How to apply Technical Analysis

We had looked at the concept behind Technical Analysis (TA).

The next question is how can investors actually use these TA techniques?

The answer lie on the ability to identify 3 important features:

• Identify a trend
• Identify that the trend is continuing
• Identify the trend has reversed

When applying TA techniques, you are always on a lookout for one of these three features.

Identify a trend

The first step for an investor is to identify a trend from the current data. Upon identifying an up trend, down trend or sideway trend, the investor can respond accordingly from the arsenal of investing strategies that caters to that trend.

Identify that the trend is continuing

The ability to identify that a trend is continuing allows the investor to “ride the trend“.

Continue to apply the strategy that had been working so far. If it is up, go with it higher. If it is down, follow it lower.

Identify the trend has reversed

When TA indicators signal a reversal in trend, the investors should be ready to change strategy.

The ability to identify reversal is considered the most critical in the application of TA. All the hard work leading up to the reversal can be wipe out if the reversal is not acted upon decisively.

Conclusion

So while one may understand the theories behind technical analysis, the successful application and ability to identify trend, whether continuing or reversing, is the hallmark of a successful TA practitioner.