Trading and Analysis are Different, Don’t Confuse the Two

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Contents

Debunking 8 Myths About Technical Analysis

Some traders and investors denounce technical analysis (TA) as a superficial study of charts and patterns without any concrete, conclusive or profitable results. Others believe it is a sort of Holy Grail that once mastered will unleash sizable profits. These opposing viewpoints have led to misconceptions about technical analysis and how it is used.

Some misconceptions about technical analysis are based on education and training. For example, a trader trained in using only fundamentals may not trust technical analysis at all. But that doesn’t mean someone who is trained in technical analysis can’t use it profitably. Other myths are based on experience. For example, the incorrect use of technical indicators often leads to losses. That doesn’t mean the method is necessarily bad – possibly the person just needs more practice and training. Other myths are perpetrated by marketing, promising overnight riches if a simple indicator is bought and used. Rarely is it that easy. (For more, see: Basics of Technical Analysis.)

Key Takeaways

  • Technical analysis tries to capture market psychology and sentiment by analyzing price trends and chart patterns for possible trading opportunities.
  • Contrary to fundamental analysis, technical analysts do not necessarily care much about the companies behind the stocks they trade or their profitability.
  • Some believe technical analysis is the best way to trade, while others claim it is misguided and lacks a theoretical basis. Here we debunk some myths on both sides of the debate.

Technical Analysis Myths Debunked

Here are eight common technical analysis myths. Read opposing viewpoints on why these myths simply aren’t true.

1. Technical analysis is only for short-term trading or day trading.

It is a common myth that technical analysis is only appropriate for short-term and computer-driven trading like day trading and high-frequency trades. Technical analysis existed and was practiced before computers were common, and some of the pioneers in technical analysis were long-term investors and traders, not day traders. Technical analysis is used by traders on all time frames, from 1-minute charts to weekly and monthly charts.

2. Only individual traders use technical analysis.

While individuals do use technical analysis, hedge funds and investment banks make ample use of technical analysis as well. Investment banks have dedicated trading teams that use technical analysis. High-frequency trading, which encompasses a significant amount of the trading volume on the stock exchanges, is heavily dependent on technical concepts.

3. Technical analysis has a low success rate.

A look at the list of successful market traders, who have decades of trading experience, debunks this myth. Successful trader interviews have cited significant numbers of traders who owe their success to technical analysis and patterns. For example, “Market Wizards: Interviews With Top Traders” by Jack D. Schwager cites many traders profiting solely from technical analysis. (See also: The Pioneers of Technical Analysis.)

4. Technical analysis is quick and easy.

The internet is full of technical analysis courses that promise trading success. Though many individuals enter the trading world by placing their first trade based on simple technical indicators, continued success in trading requires in-depth learning, practice, good money management and discipline. It requires dedicated time, knowledge and attention. Technical analysis is only a tool, only one piece of the puzzle.

5. Ready-made technical analysis software can help traders make easy money.

Unfortunately, this is not true. There are many online ads for cheap and costly software that claims to do all your analysis for you. In addition, less-experienced traders sometimes confuse technical analysis tools in broker-provided trading software for trading models that will guarantee profit. Though technical analysis software provides insights about trends and patterns, it doesn’t necessarily guarantee profits. It’s up to the trader to correctly interpret trends and data. (For additional reading, see: The Best Technical Analysis Trading Software.)

6. Technical indicators can be applied across all markets.

While this may be true in many cases, it is not true in all cases. Specific asset classes have specific requirements. Equities, futures, options, commodities and bonds all have differences. There may be time-dependent patterns like high volatility in futures and options nearing expiry, or seasonal patterns in commodities. Don’t make the mistake of applying technical indicators intended for one asset class to another.

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7. Technical analysis can provide very accurate price predictions.

Many novices expect recommendations from technical analysts or software patterns to be 100 percent accurate. For example, inexperienced traders may expect a prediction as specific as, “stock ABC will reach $62 in two months.” However, experienced technical analysts usually avoid quoting prices so specifically. Rather they tend to quote a range such as, “stock A could move in the range of $59 to $64 in the next two to three months.” Traders betting their money on technical recommendations should be aware that technical analysis provides a predictive range, not an exact number. Technical analysis is also about probability and likelihoods, not guarantees. If something works more often than not, even though it doesn’t work all the time, it can still be very effective at generating profits.

8. The winning rate in technical analysis should be higher.

It’s a common myth that a high percentage of winning trades is needed for profitability. However, that is not always the case. Assume Peter makes four winning trades out of five, while Molly makes one winning trade out of five. Who is more successful? Most people would say Peter, but we don’t actually know until we get more information. Proper trade structuring allows for profitability even with few winners. Profitability is a combination of win-rate and risk/reward. If Peter makes $20 on his winners but loses $80 on this loss, he ends up with $0. If molly makes $50 on her win and losses $10 on her losses, she walks away with $10. She is better off, even with fewer wins.

