Learn Forex – Michael Covel on Two Types of Technical Analysis
Learn Forex (FXpath.com) – Following is a portion of an extended quote provided by Michael Covel, author of Trend Following and The Complete Turtle Trader, in which he talks about two different types of technical analysis:“Technical traders believe that a careful analysis of daily price action is an effective means of trading for profit. Now, here is where an understanding of technical analysis becomes complicated. There are essentially two forms of technical analysis. One form is based on an ability to ‘read’ charts and use ‘indicators’ to predict market direction. This is the view of technical analysis held by most people who know of technical analysis that it is some form of mysterious chart reading technique, such as astrology.
However, there is another type of technical analysis that neither tries to predict nor forecast. This type is based on reacting to price action. Trend followers are the group of technical traders who use reactive technical analysis. Instead of trying to predict a market direction, their strategy is to react to the market’s movements whenever they occur. This enables them to focus on the market’s actual moves and not get emotionally involved with trying to predict direction or duration.
That said, this type of price analysis never allows trend followers to enter at the exact bottom of a trend or exit at the exact top of the trend. Second, with price analysis, they don’t necessarily trade every day. Instead, trend followers wait patiently for the right market conditions instead of forcing the market. Third, there should be no performance goals with price analysis. Some traders might embrace a strategy that dictates, for example, ‘I must make $400 dollars a day.’ Trend followers would counter with ‘Sure, but what if the markets don’t move on a given day?’
One trend follower summarized the conundrum: ‘I could not analyze 20 markets fundamentally and make money. One of the reasons [trend following] works is because you don’t try to outthink it. You are a trend follower, not a trend predictor.’ ”
- Michael Covel, as excerpted from Essentials of Technical Analysis for Financial Markets (John Wiley & Sons, 2010).
James Chen, CTA, CMT (bio)
- Click here for my book, Essentials of Foreign Exchange Trading (Wiley).
- Click here for my book, Essentials of Technical Analysis for Financial Markets (Wiley).
- Click here for my video DVD set, High-Probability Trend Following in the Forex Market (FXstreet).
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Comments
That`s how I trade. When the trend bias change from bearish to bullish I start to open a position every day at the open of daily candle. And do it until either trend change back or it goes a good way and I stop adding becose there is higher and higher probability that it wil start to reverse. But I close the positions only when it reverse.I do not use stops,but money management is important. Sure there will be periods of losses but at last I get rewarded greatly for being patient. Simple as that. Do not say it to anyone..
Nice article I agree. You can only take what the Forex gives you. If it ain’t givin’, you ain’t gettin!
Golio!