Law of technical analysis

Common rules, each trading system has its own specific trading rules and the market environment that suits it best, but there are always some relevant rules that apply to each trading system.

Optimize the performance of technical trading strategies

There are still considerable differences among technical traders who use the same trading system. Many trading systems are widely used among technical traders. Each system has a set of technical parameters to be selected by the trader. For example, moving average systems require entering the length of time for each average, and selecting one or two averages, etc. For some trading systems, trading rules can also vary.

For example, there is no universally accepted trading rule for the RSI. What set of technical parameters can generate the maximum profit? This will of course vary from trading system to system, but it will also vary from commodity to commodity, and even the same commodity will vary from time to time. The optimal parameter setting also depends on what the trading objective is - that is, what it means to rely on "maximum profit".

There may be parameters that lead to a relatively higher average profit, but with greater repetition between trades with greater probability. The "optimal system" and "optimal profit" can only be determined after the trader has taken into account his funding base, investment duration and risk preference. For this reason, it is difficult to determine the optimal parameter value of the system conclusively.

The wide variety of trading options, where price performance varies widely, can fail any attempt to enumerate the best parameters. However, a system tool that allows investors to decide for themselves the value of the optimal parameters of the system used is much better than simply giving "the best parameter value".

Comprehensive use of trading system

Like the blind man touching the elephant, each person feels only part of the elephant's body, and each trading system focuses only on different aspects of past price patterns. If we compete with the immutability of the trading system against the complexity of the actual price pattern, we will inevitably be in a situation where the system fails from time to time.

No system can capture every event that occurs in the market. If each system reveals part of the picture, it seems reasonable that a combination of several systems might complete a more complete picture. (The combination of trading systems constitutes a specific trading method, unlike the "simultaneous use" of multiple methods, which is not inconsistent with the singularity or consistency of successful methods.) Some systems can indeed cooperate with each other to achieve information complementarity, or to confirm trading signals from other systems.

The best example of complementary information between two trading rules is the combination of a trend measurement system and a trend following system (such as the volatility repetitive indicator or moving average method). Trend following rules work best when the market is trending, and trend measurement systems provide a way to measure how much trend exists in the market. An example of two trading rules mutually confirming trading signals is the combination of moving averages and volatility repetitive indicators.

Moving averages and volatility repetitive indicator trading rules both indicate trend signals, but each relies on the data in different ways and views the data from a different perspective. When these particular methods both send trend signals, there is all the more reason to open a position. If the signals of the two methods do not match, there is a reason to close the position.

Diversify your investments to eliminate risk

Diversification is pretty much the second characteristic of portfolio managers. Indeed, portfolio managers spend most of their time creating a portfolio that best balances risk. Technical investors can also benefit from diversification. These benefits can be reinforced in two ways.

First, traders should apply a trading system to multiple trading markets, not just one instrument. Market conditions for a particular instrument may be unfavourable to a particular technical system, but if the technical system is sound, this environment should be the exception rather than the rule. By applying the system to multiple independent markets, traders can put the principle of large numbers on their side without worrying about the possibility of "trading in the wrong market at the wrong time".

Second, diversification can also be exploited before technical systems. Instead of trading and applying technical systems to multiple trading instruments individually, a group of stocks or futures with the same characteristics is first combined into a portfolio, and then the trading system is used for that portfolio. The portfolio is not affected by changes in a particular commodity or stock. Its price movement is less volatile than the price movement of any one component. The resulting price series have fewer false starts and less noise. The ionic energy of these portfolios includes holding or holding a basket of foreign exchange across specific industries.

Don't doubt the system

One of the goals of technical analysis is to establish a set of trading rules independent of subjective factors, a set of rules that can be executed to exclude the emotional factors inherent in the transaction. Trading systems succeed or fail according to their own value. If the trading signals generated by the system are accompanied by subjective opinions, it is impossible to tell whether the system made the transaction successful or human factors changed the situation.