Tom Welsh talks with Zoe Fiddes about the principles underpinning technical analysis
What is technical analysis, and how should traders approach it?
Technical analysis is the study of the psychology of the market crowd, which causes moves you see on a trading screen. You analyse the market crowd’s behaviour by looking at charts or an indicator. If you’re considering resistance levels, that resistance is a feeling about how far a market might move based on a reading of data. But it’s more than that. If you took that information on its own and sold every time prices came to that resistance, you likely wouldn’t make much money. You must understand the theory behind the resistance level, that it’s a battle between the bulls and bears. If you saw a very aggressive candlestick approaching a resistance level, for example, you might know that the psychology is very aggressive, hence there’s a higher chance the resistance is about to break. But if you’re just going off the basic rule to sell off at resistance, you may not get it right.
How did you first became involved in trading?
I started in FX deliverables in 2007, after studying maths at university. But I began to use technical analysis as a dealer on the FX desk for CMC Markets. After that I moved to easy-forex where, for the first year, I had a closer relationship with clients as an account manager, training them in technical analysis. Then as a dealer, I was helping more advanced traders. They’d call up for market updates and analysis of the indicators.
You’ll be discussing technical analysis at City A.M.’s Active Trader Conference. What will you cover?
Traders are looking for a strategy that’s going to work, so listening to someone with experience may help them find that strategy. Of course, everyone should understand they have to do the hard work. You can introduce strategies and talk about risk management, but it’s up to the individual to test it and make it work for them. And there are hundreds of indicators out there – technical analysis can be mind-boggling. One of the main issues is that traders use indicators but don’t know the logic behind them. They will read the basic rules about the relative strength index (RSI), for example, but they don’t understand the theory behind it.
What advice would you give novices approaching technical analysis?
It’s a steep learning curb. First, you have to get information from a reliable source. You might be using a strategy that works really well for turning points, for example, but it doesn’t work for following a trend. So first, understand the indicator and what it’s best for. Then you’ve got to test it. Using hindsight data, it’s difficult to decide the exact point to get in, for example, as well as working out where to place a stop loss and take profit. The best idea is to write a set of rules, and to practice with a very small account where you can risk as little as 10p to 50p per point movement. Record every trade you do in a diary and soon you’ll see what you’re doing right and where you’re going wrong. Using the majors is a good idea as they’re cheaper. But there are some opportunities away from US dollar pairs, like yen crosses or the Skandi pairs. I like Aussie-dollar, because you can get some nice swings, and there’s no Australian data out during the day if you’re trading UK time. It can be cleaner to trade. But euro-dollar is the most popular – the cheapest tends to be the one everyone goes to.
Zoe Fiddes is head of UK business at easy-forex. She will be speaking at this year’s City A.M. Active Trader conference on 21 June 2013 at the Grange Hotel, Tower Bridge, London E1 8GP. Tickets are available for only £55 at www.CityAMactivetrader.com