Many people think that trading is not easy and this is the truth. Professional investors have sacrificed years of their lives to hone their skills. Thanks to social networks designed only for
traders, they can share their knowledge and experience with newbie traders. This phenomenon is called social trading and it allows traders of all skill levels to share mutually beneficial trading
One aspect of social trading is copy trading, allowing investors to duplicate the trading moves of professional investors they admire. In other words, someone else is in charge of your trading
decisions. But if you want to be the one that is copied by others, you have to not only copy someone else’s trading positions but learn the logic behind them. Brokers offer various tools, allowing investors to analyze the market from different perspectives and predict the future price movement of a security. The most widespread methods used by traders to analyze the market are fundamental analysis, technical analysis, and quantitative analysis. In this article, we will focus on the technical analysis and its strengths and weaknesses. But if you would like to learn more, you can find many technical analysis for beginners on the Internet.
What Does Technical Analysis Mean?
Technical analysis takes into account the past movements to project future market conditions. Investors who use technical analysis are often referred to as technical traders. Technical
analysts look for some patterns, observing the price movement over a period of time. Hence, it is safe to say that this method is more about probability rather than prediction. Since technical analysis is based on past price movements, it is not surprising that it relies on charts to visualize the price movement of an asset over a designated time frame. Of course, different traders interpret the charts in different ways. Generally speaking, there are three types of charts, and more precisely candlestick, line, and bar charts.
The Difference Between the Chart Types
Line charts are the most basic trading charts. In a few words, line charts represent only the closing price during a given timeframe. According to some industry insiders, the closing price is
the most crucial element when analyzing data.
Bar charts are more detail-oriented. They consist of several vertical lines, each representing some trading information. Bar charts include information about the highs and lows of the trading
period they cover. Unlike the line charts, bar charts represent both the opening and closing prices.
Candlestick charts are the most complex, but they provide the most information about the price movements over a given timeframe. They include information about the opening and closing
price as well as high and low prices. If we have to be accurate, candlestick and bar charts present the same information in different ways. Professional traders claim that candlestick
charts are more visual as the candles feature different colors, representing the market changes.
Trends and trendlines in trading explained in a few words – these are lines drawn by traders to connect a sequence of price. Such trendlines help investors to better spot the direction of the
price movement of an investment.
Technical Analysis – Advantages and Disadvantages
Some industry insiders criticize technical analysis, claiming that you cannot predict price movements based on historical information. We can say that technical analysis somehow relies
on the idea that models tend to repeat.
What is more, technical analysis often leads to ambiguous conclusions. Two professional traders who analyze the same chart are likely to come to different conclusions. This means that
the technical analysis includes an element of subjectivism.
Despite its downsides, technical analysis is associated with some worthwhile benefits. It provides traders with the opportunity to analyze different markets and products. Moreover,
charts cover different intervals – from hours to a century.
Another praiseworthy aspect of technical analysis is that it is based on precise data. The fundamentals behind technical analysis are easy to understand and that is why many amateur
traders prefer it among other tools.
Many investors who rely on technical analysis use it in conjunction with fundamental analysis. While on the subject, we would like to provide a brief explanation of fundamental analysis to
better understand how the two approaches of analyzing market trends can complement each other.
The fundamental analysis estimates the value of a security based on economic and financial factors. It determines the real price of a given stock. Provided that the fair market value of a
stock is higher compared to its market price, then the stock is undervalued and traders are recommended to buy.