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Technical Analysis Explained

Trading Tactics or Technical Analysis is only one building block of successful trading

A successful trading programme must take into account three important factors:

1. Price forecasting (eventually through technical analysis) indicates which way the market is expected to trend. It provides the answer to the basic question of whether to enter the market from the long or short side.

2. Timing determines specific entry and exit points. It is quite possible to be correct on the basic direction of the market, but still lose money on a trade if the timing is wrong. Timing is almost entirely technical in nature. Therefore, even if the trader is fundamentally oriented, technical tools must be employed at this point to determine specific entry and exit points.

3. Money management covers the allocation of funds. It includes such areas as portfolio makeup, choice of instrument, diversification, how much money to invest, the use of clear trading guidelines as cited below: (etc.)

Trading guidelines

1. Trade in the direction of the intermediate trend

2. In up-trends, buy the dips; in downtrends, sell bounces

3. Let profits run, cut losses short. Always use protective stops to limit losses and move them only to reduce potential losses or protect newly achieved profits

4. Set up your plan before entering the market; don't trade impulsively

5. Employ at least a 3 to 1 reward-to-risk ratio

6. When pyramiding, follow these guidelines:

a) Each successive layer should be smaller than the preceding one b) Add only to winning positions c) Never add to a losing position d) Adjust protective stops to the break-even point (or better)

7. Except for short-term trading, make decisions away from the market, preferably when the markets are closed

8. Try to ignore conventional wisdom; don't take anything said in the printed media too seriously

9. Learn to be comfortable being in the minority, if you are right on the market, most people will disagree with you

10. Keep it simple; more complicated isn't always better

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Vocabulary

A
Apex
Arithmetic scale
Art-charting
Ascending triangle

B
Bar-chart
Bearish engulfing pattern
Bottom-line
Bullish Consensus
Bullish engulfing pattern

C
Candle Stick /-chart 1, 2
Channel formation
Chart
Chartist
Closing prices
Complete cycle
Consolidation
Continuation formations
Contrarian Opinion
Corrective waves
Cycle lines

D
Descending triangle
Divergence
Daily close
Doji
Double top/bottom
Down-trendline
Dow Theory

E
Edge band analysis
Elliott-Wave
Engulfing pattern
Exponential moving average

F
Fibonacci-numbers
Fibonacci time zones
Five-wave
Four-weekly-rule
Flag
Fundamental Analysis

G
Golden section /ratio (phi)

H
Hammer
Hanging man
Head and Shoulder
High
Horizontal triangle

I
Impulsive waves

L
Larry Williams %R
Line-chart
Logarithmic scale/chart
Long term
Low
Low-risk entry point
Lunar cycle

M
MACD (moving average convergence/divergence)
"Markets Vane"
Medium term
Momentum
Monthly close
Moon cycles
Moving Average
M-Top

N
Negative or bearish divergence
Non-trending indicators

O
Oscillator
Opening

P
Peak
Pennant
"Phi"
Point and figure
Positive or bullish divergence
Price formation
Price objective
Psychological rationale

R
Rate of Change
Ratio
Real Body
Resistance
Rounding bottom/top
Relative Strength Index (RSI)
Reversal criteria/formation 1, 2

S
Saucer
Sentiment
Short term
Sideways trend
Simple Moving Average
Spiral Calendar
Stochastic
Stop-loss/Stop
Stop-profit
Support
Symmetrical triangle

T
Technical Analysis
Technical Analyst
Technical indicators
Three-wave
Time Cycles
Time frame
Timing
Top-line
Trading
Trading signals
Trend
Trending indicators
Trendline
Triangle
Trigger levels
Troughs

U
Up-trendline

V
Volume

W
Weekly close
Wedge
Weighted moving average
Whipsaw

Z
Zero line