When it comes to investing, most people follow the advice of experts and make their decisions based on what they say.
But some investors take a different approach:
They use technical analysis, which is the study of past market trends in order to predict future ones.
In this article, we’ll explore the pros and cons of technical analysis as well as its history and how it works today.
What is Technical Analysis?
In a nutshell, technical analysis is the study of past market data to predict future trends.
The goal is to determine if a security is overvalued or undervalued at any given time by looking at how it’s previously performed in similar situations.
A company’s stock price, for example, moves in trends due to investor sentiment—that means that it will typically go up or down depending on whether investors are optimistic or pessimistic about its future prospects.
Technical analysts look at all sorts of factors like this when trying to figure out where a stock price might be headed next: they examine historical trading patterns (e.g., how many times has this company risen following earnings reports), charts showing underlying supply and demand data (e.g., what percentage of available shares are currently being traded), news reports about upcoming events related directly with that particular stock (e.g., if rumors start circulating about another merger), etcetera.
What are the different types of technical analysis?
1. Fundamental analysis
This approach uses real-world data to predict an asset’s future price.
It often looks at macroeconomic factors such as consumer spending, unemployment rates, and interest rates.
2. Technical analysis
This method focuses on analyzing market prices, volume, and open interest to try to predict future movements in prices without taking into account economic metrics or fundamentals like earnings per share (EPS).
3. Commodity analysis
This is similar to fundamental analysis in that it uses economic reports as well as historical data about commodities themselves but differs because the goal is not always to find stocks with high profit potential; instead, it seeks out opportunities within specific industries based on supply/demand imbalances or other kinds of trends in demand for a given commodity over time such as seasonal fluctuations that may affect supply levels during certain periods throughout the year (i.e., Christmas trees).
4. Sentiment analysis
Sentiment analysis involves paying attention not just to what people are saying about something but also to how they’re saying it: Do they seem optimistic or pessimistic?
Are there more negative comments than positive ones? How many times have you heard someone say something like “That’s going nowhere!” And yet when we look at its chart we see this stock has been going up steadily since last week—what gives?
These are all questions someone using sentiment analysis would ask when trying to get a sense of how much confidence investors have surrounding an issue under consideration before making any decisions themselves regarding whether or not to make those same decisions.
How does Technical Analysis Work?
Technical analysis uses historical data to predict future prices, so it’s based on the idea that past price movements can be used to predict future price movements.
The basic concept of technical analysis is simple: stocks move up or down in relation to supply and demand.
In this case, the supply and demand for a stock are determined by its value relative to other securities and its underlying fundamentals (e.g., earnings).
Stock charts display all kinds of information about what happened in the past with respect to supply and demand for a given security.
For example, you can see how much more active buyers have been than sellers over time by looking at their relative activity levels on each side of your chosen chart’s y-axis (or vertical axis).
This will tell you whether they were buying heavily all along during one period or selling heavily all along during another—and it gives you valuable insight into their intentions going forward as well!
Does Technical Analysis Really Work?
The answer to the question of whether technical analysis works depends on who you ask, and what they’re looking for.
Some people will tell you that it’s a reliable way to predict future price movements, while others will say it’s a complete waste of time that should be avoided at all costs.
There are many different types of technical analysis tools and methods out there, but one thing remains true: none of them are magic bullets.
Technicians look at the current price movements in an attempt to find patterns or trends that allow them to make predictions about future market conditions.
This can involve analyzing charts based on various indicators over different time frames (hours/days/weeks/months) and drawing conclusions based on those observations.
While this type of analysis can be helpful for traders who already know what they’re doing when it comes to trading strategies, inexperienced traders might find themselves lost in all the jargon surrounding TA!
What are the Pros and Cons of Technical Analysis?
It’s important to know the pros and cons of technical analysis to help you make a decision.
It’s best to think of it as an experiment.
If you find that the method works for you, keep using it; if not, try something else! Below are some notable pros and cons of using technical analysis:
- It can be used on any financial market — stocks, bonds, commodities, or currencies (for example).
- You don’t need special access to information or insider knowledge in order to use this type of research tool effectively.
- Technical analysis is not foolproof.
- There are no guarantees that you will make money using this method, and it can be difficult to interpret charts correctly.
The History of Technical Analysis (and why we’re still using it today!)
Technical Analysis is a way of analyzing the markets using past data.
It’s been around for hundreds of years and was used in ancient Greece and Rome, as well as during the 1920s and 1930s.
Even though it’s been popularized in recent times, many people still don’t understand how technical analysis works—and that’s okay!
Technical analysts look at historical patterns on price charts to predict future market conditions.
They believe that past trends can be used as proxies for predicting future ones—that is, if a stock did something well before, there’s a higher likelihood that it will do something similar in the future (or vice versa).
The Future of Technical Analysis (will it still be around in 20 years?)
If you’re new to technical analysis, it’s important to understand the context of how this practice has evolved over time.
It is certainly not a recent development—the father of TA, Charles Dow (1851–1902), was one of America’s most influential market analysts and co-founder of the Wall Street Journal. Contrary to what you might think, TA was never intended as a way for individual investors to make large profits by successfully predicting short-term fluctuations in stock prices—it simply wasn’t possible back then because information traveled so slowly.
Although it’s impossible to predict exactly how markets will behave in years ahead or even months ahead, there are reasons why we think TA will continue being used by many traders for many years:
- It helps them make better decisions
- It makes their job easier when trading multiple assets at once (i.e., stocks vs commodities)
As you can see, there’s no right or wrong answer when it comes to technical analysis.
Some people believe that it truly works, while others argue that it’s just a bunch of mumbo jumbo.
The truth is that there is no one way to analyze the market – many different approaches will yield different results depending on the circumstances and your own personal style.
The key takeaway here should be that technical analysis isn’t some magical tool for trading success; instead, it should be viewed as another tool available for those who wish to improve their skills and make better decisions about what stocks they buy or sell based on past performance trends (or lack thereof!).