Technical Analysis 101: How technical analysis helps you profit?

Investing with moomoo joined discussion · Jul 13, 2021 18:21

Technical Analysis 101: How technical analysis helps you profit?

Why we need technical analysis?

Technical analysis (TA) uses methods to help indicate when prices are starting to change direction.

The goal of the technical analyst is to buy a stock when the price chart indicates that the price is starting to rise and then sell when the price chart indicates that the price is starting to move down.

Warning:

While technical analysts have many mathematically based tools to analyze price and volume movements, they can never be completely sure of future price movements as human behavior is involved.

1. TA shows “what” and “when” to invest

All investors face three fundamental questions in stock trading - what to invest in, when to buy, and when to sell. Technical analysis provides investors with a framework for methodically selecting stocks and choosing the correct timing.

Emotion, the investor's nemesis, is greatly reduced in these decisions. Rather than "buy and hope for the best", technical analysts always know how much risk they are taking and know when to "exit at the right time".

Further Reading: Technical Analysis 101: Introduction to technical indicators

2. TA determines the likely direction of future prices

Technical analysis only uses historical price and volume data. The basic premise of technical analysis is that all known information, such as a company's business, financial performance, etc., is reflected in the historical price and volume data.

It is important to understand that technical analysis can only be used to determine the likely direction of future prices. It cannot predict news events or how investors will respond to those events.

How technical analysis works?

Technical analysis is effective because prices and trading volume often reveal the collective psychology of investors ("fear/greed balance"). Technical analysts work to identify charts where the fear/greed balance has recently changed in a predictable manner. They then place trades to try to profit from such changes.

Once they have purchased a stock, technical analysts monitor price and volume for sell signals. When done correctly, trades based on technical analysis have an above-average success rate.