Technical analysis is the back bone of almost all day trading systems, but first what is technical analysis and why is it so important?
The text book definition is a type of financial analysis that uses patterns in market data to identify trends and make predictions. Price Action is a type of technical analysis due to the fact we rely on patterns and price movement to make decisions throughout the day.
For example if we are looking at a bullish trend we first identify the patterns that make up a bullish trend., such as higher highs (HH) and higher lows (HL) and then make a decision if we want to place a trade.
Now that we know the basics of what is technical analysis, now it's time to figure out why its so important for day traders.
The main reason technical analysis is so important for day traders is the fact it allows us to interpret data extremely fast and place trades according to that interpretation.
Lets take our example from above about the bullish trend. If price is making HH's & HL's we know we are in a bullish trend but if we take our technical analysis even further we can then look at using price action and a handful of signals to find trades. If we can pair all of these aspects of trading together we can have a potent day trading system to take on the markets.
Technical analysis allows us to find trades and place trades throughout the day, if we were only relying on fundamental analysis to place day trades through out the day we would have to constantly be reading lengthy news reports and releases.
Now fundamental analysis certainly has it's place in day trading and can be very valuable at times helping traders navigate the news. The biggest issue is, it's just to slow to only use while day trading and that is why technical analysis is so important.
With out technical analysis traders would be glued to there news service scanning for information through out the day, similar to what algo's do with news releases but that is another blog for another day.
Comment down below if technical analysis is the back bone of your trading system.