How Does The Technical Analyst Make Money

Several requirements are needed to convert pure technical analysis into money. The first and most important, of course, is to determine when a trend is beginning or ending. The money is made by “jumping” on the trend as early as possible. Theoretically, this sounds simple, but profiting consistently is not so easy.

       The indicators and measurements that technical analysts use to determine the trend are not crystal balls that perfectly predict the future. Under certain market conditions, these tools might not work. Also, a trend can suddenly change direction without warning. Thus, it is imperative that the technical investor be aware of risks and protect against such occurrences causing losses.

       From a strategic standpoint, then, the technical investor must decide two things: First, the investor or trader must choose when to enter a position, and second, he or she must choose when to exit a position. Choosing when to exit a position is composed of two decisions. The investor must choose when to exit the position to capture a profit when price moves in the expected direction. The investor must also choose when to exit the position at a loss when price moves in the opposite direction from what was expected. The wise investor is aware of the risk that the trend might differ from what he or she expected. Making the decision of what price level to sell and cut losses before even entering into a position is a way in which the investor protects against large losses.

       One of the great advantages in technical analysis, because it studies prices, is that a price point can be established at which the investor knows that something is wrong either with the analysis or the financial asset’s price behavior. Risk of loss can therefore be determined and quantified right at the beginning of the investment. This ability is not available to other methods of investment. Finally, because actual risk can be determined, money management principles can be applied that will lessen the chance of loss and the risk of what is called “ruin.”

       In sum, the basic ways to make money using technical methods are

      • “The trend is your friend”—Play the trend.
      • Don’t lose—Control capital risk of loss.
      • Manage your money—Avoid ruin.

      Technical analysis is used to determine the trend, when it is changing, when it has changed, when to enter a position, when to exit a position, and when the analysis is wrong and the position must be closed. It’s as simple as that.