Technical analysis is an approach where you study the past data of an asset’s price movement to predict its possible future movements. It uses charts, graphs, and other technical tools to let the trader visualize the price patterns and movements.
Although it sounds a bit too difficult to do, technical analysis actually has a lot of advantages. And here are some of them.
Reflects Current Information
The price that you see on the chart or asset ticker reflects all of the available information regarding the asset.
Although rumors and speculation can make the price surge or slip, the current price serves as the balancing point of all of this information.
And since this is the case, the only information that traders need is the price chart. The reason behind the rise or fall of the price also matters, but ultimately it is the movement of the price on the chart that matters more.
But if prices are moving randomly and without direction, it would be a very difficult venture to trade. The good thing is, even though wild price swings do occur, the market prices generally move in trends.
A directional bias to the price exists, and it offers the traders with an advantage. A huge part of technical analysis is about knowing when a trend is in place (whether uptrend or downtrend), when there isn’t any trend (which we call a sideways market), and when the said trend is reversing.
As a matter of fact, the most profitable trading methods that traders use are trend-following strategies. Using these strategies, you isolate the trend and find opportunities to enter the same direction as the trend.
History Repeats Itself
Technical analysis is primarily based on discovering repeating and common patterns and finding them again to use them to trade.
It doesn’t necessarily happen in the exact way as before. It happens in varying degrees. For instance, you may see a double-top pattern here, and a few weeks later you may see it again, but this time it’s much, much bigger, although the general construct is the same.
And because human psychology doesn’t change very much, trends tend to reflect it. The rise and fall of prices as well as the trends will continually appear on the chart. And the goal of the technical analyst is to see it before it even appears.
Timeframe and Market
When you learn technical analysis, you will be able to apply many of its concepts to multiple markets like the stock market, forex market, futures, CFDs, and options.
After all, market trading is based on human behavioral patterns, which appear on price charts across different markets.
What that means is that you don’t necessarily have to learn how to analyze every market. Although they have many small differences, most of the knowledge you learn through technical analysis will help you well with the markets.
Also, you can use technical analysis on different timeframes. You can view the daily or weekly charts and trade on either of them.