Technical Analysis is an examination technique to recognize trading opportunities in the market on the basis of activities of market’s participants. The movements of these participants can be envisioned by the preparation of a stock chart. With the passage of time, patterns are shaped within these charts and each pattern expresses a different meaning. The duty of a technical analyst is to recognize these patterns and construct an opinion. Just like any other technique, technical analysis also is based on a few assumptions. As an expert of technical analysis, one needs to trade in the market after considering all assumptions in standpoint.Well, as we already know there is nothing such as one best research methodology. In fact, all research methods have their own merits and drawbacks. It would be pointless to invest time in comparing TA and FA so as to figure out which of these is better method. Both techniques are equally efficient and thus not comparable. As a matter of fact, any wise trader would devote time on getting educated about both these techniques so as to identify superior trading and investing prospects.Technical analysis is quite often approached by market participants as a fast and easy tactic to make a huge boon in the market. In actuality, technical analysis is quite opposite to quick and easy. Sure, if approached correctly, a boon gain is possible but to get to that phase, one has to devote the required effort to acquire and learn this technique. Moreover, if one tries to take TA as a fast and easy approach to making huge money in markets then trading upheaval becomes inevitable. Whenever a trading catastrophe takes place, most certainly the blame goes to technical analysis and not on the trader’s lack of knowledge and misuse of information provided. Thus before one starts to delve deep into technical analysis, it is vital that he or she knows what can and cannot be achieved by technical analysis.
Here are a few significant points to remember in regard to Technical Analysis –
Trades – TA is most suited to find short-term trades. TA should never be used to recognize long-term investment prospects. This is because long-term investment prospects can be best recognized through fundamental analysis. Furthermore, if one are a fundamental analyst, he/she should utilize TA to regulate the entry and departure points.
Return per trade – The trades based on TA are usually of short term nature. As said earlier, one should not expect very significant returns within a matter of a few days. The trick with getting successful through TA is to recognize recurrent short-term trading prospects which can offer small and regular profits.
Holding Period – Trades that are done on the basis of technical analysis are most likely to last anywhere between a few minutes to few weeks, but not beyond that. More information on this aspect can be found on the subject on timeframes.
Risk – Traders most probably start a trade for a specific reason, though in case of a hostile movement in the stock, the trade begins to make a loss. In such situations, traders usually stick to their loss incurring trades with an expectation of recovering the loss. Recall that TA based trades are most often short-term and in case the trade does not goes as expected, remember to amend the losses and progress to find another occasion.