Investment decisions are often informed by several factors, ranging from investors’ sentiments to historical information. Technical analysis is one of the most common methods of predicting future stock price trends, but is it worth learning? And how can you learn it the most efficient way?
Technical analysis is worth learning because by having in-depth knowledge of this method, you can spot price movement trends, determine the best time to trade a stock, and establish other investors’ opinions towards it. However, this method is more helpful in the short term than in the long-term.
Technical analysis is one of the most interesting disciplines in investments. Read on for information on what it involves, why you should learn it, and the best technical analysis books to read.
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?
When buying or selling shares on the securities exchange, investors often consider several factors. Some may examine past price movements, while others may consider companies’ business models, profitability, long-term growth potential, and ethical issues.
The process of examining and evaluating such information is called analysis, which can be described as either technical or fundamental analysis, depending on the factors considered.
Technical analysis involves “charting” the past behavior of a stock or currency pair’s price and volume. According to Investopedia, it involves using statistical methods to scrutinize how
changes in supply and demand of security affect its trading price and volume.
This method is often used to generate short-term trade signals. Still, it can help analysts determine the strengths and weaknesses of a stock compared to other companies in the same sector.
This YouTube video explains technical analysis in detail:
The fundamental analysis evaluates securities based on sales and business models, as well as other models.
What’s the Difference Between Technical and Fundamental Analysis?
Besides the criteria considered during decision-making, what distinguishes technical analysis from the fundamental analysis?
According to Business Today, the two can be differentiated using different aspects. These are:
Data
Technical analysis looks at how past price changes can identify a pattern and predict future prices. If you establish an uptrend, you may buy the stock hoping to make profits in the future as the price continues to rise. But a downtrend can be bad news since you’d expect to make a loss if you bought the security while its shares are plummeting.
Fundamental analysis looks beyond past performance and considers the company’s financial performance, notably its profit growth, strategic plan, and the potential to make more profits in the future.
Tenure
Technical analysis usually takes a short-term perspective and ranges from daily to quarterly performance. Conversely, the scope of fundamental analysis usually begins from two years upwards and uses more information to produce more in-depth results.
Assumptions
Technical analysis often assumes that the price of a security will move along a given trend or pattern based on past movements, but fundamental analysis assumes that a company’s intrinsic value and future earning potential determine its stock price.
Investments
Technical analysis can be used for a broader range of financial securities, such as shares, forex trading, futures, commodities, and bonds. Fundamental analysis can be used on a narrow range of securities, notably stocks, indices, and commodities.
Tip: If you’re a short-term investor looking for quick gains, it would be better to use technical indicators. On the other hand, if you want to create wealth over the long-term, you should learn fundamental analysis.
Is Technical Analysis Worth It?
Besides gaining insights into the short-term price movement of a stock, here are some of the reasons to learn technical analysis:
- Trend analysis: With technical analysis knowledge, you can easily predict the uptrend, downtrend, and sideways price movements, which can help you determine whether it’s appropriate to buy, hold, or sell a security in the short-term.
- Entry/exit point: Timing plays a crucial role in trading. By learning technical indicators, such as moving averages, candlesticks, and chart patterns, you’d gain insights into when it’s appropriate to enter or exit a trade.
- Early signal: Technical analysis can determine the psychology of other investors or traders. Notably, analyzing prices and volume would enable you to determine what most investors think about a company’s short-term performance, with which you can predict whether the stock’s returns will increase or decrease in the future.
- Quick and affordable: Learning technical analysis is faster and less expensive than fundamental analysis because there are several charting software that can calculate and visualize different technical indicators within minutes.
- Obtain comprehensive information: Technical analysis provides a lot of information that you can use to build a position and trade. Such information includes support and resistance, market momentum, chart pattern, and trader’s psychology.
What Are the Best Ways To Learn Technical Analysis?
So you’ve decided to learn technical analysis. What are the best ways to do that?
Read Books
One way of learning and mastering anything is by reading books about it and applying the knowledge in real life to determine whether you’ve understood it. The same principle applies to stocks as well as learning technical analysis. Here are five of the best technical analysis books you can start with:
- Technical Analysis of the Financial Markets by John Murphy. This book provides detailed information on technical analysis and is authored by a former technical analyst at CNBC with over 40 years of experience. The topics are conveyed in a simple, easy-to-understand manner, making it a worthwhile starting point for a novice trader.
- Technical Analysis Explained by Martin Pring. Touted as an “investment bible,” this is one of the most comprehensive technical analysis books, as it covers critical topics, such as trading psychology. The author describes what you need for accurate predictions and how traders usually react to events based on their past behavior.
- Technical Analysis Using Multiple Timeframes by Brian Shannon. This book describes what technical analysis is and how you can use it in different time frames to identify the stocks with the highest possibility of generating profits, as well as the strategies for entering, managing, and exiting a trade.
- The Art and Science of Technical Analysis by Adam Grimes. This book discusses technical analysis in detail and teaches how to employ different strategies to make profits. It also explains how to capture statistical patterns to make the most of technical analysis.
- Getting Started in Technical Analysis by Jack Schwager. This book covers basics, such as chart patterns, technical indicators, how to determine when to buy, hold, or sell, how you can develop trading systems, and how to increase the probability of success in trading.
Practice What You’ve Learned
It would be helpful to practice backtesting or paper trading once you’ve learned the principles from the books I’ve described.
We prefer backtesting since it’s risk-free, which involves using data from a more distant past to predict the more recent past’s performance. Therefore, you can determine how much profit or loss you would have made if you made a given decision based on your judgment of the former period’s data.
Caveat: It’s not guaranteed that if a strategy works well during backtesting, it will be successful when applied at current market conditions. Also, if you prefer paper trading for practice, it’s advisable only to risk what you can afford to lose.
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!
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- 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 a fascinating, informative, and worthwhile discipline. By learning it, you’d gain insights into how to employ trends in price movements to make investment gains.
Most notably, knowledge of different indicators and how to interpret them can help you identify the best times to trade security while predicting how investors’ current opinions or sentiments will affect future prices.
Learning this method is quick and more affordable than the alternative, fundamental analysis. To make the best of this approach, you should read books about it and apply the techniques you’ve learned.
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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