of large crowds leave 'prints' in the markets, rather than just learning how to keep your own emotions in check, eventually, you'll be able to leave your own mark on the market as a master trader.
Don't Fall For the Buzzwords
Although reading this article might have persuaded you to start learning Elliott Waves, here's a warning for you: drawing pragmatic conclusions from patterns won't be a one-day job; it requires competence, responsibility, and a lot of practice!
Elliott Waves are not just a tagline and "Fibonaccis" are cool. But it's cooler to know how to use them effectively when combined together. At the end of the day, as cool as "mean reversion" sounds, we "Elliotticians" have oversimplified to "correction." So, what gives?
Think critically before giving yourself a chance
to dig under the thick layer of what mastering technical analysis is. You can
start here: https://www.orbex.com/
