There are three primary methods to determine the profitability of a stock. Among these methods are technical analysis and quantitative finance, which can be confusing for new traders. How can new traders tell the difference?
Technical analysis is similar to quantitative finance, but they are not the same thing. Technical analysis is a form of stock valuation based on previous price patterns, while quantitative finance relies on statistics and math to value a stock. Traders use both to evaluate a stock’s viability.
This article will explain what technical analysis is and how it compares to qualitative finance, as well as why you should implement one or both these methods into your trading strategy. So. without further ado, let’s get started.
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?
Traders use technical analysis to predict the market’s direction based on historical price patterns, which assumes that price patterns will repeat themselves over time. Therefore, traders use the following data to look for opportunities to buy or sell when implementing technical analysis:
- Trend lines
- Support levels
- Areas of resistance
- Fibonacci numbers
- Volume indicators
- Moving averages
- Oscillators
- Chart patterns
What’s common among these numbers is that they are highly volatile, so traders who are using technical analysis must stay up to date with recent price changes. Despite the challenge of staying organized, technical analysis is very useful for evaluating multiple securities, including:
- Stocks
- Commodities
- Currencies
- Futures
- Fixed-income
There are two main methods used in technical analysis. Traders should test out both and see which works for them.
What Are the Types of Technical Analysis?
The two fundamental forms of technical analysis are statistical or technical indicators and chart patterns.
The statistical indicator is a method that uses mathematical formulas to predict trading volumes and price trends. The most common and perhaps the simplest technical indicator that traders use is the moving average indicator. Notably, many trading strategies employ statistical indicators because they are quantitative.
On the other hand, trading with chart patterns requires fundamental knowledge of trading directions. To use this method, you must identify the resistance and support levels on a chart and use them to predict the stock’s eventual movement.
Both methods are equally sound when it comes to evaluating the market. However, most traders prefer to use the chart patterns method.
What Is Quantitative Finance?
Quantitative finance leverages large datasets and complex mathematical models to forecast the future price performance of a security or financial instrument. In essence, quantitative finance is a combination for four disciplines, namely – mathematics, finance, computer science, and statistics, and is relatively a newer discipline that has gradually gained immense popularity.
Few common examples of how traders and investors leverage quantitative finance include the following:
- Derivative pricing
- Algorithmic trading
- Finding correlations among different liquid assets
This method of evaluation uses broad historical performance indicators of the company. Once obtained, investors can use this data to:
- Trade stocks
- Assess risks
- Predict market movement
- Price assets
The goal of quantitative finance is to determine the financial stability of a company. This information generates profits from the sale of security while reducing the risk.
What Are the Similarities Between Technical Analysis and Quantitative Finance?
The most significant similarity between quantitative finance and technical analysis is that they both use a stock’s past data to conclude future outcomes.
Also, quantitative finance shares common indicators with technical analysis, including:
- Moving averages
- Oscillators
- Trend line
Besides a few similarities, the goals of these methods differ significantly.
What Are the Differences Between Technical Analysis and Quantitative Finance?
Technical analysis and quantitative finance differ in the following ways:
- Application
- Tools
- Goals
The technical analysis predicts the short-term trading of a stock. Additionally, traders can assess a stock’s strengths concerning the broader market using technical evaluation. In contrast, investors use quantitative finance to determine the long-term position of a company and its shares.
Also, quantitative finance requires more complex tools to gather information. While technical analysis can depend on observation and price investigations, quantitative finance requires advanced methods like:
- Genetic optimization
- Machine learning
- Sample tests
- Advanced Algorithms
The goal of technical analysis does not match the intent of quantitative finance. Technical evaluation determines the movement of price, while quantitative finance aims to create an investment strategy that the trader can use eventually.
Should You Use Technical Analysis?
You may want to use technical analysis in your investment strategy on the market because the technical analysis can predict the price of any security influenced by supply and demand. So if you are interested in trading volatile items, technical analysis could improve your profits and stock portfolio.
Also, if you are an active stock trader, technical analysis can help identify market trends for buying opportunities.
But, like any strategy, technical analysis has its advantages and limitations.
Pros of Technical Analysis
Technical analysis has four advantages over other methods, including:
- Efficiency
- Up-to-date information
- Accuracy
- Time management
Technical analysis allows charts to be read quickly. Moreover, there are many resources available that automate the analysis process to save the trader time. For this reason, investors praise technical analysis for improving their hedging strategies by helping them identify fast opportunities to buy or sell a share.
Besides being efficient, technical analysis provides you with all the current information on a stock’s price, which is the focal point for all other information. Traders will always have an accurate view of the current state of a share and be better able to make short-term decisions.
What Are the Most Significant Advantages?
Technical evaluations are usually correct in predicting trend shifts. The most profitable trading strategies rely on uptrend or downtrend markets. Price continuously moves in trends so traders can take advantage of this directional bias for profit.
The most significant perk of using technical analysis is having the ability to time your trades because technical analysis helps traders to identify when stock will be the most profitable. Thus, traders can spend their money as the opportunities arise or hold their funds until a better chance presents itself.
Indeed, the information gathered from the technical analysis is not flawless. However, using this evaluation strategy is better than going into the market without prior research.
Cons of Technical Analysis
As mentioned earlier, technical analysis is not totally accurate. This feature is the most obvious flaw of technical analysis so traders shouldn’t solely depend on it.
Also, technical analysis can be challenging. Some traders consider it confusing because a buy signal can immediately follow a sell indicator or vice versa. For this reason, technical analysis can be hard to follow when initially learning it.
Finally, some traders consider technical analysis an inadequate evaluation system because history doesn’t always repeat itself. Some argue that price is of minimal importance so traders should focus on other tactics when judging a stock.
Ultimately, using technical analysis is a personal choice. It is not the only method available and can be used in conjunction with others to suit your investment style.
Is Technical Analysis Better Than Quantitative Finance?
Generally speaking, technical analysis is not better than quantitative finance, nor does quantitative finance outweigh technical analysis. Investopedia suggests using both evaluation methods together to conclude the most accurate position of the stock.
The technical analysis explores price changes and monitors chart patterns so that investors can estimate the future directions of a single share or the entire market.
Following this, you can use quantitative finance to determine the valuation of a particular company. The results can determine the expected risk, profits, and other statistics of a share. Investors can use this additional data to develop a trading strategy with a safe:
- Entry price
- Stop loss
- Take profit
Traders should combine technical and quantitative methods to determine a share’s growth and reduce risk even further. However, this is not mandatory, and traders should always choose the best strategies for them.
Author’s Recommendations: Top Trading and Investment Resources To Consider
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Conclusion
Investors should depend on technical analysis and qualitative finance. Also, experienced traders should consider combining these methods with fundamental analysis for a complete idea of a share’s potential.
If you are new to evaluating stocks, Rayner Teo has an in-depth video discussing technical analysis for beginners and expert stock traders:
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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