Trading is an art and discipline that relies on one’s intuition and gut feeling as much as it does on technical and fundamental analysis. Knowing how to blend these different competencies without relying on one too heavily is the key to becoming an expert in trading. However, for this piece, we’re only going to look at technical analysis and its impact on trading.
Technical analysis studies the behaviour of the market and market participants as opposed to fundamental analysis, which looks at the goods and services the market deals with. Furthermore, you can incorporate technical analysis in your trading strategy without knowing the fundamentals, but the reverse isn’t true. This piece will explore technical analysis, so keep reading to learn more.
What is Technical Analysis?
Technical analysis is utilised to asses trading and investment opportunities by evaluating price movements and chart trends. Analysts use historical data on a security’s past performance and try to determine its future value. They depend on the forces of supply and demand to estimate how the price, volume, and volatility will affect the investment or security under question.
The use of technical analysis often avails trading signals and assists in assessing securities’ pros and cons relative to the market’s bigger picture. This helps traders better understand the investment moves they’re making and reduces some of the uncertainties involved in trading. The concept as we know it today was first thought of by Charles Dow in the 1800s, but reviews have helped make it more accurate over the years.
However, most analysts and traders use technical analysis to complement other forms of research and use the most apparent trends to inform their decisions. Furthermore, as a trader, you can use the analysis to analyse any form of trading data, including stocks, bonds, futures, or even currency pairs. Day traders in the forex and commodities industry focusing on marginal price movements are some of the main beneficiaries of the discipline.
Technical Analysis Approaches
- The Top Down Approach
When using the top down approach, you look at the entire economy before zeroing down on a specific sector or security. This approach also focuses more on short-term gains than investments with a long horizon. For instance, stocks that improve or reduce their 50-day trading averages may present a trading opportunity.
- The Bottom Up Approach
The bottom up approach takes a magnifying glass and focuses on one stock presenting a good trading opportunity. This approach helps identify a trade’s most optimal entry and exit point for the best return on investment. You can use our guide https://tradingguide.co.uk/ to help you find the best trading platforms.
Furthermore, the bottom up approach can help you identify undervalued securities on the downtrend, as well as their bottoming point, where you can enter the trade and hold your position. However, traders implement the approach depending on their trading requirements, and there is no one proper way. For instance, day traders may only use trendlines and volume indicators, while swing traders use charts and technical indicators.
Advantages of Technical Analysis
- Most technical analysis systems are automated, reducing the risk of misinterpreting the data. This increases the accuracy of the findings and the likelihood of the research producing the desired results, as well as reduces the workload on traders.
- It increases the speed at which traders and investors can review large amounts of data and make pretty accurate decisions.
- When market signals present themselves, you can quickly test them by looking at historical data and the results from such investment moves.
- Technical analysis is not expensive as you can implement it on your personal computer to a high degree of success. The software is also readily available for a small fee or on free-to-play platforms.
- It also improves your trading discipline by considering the stop-loss strategy in its processes.
Disadvantages of Technical Analysis
- Technical analysis relies on historical data and, in some scientific sense, has nothing to do with the prevailing market conditions. Therefore, you have to keep your eye on your trades and ensure your strategy is working.
- Technical analysis can be complicated to understand and implement successfully.
- Traders relying on different approaches may not fully follow through on their technical analysis strategy leading to minuscule or no results.
