What is Technical stock analysis?

Technical Analysis

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Understanding the market well can give investors insights like never before. You can know to play well only if you know the rules down pat right. In order to understand the financial market, there exists something called Technical Stock Analysis.

What is Technical Stock analysis?

It essentially is the study of historical market data, including price and volume. Using these insights from the market’s psychology, behavioural economics and thorough quantitative analysis, technical analysts can aim to use past information to predict future market behaviour.

How to use Technical analysis in your favour?

The main principle that underlies technical analysis is the fact that the market reflects all available information that could impact a market. There is no need to look at economic, fundamental or new developments since they are already priced into given security.

Analysts ideally believe that the prices move in trends and history tends to repeat itself when it comes to the market’s overall psychology.

The Fundamentals of Technical stock analysis

There are three main fundamentals to understanding technical stock analysis:

  • Market prices are indicators: When it comes to technical analysts, they are well aware of everything there is to know about a stock. They use this information when it comes to making buy/sell decisions. Eventually, it comes to fruition like a self-fulfilling prophecy in the stock’s price and eventually the stock chart as well.
  • Patterns tend to repeat themselves: Stocks tend to move in a cyclic manner; crests and troughs if one has to be more precise. Technical analysis allows you to understand the position of the stock and place your bets in accordance with calculated guesses. This will yield you the most profit at a certain point in time. One needs to know that profits are not about just that, it is about being at the right place at the right time to make the most of prices increasing.
  • Stock prices ideally follow trends: Technical analysis depends on the understanding that stocks have their own unique trends. Prices move only within a certain trend. Each move the stock price makes will ideally indicate the next move. One who understands the flow of stocks can understand how the stock will move next and make calculated decisions to make the most of that stock. This will enable the investor to get the most out of investing in a stock, and when done repeatedly will make you steady financial growth. 

Are there any limitations to technical analysis?

Technical analysis has the same limitation as any strategy based on particular trade triggers. The chart can sometimes be misinterpreted. Formations can sometimes be predicted on low volume, which may not really be the case.

However, with more tools now coming up in the market, these limitations can be weeded out. However, the accuracy of technical analysis can still be off the mark. One has to be 100% sure before making decisions solely on the basis of Technical analysis.

Overall, people cannot enter the market without any technical analysis but sole reliance on it can also prove to be an investor’s undoing.

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