In this first lesson ‘Technical Analysis What and Why’ we’re going to first consider why are people involved in markets; what’s the goal of all trading and investing? Next, we’re going to think about an “edge” in the market, where do people look for and find an edge, and last what is technical analysis.
A simple answer: we trade and invest to make money in the market.
But is there more?
Function of Financial Markets
One of the main functions of markets is price discovery.
- People (and institutions) participate in markets for many reasons:
- Producers and consumers sell and buy commodities
- Simply to buy and sell needed commodities
- To hedge
- To offset different risks
- For speculative reasons
Don’t assume everyone is seeing markets as you are!
What is an Edge?
Making money in a market requires having an edge.
An edge is a higher probability of one thing happening than another.
E() = win (prob) * win (avgsize) – loss (prob) * loss (avg size)
What does this tell us?
Consider impact of:
- Percentage of winning trades
- Average size of winning trades and losing trades
Where do we get the values to input?
- And how reliable are those values?
Where Do People Look for an Edge?
- Fundamental Analysis
- Technical Analysis
- Relative Value Trading
- Specialized expertise in an area
- Anticipating news/changes
What Is Technical Analysis?
Looking for an edge based on patterns in prices
- Is primarily a visual discipline.
- Includes an element of subjectivity.
But there are other forms of TA to consider…
TA is a discipline that covers a wide range of techniques
- Classical charting
- Price action
- More quantitative-driven approaches
People participate in markets for many reasons.
The expected value of your system is the bottom line.
There are many approaches to finding an edge in the market.
Technical analysis covers a wide range of techniques, perspectives, and philosophies.
These videos and accompanying educational materials (collectively, “the Educational Materials”) are created and authored by Adam Grimes (the “Content Creator”) and are published and provided for informational and entertainment purposes only. The information in the Educational Materials constitutes the Content Creator’s own opinions. None of the information contained in the Educational Materials constitutes a recommendation that any particular asset, instrument, security, portfolio of securities, transaction, or investment strategy is suitable for any specific person. You understand that the Content Creator is not advising, and will not advise you personally concerning the nature, potential, value or suitability of any particular security, portfolio of securities, transaction, investment strategy or other matter. To the extent any of the information contained in the Educational Materials may be deemed to be investment advice, such information is impersonal and not tailored to the investment needs of any specific person. Any statements about income, expressed or implied, does NOT represent a guarantee. Your actual trading may result in losses as no trading system is guaranteed. From time to time, the Content Creator or its affiliates may hold positions or other interests in assets mentioned the Educational Materials and may trade for their own account(s) based on the information presented. The Content Creator may also take positions inconsistent with the views expressed in the Educational Materials.
Hypothetical performance results have many inherent limitations, some of which are described below. No representation is being made that any account will or is likely to achieve profits or losses similar to those shown. In fact, there are frequently sharp differences between hypothetical performance results and the actual results subsequently achieved by any particular trading program.
One of the limitations of hypothetical performance results is that they are generally prepared with the benefit of hindsight. In addition, hypothetical trading does not involve financial risk, and no hypothetical trading record can completely account for the impact of financial risk in actual trading. For example, the ability to withstand losses or adhere to a particular trading program in spite of trading losses is material points which can also adversely affect actual trading results. There are numerous other factors related to the markets in general or to the implementation of any specific trading program which cannot be fully accounted for in the preparation of hypothetical performance results and all of which can adversely affect actual trading results.
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Information posted on IBKR Traders’ Academy that is provided by third-parties and not by Interactive Brokers does NOT constitute a recommendation by Interactive Brokers that you should contract for the services of that third party. Third-party participants who contribute to IBKR Traders’ Academy are independent of Interactive Brokers and Interactive Brokers does not make any representations or warranties concerning the services offered, their past or future performance, or the accuracy of the information provided by the third party. Past performance is no guarantee of future results.
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