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Coach's Playbook Posted by Team Topstep February 10, 2021

Using Technical Analysis to Determine Opportunities

Have you ever put on a trade without looking at a chart? Doubtful, right? The learning process for many first-time traders begins with technical analysis. This week, the Topstep coaches are here to give you a glance at how they use technical analysis to determine opportunities.

Funded Trader Shoutout

We’re back on that Nasdaq train this week! Tying into the “technical analysis” theme we’ve been on this year; I’d like you to take a peek at a daily chart of the E-Mini Nasdaq-100 futures (NQ). You’ll notice that as prices have been creeping higher over the past few weeks, the daily ranges have been getting tighter, and volume has been drying up. The same pattern is visible in the E-Mini S&P 500 futures (ES) as well.

When you see this kind of exhaustion in price action, a temporary market top could likely be forming. It doesn’t mean that it’s time to start picking tops, but you should be aware that a reversal is possible. It also means that intra-day trading is going to be choppy until the market finds a strong direction. 

Obviously knowing all of that, Funded Trader Anastasia A. was able to capitalize on the smaller swings in the fast moving NQ market to put up a solid $2,300 trading day. That’s the kind of tenacity we like to see out of our traders!

The Basic Tenets of Technical Analysis

At its core, technical analysis is the study of past price action to forecast future moves. The basic belief structure behind technical analysis is that prices discounts everything, prices move in trends, and history repeats itself.

In John J. Murphy’s famous book, Technical Analysis of the Futures Markets, he states that a true technician believes that everything that can actually affect the price of a financial instrument is actually reflected in the current price. And, If everything is already reflected in the market price, then the market price is the only thing that needs to be studied.

Knowing what we know today about the evolution of fundamental analysis, headline risk, in particular, the ‘old school’ belief structure around technical analysis seems a bit dated. While we do favor a more rounded approach; including technical analysis, fundamental analysis, and seasonalities; there’s still no substitute for being able to identify some good old-fashioned chart patterns when you turn on your screens.

Trade Well!