Technical analysis provides the tools needed to successfully traverse the gap between intrinsic value and market price. In addition to chart patterns and indicators, technical analysis involves the study of such wide-ranging topics as behavioral economics and risk management. The goal is to quickly identify trading opportunities and capitalize on them using a disciplined, rules-based approach that maximizes long-term risk-adjusted returns.
In this article, we will look at some of the best ways for beginners to learn technical analysis without having to risk thousands of dollars in the market.
Gain a Foundational Understanding
The first step in learning technical analysis is gaining a foundational understanding of the core concepts, which is best accomplished by reading books, taking online or offline courses, or reading through educational websites covering these topics. While there have been countless trading books authored, several have withstood the test of time and become go-to resources for novice traders as they start learning how to trade.
Some popular books for learning technical analysis include:
- Technical Analysis of the Financial Markets: A Comprehensive Guide to Trading Methods and Applications by John J. Murphy
- Market Wizards, Updated: Interviews with Top Traders by Jack D. Schwager
- Reminiscences of a Stock Operator by Edwin Lefevre
- Way of the Turtle: The Secret Methods that Turned Ordinary People into Legendary Traders by Curtis Faith
- Expert Advisor Programming for MetaTrader 5: Creating Automated Trading Systems in the MQL5 Language by Andrew R. Young
There are also several online and offline courses available including:
It’s important to keep in mind that there are many online trading courses that promise spectacular results and use high-pressure sales tactics. Notice traders should avoid these courses and seek out those teaching the core fundamentals. Most successful traders develop their own trading systems and techniques over time. After all, companies offering “off the shelf” trading systems wouldn’t be selling them if they were profitable.
Finally, there are many different websites that provide a detailed overview of technical analysis concepts, such as Investopedia’s Technical Analysis Guide.
It’s important to keep in mind that there are many online trading courses that promise spectacular results and use high-pressure sales tactics.
Practice & Develop Your Skills
The next step is to take the foundational principles from these courses and apply them in practice through backtesting or paper trading.
Traders developing automated trading systems can use backtesting to see how a set of rules would have performed using historical data. For example, a trader might develop a simple moving average crossover strategy that generates a buy signal when a short-term moving average crosses above a long-term moving average and vice versa. The trader could then backtest the system to see how it would have performed over the past several years.
There are many different platforms that enable traders to develop automated trading systems and backtest them against historical data, including:
It’s important to keep in mind that trading systems generating compelling returns using historical data aren’t guaranteed to perform well in the future. In fact, sufficiently complex trading systems can be “curve fit” to perform perfectly using historical data, but won’t be of much use in the future. The best trading systems employ a simple set of rules that perform profitably and are flexible enough to perform well in both the past and in the future.
Traders that place trades on their own without automated trading systems may want to consider paper trading to fine-tune their skills. Using a demo account, traders can practice placing trades to see how they would have performed over time. It’s important to carefully track the performance of these trades to objectively determine how successful the strategies are over time and to practice over a long enough timeframe and diverse enough assets.
Many online discount brokers offer demo accounts for paper trading using the same tools that traders would have access to with live accounts.
The Bottom Line
The best way to learn technical analysis is to gain a solid understanding of the core principles and then apply that knowledge via backtesting or paper trading. While there is no shortcut to success, traders can develop an understanding and feel for the market over time that can provide them with an edge when trading.