Johndeo started trading with the help of his mentor. He was taught to look at the current and historical prices of stocks, and he uses technical analysis.
Yes. Most professional traders use technical analysis in their price analysis because they believe that current and past price actions are the most reliable indicator.
Even non-technical traders use technical analysis to pin-point excellent, low-risk buy entries.
For example, while looking at the chart, traders can analyze the current stock price relative to its historical data. They can determine whether it is expensive or cheap.
People should not buy stocks at the top, so they need to understand the current price. Is it above its average?
The market is dominated by fund managers and large institutions. Their buying and selling drives 80% of the market. (source)
By looking at the charts, traders can see what big investors, funds and institutions are currently working on.
Knowing what to look for is critical, and that is where technical analysis comes in.
Even beginner traders look at the stock prices when taking their trades. They are not that stupid, so it must be obvious now.
Below, one can see that top traders, in the world, heavily use technical analysis in their trading.
What is technical analysis?
According to IG.com, “Technical analysis is a means of examining and predicting price movements in the financial markets, by using historical price charts and market statistics.” (source)
Traders can form their accurate prediction based on previous market patterns. They can use supports and resistance, technical indicators, and or volume to make their trading decisions.
A technical chart draws its maps about price actions, and it is a visual representation of historical data.
Traders often use technical indicators in their charts to make clear trading decisions.
However, there is one caveat.
Hedge funds and other large institutions can actually abuse technical analysis, because it is easy. For example, they can look for popular strategies among retail traders, and then they can bet against them.
It is the reason many people fail in their trading decisions. They lose a lot of money, yet they still do not realize it.
In stock trading, to make any money, traders can go against what is cool and popular and still make money.
What indicators do professional traders use?
Most professional traders use Technical Analysis, and some examples are momentum indicators such as ALMA, MACD, MA indicators. They also use mean reversion indicators which include the RSI, Bollinger Bands and also MACD. These indicators are the creation of professional traders.
For example, the Bollinger Bands is from John Bollinger himself. It is also a fact that professional traders also create their indicators as a technician.
Why technical Analysis work and its limitation
Lagging indicators have no value, and traders should find good technical indicators. Technical analysis works if you incorporate patterns.
Francis Hunts uses patterns because it continues to form in the chart, and because human emotions are always the same.
He said that it does not matter who the trading participants are, because their reactions will be the same.
Patterns have a probability of occurring again, according to hunts.
He considers also fundamental analysis, because he viewed it as the other half of the coin. He thinks that both technical and fundamental should be combined.
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Trading legend Stephen Kalayjian
Trading legend Stephen Kalayjian also uses technical analysis, and his proprietary algorithm in trading. He spends his trading day by looking at his several technical charts to find trading opportunities.
He normally has several screens in his trading room, and he is doing it already for many years, because he wants to have a visual guide of the markets.
Well, Stephen also analyzes patterns just like Francis, so professionals do use technical analysis.
Most traders cannot do what he is doing, but people should learn that with practice, and anything is possible.
Just like any other successful traders, he also looks at the news, so that he can prepare himself before market opens.
He said that if the economy is strong, it could be a sign that the Federal Reserve is going to raise interest rates again.
He also wants to identify the trend, and he wants to be on the right side of the market.
Correlation is also important to him. It is a technical analysis method used by professional traders to have high probability trades.
He uses his proprietary algorithm on a 15-minute time frame to catch buy and sell signals. It shows that he relies also on computers to make his trading decisions.
He based his algorithm on extensive research. He also likes to trade between one and six bars, which is approximately from one to 30-minute time-frame.
Jim Simons is one of the greatest traders in modern finance, and he uses math to solve the stock market.
He looks at the stock market as an abstract intellectual system. He also uses price, volume and volatility to segregate the market’s movements.
His approach is really evolutional.
Johndeo: Today, traders can use Amibroker to study the markets through back testing.
Jim Simons also uses patterns in his trading decisions.
Technical analysis is actually used by professional traders.