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Technical Analysis for Non-Professional Stock Traders

By Charles Hopkins Published 04/21/2006 | Finance
Technical analysis is a premier tool for many professional traders. It gives them a lot of information upon which they can base their trading decisions. The days that these tools were only available to the professionals have past. These days everyone who has access to the Internet can use technical analysis and many of the tools that are available to the public these days are more sophisticated than the tools used by professional traders only a decade ago.

"But I'm not technical." you might say. This would be a true statement for the majority of the population. The word 'technical' sometimes frightens people and causes them to stay clear of anything that might seem too difficult for them. There is no doubt that this gives at least a partial explanation why so many private investors don't use technical analysis in their buying and selling decisions.

When it comes to technical analysis the word 'technical' is slightly misleading to the general public. Of course it took a lot of technical market knowledge to put many of the tools and market indicators together, but you don't really need any technical background to benefit from these tools. You could say that all the hard work has already been done for you. In this respect using technical analysis is a lot like driving a car. Almost everyone can learn how to drive a car. When driving, one of the things you should keep track of is your current speed. Fortunately car manufacturers have equipped their vehicles with a nice little piece of technology that tells us the car's velocity. Putting that speedometer together took quite a bit of technical knowledge. However, we as drivers don't have to worry about that because it has been taken care of. We can just look at the display and have the information presented to us. Of course then it's up to us to interpret the information correctly.

You don't necessarily have to understand exactly how a market indicator works as long as you can interpret its signals correctly. And that is not always as difficult as it seems. In many cases it may be a bit more complicated than reading the speedometer in your car, but after a while you will find it becomes second nature. These takes practice of course, but lets face it, so does driving a car.

With the variety of technical indicators and the large amount of technical terms it's easy to get overwhelmed. The best way to prevent this is to keep it simple and start small. A smart way to get better acquainted with technical analysis is to take a fairly simple indicator, for example a 50 day simple moving average. The second step is to start looking at different charts using only this one indicator. Not just two or three charts or ten. Start by going through at least a couple dozen charts. As you go through these charts you will start to notice certain patterns. Pattern recognition is something we as human beings are quite good at. We react to patterns in almost everything we do. Our brains are trained to recognize different patterns. When studying charts patterns are exactly what we are looking for. Once we start to recognize these patterns we can start assigning meaning to them. Some patterns clearly indicate that the market is bullish while others are typical for bearish market conditions. Of course this will not allow you to predict the markets but it will enable you to assess probability of certain outcomes. And this in turn will help you make better trading decisions.

If you are not using technical analysis yet you may find that it is a valuable tool to help you make the right trading decisions. And if you are already using various indicators you know that there is always room for refinement.