5 Steps to Trading Success Using Technical Analysis

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5 Steps to Trading Success Using Technical Analysis
By Tim Huang
This article is for both novice and experienced traders.

1. Simple is better - Use a handful of technical indicators
There are dozens of technical indicators out there. It is a mistake to apply all of them at the same time as many indicators give contradictory signals and you will never find a stock that meets the requirements of all indicators. Instead, you should focus on four to five indicators to make a trading decision. Some of the popular ones include Moving average (MA), Exponential moving average (EMA), MACD, Stochastic and so on.

2. Back test your indicators with historical data
Use the technical indicators you learn and test them with historical data. The more tests you do, the better. Develop a trading system that works for you based on your testing results. Try to break your system with more stocks and historical price.

3. Paper trade using your trading system
You should spend at least one month testing your system with end of date market data. Select a few stocks that meet the requirements of your technical indicators and see how they are doing each day.

4. Set a proper stop loss
No matter what stock you choose, you should always set a stop loss point. Do not hold a losing trade too long hoping it will rise again. Remember, 90% of your profit will be made on 25% of your trades. You should hold winning trades longer instead of the losing ones. What percentage is a proper stop loss point? That depends on your own trading style. If you are an aggressive trader picking volatile stocks, then you should use 8%-10%. If you are less aggressive, then you should consider 2%-5%. One thing to keep in mind, if your stop loss point is 5%, you should not pick a stock that lost more than 5% on a single day in the past 30 days to avoid being kick out.

5. When to sell and take profit
Remember, you will never sell at the exact top because no one knows the market for certain. You should keep your winning trades longer. However, if your technical indicators go against you, and the patterns start to fail, that's when you should sell your stock and take profit.

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