Technical versus fundamental analysis has been a lengthy debate among various proponents and investors. However, for day traders and short term investing, technical analysis has been the go-to approach.
Technical analysis refers to the study of price charts and basically any kind of information that one can compile from them, like volume analysis, cycles, trends, and statistics. Technical analysis is used to predict price movements. It is also used to provide methods of entry and exits from trades.
Provides all Current Information
The current price reflects all the currently available information about an asset. Meanwhile, rumors may constantly swirl that the price may plunge or surge. Ultimately, the current price is the balancing point for all information.
As investors and traders sway from one side to the other, buyers or sellers, the asset moves in a way that reflects the current perception on its value.
If this is true, then the only information we need is a price chart since all information and perceptions of value are recorded in the price gyrations on that chart. You don’t really have to be concerned about the reasons behind price rises or falls. What you could focus more is the fact that you know whether there is more selling interest than buying, and vice versa.
Prices Move in Trends
If prices just moved wildly and randomly it would be very difficult to make some money. Even though wild gyrations do occur, overall prices typically move in trends. there is a directional bias to the price which offers traders some advantages.
Much of technical analysis is about knowing when a trend is in place, when it isn’t, and when a trend is reversing.
Most profitable trading methods that are used by traders are trend-following strategies. This means that you isolate the trend and then find chances to enter in the same direction as the trend, therefore capitalizing on the directionally biased movement. Trends take place in various degrees.
History Repeats Itself
Technical analysis is mainly based on uncovering common patterns, finding those patterns again and using them to trade. This doesn’t mean that history repeats itself exactly.
Take the common chart pattern called the triangle for example. The general construct is always similar, but every time it will likely be bigger or small than the last triangle. And it may breakout in a different direction from the previous one.
Therefore, history repeats in a general way, but it does not necessarily produce an extra replica of the previous instance.
Another major advantage of technical analysis is that it offers ways to “time” your trades. With a fundamental approach your research may whip out some interesting news on a company stock that you think may make it rise in the future. But when?
With technical analysis you can wait and use your money for other opportunities until the price tells you the stock is ready to move up.