With all the trading strategies available, it’s easy for traders to combine two or more methods for more profits. However, these methods can be very complicated, especially if you’re using them to take a closer look at different trading instruments. So, many individual traders have this crucial question: is technical analysis enough to make profitable trades?
Technical analysis is enough for trading, and it can be a very effective risk management tool that increases your profits. However, there are certain guidelines that you have to follow when using it. It’s also important to note that not all traders will get the same results from using this method.
This article will cover everything you need to know about technical analysis and what it can do for your trades. Stick around because this might change your perception of technical analysis and might even change your trading results.
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
What Is Technical Analysis?
It’s impossible to determine whether using technical analysis is enough for trading without knowing what it is and what it can do for traders. So, before we answer your question, let’s have a clear definition of technical analysis.
According to Wikipedia:
“Technical analysis is an analysis methodology for forecasting the direction of prices through the study of past market data, primarily price and volume.”
This definition might change slightly, depending on who you ask or how they use the information they get from technical analysis. For example, we’d define technical analysis as a method of using past data to formulate an actionable, risk-defined forecast of an instrument’s price trajectory.
Regardless of how traders define it, technical analysis refers to the study of past performance data to formulate their trades. It may seem similar on the surface, but keep the “actionable, risk-defined forecast” in mind; we’ll get back to it later.
The most common misconception about technical analysis is that it provides the trader better knowledge of the future price movement based on historical data. Although it works, it’s often not accurate because technical analysis is mostly a reactive strategy. Traders use it to generate new, better trade ideas and react to the current market trend.
Technical analysis works, and it’s an effective way to manage your risks when trading. However, it’s also worth noting that it’s seldom enough to determine an investment’s future price. That’s because traders also need to outline where they want to close their trades to make a profit and a stop-loss to protect their investments from further losses.
Types of Traders Who Use Technical Analysis
Technical analysis is the same, and it will remain the same regardless of who uses this method. It will also provide the same information to all the traders who use it. However, what we do with the information is different, and it’s where the difference in results comes in. Basically, two types of traders use technical analysis — or any trading strategy for that matter.
- Traders who are disciplined, patient, and know how to make systematic trades: These people use technical analysis as a guide to help them manage their risks by setting up positive expectancy and stop-loss.
- Traders who are using historical data as an exact science to predict an instrument’s future price: These people use technical analysis to take chances on what looks like a bullish pattern to make their trades and expect a profit.
Again, the information that both types of traders get doesn’t vary — historical data can reveal bullish or bearish patterns. What varies is how traders use the same data to make their trades, which can significantly impact their profits.
Can You Trade Using Technical Analysis Alone?
It’s possible to use technical analysis for trading, but not everyone who uses it will be successful. For example, a trader who is disciplined and systematic with his trades will get better results from technical analysis versus someone who only relies on chances based on what looks like a bullish pattern.
So, instead of using technical analysis to predict future prices, traders should only use it as a tool that will help them manage risks by formulating actionable, risk-defined forecasts. It allows them to create setups that will help them maximize their profits while minimizing their losses.
However, if you are using technical analysis as an exact science to predict an instrument’s future price, it’s seldom enough to make profitable trades. In fact, without a disciplined and systematic approach to trading, using technical analysis is not that much different from gambling. Although traders will do the same technical analysis, the results that they will get from it will vary, depending on how they see this method.
Another important factor that you need to remember when using technical analysis is that it’s not a technique you can use to predict an instrument’s future price or outperform other traders. Remember, you’re making trades for profit, not to win or beat the market.
Common Myths About Using Technical Analysis for Trading
Indeed, technical analysis may or may not be enough for trading, depending on the trader who uses it. Unfortunately, many people translate it to the low success rate for this trading strategy. It’s what prevents them from using technical analysis for their trades.
Aside from this, there are other myths that traders have when it comes to technical analysis. The myths that we’ll share below lead many traders to avoid using it or enter risky trades. Here are some of the most common myths about using technical analysis for trading:
It Offers a Quick and Easy Way To Make Profitable Trades
This myth comes from online courses that promise quick, profitable trades using technical analysis, even for those with zero trading experience. The truth is that being successful in using this strategy for trades requires experience, practice, money management skills, discipline, and patience.
It Provides Traders With an Accurate Price Prediction for an Instrument
The difference between traders who are using technical analysis to make profitable trades versus someone who gambles on prices is the use of price predictions. Gamblers use an exact amount of an instrument, and they’ll accept no less than that. Experienced traders always use a range in predictions and use it to set up their trades.
It Can Provide You With Guaranteed Profits in Every Trade
It’s one of the pitfalls for newer traders, and sometimes, even people who don’t know how to trade. There are thousands of ads promoting cheap and expensive technical analysis programs that promise guaranteed profits. However, the truth is that it will still depend on how traders interpret the information and make decisions based on what they get from this strategy.
There’s nothing wrong with using technical analysis for trading. In fact, traders who have been in the market for decades can attest to its effectiveness as a risk management tool. However, it’s also important for traders to set their expectations to ensure they can take full advantage of this trading strategy.
Author’s Recommendations: Top Trading and Investment Resources To Consider
Before concluding this article, I wanted to share few trading and investment resources that I have vetted, with the help of 50+ consistently profitable traders, for you. I am confident that you will greatly benefit in your trading journey by considering one or more of these resources.
- Roadmap to Becoming a Consistently Profitable Trader: I surveyed 5000+ traders (and interviewed 50+ profitable traders) to create the best possible step by step trading guide for you. Read my article: ‘7 Proven Steps To Profitable Trading’ to learn about my findings from surveying 5000+ traders, and to learn how these learnings can be leveraged to your advantage.
- Best Broker For Trading Success: I reviewed 15+ brokers and discussed my findings with 50+ consistently profitable traders. Post all that assessment, the best all round broker that our collective minds picked was M1 Finance. If you are looking to open a brokerage account, choose M1 Finance. You just cannot go wrong with it! Click Here To Sign Up for M1 Finance Today!
- Best Trading Courses You Can Take For Free (or at extremely low cost): I reviewed 30+ trading courses to recommend you the best resource, and found Trading Strategies in Emerging Markets Specialization on Coursera to beat every other course on the market. Plus, if you complete this course within 7 days, it will cost you nothing and will be absolutely free! Click Here To Sign Up Today! (If you don’t find this course valuable, you can cancel anytime within the 7 days trial period and pay nothing.)
- Best Passive Investment Platform For Exponential (Potentially) Returns: By enabling passive investments into a Bitcoin ETF, Acorns gives you the best opportunity to make exponential returns on your passive investments. Plus, Acorns is currently offering a $15 bonus for simply singing up to their platform – so that is one opportunity you don’t want to miss! (assuming you are interested in this platform). Click Here To Get $15 Bonus By Signing Up For Acorns Today! (It will take you less than 5 mins to sign up, and it is totally worth it.)
Conclusion
Technical analysis is an effective strategy for trading. Although it’s not 100% accurate, it’s more than enough to help you make profitable trades. Like anything related to trading, any strategy that can help you formulate better trades is something you should consider.
You also need to remember that technical analysis will still depend on your overall skills as a trader. Without discipline, patience, and a systematic approach to performing trades, technical analysis — or any strategy — will be no different from gambling. So, use it as a risk management tool instead of using data as an exact science.
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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