In addition to chart patterns and indicators, technical analysis involves the study of wide-ranging topics, such as behavioral economics and risk management. The goal behind technical analysis is usually to 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 money in the market.
Build a Foundation
The first step in learning technical analysis is gaining a fundamental 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. Many of these resources are free, but some educators, workshops, or courses charge a fee.
- Technical analysis is the study of charts and patterns, but can also include aspects of behavioral economics and risk management.
- Novice traders can turn to books and online courses to learn about technical analysis.
- Many online trading courses promise spectacular results and use high-pressure sales tactics, but then fail to deliver the promised results.
- Simulated or "paper" trading can help traders see how technical indicators work in live markets.
While countless trading books have been authored, several on technical analysis have withstood the test of time and are go-to resources for novice traders as they start learning how to trade:
- 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
Many courses are also available on and offline, including:
Importantly, many online trading courses promise spectacular results and use high-pressure sales tactics, but do not deliver the promised results. Novice traders might want to avoid courses that boast about unrealistic returns and, instead, seek out educators that teach the core fundamentals of technical analysis.
Many traders develop their own trading systems and techniques over time. After all, companies offering “off the shelf” trading systems that yield consistent profits probably wouldn’t be selling them if they were indeed profitable (they would keep the secrets to themselves).
Finally, many different websites provide a detailed overview of technical analysis concepts for no fee, such as Investopedia’s Technical Analysis Strategies for Beginners, and can provide a good starting point for aspiring traders.
Practice and Develop Your Skills
After learning the ins and outs of technical analysis, the next step is to take the 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 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.
It’s important to keep in mind that trading systems generating compelling returns using historical data aren’t guaranteed to perform well in live markets. 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. However, rather than jotting the trades down on paper, 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 time frame.
Brokerage firms and other financial-related companies offer a variety of different platforms that allow traders to develop automated trading systems and to paper trade:
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. Thanks to the technology available today, many brokers and websites offer electronic platforms that offer simulated trading that resemble live markets. While there is no shortcut to success, aspiring traders can build a knowledge base and get a feel for the market over time that can provide an edge when trading.