A: You will often hear of chartists and technical analysis in the business of spread betting and trading. Chartists are persons who study charts that track the performance of a particular index or share and try to identify patterns and trends which can be used to influence future trading decisions. Technical analysis involves the application of methods designed to measure the changes in the net mood or psychology of the market and then return a prediction pf the possible consequences of that interplay. By analyzing chart patterns, chartists are looking for a compelling reason to initiate a trade or to exit an existing one.
Markets are monitored for subtle shifts in the basic supply-demand equation, and once an 'initial condition' is found that indicates a spot where there is a probable edge, the job simply becomes a matter of setting up an entry trigger, defining initial risk and then learning how to manage a trade properly in response to the market's actions. They typically identify support and resistance levels - a support level being a price which a stock is unlikely to fall into, however should it rupture this level they will sell on the belief that having breached the support level, the stock will continue falling until it reaches the next support point.
Technical analysts (another word for chartists) are less interested in fundamentals like management changes or a company's quarter announcement - they just focus on the price and on how it moves since they believe that prices follow simple patterns and believe that history tends to repeat itself meaning that key price levels of the past may effect how the share price moves in future.
Technical analysis trading works because you're assessing the supply/demand through price. Speculators and hedgers are entering/exiting the market, all of which are watching price to make decisions. That's why it works. Whether you agree or not on whether charting and technical analysis is important is irrelevant - the fact remains that 80% of the market does. So if you know that most market participants are checking charts, you should keep an eye on them as well, if anything to know how the herd is thinking. Important factors to watch out for are when major support or resistance chart levels are breached, 50 or 200 day-moving averages and price breakouts from key highs or lows. Note that technical analysis is taught all over the world and has several professional bodies, The Society of Technical Analysts and the International Federation of Technical Analysts, to name the leading ones.
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A: Technical analysis can be very effective in helping traders plan a trade. It is basically another way to help limit risk and identify sound opportunities, and that's the only real way to make net profit through trading I think. No method is perfect and none works all the time but a decent technician can find a trade that you might take and give you the plan for success or failure of that trade.
Note, however that technical signals still average about 50% win: lose (Warwick University have done a lot of study on this) or it would be a license for us all to connect to a simple trading program, leverage to the sky and rake in our fortunes. The investment banks make sure that can't happen. They have the best mathematicians and algorithm programmers on their side to stop us from winning. What makes all technical analysis work is that it assists us with a disciplined process whereby we can enter and exit trades with the ability to keep the 50% losers smaller than the 50% winners. For instance technical analysis helps me to wean me off the emotional attachment to bad positions, which in fact I find incredibly liberating - it is amazing how much poor timing and then dwelling on a bad result can wear you down each day. It feels great to let go of a bad position...
To further improve on this we trade with positive company fundamentals and main market direction. Although I would add that fundamentals will get you into a trade, but by the time the fundamentals change the opportunity to leave a trade is normally long gone, for which we need charts.
Combine all three and :-)))
Hope that answers some of your questions but feel free to send me queries, comments or concerns at traderATfinancial-spread-betting.com or by filling in the form below :-)
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