Traders Toolbox: Trading tools for today's markets

To some, technical analysis is a mystical method used by individuals to look into the future. Much of the glamour comes from the use of technical analysis as a predictive tool. While predictions can invigorate in a manner such as taking a joy ride, the end result will often feel like a ride gone bad. Although less exciting, the better use of technical tools can be likened to the tools a doctor uses to diagnose the condition of a patient. Similarly, a technical analyst applies his tools to determine the present condition of the market. Once a diagnosis has been made, a trader has a guide on how to approach a market. The understanding and application of tools is an important step in the development of an analyst or a trader. Properly used, various technical tools allow the drawing together of pieces of evidence to determine the market's present condition. While no one can guarantee the correct analysis of a market, the more evidence you gather, the better your odds. Once the evidence is gathered, diagnosing a market often ends up in a process much like jury deliberation. Each piece of evidence is considered; some will be accepted as valid, others may be suspect. Often one or two pieces of evidence prove to be the key in making a final determination. Once an analysis is made, based on the preponderance of evidence, a trader is ready to plan a course of action. TOOLS OF THE TRADE: The purpose of the series is to expose the reader to various analytical tools and to allow an insight into their applications. Hopefully the reader will have a better understanding of why a final diagnosis of a market's conditions has been reached.