Technical analysis is a trading strategy used to evaluate investments and trading opportunities using price trends and patterns on charts. It helps traders and retail investors to determine the intrinsic value and market price by using tested techniques such as statistical analysis and behavioral economics.
In simple terms, technical analysis helps traders predict what will likely happen in the future based on the available historical data. However, to take advantage of technical analysis, you need to know how to use the data availed to you in the charts. In the next couple of programs, I will discuss some of the ways to use technical analysis to your advantage.
Choose the best approach
There are two technical analysis approaches you can use while trading: the top-down approach and the bottom-up approach. Let me explain each of these approaches to help you figure out the right one for you.
This approach is mainly used by long-term investors, and it focuses on individual stocks and not the macroeconomic view. With this approach, analysis is done on a particular stock to determine how it will likely perform in the long term. For example, an investor can use technical analysis to identify an undervalued stock and determine the right entry point when the stock could be bottoming out.
This approach is mainly used by short-term traders. It involves doing a macroeconomic analysis to determine the status of the market as a whole before focusing on the individual stocks. Most of the time, the fluctuation in stock prices is caused by macroeconomic conditions. So, if you intend to do day trading, this is the approach you have to use for the best results.
The five steps to get started with technical analysis
- Choose a strategy: Before getting started, you need to choose a strategy you intend to use while analyzing technical analysis data. One of the commonly used strategies is the moving average crossover strategy. You may have to do your research to determine the strategy that is ideal for you.
- Identify securities: The strategy you choose to use needs to be suitable for the stocks/securities you intend to analyze.
- Find the right trading platform: You need to choose a brokerage that supports the securities you intend to invest in. The trading platform you choose should support the selected technical indicators without escalating the costs to avoid eating up your profits.
- Track and monitor your trades: Long-term and short-term traders require different levels of functionality since they use different strategies. For example, a short-term day trader may need a margin account that gives them access to more data, including Level II quotes and market maker visibility.
- Take advantage of additional software tools: Besides the features in the trading platform you are using, there are several other tools that you can take advantage of to boost your trading income. For example, you can use automated trading systems to help you execute some trading decisions on your behalf.