The biggest headache facing the technical analyst these days is interpretation or "How do I trade it?" With all the possible methodologies taught today, one could become totally confused as to how to use the methods profitably.
Just for the exercise, check out this chart of mine, which is my
worksheet for today. It is the 3-minute ES for Monday, June 19, 2006.At first glance, it looks like a jumbled mess to the untrained eye. It reminds me of the time when Mark Douglas asked me, “Bryce, what do you see when you look at a chart?” Then, he answered his own question with, “Only what you have trained yourself to see.”
Now, the first thing you need to understand about technical analysis methods is that they serve one of two purposes. Either they confirm support or resistance in the marketplace, or they tell you immediately that the technical support or resistance is not working, and the market is going to continue in the current direction.
I use a combination of tools to determine the safest place to initiate trades. I do not hold positions for any extended length of time because my approach is to enter and exit the market when it is clear to me what it is doing and then go for the small bites.
Some days, it will involve 4 to 6 entries with tight stop losses or stop and reverse orders when the first choice does not work out.
I try to keep my entries as simple as possible and place them at levels where the majority of informed traders would recognize the technical SUPPORT or RESISTANCE and, if it is broken, will place one side of the market (buyers or sellers) in an unarguably wrong position.
The key to trading profitably has nothing to do with technical theory. It has to do with detecting when the buyers or sellers are going to have to take evasive action. Technical analysis is the only tool you can use to detect the levels that will cause traders to enter or quit positions.
*Reprinted (and modified) with permission from Bryce Gilmore
