Technical Analysis and How you can make money in the market using it
Technical analysis has always been the favorite of day-traders who are making a lot of money in the market. Other people who don’t know much about it are always fascinated; they wonder how can someone repeatedly make so much money in the market and can actually make a living out of it. Well, in this article let’s see what technical analysis is and why it is so effective. We will also look at the drawbacks that it has and how much you can rely on it.
When it comes to trading in the stock market or the foreign exchange markets; we look at the technical analysis and charts. But we should also look at things around how fundamentals affect market; trading around news events, and the important aspects of psychology and money management.
In this article, let’s start from the basics and talk about charts and technical analysis: what it is, and what it is not! So, first things first, Technical Analysis is not a magic system that’s going to predict every move in the market. It is a common misconception that if you can only get your charts right; the moving averages, etc. then you can make a lot of money in the market, but it is not so. There’s a lot more to trading than those glorifications of the charts.
So, let’s talk about the three basic principles of Technical Analysis:
- Market price discounts everything
This principle suggests that the market price that is existing right now in the market has been decided by the buyers and sellers; through their actions and that is the fair market price and a good representation of the company. In other words, this says that the market price of a company is the correct price for the company; and accurately represents the value that it holds. All of the hopes, fears, and expectations have been factored into the market price. For example, the market price of a stock may still fall even after the company has made a good profit in the past quarter; maybe because of the negative news surrounding the future of the company; and that is to say that the market price has factored in the news as well. However, that is not to say that the investor shouldn’t keep up with the news of the stock market.
- Markets move in trends
This assumption says that any market’s historical graph will generally show a trend; whether in the long-term or the short-term, it would not be totally random; but a series of ups and downs with a smoother trend if looked at from a less granular level.
In other words, It is very rare for a market to take a sudden turn; and crash or go up immediately in a very short period of time. Markets take time to reach where they are and slowly the share prices keep on adjusting either upwards or downwards to take the market to where it currently is.
- History repeats itself
This assumption basically says that levels that were important in the past are important today as well, and will be so in the future. Therefore, in the long term, you’ll see that short-term trends have repeated themselves in a similar manner throughout the timeframe. This would hold true for any kind of market and not just the stock market, but for assets like gold as well.
Advantages of using charts:
- If you’re a trend follower, you can follow lots of different markets; since you only have to worry about the price chart; it is not very crucial for you to know the exact specifics of the market that you’re trading in. You understand charts; therefore it is possible for you to notice trends in the market that you’ve not been already following; since you’re using charting to make your decisions of buy and sell. However, do keep in mind that it will always be beneficial to know about the fundamentals of the market in which you’re trading; it is never possible to know everything just by looking at the charts.
So, you can observe good trends in different markets if the one that you’re currently following isn’t showing any strong trending which you can use to make money.
- When you use charts, you can enforce a discipline in your trading regarding your buy and sell points; therefore, you won’t be easily swayed by your emotions and will be able to take more practical decisions. One important thing to know when working in the stock market is that practicality is extremely important; whenever someone is swayed by their emotions, chances are very high that they will make mistakes and lose money in the market. Therefore, one advantage in charting is that you have pre-decided levels of buy and sell; your faith in the technical analysis is more than your faith in emotions; hence, you’ll be more successful.
Technical analysis primarily involves study of charts using different tools to understand and predict how the market is going to behave. It uses historical data to predict future outcomes; and more often than not, it has proven to be correct and useful; with people making money using the different tools and techniques available in technical analysis.
However, it is extremely important to know and understand that nothing is fool-proof; and nothing can give you 100% correct predictions or results all the time. Same is true for technical analysis, although it might give you a broader picture regarding how the market is expected to behave; everything will not always be accurate, and therefore it is also important to apply your own understanding of different stocks and the fundamental analysis that you’ve done, in tandem with technical analysis; to figure out the stocks in which you want to invest your money.
In our upcoming articles, we will take an in-depth look at the different types of charts and graphs that are used in technical analysis; we will do a detailed review of each technique that you can use in your technical analysis of a share or a stock. Stay tuned!
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