The Bottom Line

Technical analysis provides a large basket of tools and concepts for trading. There are successful traders that don’t use it, and there are successful traders that do. Ultimately, it is up to each trader to explore technical analysis and determine if it is right for them. It doesn’t guarantee instant profits or 100 percent accuracy, but for those who diligently practice the concepts, it does provide a realistic possibility of trading success. (For additional reading, check out: Technical Analysis Strategies for Beginners.)

The Top 17 Investing Quotes of All Time

When it comes to the world of investing, three words come to mind: overwhelming, intimidating, and scary. For us “regular Joes,” the questions seem never-ending. On that note, let’s revisit what experts have said over the years on the topic of investing. The quotes date back to Ben Franklin, and some are from modern experts like Dave Ramsey and Warren Buffett. Though markets may change, good investing advice is timeless.

Key Takeaways

  • Even though markets may change, good investing advice is timeless.
  • Do the necessary research, study, and analysis before making any investment decisions.
  • There is a risk in everything, so be prepared for the ups and downs.
  • By being modest in your spending, you can ensure you will have enough for retirement and can give back to the community as well.
  • Diversification is relevant, and once you have confidence in your investments, you can adjust your portfolio accordingly and make bigger bets.

Timeless Advice

1. “An investment in knowledge pays the best interest.” – Benjamin Franklin

When it comes to investing, nothing will pay off more than educating yourself. Do the necessary research, study, and analysis before making any investment decisions.

2. “Bottoms in the investment world don’t end with four-year lows; they end with 10- or 15-year lows.” – Jim Rogers

While 10- to 15-year lows are not common, they do happen. During these down times, don’t be shy about going against the trend and investing; you could make a fortune by making a bold move or lose your shirt. Remember quote #1 and invest in an industry you’ve researched thoroughly. Then, be prepared to see your investment sink lower before it turns around and starts to pay off.

3. “I will tell you how to become rich. Close the doors. Be fearful when others are greedy. Be greedy when others are fearful.” – Warren Buffett

Be prepared to invest in a down market and to “get out” in a soaring market, as per the philosophy of Warren Buffett.

On the Markets

4. “The stock market is filled with individuals who know the price of everything, but the value of nothing.” – Phillip Fisher

Another testament to the fact that investing without an education and research will ultimately lead to regrettable investment decisions. Research is much more than just listening to popular opinion.

5. “In investing, what is comfortable is rarely profitable.” – Robert Arnott

At times, you will have to step out of your comfort zone to realize significant gains. Know the boundaries of your comfort zone and practice stepping out of it in small doses. As much as you need to know the market, you need to know yourself too. Can you handle staying in when everyone else is jumping ship? Or getting out during the biggest rally of the century? There’s no room for pride in this kind of self-analysis. The best investment strategy can turn into the worst if you don’t have the stomach to see it through.

6. “How many millionaires do you know who have become wealthy by investing in savings accounts? I rest my case.” – Robert G. Allen

Though investing in a savings account is a sure bet, your gains will be minimal given the extremely low-interest rates. But don’t forgo one completely. A savings account is a reliable place for an emergency fund, whereas a market investment is not.

7. “Invest in yourself. Your career is the engine of your wealth.” – Paul Clitheroe

We all want wealth, but how do we achieve it? It starts with a successful career which relies on your skills and talents. Invest in yourself through school, books, or a quality job where you can acquire a quality skill set. Identify your talents and find a way to turn them into an income-generating vehicle. In doing so, you can truly leverage your career into an “engine of your wealth.”

8. “Every once in a while, the market does something so stupid it takes your breath away.” – Jim Cramer

There are no sure bets in the world of investing; there is a risk in everything. Be prepared for the ups and downs.

9. “The individual investor should act consistently as an investor and not as a speculator.” – Ben Graham

You are an investor, not someone who can predict the future. Base your decisions on real facts and analysis rather than risky, speculative forecasts.

Many of the best quotes about investing urge thoughtfulness over impulsiveness, daring versus caution, and smart research versus flavor-of-the-month decision making.

On Wealth

10. “It’s not how much money you make, but how much money you keep, how hard it works for you, and how many generations you keep it for.” – Robert Kiyosaki

If you’re a millionaire by the time you’re 30, but blow it all by age 40, you’ve gained nothing. Grow and protect your investment portfolio by carefully diversifying it, and you may find yourself funding many generations to come.

11. “Know what you own, and know why you own it.” – Peter Lynch

Do your homework before making a decision. And once you’ve made a decision, make sure to re-evaluate your portfolio on a timely basis. A wise holding today may not be a wise holding in the future.

12. “Financial peace isn’t the acquisition of stuff. It’s learning to live on less than you make, so you can give money back and have money to invest. You can’t win until you do this.” – Dave Ramsey

By being modest in your spending, you can ensure you will have enough for retirement and can give back to the community as well.

