Technical Analysis?

Technical analysis is a non-traditional way of picking stocks to buy and sell. It is based off of human emotions and patterns in those emotions.

A technical trader realizes that stocks do not move up and down because a company is making or losing money. A stock goes up and down based off of supply and demand. If there are more buyers than sellers a stock will normally go up until it reaches a point where sellers start to come in.

This can be flipped around. If a stock has more sellers than buyers it can push the stock down until the stock gets to a low enough point and buyers start to come back in.

Technical analysis tries to play off of this. They notice human emotions create patterns and trends that occur over and over again. So playing off of these trends and patterns rather than looking at a company’s financials can be a smart way to approach the market.

This simplified approach to the market disregards all fundamental factors such as dividends, cash flow statements, P/E rations, and so on.

There are a variety of instruments a technical trader can use to determine if a stock is a good buy or a good sell. Oscillators, chart patterns, stock trend, and candlestick patterns are all used to determine if a company makes a good trade or not.

So does it work? Technical analysis has proven to be a great way to approach the stock market. Combing Technical analysis with risk management may be the best way to approach the stock market for a short term trader.

Technical Analysis is built for short term trading. If you have a time frame longer than a couple months it may not be for you. Instead fundamental analysis can be used for longer term time frames.