Technical Analysis StrategyA technical analysis strategy involves analyzing a stock’s historical price movements to determine the likely future direction of the stock.Let’s consider technical analysis as a strategy . . . Why technical analysis worksStocks tend to move in predictable ways some of the time. If you examine enough stock charts you’ll start to see certain patterns in buying and selling behavior.By recognizing the patterns with the strongest correlation to share price movement, a technician (a practitioner of technical analysis) is able to predict, with a certain level of confidence, the likelihood of the stock moving in a particular direction. There is also a less sophisticated type of technician who simply buys stocks that are in strong uptrends. They hold the stock as long as it continues to rise. As soon as it starts to decline significantly, they sell. How technical analysis worksSimilar to fundamental analysis, technicians use special stock screeners to find stocks that are displaying the behaviors they’re looking for.Once found, they filter out the stocks that show the most potential based on their trading style. There are different types of technicians. How they trade depends on their chosen approach. Here are some common ones:
One thing that all successful traders will have in common is their “trading plan”. Their trading plan contains the rules that they must follow with a high degree of discipline if they want to be successful. The trading plan will consist of items such as:
With a technical analysis strategy in particular, the allocation and preservation of capital is most important. Not all trades will be profitable. A number of successful traders report that their success rate is around 65%. This means that 65% of their trades are profitable trades, and 35% are losing trades. As long as the winning trades substantially outweigh the losing trades, you’re winning. Tactics of technical analysisA technical analysis strategy requires a more watchful approach than long-term buy and hold type strategies. Markets can change directions fast. You need to be “on the ball”.Here are some general guidelines:
Advantages of technical analysisA technical analysis strategy doesn’t require fundamental analysis. You just trade based on what you see on the chart.Technical analysis is a shorter-term strategy so you realize profits sooner. Technical analysis takes less time than fundamental analysis. Disadvantages of technical analysisTrades don’t always work out.You need to be alert for the duration of the trade and watch the market closely. Emotions need to be controlled and discipline needs to be exercised if the technician is to be successful. There are periods when trading will not be fruitful. Who uses technical analysis as a strategy?
Stock market strategies: Fundamental Analysis – the company’s financial numbers and its story Technical analysis – examining stock charts and technical indicators Value Investing – buying good companies at the right time Growth investing – buying companies that are growing fast Income investing – buying companies for their dividends Index investing – buying into a stock market index fund Return from Technical Analysis Strategy to Stock Market Strategies |