Technical Analysis
What is Technical Analysis?
Technical analysis is a unique approach where traders use statistical trends to predict the price movement of assets. It focuses on studying the price and trading volume of a stock or asset. Unlike fundamental analysis, which considers all the news and data, technical analysts assume that everything is already reflected in the asset's price.
In this method, fundamentals are disregarded, and the analyst looks for patterns in the asset's price to gauge its future direction. These patterns offer predictive insights based on past price movements and reveal the market's psychology behind the asset. Essentially, technical analysis uses historical data and patterns to forecast future price movements.
The difference between Fundamental and Technical Analysis
Fundamental analysis and technical analysis differ in what influences an
asset's price. Fundamental analysis considers external factors like economic
policies, industry trends, and the company's financial strength. It focuses on
how these factors impact the asset's price and its true value.
On the other hand, technical analysis mainly examines the asset's price action
and historical patterns. It also takes trader psychology into account since the
effectiveness of price actions and patterns used by technical analysts are
related to market psychology. Technical analysts solely focus on price and
volume data.
What are the risks of each method?
Fundamental analysis has a significant drawback – it takes a lot of time. Gaining an edge with fundamental analysis is tough as everyone has the same information. Additionally, it's not very effective for predicting short-term market moves. On the other hand, one challenge with technical analysis is its subjectivity. Different analysts may draw diverse conclusions when looking at the same chart. Also, the abundance of analysis tools it's not uncommon that this can lead to "analysis paralysis" for technical traders, making decision-making difficult.
