What is technical analysis? It’s the process of analysing price movements (past and present) of an asset in hopes that it can give us some indication on where it might trade in the future.
Generally, this done by observing a chart of the security when looking to buy stocks online.
Why should you care?
Since most discretionary stock trading consists of having an
opinion on the future direction of a security, it’s important to have tools that help us generate ideas that provide an edge.
Technical analysts makes a couple of assumptions
Price patterns repeat, and therefore, they’re predictable.
There lies a belief that fundamental factors are imbedded in price behaviour.
Of course, there are some truths to these assumptions, but there are cases in which it’s simply not true. For example, we are all not privy to the same research. However, we do see certain patterns constantly repeat themselves.
In any event, the idea is that the market price reflects the sum knowledge of all participants, which includes banks, hedge funds, small and large investors. Trading technical analysis can be used in all asset classes when buying stocks online.
Fundamental analysis Vs Technical analysis
Of course, fundamental analysis varies greatly from technical analysis.
But here’s how:
There is no concern about price action, but rather key “fundamental factors.” In stocks, this type of market analysis involves studying sales, profits, expenses, debt and other factors to help determine the direction of the stock price.
In commodities, it is the study of the supply and demand chain and factors which influence its price…ultimately determining whether prices should rise or fall when buying stocks online.
Now, you don’t have to pick sides, there is no black and white in the markets. If there is breaking news in a stock, and let’s say it’s involved in accounting scandal, does it make sense to wait for a “specific technical level” to get out?
Probably not. Market participants who are long are going to sell, momentum traders will most likely start shorting. In the meantime, they’ll be sifting through the story to get a grasp of the validity and potential impact on the stock price.
With that said, some concepts in technical analysis are still worth understanding.
Four reasons why its important to understand technical analysis
- Understanding the principles behind technical analysis, and ultimately creating strategies with them is much more straightforward than analysing mountains of data and research which is necessary in fundamental analysis.
- Technical analysis is better suited for short-term trading, whereas fundamental analysis tends to be more accurately applied to the big picture and long-term trends. In other words, technical analysis is better for trading, while fundamental analysis is better for investing and buying stocks online.
- It’s a lot cheaper. There are several charting packages that are free to use. However, not only is fundamental analysis complicated to decipher, it’s also very expensive. The average trader simply doesn’t have the resources to conduct market surveillance, industry analysis, statistical analysis, news and research.
- You’ll save a lot more time. With technical analysis, you can quickly scan through charts to find the best set ups possible for your day and swing trades. However, with fundamental analysis, it requires a great deal of reading.
As mentioned earlier, today’s markets are a lot more complicated than they were in the past. A lot of the trading today is conducted by computer buy/sell programs, and market makers have been replaced by high-frequency traders. The pure efficiency of technical analysis has dropped, but it still does have a place in trading. You’ll see patterns repeat themselves, intertwining these observations with your other tools, which should help make you a better trader when buying stocks online.