Technical analysis is a methodology to trade the markets.<\/p>\n
It uses historical price (or volume) to help you make a trading decision.<\/p>\n
There are hundreds of technical analysis tools available, but most of them fall into one of these categories\u2026<\/p>\n
- \n
- Volume<\/li>\n
- Indicators<\/li>\n
- Chart patterns<\/li>\n
- Support & resistance<\/li>\n<\/ul>\n
But here\u2019s the thing\u2026<\/p>\n
Despite having an abundance of these tools (like RSI, MACD, Stochastic, Fibonacci, etc.), most traders lose money with technical analysis.<\/p>\n
Why?<\/p>\n
It\u2019s often because they\u2019re making one of these mistakes\u2026<\/p>\n
No trading plan (bringing \u201cnasty surprises\u201d)<\/strong><\/h2>\n
Let me ask you\u2026<\/p>\n
Which is more important, entry or exit?<\/p>\n
Most traders focus heavily on entry, believing a good entry guarantees profit.<\/p>\n
As a result, they use technical analysis mainly to time their entries.<\/p>\n
But perfect entries are impossible to find for every trade.<\/p>\n
Without a plan, crucial questions remain: What if the market moves against you? What do you sell if it reverses after a gain? What if an accidental profitable trade happens?<\/p>\n
Clearly, trading needs more than just the best entries.<\/p>\n
To be a profitable trader, you must have a trading plan that tells you what to do, no matter what happens.<\/p>\n
The next mistake is\u2026<\/p>\n
No edge (masking consistent losses)<\/strong><\/h2>\n
What\u2019s the true purpose of technical analysis, then?<\/p>\n
It\u2019s to help you develop a trading system to gain an edge in the markets.<\/p>\n
So, what is an edge?<\/p>\n
An edge (aka expectancy) means your trading activity, over time, yields a net positive result.<\/p>\n
The mathematical formula is as follows:<\/p>\n
E= (Winning % x Average Gain) \u2013 (Losing % x Average Loss)<\/em><\/p>\n
Let me give you a few examples to show how this works\u2026<\/p>\n
Example 1<\/strong><\/h3>\n
- \n
- Winning Rate: 70%<\/li>\n
- Average Gain: $80<\/li>\n
- Losing Rate: 30%<\/li>\n
- Average Loss: $100<\/li>\n<\/ul>\n
E = (0.7 \u00d7 80) \u2013 (0.3 \u00d7 100) = $26<\/span><\/p>\n
This means you can expect to earn an average of $26 per trade. So after 100 trades, you can expect to earn around $26 \u00d7 100 = $2600.<\/p>\n
You might be thinking\u2026<\/p>\n
\u201cSo I need to have a high winning rate to be a profitable trader?\u201d<\/p>\n
Nope.<\/p>\n
Here\u2019s another example with a high winning rate, but having a negative expectancy\u2026<\/p>\n
Example 2<\/strong><\/h3>\n
- \n
- Winning Rate: 70%<\/li>\n
- Average Gain: $10<\/li>\n
- Losing Rate: 30%<\/li>\n
- Average Loss: $100<\/li>\n<\/ul>\n
E = (0.7 \u00d7 10) \u2013 (0.3 \u00d7 100) = -$23<\/span><\/p>\n
This means you can expect to lose an average of $23 per trade.<\/p>\n
What this shows is that on its own, your winning rate or risk-to-reward ratio is a useless number.<\/p>\n
Both are needed to confirm an edge.<\/p>\n
Technical analysis helps you develop a trading system that aims for this crucial edge.<\/p>\n
So, be honest\u2026<\/p>\n
\u2026does your trading system have an edge?<\/p>\n
If you don\u2019t know the answer, that\u2019s because you have\u2026<\/p>\n
No data (leading to a lack of discipline)<\/strong><\/h2>\n
Without data, defining your edge, verifying if your trading system works, or maintaining the discipline to follow the rules becomes impossible.<\/p>\n
In fact, it usually leads to abandoning a system after only a few losses.<\/p>\n
So, for starters, these are the data you must track\u2026<\/p>\n
- \n
- Annual return %<\/li>\n
- Number of trades<\/li>\n
- Maximum drawdown %<\/li>\n
- Winning rate %<\/li>\n
- Losing rate %<\/li>\n
- Average gain $<\/li>\n
- Average loss $<\/li>\n<\/ul>\n
Now you\u2019re probably thinking:<\/p>\n
\u201cHow do I get access to such data?\u201d<\/p>\n
There are two approaches.<\/p>\n
First, you can journal your trade<\/a> and accumulate this data over time. However, it\u2019s time-consuming, and you\u2019ll need months or even years to get a decent sample size.<\/p>\n
