The necessity of technical analysis is a controversial subject. Although some investors and analysts argue that it provides winning strategies, others have denounced it as a superficial method without profitable results. But can you trade without it?
You can trade without technical analysis by using fundamental analysis, which focuses on broader issues, such as growth potential, sustainability practices, sector performance, and macroeconomic conditions. You could also use quantitative analysis to value a stock and make a decision.
The rest of this article will discuss technical analysis, its alternatives, and why you can trade without it. Read on for more detailed insights into these aspects.
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?
Technical analysis evaluates a security using the statistics generated by its market activity, notably historical prices and trade volumes. Unlike fundamental analysis, which evaluates a company’s intrinsic value, this method uses charts and other indicators to identify patterns for predicting future activity.
According to Investopedia, the most common technical indicators are:
- Moving average
- The moving average convergence divergence (MACD)
- The relative strength index (RSI)
- The on-balance volume (OBV)
For more information on technical indicators, I recommend that you watch this video:
What Are the Pros and Cons of Technical Analysis?
Using technical analysis in trading comes with several advantages and disadvantages. Here’s a breakdown of its pros and cons:
The Pros of Technical Analysis
You Can Tell When To Trade
As the saying goes, history repeats itself. You can compare past patterns with current ones for deeper insights and possibly identify opportunities. In that regard, technical indicators are usually helpful in spotting trading opportunities. You can chart different indicators and identify the trade signals generated at each moment. Using that information, you may decide to trade or not. This approach is straightforward and leaves nothing to instinct or intuition.
Better Understanding of Short-Term Trends
Despite the arguments and counter-arguments for and against technical analysis, a common ground is that it’s a powerful tool for understanding market trends in the short term. That means you can use the insights to make gains as a short-term trader rather than a long-term investor.
Less Data
Since it focuses on the short-term, technical analysis uses less data than its alternatives, fundamental and quantitative analysis. This aspect simplifies the process – you won’t have to handle larger datasets that could be more expensive, time-consuming, and confusing to analyze.
The Cons of Technical Analysis
Delayed Response
A significant drawback of technical analysis is that it generates trading signals once the ideal time to execute the trade has passed. That’s because technical indicators are price-derived, meaning you’d take the price and decompose it to gain some insights.
In a nutshell, technical analysis is forward and not backward-looking. Therefore, technical analysts expect past relationships to continue in the future. However, the underlying truth is that they use past data, which only contains past signals that reflect the market conditions then.
That can put you at a disadvantage, especially if the current market reality contradicts the past trend.
Contradictory Signals
Technical analysis uses several indicators that track different variables. For instance, the momentum indicator tracks the rate at which a stock’s price changes. In contrast, the volume indicator tracks the supply and demand of a stock, which is the number of shares traded at the securities exchange at a given moment.
At some point, the momentum indicator may indicate an uptrend, meaning the price is increasing. In contrast, the volume indicator may show that fewer shares have been traded. Therefore, you’d have the former telling you to buy the security while the latter shows you should not. This contradiction may confuse you.
Tip: If two or more indicators show contradictory signals, you should consider other factors, meaning you’d have to use fundamental analysis before making a decision.
It May Not Provide a Winning Strategy on Its Own
There are several alternatives to technical analysis indicating that the method does not guarantee success. If it did, why would we have fundamental and quantitative analysis?
Besides, if technical indicators provided sure-fire winning strategies, many would easily become millionaires by depending on the trading signals this method generates.
What Are the Alternatives to Technical Analysis?
If you’ve read the sections above keenly, you’ve probably known the answer to this question. Either way, let’s discuss the two most common alternatives to technical analysis:
Fundamental Analysis
Fundamental analysis is a different ball game altogether: investors who use this approach are more interested in aspects beyond the past price and volume performance of a security. Their decision is based on the firm’s intrinsic value, its assets, patents, intellectual property, branding, corporate social responsibility activities, to mention but a few.
These investors are interested in the long-term growth potential of the company. They are patient and can hold a security for years or decades, waiting for the ideal moment to make massive gains. Therefore, they look at a company’s future from a broader perspective and consider other factors, such as the economy and the specific industry sector’s performance.
Fundamental indicators assign a value to a company and compare it with the current price. If the value is higher than the price, the stock is undervalued; therefore, it is worth buying. If the result is lower, the stock is considered overvalued and worth selling.
Pro Tip: To use this method, you need historical stock prices, annual reports, investors’ conference calls, and analyst reports and estimates.
Quantitative Analysis
Quantitative analysis is another method of evaluating the historical performance of a company. It’s used to compare firm performance with that of competitors or the broad market. This method involves calculating simple financial ratios, such as returns on equity and earnings per share, or complex ones, such as discounted cash flows and immunization.
The results provide insights into whether a security is risky to invest in or not. However, it’s critical to note that quantitative analysis is often used alongside the other two methods we’ve already discussed.
We recommend that you buy and read the Trader Construction Kit by Joel Rubano from Amazon.com to learn more about these techniques. This book goes beyond explaining how to analyze markets. You’ll also gain insights into deeper subjects, such as risk and volatility.
Can You Trade Without Technical Analysis?
Now that we’ve discussed technical analysis, its pros and cons, and alternatives, let’s focus on the pertinent question that brought you to this page.
In a nutshell, you can trade without technical indicators and technical analysis. For instance, you can use fundamental or quantitative analysis or a blend of both without technical analysis. You’d still base your investment decisions on the available information if you ignore this method.
Here are some points that justify this opinion:
- Technical analysis focuses on the past. However, future performance is what will determine how much profits you’ll make.
- The method follows the crowd. One sure thing about crowds is that they’re bound to be wrong at some point. A case in point is how some investors expected to make significant gains from JDS Uniphase’s shares in 2000, but ended up with terrific disappointments.
- Charts don’t predict macroeconomic trends. Macroeconomic trends are a critical determinant of stock prices. You may purchase an oil and gas company’s shares based on past performance, only for OPEC countries to increase supply, impacting the stock’s returns negatively.
However, by trading without this method, you may not gain a deeper understanding of a stock’s short-term trends. You may also miss out on critical information, such as support and resistance and market momentum, which can inform you whether to buy, hold, or sell a stock at a given moment.
Therefore, we suggest that you use a blend of the three methods for better results.
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.)
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Conclusion
Whether you can trade successfully without using technical analysis is a topic of intense debate. While some analysts and investors argue that it focuses on the past, which is irrelevant, others consider it a crucial information source. Since both are right in some way, it would be an injustice to dismiss them entirely.
You can trade without using technical indicators and technical analysis. Notably, you can base your decisions on fundamental and quantitative analysis. However, by doing that, you miss out on some critical details, so it’d be helpful to combine the three.
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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