Many investors perform stock analysis under the lens of fundamentals, which are the company’s revenues, valuation, or industry trends. However, the markets do not always appreciate fundamentals. That is why technical analysis is here.
What is Technical Analysis?
Technical analysis aims to predict price movements by analyzing past data, mainly the price and volume.
This approach aids traders and investors traverse the gap between intrinsic value and market price by using techniques such as statistical analysis and behavioral economics.
Technical analysis guide traders what will likely happen according to the available information.
Still, most investors do not use one or the other analysis technique exclusively. Most of them use a combination of the two.
Choosing the Correct Approach
There are two different ways to perform technical analysis. Often, short-term traders prefer a top-down approach while long-term investors prefer the bottom-up approach.
The Top-Down Approach
The top-down approach is a macroeconomic analysis looking at the overall economy before focusing on individual securities.
A trader would first focus on economies, then sectors, and then companies for stocks. Traders using this focus on short-term gains instead of long-term valuations.
The Bottom-Up Approach
The bottom-up approach focuses on individual stocks instead of the macroeconomic view.
This process involves stock analysis that appears fundamentally attractive for potential entry and exit points.
In a nutshell, bottom-up investors search for value in their decisions and aim to hold a long-term view on their trades.
Now, here’s how to start.
Identify a Strategy
The first step is to find a strategy or create a trading system gravitating towards technical analysis.
A newbie trader might decide to follow a moving average crossover strategy. This trader will track two moving averages on a certain stock movement.
The next step is to find the security best fitting to the strategy. Remember the above strategy will not always be suitable to all stocks. Some are ideal for highly volatile stocks, while others require different parameter choices.
Finding the Right Brokerage Account
Find the right trading account supporting the selected security. The account should offer the required features for tracking and monitoring the technical indicators while also putting a cap on costs to avoid eating into profits.
Determine an Interface to Track and Watch Trades
Traders might need different levels of functionality that depends on their strategy.
For instance, day traders usually need margin accounts providing access to level II quotes and market-market visibility.
Find any Other Necessary Application
You may even need other necessary features to maximize the performance of your trader. Some traders need mobile alerts or access to start trading on the go.
Others might take advantage of automated trading systems to execute trades on their behalf.
Other Key Considerations:
- Understand the rationale behind technical analysis
- Backtest trading strategies to see how they would have performed in the past
- Practice trading using a demo account before using real money
- Know the limitations of technical analysis to avoid expensive mistakes and shocks
- Evaluate the features of a trading account through free trial
- Start small in the beginning and build the career up as you gain experience
The key to success is awareness. That’s why you need to go and check Finance Brokerage educational websites available. And you can choose the one that suits you the best in the Online Trading Courses offered.