The other approach is backtesting (and it\u2019s the one I prefer). I\u2019ll go into more details later\u2026<\/p>\n
But for now, another reason why most traders fail is that they have\u2026<\/p>\n
No risk management (blowing up multiple accounts)<\/strong><\/h2>\n
Imagine there are two traders, John and Sally.<\/p>\n
- \n
- They have a $1,000 account<\/li>\n
- They have a 50% winning rate<\/li>\n
- They have an average of a 1 to 2 risk-reward ratio<\/li>\n
- John risks $250 per trade<\/li>\n
- Sally risks $20 per trade<\/li>\n<\/ul>\n
The outcome of the next 8 trades is as follows\u2026<\/p>\n
Lose Lose Lose Lose Win Win Win Win.<\/em><\/p>\n
Here\u2019s the outcome of both traders\u2026<\/p>\n
John\u2019s result: -$250 -$250 -$250 -$250 =\u00a0BLOW UP<\/span><\/p>\n
Sally\u2019s result: -$20 -$20 \u2013 $20 -$20 +$40 +$40 +$40 +$40 =\u00a0+$80<\/span><\/p>\n
Can you see the importance of risk management?<\/p>\n
As a trader, you\u2019ll encounter losses regularly, guaranteed.<\/p>\n
But proper risk management contains them, making them manageable.<\/p>\n
Breaking it down\u2026<\/strong><\/h3>\n
Most traders lose money with technical analysis because they have\u2026<\/p>\n
- \n
- No trading plan<\/li>\n
- No edge<\/li>\n
- No data<\/li>\n
- No risk management<\/li>\n<\/ul>\n
These issues all point to the same root cause: a lack of a proven, quantifiable trading system backed by data.<\/p>\n
But once you have it, all of these problems will go away.<\/p>\n
Now you\u2019re probably wondering:<\/p>\n
\u201cSo, how do I develop a trading system that works?\u201d<\/p>\n
Here\u2019s my answer to it\u2026<\/p>\n
The RETT Technique<\/strong><\/h2>\n
This is the technique I\u2019ve used to develop multiple trading systems so I can profit in bull & bear markets, even during a recession.<\/p>\n
Here\u2019s the proof\u2026<\/p>\n
![\"technical](\"data:image\/svg+xml,%3Csvg%20xmlns=\")
![\"technical](\"https:\/\/www.tradingwithrayner.com\/wp-content\/uploads\/2025\/05\/1.-equity-curve.png\")
\n<\/picture>\n<\/a><\/p>\nAs you can see, from 2019 to 2025, my trading account was up 179% (compared to 84% for the S&P 500).<\/p>\n
So, how does The RETT Technique work?<\/p>\n
It can be broken down into four parts\u2026<\/p>\n
- \n
- R<\/strong>ead trading books with backtested results<\/li>\n
- E<\/strong>xtract the concepts<\/li>\n
- T<\/strong>est the trading system<\/li>\n
- T<\/strong>weak the trading system<\/li>\n<\/ul>\n
Let me explain\u2026<\/p>\n
Read trading books with backtested results<\/strong><\/h3>\n
You want to read trading books<\/a> that give you the rules of a trading system and the backtest results. Here are 3 reasons why\u2026<\/p>\n
- \n
- You have a framework to start with, so you can save time<\/li>\n
- The backtest result gives it more credibility, and you can use it to compare it against your result<\/li>\n
- The author\u2019s reputation is at stake, which means the trading systems are likely to work<\/li>\n<\/ol>\n
Once you read a few of these books, you\u2019ll notice most profitable trading systems have similar characteristics. That\u2019s when you move on to the next step\u2026<\/p>\n
Extract the concepts<\/strong><\/h3>\n
Concepts are the underlying principles driving a trading system\u2019s performance.<\/p>\n
For example\u2026<\/p>\n
The concept of breakout means you\u2019ll buy after the price has moved in your favour.<\/p>\n
The concept of counter-trend means you\u2019ll buy in a downtrend (and go short in an uptrend).<\/p>\n
The concept of a trailing stop loss<\/a> means you\u2019ll give your trade \u201cbreathing room\u201d with the hopes of riding a trend.<\/p>\n
Every profitable trading system combines a few core concepts. Understanding these allows you to develop multiple trading systems.<\/p>\n
To extract the concepts of a trading system, ask yourself these questions\u2026<\/p>\n
- \n
- What\u2019s the characteristic of the trading system?<\/li>\n
