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Does Technical Analysis Work?

Mon Jun 07 2021 14:56
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As a beginner trader, you are always advised to study more about technical analysis. Expert traders recommend that studying technical analysis more will help you get success in any market. What if you don't get success even though you apply technical analysis strategies? 

Many questions pop up in the minds of traders. They want to get answers, but a large part of the global market is busy appreciating technical analysis. Sometimes it feels like there are biased opinions about technical analysis. 

To know the reality, you need to know everything about technical analysis. Here we are not going to describe any strategy of technical analysis, but we will focus more on its importance and results. If you have also asked yourself the same questions many times, then you are at the right place. 

Let's find out the reason why technical analysis is good and what makes it not a useful approach for some traders.

Technical Analysis — Basic Understanding 

The first thing you need to do is understand what technical analysis is. As a basic definition, we all know that technical analysis consists of various signs to find out the trends. We use historical data instead of using fundamental and current data. 

We need to go beyond the basic definition of technical analysis. There are many things to know about technical analysis. From myths to its advantages and disadvantages, we will explain everything to you.  

Technical Analysis 

In technical analysis, we use historical data of an asset and then compare and analyze it according to the current time. The ultimate goal of technical analysis is to find the price and volume trends for an asset. Finding a trend with strength and relation is more important in technical analysis.

Stop Believing Myths About Technical Analysis 

Now let us come to the myths. Myths about anything make us confused and doubtful, and the same thing happens with technical analysis. Whenever we listen to some myths about technical analysis, we start believing them and they confuse us. 

As a trader, you may have experienced the same situation many times. So, before you start working with technical analysis, you need to forget all the myths about it. Below are some of the popular myths about technical analysis. 

Popular Myths About Technical Analysis 

There may be more myths than we have mentioned. But right now, all these are creating new confusions and doubts in the market. Beginners are always affected by these popular myths about technical analysis.

Suitable For Day Trading Only 

Popular myth is that technical analysis is only for day trading or short term trading. But this is completely wrong. Because long traders also use the power of analysis.

Low Success Rate 

One myth claims that technical analysis has a low success rate. But if it has a low success rate, why does the whole market still use it? So this myth is also false.

Software Or Bots Can Help 

Some spam promoters or sellers promote some software and bots. They claim that a trader can make money with the technical analysis done by their software or bots. But this is not quite true.

100% Accuracy In Predictions 

Technical analysis can help you catch the trend, but it can never predict the price with 100% certainty. No one can give you that level of certainty in an analysis.

A Very Easy To Follow Process 

Technical analysis is not that simple & that's why beginners are advised to study more before they start using it.

Suitable For Retail Investors Only 

If you think that small traders can only use technical analysis strategies, then you are wrong again. Many fund management companies, hedge fund companies & banks use technical analysis in their trading plans.

Benefits Of Technical Analysis 

If you want to get answers whether technical analysis is useful or not. Then you need to look at the benefits of technical analysis. There are several benefits that technical analysis offers that other types of analysis cannot yet offer. Below are some of these advantages.

Capture The Trend 

The biggest advantage that technical analysis offers is capturing the trend. If you are a trader who follows the trend before starting to trade, then this is important for you. 

Only this beneficial factor of technical analysis can get you into profitable trading. This is because most of the technical analysis strategies focus on finding the trend of the market or an asset. 

Set Stop Loss & Targets 

It helps you to determine the stop loss and targets in your trading session. A trader is always confused about the stop loss targets and they are not able to make quick decisions about it. But if the technical analysis is done before starting the trading session, then it will make the process easier.

Accurate Information 

Technical analysis provides accurate information about the market because it depends on the statistical data of an asset. More than market sentiments and market news or commentary, statistical data is used in technical analysis. This makes it an accurate source of information.

Entry/Exit Points 

It helps a trader in determining entry and exit points of his trading sessions. Novice traders always face problems in determining entry and exit points. But technical analysis can help them.

Quick Signals 

If your trading decisions depend on technical analysis, then you will get quick signals compared to other traders who do not use technical analysis.

Cons 

Along with the advantages, there are also some disadvantages associated with technical analysis. These disadvantages can get you into trouble. That is why it is also important to pay attention to them.

Delayed Response Time 

Sometimes, technical analysis shows a delayed reaction time. It leads you to delay action and you miss the opportunity in the market. Most traders who use technical analysis have mentioned this as the biggest disadvantage of technical analysis.

Different Results From Indicators 

Sometimes, using two different technical indicators for a technical analysis strategy can get you into trouble. Sometimes different indicators show different results in finding out the trend and its strength.

Human Intervention 

Human intervention is required in technical analysis strategies. This increases the chances of inaccuracies and errors.

Factors On Which Technical Analysis Is Based Upon 

You need to understand that technical analysis is based on what factors. Several factors affect technical analysis and its strategies. Below are some of these common factors.

Investor Psychology 

Technical analysis is based on the psychology of investors. How investors will react to a trend or how they have reacted to a trend in the past is the key factor to consider. 

Trends 

Trends over a period of time are related, compared and used to find out the upcoming trends in technical analysis.

Comparison 

Comparison of different information is also important. Everything from price to trend lines and from market sentiment to volume is compared.

Summary

Technical analysis is important and it works in trading, but working with myths like 100% accuracy in price predictions is not good for you. You need to find out what is the actual reality and what is a myth. Dispelling myths is the first thing a trader must do before using technical analysis. 

Try to learn about the factors behind technical analysis. It will benefit you if you do technical analysis in a proper manner. But, relying completely on technical analysis only is not a good idea.
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