- 1 What is Technical Analysis
- 2 Key Point to remember.
- 3 8 Myths About Technical Analysis
- 3.1 1. Technical analysis is only for short-term trading or day trading.
- 3.2 2. Only individual traders use technical analysis.
- 3.3 3. Technical analysis has a low success rate.
- 3.4 4. Technical analysis is quick and easy.
- 3.5 5. Ready-made technical analysis software can help traders make easy money.
- 3.6 6. Technical indicators can be applied across all markets.
- 3.7 7. Technical Analysis can provide very accurate price predictions.
- 3.8 8. Winning rate in technical analysis should be higher.
- 3.9 Most Common Thing
- 3.10 Indicator versus price driven
What is Technical Analysis
Technical analysis is something by which trader try to predict the price or trend of the particular stock. It help to understand the technical thing related to a stock or company for example what is the P/E ratio for this company and what about the standard deviation. Some traders and investors denounce technical analysis (TA) as a superficial study of charts and patterns without any concrete, conclusive or profitable results. Others believe it is a sort of Holy Grail that once mastered will unleash sizable profits. These opposing viewpoints have led to misconceptions about technical analysis and how it is used.
Some misconceptions about technical analysis are based on education and training. For example, a trader trained in using only fundamentals may not trust technical analysis at all. But that doesn’t mean someone who is trained in technical analysis can’t use it profitably. Other myths are based on experience. For example, the incorrect use of technical indicators often leads to losses. That doesn’t mean the method is necessarily bad – possibly the person just needs more practice and training. Other myths are perpetrated by marketing, promising overnight riches if a simple indicator is bought and used. Rarely is it that easy.
Key Point to remember.
- Technical analysis tries to capture market psychology and sentiment by analyzing price trends and chart patterns for possible trading opportunities.
- Contrary to fundamental analysis, technical analysts do not necessarily care much about the companies behind the stocks they trade or their profitability.
- Some believe technical analysis is the best way to trade, while others claim it is misguided and lacks a theoretical basis. Here we debunk some myths on both sides of the debate.
8 Myths About Technical Analysis
1. Technical analysis is only for short-term trading or day trading.
It is a common myth that technical analysis is only appropriate for short-term and computer-driven trading like day trading and high-frequency trades. Technical analysis existed and was practiced before computers were common, and some of the pioneers in technical analysis were long-term investors and traders, not day traders.
1 Technical analysis is used by traders on all time frames, from 1-minute charts to weekly and monthly charts.2
2. Only individual traders use technical analysis.
While individuals do use technical analysis, hedge funds and investment banks make ample use of technical analysis as well. Investment banks have dedicated trading teams that use technical analysis.3 High-frequency trading, which encompasses a significant amount of the trading volume on the stock exchanges, is heavily dependent on technical concepts.
3. Technical analysis has a low success rate.
A look at the list of successful market traders, who have decades of trading experience, debunks this myth. Successful trader interviews have cited significant numbers of traders who owe their success to technical analysis and patterns. For example, “Market Wizards: Interviews With Top Traders” by Jack D. Schwager cites many traders profiting solely from technical analysis.4
4. Technical analysis is quick and easy.
The internet is full of technical analysis courses that promise trading success. Though many individuals enter the trading world by placing their first trade based on simple technical indicators, continued success in trading requires in-depth learning, practice, good money management and discipline. It requires dedicated time, knowledge and attention. Technical analysis is only a tool, only one piece of the puzzle.
5. Ready-made technical analysis software can help traders make easy money.
Unfortunately, this is not true. There are many online ads for cheap and costly software that claims to do all your analysis for you. In addition, less-experienced traders sometimes confuse technical analysis tools in broker-provided trading software for trading models that will guarantee profit. Though technical analysis software provides insights about trends and patterns, it doesn’t necessarily guarantee profits. It’s up to the trader to correctly interpret trends and data.
6. Technical indicators can be applied across all markets.
While this may be true in many cases, it is not true in all cases. Specific asset classes have specific requirements. Equities, futures, options, commodities and bonds all have differences. There may be time-dependent patterns like high volatility in futures and options nearing expiry, or seasonal patterns in commodities.
Don’t make the mistake of applying technical indicators intended for one asset class to another.5
7. Technical Analysis can provide very accurate price predictions.
Many novices expect recommendations from technical analysts or software patterns to be 100 percent accurate. For example, inexperienced traders may expect a prediction as specific as, “stock ABC will reach $62 in two months.” However, experienced technical analysts usually avoid quoting prices so specifically. Rather they tend to quote a range such as, “stock A could move in the range of $59 to $64 in the next two to three months.” Traders betting their money on technical recommendations should be aware that TA provides a predictive range, not an exact number. TA is also about probability and likelihoods, not guarantees. If something works more often than not, even though it doesn’t work all the time, it can still be very effective at generating profits.
8. Winning rate in technical analysis should be higher.
It’s a common myth that a high percentage of winning trades is needed for profitability. However, that is not always the case. Assume Peter makes four winning trades out of five, while Molly makes one winning trade out of five. Who is more successful? Most people would say Peter, but we don’t actually know until we get more information. Proper trade structuring allows for profitability even with few winners. Profitability is a combination of win-rate and risk/reward. If Peter makes $20 on his winners but loses $80 on this loss, he ends up with $0. If molly makes $50 on her win and losses $10 on her losses, she walks away with $10. She is better off, even with fewer wins.
Most Common Thing
Technical analysis provides a large basket of tools and concepts for trading. There are successful traders that don’t use it, and there are successful traders that do. Ultimately, it is up to each trader to explore technical analysis and determine if it is right for them. It doesn’t guarantee instant profits or 100 percent accuracy, but for those who diligently practice the concepts, it does provide a realistic possibility of trading success.
Indicator versus price driven
Objective technical analysis can be split up into to types of TA, namely indicator driven and price driven technical analysis. Both types are well applicable and are widely used and can be used in combination, because both indicator driven and price driven technical analyses have different purposes. The indicator driven technical analyses is based on indicators and the price driven TA is based on the price of a share. The ultimate purpose of TA is determining the risk and possible return of investments, and indicator and price driven technical analysis can help you with that.
When the price driven TA is used, the resistance and support price levels of a share are important. The closer the price of a share approaches this line, the less possible movement space of the price to that line exist. The chance of a counter-movement keeps on growing when the price approaches the support or resistance line.
A logic of the resistance and support lines can be found. Each time a support or resistance line is not broken, the support or resistance price level gets stronger. Investors get more and more convinced of the reality of the resistance or support and will use this information in their trades. When a resistance level is reached, investors will not buy the share any more, but want to go short in this share. This is why a resistance will not be broken easily, of course the possibility always exists that a resistance or support will be broken. This should tell you that using the resistance and support levels can lower your risk, but a certain level of risk will always be present.
The indicator driven TA uses trends that are present in the progress of a share. Upward and downward trends, as well as turnarounds in trends, can be recognized using indicator driven TA methods. An example of an indicator driven TA method is the 200-day simple moving average. With this indicator, the trend of a share can be found. In a next article I will discuss the most important and used indicator driven TA methods.
TA always try to provide most accurate price for the stocks, with the help of TA you can understand the so many thing which will help you in long term investment. TA is helpful in intra day, short term and in long term investment. So always be focus more on technical factor about the stocks.