In the stock market, technical analysis is the method most used by individual traders. This is one of the two major schools of market analysis, the other being fundamental analysis. While fundamental analysis focuses on the true value of an asset by considering the significance of external factors and intrinsic value, technical analysis is purely based on charts of an asset. Only the identification of graphic trends is used to anticipate the next market movements.
The purpose of this article is to show you how to work with technical analysis:
By definition, technical analysis is the graphical study of a stock price. It applies to any type of market such as listed shares, stock indices, currencies on the money market (forex), commodities (gold, oil, silver) or even crypto-currencies. In principle, it is a way of studying and anticipating price movements in the financial markets based on the history of the charts of an asset.
Use of technical analysis:
Based on the study of the curves of different parities, the main tool of technical analysis is the graph which allows the visualization and analysis of an underlying asset. A good understanding of this mechanism is fundamental to detecting discrepancies. Because the overall success of the trader’s strategy depends on the relevant analysis of the technical situation of the indices making up the parity on which a divergence has been detected. It consists of studying the graphs of the stock market prices and of various indicators deduced from the prices in order to predict the evolution of the financial markets.
The advantages and disadvantages of technical analysis:
Even if technical analysis is widely practiced by traders today, its great advantages do not exclude its small disadvantages.
- Thanks to the configuration which gives indications on the probabilities of a future rise or fall of the asset, the technical analysis makes it possible to make an anticipation on the future evolution of the prices. Each element of the chart is associated with an uptrend or a downtrend.
- In addition, it facilitates the trader in decision-making, that is to say, it allows him to accurately determine entry and exit points.
- Then, the technical analysis is adapted to any unit of time. Indeed, whether you are a short, medium or long term trader, it is perfectly suited to your preference.
- A technical analysis is never 100% sure, because there is no mathematical proof that confirms that it works. Old prices say nothing about potential future prices according to experts. It is therefore a question of whether the technical analysis leads to something concrete.
- Moreover, we will probably have three different results even if several analysts decide to rate the same stock.