investor using stock market technical analysis

Does Stock Market Technical Analysis Work?

So you’ve entered into the world of investment and stock trade, and you want to know how to succeed in this endeavor. You may have tried going at it by pure instinct, but chances are you’ve lost just as much as you’ve won. Worse, you may have lost even more than you’ve won, and your trading capital is at a decline. You wonder, how do other people become wealthy doing this? Are they just purely lucky? Is it all a big deception? Or is there a secret to their success? Enter the stock market technical analysis.

Stock market analysis is generally done in two ways: fundamental stock market analysis and technical stock market analysis. Fundamental analysis aims to determine a stock’s inherent value through a comprehensive list of considerations, while technical analysis only considers a stock’s price and volume. For this article, we’ll be focusing on the latter. 

Fundamental stock market analysis is a method of analysis that was first introduced in the 1800s by Charles Dow, founder of the Wall Street Journal. What sets it apart is its dependency on trends to determine stock value. It has been successfully applied by numerous investors who have been accomplished in their trade.

stock market technical analysis wall street sign

Whilst upholders of fundamental analysis may argue that technical analysis is too shallow and therefore unreliable, let us take a closer look at how and why stock market technical analysis should work:

  • It is reliable. The share values in stock market technical analysis is based on historical trends and the concept it upholds is repetitive. The reason why this works is that what the concept believes in is generally true. Many successful investors swear by this method of analysis because it has been proven that typically, history repeats itself, albeit not exactly in the same manner–the pattern prevails.
  • It allows better control of your trade. You get clear control of when to enter and when to exit a specific trade. It sets a trendline resistance so that you can objectively make a decision based on actual figures instead of going by your gut alone. It makes extensive use of stock market technical indicators such as chart patterns, moving averages, candlesticks, and Elliot wave analysis.
  • It forewarns you. If there is one superpower that an investor would most likely wish for, it would be the power to tell the future. Unfortunately, this can only exist in fantasy. However, in essence, there is some level of fortune-telling going on with technical analysis in the sense that it doles out early signals pertaining to price movements and even trend reversals. 
  • It values short term returns. If you are a day trader and enjoy a dynamic environment for your investment, technical analysis can give you just that. It can also give you results within a span of a few minutes with the use of 1 minute, 5 minute, 30 minute, and 60-minute charts–all of which are much quicker and therefore more efficient than a daily chart.
  • Information is both current and ample. Perhaps one of the main misconceptions about technical analysis is that it is ONLY applicable to short-term investors. While it proves to be a powerful tool for day traders and swing trades, a lot of long-term investors also thrive on it because of the scope of its information is not only up-to-the-minute, but it also spans a vast extent of time. It considers crowd market psychology through an objective approach utilizing technical data, thus making it reliable.
  • It is a more affordable way to invest. Apart from the time you save with quicker results, you’d be surprised at how many companies offer free charting software for technical analysis. You can easily take advantage of these free offers, although that does not take away your need for skill development, knowledge enhancement, and practice.
checking stock market technical analysis on phone

Despite having all those advantages mentioned above, and as with anything else in trade and life, technical analysis has its own set of limitations. Here are some of its most prominent setbacks:

  • Accuracy. Anybody could use a dose of precision when dealing with money, but such is a rarity in the world of investment. Although technical analysis provides objective data as a basis for your next action, its accuracy is not 100%. There is still some risk involved, such as a decline upon entry or an increase upon exit. Technical indicators are calculated and can buffer you from devastating results, but it does not fully guarantee a maximum win.
  • Mixed signals. Technical analysis can sometimes confuse you by giving out mixed input. If you take a look at several indicators, you will sometimes find that they contradict each other with one telling you to sell and the other one telling you to buy. When this happens, you can no longer rely solely on the indicators but instead have to factor in moving averages, patterns, and volume on top of the analyses. 
  • Biases. Even though the stock market is a world of numbers and figures, there is still much room for biases to seep in. Biases happen because there can be opposing opinions between analysts regarding a specific stock. That is because of inherent biases and the variety of technical methods applied to come up with the analysis. When this happens, technical analysis loses its reliability.

So, does stock market technical analysis work?

Hardcore fundamentalists would say that it does not, just as hardcore technicalists swear by it. Objectively speaking, technical analysis does have its merits and strengths, which is why many traders do just fine while using it. The critical point is not being blind to its limitations and not relying entirely on it as there are plenty of other factors you should take into consideration when making your next move in the trade. 

At the end of the day, your discipline and sound judgment in trading, along with a methodical and objective approach using the right analyses, is what will ensure that your investments succeed. Technical analysis is simply one of a full arsenal of practical tools you can employ in this business. But does it work? Most of the time, with the right mindset and a sensible approach, it does.

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About The Author

Vanessa R.

Vanessa R.

Vanessa has been a freelance writer for eight years, providing content independently and through various online platforms. Having worn many hats—a former student journalist, a registered nurse, an aspiring mom-blogger, plus six years of pharmaceutical sales experience under her belt, she adopts a broad range of approaches to tackling different subjects in personal and professional development. In her spare time, she enjoys chasing her two rowdy boys around the house.