Getting Started with Technical Analysis

Million Dollar Countdown asked for some advice on introductory books on technical analysis. There are only two technical analysis books I have ever read. One is the classic guide to interpreting charts by Edwards and Magee. This book provides the fundamental rationale for technical analysis. Once you read this, hopefully, you will be convinced that movement in the financial markets is not totally random. They explain the basics of price and volume action in the markets. This kind of understanding is even more important in intraday trading than in interpreting large scale chart patterns. This edition has been much updated from the 1960s edition I borrowed from our university library in Australia. The other book is Frost and Prechter's "The Elliott Wave Principle". Elliott wave theory systematizes a lot of the formations and ideas found in traditional technical analysis as presented by Edward and Magee. Everything else I know I picked up on the web or developed myself. Stockcharts.com has an excellent "chart school" for example.

I am very skeptical about a lot of the other technical analysis out there. Some of it makes no sense to me coming from a background in time series analysis and much of the rest is not very predictive. Those latter methods may be good for working out which waves the market has gone through and maybe E-Wave could then help in predicting what might come next but the indicator itself doesn't predict anything. One such indicator IMO is the much used MACD. However, I have found that stochastic oscillators are much more useful and can be used to predict the market to some degree. Then there are methods, which are hard to comprehend but seem to produce excellent results.

As a beginner a reasonable goal is to understand technical analysis well enough to avoid making stupid and expensive mistakes.