“You don’t make money by trading, you make it by sitting.” ― Fred McAllen

What is Technical Analysis?

Technical analysis in simple terms means the study of Candlestick Patterns, Chart Patterns, Support & Resistance, Demand & Supply Psychology, and various other indicators. Prediction of stock Market accurately is a difficult task, but technical analysis helps a lot in making it easier to accurately predict the market to a certain extent.

Technical Analysis also helps in understanding the sentiments of the market which is based on human psychology. With the help of Technical Analysis, one can predict the future of the market without going through the fundamental factors of equity, currency, or commodity.

Scope of Technical Analysis

Technical Analysis is commonly and widely used by Equity traders, Forex traders, Commodity traders around the globe to predict the market for short term as well as long term. Technical Analysis has led to an increase in profits of traders and investors and this has become the reason that more and more people are now learning the skills of technical Analysis to earn maximum profits from the market.

The Stock Market is a competitive arena with a zero-sum game. The correct analysis of the market directly leads to more profits as technical analysis gives important insights into the future price movements.

Advantages of Technical Analysis

1. Psychology

Technical Analysis helps in understanding the psychology of Investors and Traders regarding the market and gives a clear understanding of what they are doing.

2. Trend Analysis

The ultimate advantage of technical analysis is that it helps the traders and investors to predict the future of the market and make investment and trading decisions based on the analysis. The market usually has three trends namely Up Trend, Down Trend, and Sideways or Ranging Market and these trends are easy to predict with the help of technical analysis.

3. Entry and Exit Points

In Investing and Trading, the important role is played by Time. The right the time to enter or exit the market is easily predicted with the help of technical analysis which enables good returns. Candlestick Patterns, Chart Patterns, Elliot wave theory, Dow Theory & various Indicators are extremely useful for investors and traders to make a good entry and exit from the market.

4. Early Signals

The main advantage of technical analysis is that it provides early signals before the reversal of the trend so that investors and traders can take their decision based on those signals. Activities of Market makers can be analyzed with the help of technical analysis and such activities can be observed in Price-Volume Analysis.

5. Stop Loss and Target

Technical Analysis clearly defines the Stop Loss and Target for the position taken by investors and traders in the market. This helps traders and investors to decide as per the individual risk appetite.

6. Information

Technical Analysis is helpful for Swing Traders, Intraday Traders, Short Term Traders, and Long-Term Investors. The detailed information provided by technical charts helps the investors and traders in taking the right position in the market and build their portfolio. A lot of information is provided to traders and investors with the help of Chart Pattern, Candlestick Pattern, Volatility, Support, and Resistance, etc.

Traders and Investors use a combination of various time frames to analyze the equity, currency, and commodity market as it helps in the fast prediction of the market, volatility, and trader’s psychology.

Myths of Technical Analysis

1. Technical Analysis is only for Intraday Trading

This is the most common myth about technical analysis that technical analysis is only appropriate for intraday traders or short-term traders. Technical Analysis existed way before computers were common and many successful investors have openly accepted the use of technical analysis for long term investments. Technical analysis is used by all types of traders and investors on all time frames from a 1-minute chart to a monthly chart.

2. Only Retail Traders use Technical Analysis

Retail traders do use technical analysis for their trade’s decision, but it is also widely used by investment banks and hedge funds. Investment banks and Hedge funds have a dedicated team that uses technical analysis for trading. Algo Trading & High-frequency trading has a great amount of trading volume on stock exchanges across the globe which is heavily dependent on technical analysis.

3. Low success Rate

You can look for interviews of all the successful traders who have vast experience and deep knowledge. You will find one thing common about them that they all relied on technical analysis and a lot of them owe their success to technical analysis. There exist a list of investors and traders who have created their fortune with the help of technical analysis.

4. Technical Analysis is Easy

The internet is full of courses based on technical analysis that promises a high return. Most of them have not placed a single order in the stock market or forex market based on technical analysis but selling courses based on a combination of Indicators. Technical analysts need deep learning, complete knowledge, good money management skills to succeed in the market. Technical analysis is only one tool and there are other aspects associated with it.

5. Technical Analysis accurately predicts the price 

Inexperienced traders predict the market with exact price points but experienced traders predict the market with the price range and avoid price quoting as points. One must be aware that technical analysis provides the range for predictions and not the exact numbers. Profits are generated by traders and investors who use good risk to reward ratio.

6. Technical Analysis is profitable with a higher winning rate

This is the most common myth and it must be busted as technical analysis is more about the high risk to reward ration than the winning rate. Assume Naveen makes 4 winning trades out of 10 while Saurav makes 7 winning trades out of 10. Who is more successful? Most people might say Saurav but to know who is more successful then we need more information. One can be more profitable after having less winning rate if that person is going for a good risk to reward ratio. If Saurav makes Rs 10 on his win but losses Rs 10 on his loss, then he ends up with a profit of Rs 40. If Naveen makes Rs 30 on his win and losses Rs 10 on his loss, then he ends up with a profit of Rs 60. Naveen is better off, even with fewer wins.

Key Takeaways

Technical analysis provides a set of tools and concepts for investing and trading. There are some traders and investors who are successful and do not use technical analysis and there are some successful traders and investors who use it. There is no 100% guarantee that technical analysis will lead you to profits. It depends on individual investors and traders to analyze and determine that if it is right for them or not. People who practice technical analysis and constantly learn from it can generate profits from it. It all depends on individual risk appetite, knowledge, and understanding of concepts of technical analysis.