You probably have heard about the great things that technical analysis can do for traders. It helps them spot great opportunities to buy and sell instruments for quick profits. But is it as effective and useful when making long-term investments?
Technical analysis is useful for long-term investment, as long as the investor uses it correctly. This method has gained a bad reputation because people are using it as a tool to predict the exact price of an instrument. But the truth is traders and investors should primarily use it as a risk management tool.
Investors can get many things from technical analysis, and we’ll go through all of them in great detail. Stick around because this article will be an eye-opener for investors who think technical analysis is only useful for short-term traders and won’t do much for long-term investments.
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
Why Traders Use Technical Analysis?
Analysts use technical analysis to study different instruments’ price movements and past performance data to predict future prices. In theory, traders can use historical data to forecast the market movement to formulate actions and perform profitable trades.
We use technical analysis because it’s the easiest way for traders to use and visualize historical data. However, it’s also worth noting that this strategy is about the probability and likelihood of market movements. Past performance increases a trader’s chance to make profitable trades, but it’s not guaranteed.
Another reason is that traders are entering trades to make money — not to win. Using historical data, we can predict how the market reacts to certain situations, making it easier to set up trades that maximize profits and minimize — or prevent — losses.
However, since it focuses on probabilities, technical analysis is not 100% accurate. There are times when this strategy isn’t an effective tool. Still, it’s enough to formulate actionable trades and take calculated risks to generate more profits.
What Can Long-Term Investors Expect From Technical Analysis?
Many investors often dismiss the idea of technical analysis because it relies on historical data. Some would even say that it’s not an effective way to find good long-term investments. But to be a successful investor who uses technical analysis, it’s important to have a clear idea of what you can expect with it.
This strategy isn’t an exact science. Some people who use technical analysis tend to use it to predict an exact price for an instrument. The truth is that technical analysis should only serve as a guide that you can use to predict a price range — 5 to 24 points vs. exactly 20 points.
Although technical analysis will provide different investors with the same information, the way we process and handle the information may vary. This subtle difference is what separates successful investors from mediocre ones.
Instead of using technical analysis as a way to forecast the future price of an instrument, you only need to see it as a risk management tool. It shouldn’t be more than something that will help you maximize profits while minimizing any potential losses.
Why Does Technical Analysis Work for Short-Term Investments?
Short-term trades are where we often use technical analysis. It works well because this strategy relies on the short-term data that we have on the market. It only provides an insight into the activity of the market based on past performance data.
Since the data that we have on the market is usually for a short duration, experienced traders often use it as a guide for making short-term investments. It’s the reason why traders often use technical analysis for short-term transactions. However, this doesn’t mean that you can’t use the same strategy when making long-term investments.
Will Technical Analysis Work for Long-Term Investments?
When investors make long-term investments, they use fundamental analysis more than they use technical analysis. That’s because fundamental analysis relies on a company or an instrument’s intrinsic value versus the past performance data.
By using fundamental analysis, investors can easily determine and buy undervalued securities and assets and then sell overvalued assets to prevent future losses. Many investors believe it to be a more effective way to determine an asset’s long-term value versus looking at the charts and see how the market may or may not react to certain situations.
However, there’s one misconception that many investors have when it comes to using these strategies. Although it’s excellent to use one strategy to make profitable investments, it doesn’t mean that you can’t use a combination of both.
Remember, traders are trading for profit, but investors are looking for instruments to protect their assets’ value. By using fundamental analysis, it’s possible to find undervalued assets to invest in and overvalued assets to sell. However, it may be difficult to predict the movement of certain asset classes without using technical analysis.
Simply put, you can make winning investments using fundamental analysis, but if the market doesn’t agree with your trade, it’s still impossible to make a profit out of it. That said, technical analysis also works for long-term investments, but you may have to combine it with fundamental analysis.
Remember, technical analysis isn’t 100% accurate — it doesn’t care about the fundamentals of a company or asset; it only relies on the charts and uses it to decide whether to buy or sell. Fundamental analysis may be subjective, and it doesn’t focus on what the chart says. Although it’s possible to use either of them to make profitable long-term investments, combining technical with fundamental will allow you to make even better investments.
Technical analysis can be complicated if you’re going to use it for long-term investments. Experienced investors use it to look at the price trends, which can get even more complicated. However, if you’re going to use it as a way to determine which instruments to hold long-term, it can be a more accurate way of defining trends.
Another reason why technical analysis works well with long-term investments is that it’s only a risk management tool that lets you find good assets. Investors still need to be disciplined and systematic enough to invest when the market calls for it — two important traits for successful long-term investors.
Why Do People Think Technical Analysis Is for Short-Term Investments?
There’s only one compelling reason why people think technical analysis is only good for short-term investment — it’s the fact that people tend to see it as a quick and easy way to make guaranteed profits.
Quick and easy profits are what traders want. The guaranteed profits stem from online courses that promise anyone to make money by using technical analysis. However, it can’t be further from the truth because this strategy only serves as a guide for making trades.
Investors process information differently, and it’s the reason why some find great success in using technical analysis. If you can use it to predict an instrument’s future performance and take calculated risks, then it’ll be easier for you to make solid long-term investment decisions.
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.
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Conclusion
Technical analysis is useful for long-term investment, but there are things that you have to consider to make the most out of it. Aside from this, you also need to understand that using this method isn’t a guarantee that your investments will be profitable.
So, if you’re going to use technical analysis for long-term investments, you have to be clear with the metrics you’re going to use. Remember, traders and investors think differently, but they both need discipline, patience, and a systematic approach. Without these, trading or investing isn’t different from gambling and hoping to turn a profit.
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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