If you want something done right, you have to know how to do it, and trading is no different. Technical analysis requires some degree of know-how and a good knowledge of trading to inform investment decisions correctly. So, do professional traders use technical analysis?
Professional traders do use technical analysis, but amateurs can use this method, too. Technical analysis only considers the past and current price and the trading volume of assets. On the other hand, fundamental analysis requires extensive knowledge of the market.
In this article, we’ll explain the basics of trading, define technical and fundamental analysis, distinguish between professional and amateur traders, and answer whether and why professional traders use technical analysis.
IMPORTANT SIDENOTE: I surveyed 1500+ traders to understand how social trading impacted their trading outcomes. The results shocked my belief system! Read my latest article: ‘Exploring Social Trading: Community, Profit, and Collaboration’ for my in-depth findings through the data collected from this survey!
Table of Contents
Technical Analysis vs. Fundamental Analysis
As a trader, you should familiarize yourself with technical analysis and fundamental analysis. Both methods are used on Wall Street to maximize profit.
Technical analysis is when a trader only observes the present and past pricing and volume (trading volume, the total amount of securities traded during a specific point in time) of a particular asset. It relies on spotting patterns and trading them when they reappear on the current price and volume chart.
There are many variations of technical analysis, although they’re typically broken into two groups: chart patterns and technical indicators.
Chart and Candlestick Patterns
Chart patterns in technical analysis are graphical tools that involve technicians attempting to spot areas of support and resistance – predetermined security prices where traders assume that said price will freeze and reverse. Chart patterns are prone to be supported by human psychology and are meant to predict future pricing following either a breakout or a breakdown.
Candlestick patterns are displayed on candlestick charts (or Japanese candlestick charts), which show security, derivative, or currency prices moving. Candlestick chart patterns are up to personal interpretation and depend on prespecified rules that match the spotted pattern. A technician can spot up to 42 different patterns, classified into complicated or straightforward patterns.
Technical Indicators
Technical indicators or statistical indicators are technical analysis tools that use mathematical formulas to predict future prices and volumes. Moving average is a simple and commonplace type of statistical indicator and works by calculating data by obtaining an average for each subset in a complete data set.
At a macro level, technical indicators can be classified into four main categories. These are:
- Momentum indicators
- Volatility indicators
- Volume indicators
- Trend indicators
Momentum Indicators
Momentum indicators, as the name indicates, help traders understand whether the rate of price change for a security is falling or rising at any given point. In doing so, they help determine whether a security is overbought or oversold, thereby empowering traders to make informed trading decisions.
Examples of most popularly used momentum indicators include MACD, RSI, Stochastic Oscillator, etc.
Volatility Indicators
Volatility indicators help measure how close or far a security’s price is from its average position. The relative position of price from its average position gives important information regarding the anticipated future direction of the price. If the price is too far from its average range, a trader might want to be cautious with his/her open positions. This is because a security’s price tends to hover around its moving average.
Popular examples of volatility indicators include Bollinger Bands, Donchian Channels, Keltner Channel, etc.
Volume Indicators
Trading volume is perhaps one of the most important confirmation signals that traders rely on for a variety of technical trading strategies. Volume indicators, as suggested by their name, help measure the trading volume associated with a particular price movement. Generally speaking, a price movement with high trading volume is much more likely to sustain its momentum when compared to a movement triggered by low trading volume.
Examples of commonly used volume indicators include On Balance Volume (OBV), Klinger Oscillator, etc.
Trend Indicators
‘Trend is your friend’ is an adage many technical traders keep close to their heart. This is why trend indicators are counted among the most dependable technical indicators by most technical traders. In essence, these are the indicators that help traders determine the direction of the trend, thereby guiding them on the direction that they should be trading in.
Examples of trend indicators include Moving Averages, Parabolic SAR, etc.
Professional Traders vs. Amateur Traders
Buying and selling goods, stocks, or currency makes you a trader, but there are two classes of traders: amateur and professional. However, you may be surprised to learn that you don’t need a degree to trade on Wall Street. We’re not saying that a degree would be pointless, though, far from it; mathematics, banking, or economics degree can be beneficial if you’re looking to work for a reputable financial establishment.
If you want to learn how to trade (and you’re good at learning this way), studying books on the subject and good observational skills will suffice if all you’re looking to do is simply trade for profit.
What truly distinguishes a professional trader from an amateur is the willingness to take calculated risks. Professionals don’t purposefully seek terrible investments, but they roll with the punches and move on if something goes south. An amateur may be prone to thinking that they’re more intelligent than the market and put too much energy into searching for strategies that’ll always get them a big win, and in the process, are less profitable and consistent than professional traders in the long run.
Which Type of Trader Prefers Technical Analysis?
As it turns out, the majority of traders that use technical analysis are professionals. 80% of professional traders prefer the technical method, with only 20% using fundamental and other techniques. You don’t have to be a professional to employ technical analysis.
People who use technical analysis do so because they prefer to time when they enter and exit the market. Technical traders also enjoy the advantage of trading any asset they please. Technical trading doesn’t consider details about underlying assets (it flat out ignores the details), so every price chart looks the same to them.
That doesn’t mean that there aren’t professionals that don’t use fundamental analysis. Many professionals have become successful with fundamental trade, and it does have its advantages. Fundamental analysis requires gathering as much information as possible that has to do with every asset, market, and global market, to be better informed when making trades.
There’s a reason why everyone doesn’t use fundamental analysis, though. It’s hard for most people to get access to all the market news on time. It’s not uncommon for the public to receive notification of market data after it becomes irrelevant, which can significantly impact their ability to trade.
Even if a trader did decide to make do with what information is available to them, it could be challenging to keep up without assistance. Although every bit of information isn’t immediately accessible, what you get is still too much to retain. Perhaps most professionals don’t bother with fundamental analysis because they already know that the news is priced-in, meaning present or future economic information is shown in current pricing.
Is Technical Analysis a Perfect Technique?
Although professional traders worldwide will tell you that technical analysis is a fantastic way to get ahead in the stock exchange, it is far from a perfect technique. One pervasive issue with technical analysis is that it’s prone to reflect personal bias.
Technical analysis is also incredibly subjective. Three people can look at one situation and logically interpret it in entirely different ways. Whether or not what you see is good or bad depends largely on your perspective. Technical analysis is often seen as being “late” as well. Some of the stock may have already moved by the time someone has picked up on a trend.
Which Analysis Method Should You Choose?
You can choose whichever analysis method you prefer. Some people use a combination of technical and fundamental analysis. You should know that trade is probably not for you if you’re not an exceptionally patient person. It can take years to reap any kind of profit, and you’re going to lose money along the way. Some simulators can help you get the feel of trading if you’d like a trial run.
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Conclusion
Professionals do use technical analysis for market trade, and so can amateur traders. Conversely, some professionals use fundamental trade, and some use a combination of both. The primary difference between a professional and an amateur is the mentality, which means you don’t need a degree to trade, just some know-how and the ability to move on from mistakes professionally.
BEFORE YOU GO: Don’t forget to check out my latest article – ‘Exploring Social Trading: Community, Profit, and Collaboration’. I surveyed 1500+ traders to identify the impact social trading can have on your trading performance, and shared all my findings in this article. No matter where you are in your trading journey today, I am confident that you will find this article helpful!
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