The Millionaire Trader's Handbook
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TECHNICAL ANALYSIS
If you want to make millions from the market, then stay
away from the following:
The news (fundamentals)
Trading indicators
Signal services
If your analysis relies heavily on any of these three methods,
then you are subjected to more bad trading decisions.
The News (Fundamentals):
Unlike fundamental analysis where price moves are based on
business results (the news), technical analysis relies on basic
technical tools and past price movements (price action) to
determine the next move in the market.
It is hazardous to rely solely on fundamental analysis for any
reason to justify your trade decisions. Why? Because during
the news hour, the financial market can rally to the upside on
bad news and the downside on good news (no matter how
intense the news is).
You also need to understand that many of the projections
heard from the news are based on analyses done by other
people, and their analyses, too, can be wrong.
Rather than just taking their word for it, why not do your
own analysis using the technical means you have? Here‟s a
real-life example of the S&P 500.
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Technical analysis helped me not to be swayed by popular
opinions during brexit in 2014. It all began in September
2014 when I was in the living room with my mum, and the
news came up.
Bloomberg was talking about the S&P 500 index, which was
collapsing. CNN had the same result, and every news
coverage talked about the massive fall of the S&P 500,
making everyone on Wall Street panic.
For those who don't know, the S&P 500 index is a stock
market index that shows the performance of the largest 500
companies in the United States.
A crash in the S&P 500 index can cause a huge difference in
the business world and negatively affect consumers, leading
to a recession.
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What I saw when I decided to open my charts took me by
surprise. In trading, when the price collapses, it means there
is a potential selling opportunity. As much as the market was
collapsing according to the news, it was simply retracing on
my charts.
And we all know the market doesn't just move up or down in
one direction like this.
The Millionaire Trader's Handbook
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It moves at a certain level, pullback, or retraces and
continues its overall direction. For example, higher lows and
highs (uptrend), lower highs and lows (downtrends).
So, I pulled out the three technical tools in my arsenal:
Support and resistance
Fibonacci
Trend line
Price action indicated that the S&P 500 index is on a bullish
trend.
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I plotted my tools and did a quick analysis, and it all came
into a confluence zone, highlighted in yellow.
This is what I did:
Drew trend lines based on the market's trend
Looked for the next area of support
Plotted Fibonacci from swing low to high
It all came down to some form of confluence around the 50
and 60 fib region, which, from experience, is the most
significant level on Fibonacci.
The Millionaire Trader's Handbook
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This led me to conclude that the price is just pulling back
into that confluence zone (50 and 60 fib region) before
heading higher.
So, I stuck to my buyers and placed a buy order around that
confluence region. Seven days later, the market triggered my
buy order and rallied to the upside as predicted for 900 pips.
Recall from the news that they were only saying the S&P 500
was collapsing, which was the opposite not from a technical
standpoint.
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So what am I trying to derive here? Don't follow the news.
Then what should you focus on instead? "Price action"
because price action always leads the news.
Now, does this mean the news and fundamental analysis are
all wrong? No. But this is to guide you to stay safe from the
hype that may follow a financial instrument at a particular
time.
You can only use fundamental concepts to back up your
technical. Why? Most often, the fundamental concepts often
fuel and catalyze a correctly drawn technical analysis.
For example, in the case of the S&P 500, the market was
about to retrace to the downside before the news came on. It
was after the news the market made the quick move.
Therefore, fundamentals always support technical if
appropriately drawn.
How do you determine if a technical strategy works? It's
simple. You can verify that by following these two steps:
Backest the trading strategy on your charts for at least 6
months.
I mostly advise that you backtest it during the 2008
recession because that was a defining year for traders whose
strategy was solid.
Forward-test your strategy in a live market or on a demo
account. You cannot be a professional technical analyst
without the following: a good trading strategy, standard risk
management, and correct trading and market psychology.
The Millionaire Trader's Handbook
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