Technical Trading Guide: Act On What You See, Not What You Believe

Technical analysis is an art and a science. It is an art because we look at pictures and interpret what they represent - past action and activity around price and volume. We also consider it a science because the math, statistics and analysis involved with creating indicators, oscillators and graphics. The science part is black and white - there is no disputing the facts, numbers are numbers period. It's the art part of technical analysis that is more a gray area, completely open to interpretation of the viewer.

I can view stock charts and pictures in a way where they speak to me. Basically, I look for patterns that repeat over and over. Why? Because human behavior is captured in these charts if you look closely enough, and that doesn't change along the spectrum of fear and greed. Further, I can act upon the patterns that I see because they tend to present great trading opportunities. But I have to view a chart without bias and with complete confidence. Unless I can look at a chart with fresh eyes and a free mind then I am likely to make a wrong interpretation of the chart. That will cost me.

We can certainly see what want to see in the charts, and therein lies a problem. If we take a biased view of a chart then we're not being fair to interpreting what may really be happening. Surely, no two sets of eyes will interpret a chart exactly the same. But what if you have an option position working, you bought it based on your interpretation of the chart - and now the trend may be changing. The magic of technical analysis is that it gives you clue or insight as to what the right side of the chart may look like.

What if you have a trade you want to open, and find yourself making a bad read because you favor a trade. We establish rules, procedures and protocol in our processes, deviate from that and we have a problem. We get into trouble when we want to believe a stock will move a certain direction without analyzing the patterns that have worked so well, so often. Remember, charts don't lie, and if you believe in the patterns seen in charts then there is no guessing.

However, making a biased interpretation of a chart for what you 'want to have happen' is not being fair to technical study. No doubt, technical analysis is not easy and there is certainly an element of luck involved (with anything, right?). But the emotions can overcome pure analysis, and then we become believers of hope. That is NO way to trade or invest! Take the road leading to more accurate interpretation. You won't be right 100% of the time, but I assure you trading will be much better.