- What type of market conditions does it work best in?<\/li>\n
- What type of market conditions does it underperform in?<\/li>\n
- What\u2019s the trading setup?<\/li>\n
- What\u2019s the exit signal?<\/li>\n<\/ol>\n
From these questions, you\u2019ll understand the concepts behind the trading system, how it works, why it works, and how to develop one for yourself.<\/p>\n
Next\u2026<\/p>\n
Test the trading system<\/strong><\/h3>\n
To test a trading system, you can run a backtest on it.<\/p>\n
This means executing trades on past data so you can see how the trading system has performed over time.<\/p>\n
For example, here\u2019s the result of a Bollinger Band<\/a> trading system\u2026<\/p>\n
![\"technical](\"https:\/\/www.tradingwithrayner.com\/wp-content\/uploads\/2025\/05\/2.-technical-analysis-bollingerband.png\")
\n<\/picture>\n<\/a><\/p>\nIf you saw these kinds of results, would you have the confidence to trade the system in live markets?<\/p>\n
Possibly!<\/p>\n
This is the power of backtesting. It tells you whether a trading system works or not, saving time and money, and builds confidence, especially during a drawdown.<\/p>\n
Now you might be wondering:<\/p>\n
\u201cWhy do I need to backtest the trading system if the result is provided in the book?\u201d<\/p>\n
That\u2019s because you\u2019ve no idea if the backtest result is accurate or not. You have to validate it yourself.<\/p>\n
And finally\u2026<\/p>\n
Tweak the trading system<\/strong><\/h3>\n
Now, if you\u2019re happy with the backtest results, then you can test the system in the live markets (with a small account).<\/p>\n
But if you want to improve things like\u2026<\/p>\n
- \n
- Reduce the maximum drawdown<\/li>\n
- Improve the risk-adjusted returns<\/li>\n
- Make it less correlated with your existing systems<\/li>\n<\/ul>\n
Here are some things you can do to achieve it\u2026<\/p>\n
Reduce the maximum drawdown<\/strong><\/h3>\n
Most stock trading systems go into a deep drawdown because they are going against the overall market trend. So by having a trend filter, you can reduce the maximum drawdown.<\/p>\n
E.g. Only buy stocks when the S&P 500 is above the 200-day moving average. Otherwise, remain in cash.<\/p>\n
Improve the risk-adjusted returns<\/strong><\/h3>\n
To improve the risk-adjusted returns of a trading system, you can test the parameters over a range of settings and see which works best.<\/p>\n
E.g. A trading system goes long when the stock price makes a 5-day low. What if you test the 10, 20 or even 50-day low? What\u2019s the impact of it? Are the risk-adjusted returns getting better when the duration is increased, or does it perform worse?<\/p>\n
Make it less correlated with your existing systems<\/strong><\/h3>\n
Here\u2019s a little-known fact\u2026<\/p>\n
When you trade multiple trading systems that have little to no correlation, you will improve your risk-adjusted returns, reduce your maximum drawdown, and have a smoother equity curve.<\/p>\n
So, how do you reduce the correlation between trading systems?<\/p>\n
One way is to test the trading system on different markets. E.g., instead of the US stock market, you can test it on the Canadian or the Australian stock market.<\/p>\n
Using the RETT formula, I\u2019ve developed multiple trading systems over the years.<\/p>\n
For example, a mean reversion trading system that has generated an average of 18.69% over the last 29 years\u2026<\/p>\n
- E<\/strong>xtract the concepts<\/li>\n
- R<\/strong>ead trading books with backtested results<\/li>\n
![\"technical](\"https:\/\/www.tradingwithrayner.com\/wp-content\/uploads\/2025\/05\/1.-equity-curve.png\"\/)
![\"technical](\"https:\/\/www.tradingwithrayner.com\/wp-content\/uploads\/2025\/05\/2.-technical-analysis-bollingerband.png\"\/)
![\"technical](\"https:\/\/www.tradingwithrayner.com\/wp-content\/uploads\/2025\/05\/3.-improved-system-equity-curve.png\"\/)
![\"technical](\"https:\/\/www.tradingwithrayner.com\/wp-content\/uploads\/2025\/05\/3.-improved-system-equity-curve.png\")
\n<\/picture>\n<\/a><\/p>\n