Charting techniques, like everything else in this technology age, have been forced to evolve from its historically primitive beginnings. In the 17th century traders in Japan first used candlesticks to track the rice market. While we still use candlesticks to help track data, some 400 years later, the way we interpret that data has changed drastically in the last 30 years, let alone over four centuries. Since the advent of the “modern stock market,” the new technical realities are entirely different than the times of Charles Dow and the forefathers of the NYSE. Hand-drawn charts are now computer models withpatented algorithms working behind the scenes. So how can the modern trader make senseof these stock market charts and be consistently profitable in 21st-century markets?
1. Ignorethe Market Noise
First, find stock market charts that you can trust and use them. Technicians contend they have an edge because they have insight into what the trading masses are thinking by the breadcrumb trail they have left on a price chart. Price includes everything. While fundamental numbers are an integral piece of the pricing pie, trading is more about the psychology of traders as a whole than about supply/demand figures or statistics. A trader will react differently based on whether he or she is making or losing money. That reaction often times will be similar to how other traders in other times and other fundamental conditions have reacted in the past. How do we know this? Because human beings are creatures of habit; responding to developments as they have before. Technical analysts can study these patterns on charts to spot instances where traders react the same as similar past trading situations. So while we must acknowledge that charts don’t lie, they generally rely on past data and can’t predict future market direction.
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