13. “Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas.” – Paul Samuelson

If you think investing is gambling, you’re doing it wrong. The work involved requires planning and patience. However, the gains you see over time are indeed exciting!

14. “I would not pre-pay. I would invest instead and let the investments cover it.” – Dave Ramsey

A perfect answer to the question: “Should I pay off my _____ (fill in the blank) or invest for retirement?” That said, a credit card balance ringing up 30% can turn into a black hole if not paid off quickly. Basically, pay off the debt at high-interest rates and keep debt at low ones.

The Contrarians

15. “The four most dangerous words in investing are: ‘this time it’s different.'” – Sir John Templeton

Follow market trends and history. Don’t speculate that this particular time will be any different. For example, a major key to investing in a particular stock or bond fund is its performance over five years. Nothing shorter.

16. “Wide diversification is only required when investors do not understand what they are doing.” – Warren Buffett

In the beginning, diversification is relevant. Once you’ve gotten your feet wet and have confidence in your investments, you can adjust your portfolio accordingly and make bigger bets.

17. “You get recessions, you have stock market declines. If you don’t understand that’s going to happen, then you’re not ready, you won’t do well in the markets.” – Peter Lynch

When hit with recessions or declines, you must stay the course. Economies are cyclical, and the markets have shown that they will recover. Make sure you are a part of those recoveries!

The Bottom Line

The world of investing can be cold and hard. But if you do thorough research and keep your head on straight, your chances of long-term success are good. Refer back to these quotes when you’re feeling shaky or are confused about investing. How are they relevant to your experience? Do you have any favorite quotes to add?

How to Use Multiple Time Frame Analysis to Find Better Entry and Exit Points

No, we aren’t about to break out into song like the Glee cast.

Here at BabyPips.com, we’ve got our version of a mash-up, which we like to call the “Time Frame Mash-up”.

This is where multiple time frame analysis comes into play.

You ready? You sure you can hack this? You’ve basically got a semester left of BabyPips.com’s School of Pipsology?

You don’t wanna quit now do you?

First of all, take a broad look at what’s happening.

Don’t try to get your face closer to the market, but push yourself further away.

You have to remember, a trend on a longer time frame has had more time to develop, which means that it will take a bigger market move for the pair to change course.

Start off by selecting your preferred time frame and then go up to the next higher time frame.

There you can make a strategic decision to go long or short based on whether the market is ranging or trending.

You would then return to your preferred time frame (or even lower!) to make tactical decisions about where to enter and exit (place stop and profit target).

Just so you know, this is probably one of the best uses of multiple time frame analysis…you can zoom in to help you find better entry and exit points.

By adding the dimension of time to your analysis, you can obtain an edge over the other tunnel vision traders who trade off on only one time frame.

Did you get all of that? Well, if you didn’t, no worries!

We’re gonna go through an example now to help make things a little clearer.

How to Perform Multiple Time Frame Analysis

Let’s say that Cinderella, who gets bored all day cleaning up after her evil stepsisters, decides that she wants to trade forex.

After some demo trading, she realizes that she likes trading the EUR/USD pair the most, and feels most comfortable looking at the 1-hour chart.

She thinks that the 15-minute charts are too fast while the 4-hour take too long – after all, she needs her beauty sleep.

The first thing that Cinderella does is move up to check out the 4-hour chart of EUR/USD. This will help her determine the overall trend.

She sees that the pair is clearly in an uptrend.

This signals to Cinderella that she should ONLY be looking for BUY signals. After all, the trend is her friend, right? She doesn’t want to get caught in the wrong direction and lose her slipper.

Now, she zooms back to her preferred time frame, the 1-hour, to help her spot an entry point. She also decides to pop on the Stochastic indicator.

Once she goes back down to the 1-hour chart, Cinderella sees that a doji candlestick has formed and the stochastic has just crossed over out of oversold conditions!

But Cinderella still isn’t quite sure – she wants to make sure she has a really good entry point, so she scales down to the 15-minute chart to help her find an even better entry and to give her more confirmation.

So now Cinderella is locking her eyes in on the 15-minute chart, and she sees that the trend line seems to be holding pretty strongly.

Not only that, but stochastic are showing oversold conditions on the 15-minute time frame as well!

She figures that this could be a good time to enter and buy. Let’s see what happens next.

As it turns out, the uptrend continues, and EUR/USD continues to rise up the charts.

She could have bought another pair of glass slippers!

There is obviously a limit to how many time frames you can study. You don’t want a screen full of charts telling you different things.

Use at least two, but not more than three time frames because adding more will just confuse the geewillikers out of you and you’ll suffer from analysis paralysis, then proceed to go crazy.

Is there a wrong way to do multiple time frame analysis, you ask?

Some of our forex friends have been nice enough to give their two cents on this matter through this forum thread on multiple time frame analysis.

At the end of the day, it really is all about finding what works best for you.

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