Back to Basics #2: The Advantages of Technical Analysis

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If you do not know what is Technical Analysis, read this first: Back to Basics #1: What is Technical Analysis?

In this chapter, we’ll discuss what the advantages of technical analysis are and why it’s important to you as a trader to use technical analysis.. Since the market price is a reflection of all fundamental news known to the public technical analysis can be used on its own merit. Going forward, we’re going to explore what are the main benefits of technical analysis.

The main benefit of using technical analysis is that it gives you a visual representation of the price action. Technical analysis also provides you with all the necessary tools to analyze the current market trends which bring us to the first benefit of technical analysis:

1. Timing Your Entry and Exit Points

Unlike fundamental analysis, technical analysis serves a very precise purpose that can be measured and backtested. As the saying goes, your entry point and exit point are the most important part of your trading. The entry point will ensure that you can apply a strict management rules while at the same time maximizing your potential profits and minimizing the potential loss.

If you’re a versatile trader, technical analysis can give you the ability to have precise entry points while also closing your position at the right time.

2. Reading the Market Sentiment

Reading the market sentiment is another advantage of technical analysis. Since the markets are governed by the rules of supply and demand the interaction between the traders can be seen with the help of technical analysis. This is valuable information as you’ll know what other traders are thinking, but more importantly, you’ll know how they are positioned.

3. Overbought and Oversold Conditions

There are many indicator used in technical analysis to spot overbought and oversold market conditions like the RSI and the Stochastic being among the most popular indicators. Being able to determine in advance possible points of exhaustion in the trend can give you an early edge and that’s one of the benefits of using technical analysis.

4. Identifying Repeatable Price Patterns

Another advantage of technical analysis is the ability to identify repeatable price patterns. Generally speaking, we have only two types of price patterns:

  1. Reversal patterns, which signals the end of the trend and the beginning of a new trend.
  2. Continuation patterns, which as the name suggests signals a continuation of the prevailing trend.

Trading based on price patterns works because the price reflects human psychology and human nature doesn’t change much. Technical analysis can help you recognize these price patterns and trade them for a profit.

Conclusion

As you have already learned technical analysis, it’s important to you as a trader because you can define when to enter and exit your position. Technical analysis if used correctly can provide you with all the necessary tools to succeed in this journey.

Thanks for reading!

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At 19, JT was already a stock investor and Forex trader who not only profited from the financial markets, but also managed to pay off his tertiary education in full by putting his investing skills and knowledge to the test. JT firmly believes that investment education is the best form of post-education that accords one the power to attain financial freedom, something that he wants to empower all his students with.

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