Technical Analysis is a great deal when it comes to investing in stock market. It can be the most vital factor for an investor to make the profits he wants. It is focused on supply and demand in the market. And technicians always look forward to actions.
By examining price history and volume data, technicians ignore what has caused an event and focus on the event itself. By studying stock charts, we emphasize the effect over the cause, eliminate confusion, and allow ourselves to predict the future path of prices.
Many investors focus on the cause over the effect. By building elaborate ideas about how markets should perform, investors become frustrated when the world does not behave as they predicted. Such frustration often leads to indecision. In rapidly evolving markets, we are better served to focus on the actions that occur and use this knowledge to position for the future. Technical analysis allows us to do just that.
The five main concepts of the technical analysis presumptions are:
- History repeats itself: A study of history shows that set patterns repeat themselves over long periods. By relying on the past to predict the future, we can take advantage of these patterns.
- Self-fulfilling prophecy: Enough people seeing the same pattern will take actions that force the prediction to occur. While this is positive if you are on the right side of the trade, it presents a major weakness when everyone attempts to exit at the same time.
- Momentum reverses: When a trade becomes very crowded with everyone assuming the same position, unexpected surprises can drive prices. If the exit becomes crowded, the pink glasses turns into darkness.
- Art over science: Technical analysis does not require us to be mathematicians. Looking at the same chart, many investors will derive different answers. Therefore, reading charts evolves into an art form where each analyst can provide a unique insight.
- Less knowledge: Instead of searching for the next piece of data that magically unlocks the puzzles, technicians focus on the past and interpolate how it will affect the future. And therefore the complete knowledge of a mystery event is not needed, just the actions.
In many markets, technical analysis serves as a solid series of guiding posts. By examining trends, we increase the likelihood that markets remain in our favor and trades remain profitable.