There are two schools of thought in terms of approaches to trading: fundamental and technical analysis. While fundamental traders’ strategies revolve around the core facets of the business, the management team, and the business’s balance sheet, technical analysis uses mathematical models to play the fluctuations of price movement. Day traders mostly use technical analysis; it’s no surprise that they do. In this blog post, we will discuss what technical analysis is in detail, its benefit, and how it results in more consistent and efficient trades. We will also introduce you to using technical analysis and how incorporating it into your trading strategy will undoubtedly boost your results.
It is important to remember that fundamental analysis still has a place in the stock market and other securities. It has its merits and shortcomings, just like technical analysis. However, there has been a strong movement towards technical trading due to artificial intelligence, quantitative modeling, and statistical analysis. These developments have shown traders that the best way to play price movements is to use software to analyze historical data and predict the future (or try to, at least).
What is technical analysis?
Basically, statistical analysis is a trading strategy used to evaluate trades based on mathematical developments, whether analyzing statistical trends, price movement, volume, and volatility. Those who employ technical analysis as the base of their trading strategy believe that past trading and price changes can be valuable indicators for the future behavior of security. Technical analysis does not care about the fundamental aspects of a company, such as its balance sheet, the company’s future vision, etc.
In essence, technical analysis focuses on the price of the asset and its volume. Users don’t care whether or not the stock price accurately reflects the value of the company. As long as price movements demonstrate patterns that can be analyzed to predict the future, technical analysis can be employed. It can be used on any security with historical trading data. This includes stocks, futures, commodities, and much more. This makes the strategy attractive to traders because it allows them to diversify their markets. They don’t just need to buy stocks because the company’s value doesn’t factor into their trade strategy.
Why do I need to use technical analysis?
Some variation of technical analysis is recommended for all traders, even those who mainly rely on fundamental analysis. This is because technical traders are less prone to uncontrollable external factors, such as news about the company. Technical traders just care about price, volume, and volatility. Therefore, they are often less emotionally invested in their trades; the future of the company and general trajectory of the stock, for example, doesn’t matter. This added peace of mind is an extra advantage to using technical analysis. Naturally, trades become more efficient when emotion is minimized.
Because technical analysis is based on historical data, patterns, and models, mathematical validity can support and boost your trade ideas. It is necessary for you to have numeric evidence that supports your strategy. If you know that, historically, APPL moved up 3 points after increasing 2 points the previous day, you can get a short position in this trade.
Regardless of how expensive APPL is, you know that statistically, this will be a profitable trade. You don’t need to believe in the future of Apple, its management, its cash flow, etc. All you need to know is how the price will move in the short term.
In this blog post, we discussed the details of technical analysis. What is it, how does it work, and how can you incorporate it into your approach to trading. Based on historical data and quantitative analysis, one can gain a quick look into short-term price movement and volatility. This can result in extra profitable trades that would not be possible without certain technical indicators. This is the first step you must take to increase your efficiency in trading. Rely on the math, understand key indicators and models, and seize opportunities based on fluctuation and numerically-based models.