Technical Analysis Explained (+5 Tricks On How to Build a Strategy)
The technical analysis is a term that beginners and professional stocks traders are familiar with. The technical analysis is part of most of the trading tools being available, like e.g. from Trade Ideas Pro, eSignal, VectorVest, TC2000, NinjaTrader and MetaTrader, only to name a few. In this article, you will get to know what the technical analysis means and you will learn more about its advantages and disadvantages, about trading indicators and about how you can use them to trade effectively. Continue reading!
What does the technical analysis mean?
The technical analysis is a method to forecast the direction that the stock prices may take. It contains studies of the past market data, trading volumes and primary prices.
The advantages of the technical analysis
You may gain a lot of benefits for your stocks trading strategy by using the technical analysis. Here we mention a few of these benefits that you achieve by using the technical analysis.
1. Market news are reflected in the stock prices
The price to sell a stock is a reflection of fundamental news that influence the market. The pattern that will come up is a true reflection of the crowd-market-psychology.
This is incredibly useful when it comes to market price forecasting. This helps the investors to make informed decisions with their investments.
2. Trend identification
The technical analysis helps you to understand the trend of a certain stock in the market. A stock that you are interested in may be in an upward trend, in a downward trend or it may be sideways.
The trend direction is a great tool whenever you are trading and investing in the stock markets.
3. Entry & exit recommendations
The technical analysis helps you to plan an entry and an exit strategy at the perfect time. For a long-term entry and exit, the stocks traders will see that a fundamental analysis is the most effective help.
When ever fundamental news appear in the market, the price of stocks will change. Beginners and experienced traders use a combination of patterns, trade indicators, the moving average and the volume to determine their target levels.
Disadvantages of the technical analysis
1. Mixed signals
In some cases, the indicators may show mixed signals that make it hard for the trader to find the necessary decisions.
For instance, at one time it may show a signal to buy while another indicator will show a signal to sell. This is one of the main disadvantages of the technical analysis.
To avoid this, most of the experienced traders use a combination of patterns, moving averages and volumes to determine the right entry and exit points.
The technical analysis is used to forecast the purposes. All indicators are possible entry and exit points. You will find out that the rate of accuracy is less than 100%.
This is making it a little unreliable. This means that even when the pointers are good, this is no guarantee for a successful trade.
3. Biased opinions
One technical analysis may contradict another regarding the same kind of stock. This even happens when two analyses are based on the same technical analysis tool for the prediction.
This may be attributed to the level of skills of the analysts, to their experience and to lots of personal preferences that may be involved.
How is the technical analysis used in stocks trading
The technical analysis is an incredibly popular day trading method that the traders use to gain knowledge about the direction that the stock market is taking.
If you understand how it works, there is no doubt about it that you will become a better trader. Here we show you some ways in which the technical analysis may be useful for trading stocks.
1.It helps you to determine the right trading strategy
There are two main strategies and trade ideas that stocks traders use: Technical analysis and fundamental analysis.
The technical analysis uses data from the past to forecast the direction that a stock is taking while the fundamental analysis helps to find out which direction the stock will take.
This is reached by reviewing factors, like e.g. future sales, earnings, cost estimates, political news and more. In both of these strategies the investors use the data to determine the possible future prices of the stocks that are traded.
This way, the traders use the technical analysis to determine the most promising trading strategy.
2. Studying supply and demand
The traders use this tool to understand the demand and the supply in the markets they want to trade.
As a matter of fact, investors use to follow a trend knowing that a trend may repeat itself.
This gives them the right kind of information that helps to ensure that the profits may boost and that they will be protected from potential losses.
3. Chart data
The chart data of stock is necessary for traders who want to trade in specific stocks.
You have to keep in mind that a stock’s market price is an indication of all fundamental factors that influence the value of that particular stock in combination with all other variables that may affect the price.
These factors include market psychology and news events.
4. Trend lines
Some tools for technical analysis include trend lines that may improve your ability to trade profitably if they are used in the right way.
For instance, trend lines are a great help when they are showing the direction that the price movement of a security is taking.
This way, you can find out if the trade is moving in your favor or not.
5. Trading volumes
Trading volumes may be a great indicator to show the strength of a stock’s trend. By using them, you can find out if the market is going up or down.
This way, you can see the most promising levels to enter a trade.
Gaining trade ideas by using the technical analysis
There are many kinds of indicators that determine the trading decisions that you can make at a given time.
By using technical indicators, you are able to define entry and exit levels as well as trade management rules.
You will also be able to watch the trade volumes of certain stocks, the price to earnings ratios, the chart data and trend lines.
Depending on the strategy that you want to use, you may gain detailed knowledge of all events that contribute to determining the direction that the stock market takes.
Technichal analysis explained | Using trading indicators effectively
By using technical trading indicators, the stock traders are able to identify possible high entry and exit points.
To benefit from these indicators in an effective way, it is highly important that you learn how to combine all kinds of information being provided by a giant number of indicators for making the right decisions.
However, you should also learn how to avoid information not being useful, to appreciate the use of complimentary indicators and to keep your charts clean.
It is essential that you learn how to avoid being a victim of an information overload because this may make it even harder to find the right decision