Advantages of Technical Analysis

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What are the advantages of technical analysis?

Advantages of technical analysis

In this part of the series, we’ll discuss the advantages of technical analysis. This is useful for trading strategy.

Market news reflects the stock prices

The stock price is a reflection of all fundamental news. The crowd market psychology is identified using the patterns. It’s used for price forecasting. This helps investors make informed investment decisions.

Trend identification

The direction of the stock market trend is identified using technical analysis. The stock may be in an uptrend, a downtrend, or a sideways trend. The trend direction is useful when you’re investing and trading in stock markets.

Entry and exit recommendations

Entry and exit strategy is recommended for short and long-term trading in technical analysis. Fundamental analysis is used for the long-term entry and exit point. When fundamental news is available in the market, the stock price already changed. Some traders use a combination of trend indicators, patterns, volume, and moving averages to determine the entry and exit point.

The above chart shows the entry and exit signal for IBM’s (IBM) stock. In the above chart, the stock breaks above resistance. So, entry is suggested. Trendline resistance is used to determine the target level.

Applying technical analysis concepts

The technical analysis concepts can be applied to stocks like Cabot Oil & Gas (COG), Concho Resources (CXO), EOG Resources Inc. (EOG), and Laredo Petroleum (LPI). These companies are part of the S&P Oil & Gas Exploration & Production ETF (XLE).

Advantages of Technical Analysis

Technical versus fundamental analysis has been a long-standing debate amongst investors, but for day trading or short-term trading technical analysis is the way to go. Technical analysis is the study of price charts and basically any information that can be compiled from them, such as volume analysis, cycles, trends and statistics. Technical analysis is used to forecast price movements, as well as provide methods of entry and exits from trades. If you are new to trading, here are some of the advantages of technical analysis.

Provides All Current Information

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The current price reflects all currently known information about an asset. While rumors may constantly swirl that the price may plummet 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 reflecting the current perception of 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. There is no need to concern yourself with why a price is falling or rising, the fact that it is tells you there is more selling interest than buying interest, or more buying interest than selling interest, respectively.

This makes trading much simpler because with technical analysis we are focused on the price chart. No scouring financial statements or reading the latest financial news…it’s all reflected in the price anyway.

Prices Move in Trends

If prices just gyrated wildly and randomly it would be very hard to make money. While wild gyrations do occur, overall prices typically move in trends. There is a directional bias to the price which provides traders with an advantage. Much of technical analysis is about determining when a trend is in place, when it isn’t (called a sideways market, range or correction) and when a trend is reversing.

Most profitable trading methods used by traders are trend following strategies. This means you isolate the trend, and then find opportunities to enter in the same direction as the trend, thus capitalizing on the directionally biased price movement.

Trends occur on various “degrees.” For example you may have a long term uptrend on the daily or weekly chart, but on shorter time frames, or at the far left of the chart you may have a downtrend. Figure 1 shows an example of this.

Figure1. S&P 500 Trends

Trends are where traders make money, whether short term trading or longer term. Therefore, technical analysis provides you with tools for doing just that.

Technical analysis is largely based on uncovering common patterns, finding those patterns again and using them to trade. This doesn’t mean that history repeats exactly though. For example, there is a common chart pattern called the triangle. The general construct is always similar, but each time it will likely be bigger or small than the last triangle, and may breakout in a different direction than the prior one. Therefore, history repeats in a general way, not necessarily producing an exact replica of prior patterns.

Realizing that human psychology doesn’t change much, the technical analyst understands that we will continually see the rise and fall of asset prices as traders and investors play out the emotions of fear and greed. The emotions, as well as others, create patterns in asset prices across all time frames. The technician is able to recognize these patterns and then trade them, using history as a guide and the current price as a catalyst.

A major advantage of technical analysis is that it provides you with ways to “time” your trades. With a fundamental approach your research may dig up some interesting news on a company’s stock that you think may cause it to 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 higher.

Figure 2 shows how simple technical analysis indicated that this pair was about to drop. The pair did drop, and technical analysis provided great timing for a great trade.

