Technical analysis involves using charts and indicators to predict price movements in the market. This is exactly the type of information needed to place profitable trades. Beyond predicting price movements, traders need to know the price at which to enter a trade. This is critical information because the entry point can determine the level of profitability of a trade and even whether a trade is ripe for entering. Price triggers can only be determined by using technical analysis.
Each trader must determine the types of indicators that will be useful. There are dozens of different types of indicators from moving average lines to oscillators. Selecting the right type of indicator, time frame for charts, and type of charts are critical to using technical analysis effectively and profitably.
With that said, fundamental analysis remains important for the framework or background of the price movement. So, focus on the technical indicators, but keep an eye on the fundamentals.
Traders need precision. They need to capitalize on every price movement of the currency, however small that price movement may be. In that respect, traders need to customize their entry orders. That means avoiding market orders because they are vague and not defined enough to take advantage of every pip movement. Traders must use entry orders to assure that the trade is ripe and the parameters are triggered.
Besides knowing when to enter, a trader also needs to know when to exit a trade, even if it means taking a loss. Stop loss orders are essential for traders to prevent large losses. Small losses are acceptable if they fall within the parameters of a trading system. Investors are different because they can accept larger losses over a longer period, knowing that they are going to hold and wait for the downtrend to reverse.
Limit orders are also essential. Knowing when to lock in a profit is one of the tools that keeps a trader profitable. Traders should not rely on their instincts or willpower to make the decision to take profits. Greed is a powerful force that has encouraged disciplined traders to hold, rather than take the profit. Limit orders prevent this kind of random decision-making when it is time to take a profit. Investors don’t worry about locking in profits because they are building equity and value in a particular position over time. Traders want their profits quick so they can move on to the next trade.
As you can see, technical analysis is very useful in customizing your trades.
Investors get attached to a position. They plan to stay in for the long haul to build a nest egg from the price increase of a position. Traders are different.
Traders should not get attached to any position because they will use it only to make a profit then move on to the next trade. They should never trade any currency to which they feel emotionally attached. This is dangerous because it causes traders to break from their trading system and stay with the position while losses are accumulating.
Traders are not callous, cold, or hard-hearted, but they need to able to exit a trade without any need to look back.
Investors have mutual funds, certificates of deposit, bonds, and other instruments to guide their investment strategies. Traders have a trading system. They have parameters that let them know when to enter a trade, how long to hold, and when to take a profit or cut a loss. Investors are not as concerned with these activities. They want to buy and hold. Traders want to make a quick profit.
Trading systems can help guide the trader towards quick profits. They also help the trader know how much is “invested” in a particular position. Without a trading system, the trader is drifting along bumping into trades without any guidance as to what opportunities are good, how to use them most effectively, and how to avoid large losses.
Traders must use a trading system. Investors do not need the strict guidance and parameters.
Following this system can help to turn an investor into trader. Failure to follow these steps can cause losses for the trader. There are two camps: traders and investors. Each person needs to know in which camp he or she resides and how to act in the camp.