Technical trading strategies rely on many important factors, such as a trader’s ability to analyze security movements and recognize charting patterns. For those who are new to it, technical trading can seem overwhelming—Fibonacci ratios and harmonic patterns, reversal patterns and options spreads. There’s a lot to take in. To help take it all in and get familiar with technical trading, it’s smart to develop a system.
Below, we’ll go through a simple five-step framework that will help many traders come to grips with their own technical trading strategies. It’s broad enough to account for different trading styles and approaches. Yet, it’s defined enough to get any new trader started on the right track to successful day trading against patterns.
1. Choosing Your Technical Trading Strategies
Getting into technical trading means finding a pattern you feel comfortable with. Maybe you’re great at spotting wedges? You have a knack for seeing price channels? Prefer the animal patterns, like butterflies, bats and crabs? Whatever the pattern (or family of patterns), start with what comes natural.
Research your technical trading strategy thoroughly, so you understand the fundamentals behind it. It’s one thing to spot a pattern; it’s another to understand the technical ramifications. Spend time getting comfortable with patterns from a paper trading standpoint. Therefore, there’s no risk as you learn.
2. Identify Security Opportunities
While paper trading, explore real securities and track them. Get familiar with the process of recognizing patterns, analyzing them, setting price targets and stop-losses, etc.
Go through the process you would with a real trade and get yourself familiar (and comfortable) with trading. Practice leads to habit, which leads to consistency when it comes time to trade for real.
This is also the time to narrow down your focus. Will you trade individual securities? Index funds? Forex? Get to know the types of securities and their most common patterns, as well as how frequently you want to trade them. Will you be a true day trader or work in weekly options? Longer? Shorter?
3. Establish Your Brokerage Account
When you’re ready to trade, take time to find a broker that offers valuable tools for success. Make sure you get a Level 2 trading account for real-time quotes from market makers, and choose a brokerage that offers robust technical assessment tools and charting.
Your choice of broker will heavily affect technical trading strategies based on the features they offer. This is also a good time to explore third-party technical software.
4. Set Trade Thresholds and Monitor
This is it: time to trade! Make your first trade using the approaches you’ve developed in Steps 1 and 2. And stay true to the habits you developed while paper trading.
Spot and qualify the pattern. Identify an entry point. And, most importantly, set your trade thresholds. Whether that’s puts or calls, target price or stop-loss, define the parameters of your trade. Abide by those parameters and don’t get over-ambitious. With any luck, your first trade—and many after—will result in gains.
5. Test and Refine Your Strategy
You’ll win some and lose some over the course of your trading career. Regardless, every trade is an opportunity to learn. Figure out what went right on your big gainers and reassess your choices on losing positions.
While you can’t predict the market, you can perfect your technical trading strategies to give yourself more opportunities to win. Use your successes with one pattern to branch into another—before you know it, you’ll have a full complement of trading opportunities to pull from.
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Traders can explore all manner of technical trading strategies—from straddles and squeezes to reversal pattern trading and vertical options spreads. Finding the right one for you is a product of having confidence in the system you create for yourself. Knowledge, due diligence, the right broker and a little forethought can turn you into a successful trader, one position at a time.