Figure 2. USD/JPY Timing Signal

Any Time Frame or Market

Once you learn technical analysis, and it is a large field, you can apply many of the concepts to multiple markets, such as stocks, forex, futures, binary options, CFDs and even housing and art prices. All market trading is based on patterns of human behaviour, patterns which then appear on price charts across markets. This means you don’t need to learn how to analyze every market specifically. While there may be some small differences between analyzing stocks and the highly-leveraged forex market, most of technical analysis knowledge will serve you well in all markets.

Additionally, technical analysis can be used on any time frame, whether you trade daily or weekly charts, or trade 60 second binary options. Financial markets are considered “fractal,” which basically means patterns that appear on the smallest scale also appear on the largest, and vice versa. This once again means that most of your accumulated technical analysis knowledge can be just as easily applied to a 1 minute chart as it can to a daily chart.

Technical analysis is the preferred tool for short term traders. It provides ways to time your trades so you aren’t wasting time, and you can implement the methods in multiple markets or time frames if you desire. Technical analysis is based on the price reflecting all current information on an asset, and that the current price is the current perception of value. Also, technical analysis is used to isolate trending and non-trending periods. Finally, technical analysis is used to spot patterns, and then trade them, since history often repeats itself in general structure.

Top 4 Benefits of Technical Analysis

Technical analysis is the study of stocks and markets as they relate to price data only. Technical analysis does not concern itself with the researching of the fundamental information and prognosis–that’s left for fundamental analysis. Fundamental and technical analyses are somewhat at odds with each other. Some market experts use both, and some use one or the other. The main benefits of technical analysis are that it takes less time than fundamental analysis, can easily take advantage of useful resources, is inexpensive to employ and focuses more on strategy and execution.

1. Takes Less Time

Proponents of technical analysis believe that all the information and research is already priced into the markets. One can speculate faster with charts and price data. Just by looking at the charts and by having technical expertise, someone using technical analysis would benefit from sticking to studying the charts and data. That means that less time is spent on irrelevant information and more time is spent becoming familiar with the price movements of the market in question.

This also means that more time is spent focusing on execution and ultimately focusing on profits and managing losses. That’s why most traders use technical analysis, while most investors use fundamental analysis. Technical analysis focuses on the execution of the trade as well as profit and losses in the near term, whereas fundamental analysis focuses on value and long-term potential.

2. Ready Resources

Charting involves being resourceful. There is an abundance of technical indicators available in many trading and charting packages that can lead to good analysis and strategies. Much research has gone into many technical indicators that are included in trading software and packages that afford the everyday trader built in resources and a wealth of information. This allows anybody and everybody to learn to plan a strategy without having to create her own methodology, which can cost a lot of time and money.

These technical indicators and software packages are relatively inexpensive. They can be managed by one person and used to a desired end for the further analysis and creation of strategies. Because they are so inexpensive, the barrier to enter into day trading with technical analysis is low, allowing dedicated individuals to engage with and succeed in investing and trading. Thanks to the aforementioned benefits and economics of technical analysis, one’s own character is the driving force for success in trading.

Technical analysis is a precursor to building a good strategy. Thanks to the aforementioned benefits, technical analysis focuses the trader on the execution of a strategy that is suitable for his or her trading style. There are as many strategies as there are traders. One’s own creativity and perseverance are the only limitations. This strategic focus allows for better success from a strategic standpoint. For instance, instead of just researching the news revelations and fundamental information, traders can know systematically and strategically how to place their trades and when to close a position. This is by far one of the most important aspects to technical analysis.

More Reading

Using FOREX Technical Analysis

Using FOREX technical analysis is one of the most popular ways to trade the market. There are two main ways to trade the FOREX market. You can use fundamental analysis or technical analysis. With fundamental .

Technical or Fundamental Analysis for Day Trading?

Both technical and fundamental analysis can be used by day traders in the stock market. Some people prefer one method over the other. There is not a particular method that has been proven to be more effective. .

Day Trading with Technical Analysis

In many cases, day trading and technical analysis go hand-in-hand. In order to be a successful day trader, it is useful to incorporate as much relevant information as possible into each and every trade. Because .

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