The Science And Art Of Technical Analysis
Technical analysis, TA, it’s what we all do. This is the act, process and science of analyzing financial market health through charts and prices patterns. The odd thing is, not many traders really understand what it is they are doing and how to apply the science of TA to the art of trading. Let me be clear; Technical Analysis is applied social science. To fully understand how this applies to the markets and your trading lets step back to the beginning, as I like to do, and build a foundation of knowledge we can work with.
Technical Analysis; Applied Social Science
Social science, as defined by Wikipedia, is an academic discipline that focuses on people, society and the relationships of people within the society. It encompasses historical fields like anthropology and archeology as well as more contemporary studies such as economics, political science, sociology and psychology. If you have noted by now, let my point out that contemporary fields of social science include economics and political science, two areas of modern society that have a raging impact on market psychology, another field of social science, price and market direction. Because of the nature of the subjects studied, namely people, social science is very imprecise and highly subjective with theories and modes of thought covering a wide range of ideas. In fact, many of the current trains of thought in the field are based on assumptions, inference and other speculations.
Now, technical analysis is an applied science. It is the social science study of financial markets that includes aspects of psychology, economics, political science and other fields pertaining to society as a whole and business/finance specifically. An applied science is one in which scientific knowledge to more practical things such as advancing technology or creating inventions. In the case of TA the practical application is making money. We apply social scientific study and analysis of financial markets, through charts and price action, to trading for the practical purpose of making money. They only thing is, like all other social sciences, it is very imprecise, subjective and open to interpretation. The rules and theories that drive TA are more like guidelines, they are predictions of what might happen, based on past price performance, but are not set in stone. No system or strategy is fool proof. The market never does exactly what you think, or what the books, or your analysis tells you so there are no guarantees in the marketplace. Because of this it takes a certain amount of, flair for lack of a better word, to be successful at trading the markets.
The Art Of Technical Analysis
Imagine the actions of a high level athlete, pick any one you want, whichever sport you prefer. Think of how they play, how they are able anticipate what is going to happen, how they are able to be in the right time at the right place; basically, how they elevate the play to a higher level. They turn it into art. This is very comparable to high level successful traders. They are knowledgeable enough, experienced enough, quick enough, insightful enough; savvy enough, to ahead of the market. They turn trading into an art form. In modern times art refers more to the experiential arts such as visual, sound and others. Historically art was any endeavor in which mastery could be achieved. In that sense the task had been elevated to an art form. It takes time to do it but it is possible to achieve the Zen like state of artful mastery of the financial markets.
The trick is to treat it like a science. Learn it, study it, practice it until it becomes a part of your very being. I mentioned just recently, in another post somewhere on the internet I forget where now exactly, that one of my favorite sayings is “fake it till you make it”. Act like a social scientist when you analyze the market. Accept your failures as well as your defeats with equal scientific detachment. Learn from everything you do and keep a journal. It will help in more ways than one. Soon you will discover that this approach will help you accept loss as equally as winning because over time your trading will get better and better until one day you are in tune with the market and trading as an art form.