Technical Analysis: Why an Investor should care?

 

Technical Analysis:

Technical Analysis is a way of predicting future price movement based on the study of past price movement. Technical Analysts believe that historical price patterns keep repeating, and the price movement after the pattern is also similar to historical price movements. 

The belief may or may not be right as most technical analysts also stress keeping stop loss, having a favorable risk/reward ratio, and win percentage; but there is no denying there are traders who made fortunes trading with technical analysis as well people who lost everything they had.

So, do technical analysis really work?

Yes, but not the way the majority of non-trading technical gurus keep telling us.

The Technical Analysis is a great way of managing a trading position, but it cannot tell you the major trend's future. The future major trend of the price depends on the company's future performance and not on technical charts. (At least for long-term investments.) 

So, should we use technical analysis? Why?

Yes, we should definitely use technical analysis because if one finds a good company to invest in and do so with or without aiding technical analysis as a tool following things may happen.

Situation 1: The company performs well and stock price surges.

• With Technical Analysis: Will get good profit. If the trader is good with pyramiding his returns will be far bigger than a usual investor.
• Without Technical Analysis: Will get good profit.

Situation 2: The price neither rose nor fell drastically stayed within a small range.

• With Technical analysis: Will book small profit at the resistance level.
• Without Technical Analysis: Will book when patients are over. Cannot say whether the trader will book profit or loss, but there is a large probability of booking a smaller profit or loss compared to the previous trader. 

Situation 3: The company got into some problems which caused the price to fell drastically.

• With Technical Analysis: Will book small loss at stop loss.
• Without Technical Analysis: Probably will book a bigger loss as he will keep holding the stock till the news gets public.

In all the above scenarios the person with a technical method of managing position will have an upper hand compared to the one without any such method. 

Stock picking with fundamental analysis is important to make sure we have more probability of winning and technical analysis is important to make sure we win big when we are right and lose small when we are wrong. Ultimately it is the price-performance that decides profit to the investor.  

I hope you understood the importance of technical analysis. We will discuss some basic technical analysis concepts in further articles and then move onto trade management. 

Thank You! And don't forget to READ TO LEARN INVESTING.