Technical Analysis – Overview and General Concepts

Technical Analysis

Throughout this site, we refer to users of technical analysis as market technicians, technical traders, or simply, technicians .ABCFutures endorses technical analysis as the preferred method for trading financial and commodity futures.

Technical Analysis is an approach to investing that involves using mathematical functions and visual tools, applied to price action, trading volume and/or open interest, in order to help make sound trading decisions. There are hundreds of technical indicators, ranging from simple moving averages to complex theories such as Elliot Wave. Technical indicators can be modified or “optimized” in many different ways. One does not need to be a math expert to learn technical analysis.

To the technical analyst, it does not matter what products are being trading. For example, futures on Gold, Silver, Soybeans, Corn, Wheat, Japanese Yen, to name a few products, each respond well to technical analysis techniques. This is an attractive inherent feature of technical analysis – the technician does not need to “understand” the underlying commodity, as would be the case if fundamental analysis was guiding trading decisions.

Most commodity and financial futures are traded electronically today, although some markets still trade using open-outcry on an exchange trading floor. Technical analysis can be applied to both open-outcry and electronically traded products. In summary, technical analysis can used to trade any commodity or financial futures product. Although some markets tend to have a “personality” of their own, most, if not all markets respond to critical technical events, such as breaking a major moving average or trend-line.

Technical analysis differs from fundamental analysis in many ways. Fundamental traders use information about supply and demand for a commodity, Federal Reserve policy, government reports and news events in order to make trading decisions. In contrast, market technicians use price patterns and mathematical formulas to make trading decisions. Note that one does not need to be proficient in math in order to apply technical indicators to futures trading. We let the computer do the number crunching. Our job as a technician is to decide the proper technical tools to be used for a given market. The math is already built in to the technical indicator, ready for use by the futures trader.

Technical analysis can be very useful for timing trade entries or exits. In contrast, fundamental traders look at the big picture and are less concerned with timing – predicted moves may take months to materialize. We favor technical trading because it provides a way to reduce exposure time and eliminates the need to understand the fundamental drivers behind each market. The implications of this are significant – a technician can build a “black box” trading system based on technical indicators and apply it to 50 markets simultaneously!

More will be said about black-box trading later on. For now, it is enough to know that black box trading, using technical analysis, allows us to quantify our profitability in order to optimize our long-term trading systems.

For market technicians, trading futures and trading stocks is remarkably similar – traders profit from buying low and then selling high; or selling high and then buying low. It’s that simple. It is as simple as learning ABCs. Whether trading stocks or futures, the trader attempts to first buy low and then sell high; or first sell high and then buy low.