[riveralabs]

The only important indicator on a chart is price, and volume in some cases to confirm price. But all decisions need to be based on price action. Chart analysis is just a tool to read the emotions of other traders, that’s it.

Think about it, you see a 3 day rally with wide range bars and on day 4 you get a narrow range bar where the open and close are the same (or very close). What does that tell you? Momentum has stopped and people are undecided. There’s nothing subjective about that. After this the stock can move either way, but you are getting an indicator that something’s going to happen and you have to monitor closely. You can tighten the stops or exit completely. The decision is up to you. But you are using the chart to make an educated decision.

Another example, after a 3 day pullback on day 4 you see a narrow range bar with a very long tail. This is called a Hammer [http://en.wikipedia.org/wiki/Hammer_(candlestick_pattern)]. This tells you that at some point during the day the sellers were in control but something happened and buyers took control and raised the price. This was a war and the buyers won. This usually changes momentum and leads to a rally. An explanation for this could be that at some point during the day many stop loss orders from long term investors were triggered and short-term buyers see it as an opportunity to buy and raise the price.

I just gave you two examples where Technical Analysis can be effective. Does it work all the time? Of course not. But you have a better picture of what’s happening, therefore your odds are higher and you can use this information to lower your risk.

Finally, you have to remember that for every buyer there’s also a seller and vice versa. When you buy a stock (long) you have to ask yourself. Is the person selling me the stock profiting or taking a loss? Is the other person a beginner, professional trader or institution? You have to find scenarios where you buy the stock from the beginners taking a loss (even if it sounds cruel). Given enough time and hard work you can develop experience necessary to spot where all these people buy and sell and use this information to your advantage.

Does it work all the time? NO

Will you have losses? YES

Can you still make money? YES