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What Is Stock Market Technical Analysis

If you have just started dipping your toe in the realm of the stock market, you may have probably heard about technical analysis already. There is a lot to know, quite frankly. Over the course of time you are trading stocks, you are going to make use of technical analysis to help you harvest more than what you have invested.

What is Technical Analysis? 

Technical Analysis is the method of looking at the past market data to forecast any financial movement in the future. It is generally used to help identify if stocks will do great in the future so that you can make better decisions in trading stocks.

Technical analysts spend an ample amount of their time studying the price movements, trading volume, and other market data in order to draw up a pattern in which they could use to make decisions. Although there are no absolute predictions, technical analysis helps investors foresee what is likely to happen to prices in the near future. 

Involving a number of charts to be analyzed, technical analysis may seem intimidating to learn most especially for beginners. Worry not–this is much easier than its counterpart, fundamental analysis which is more subjective and non-beginner friendly, and requires more research.

Considering the spike of 50% among Americans who invest in stocks, which was originally just 30% 30 years ago according to the Survey of Consumer Finance, it is essential to fully understand how the stock market works. Not everyone who jumps into the pool is fully aware of how you can earn more in the stock market. It’s not just about investing as you hope to strengthen your financial stability; you have to immerse yourself more on this matter so you won’t lose your investments. 

As a budding investor, it is wise to learn at least the basics of technical analysis to avoid unfortunate losses and be on the look-out for more rewards. 

stock market data

The 3 key assumptions of technical analysis

Investing your hard-earned money on stocks you are not quite familiar with is like tossing your money on the table without knowing what you’re betting for. In learning technical analysis, you should first introduce yourself to the three assumptions that make up the methodology. 

1. The market discounts everything.

Coming as the first and strongest assumption of technical analysis, this theory assumes that the current price already reflects all the available information that affects a company. This information includes the fundamental, political, micro, and macroeconomic data, as well as the risk factor of the current market price at a given period. When all of these are all priced into one stock, the need to assess each factor separately disappears.

When the market players get this information, they either buy or sell their shares. This results in an adjustment in the supply and demand as well as the stocks’ price. 

2. Prices move in trends.

Most technical analysts believe that the price movements are not random, instead, these are said to follow the trends. There is always a general direction where the price is headed—be it upward or downward. 

That being said, when there is a trend and the stock price is increasing, it is more likely to continue to increase. Likewise, if the stock price is going down, it is more likely to continue decreasing its price. 

Trends in the prices can last for however long as they can, but they always tend to just move in one direction and continue its movement—avoiding randomness. 

3. History repeats itself.

One belief that makes technical analysis easier to understand is the assumption that history just tends to repeat itself over time—well at least in terms of the price movement. 

You see, the market players tend to consistently react in a certain way to a similar market spur. With that behavior, chart patterns over time can definitely be used to understand the trends. Thus, any occurrence in the past may be used as a guide to analyze the stock market.

stock market technical analysis

Strengths and weaknesses of technical analysis

Using technical analysis on forecasting the price movements has its own strengths and weaknesses. Although it is only logical to have your research in the past price movements, you ought to take into consideration its respective strengths and weaknesses.

Strengths

Here are some of the strengths that prove the credibility of technical analysis:

  • Minimized reliance on fundamental info

With the widespread news on the market numbers available to the public on a daily basis—whether on TV, internet, newspaper, it has been easier to monitor the market activity over time.

There came a time that seasonal trading was at its peak as you will hear in the news that people are talking about the increase in prices of commodities over this particular season. Seasonal opportunities were tradable in the past, but as time went by, this has changed—making the seasons not a factor in the price movement at all. 

Thereby, seasonal trades are not to be taken into consideration when trading. Instead, you shall monitor the technical analysis and draw up your bets based on your assessment.

  • Complete snapshot of data

In one chart, everything is presented to you. The price, volume, and the open interest are all laid out in front of you–all you have to do is ask the right questions and use the right technical analysis tools to draw up to a conclusion if a trade is worth it.

  • Sense of control and understanding

Investors want to take control of the situation. Although the stock market is not absolute—it can move upward, downward, and sideways—there is only so much you can do to impact its movement.

The constant monitoring of charts on a daily, weekly, and monthly basis just to create patterns in our minds gives us a sense of full understanding of the price movements. The idea of having knowledge in the situation makes a trader ride the wave instead of drowning in it because he knows how to “read” trends.

Weaknesses

On the other hand, here are the weaknesses of technical analysis you should take into consideration upon using it.

  • Indicators are not always appropriate

Technical analysis is very helpful in your trading decisions, but you always have to remember that it can only tell you what has happened in the past and what is present. It does not give you an exact prediction of the price movements.

Relying too much on technical analysis creates the tendency of forgetting to develop contingency plans if ever the forecasts fail you. You must practice safeguarding yourself and creating a safety net because technical indicators can only tell you what has already happened and not what is going to happen.

  • Tools are available to everyone

When you use charting software, all the information and tools are readily available. This gives you little to no advantage in competing with other traders. It always comes down to how you are going to analyze these charts and make your own predictions.

  • Interpretation is more art than science

Technical analysis may consist of concrete numbers and data to gather the right analysis, but this doesn’t mean that there are only a few ways to get this. You can use technical analysis tools any way you like as long as you understand its functions—thus, there is no constant method. There is no wrong way at all. With too many traders believing in the power of technical tools, a great deal fails to see the other side of the coin.

We totally understand how hard it is to educate oneself in penetrating the stock market especially when you are just a beginner. There is just too much at stake and you need to get ahold of many factors—including your emotions. It’s complicated to begin with, but as you go along and continue learning the ropes, you’ll nail it in no time. 

In order to fully immerse yourself on how you can utilize technical analysis in your trading, it counts to seek education that will help you grow your money in the stock market. Online courses are your best friend in learning these at your own pace. Here are two of your best bets from Skill Success on learning what stock market technical analysis is:

These two online courses will definitely amp up your knowledge in trading stocks so that you can avoid betting on trades that are not worth your coin.

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About The Author

Hazel S.

Hazel S.

Hazel is a Communication graduate who writes about e-learning subjects that vary across all fields. She believes in the power of knowledge to achieve triumphs in life—whether careerwise or personal. Currently, she is living with her family and two white cats.