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What Is Technical Analysis?
Technical analysis is a method used to forecast the future price movement of assets, like a stock or currency pair, based on market data. Technical analysis is efficient because it is based on the theory that the collective actions of all participants in the market impact traded assets.
Why Technical Analysis Is Important For Traders?
Entry and Exit Points
"The importance of technical analysis lies in the fact that it helps traders identify the proper entry and exit points. For instance, it helps to identify the right time to invest in the shares market and again the right time to withdraw the money with profits. Figuring out this right time can make a lot of difference in the trading world.
Another importance of technical analysis lies in the fact that it helps the trader understand the market conditions thoroughly with the help of basic charts and patterns. The technical analysis thereby makes it very simple and time-efficient for a trader. Hence, an accurate technical analysis is one of the most important aspects of a trader's life.
Technical analysis helps the traders predict the financial market's future and make the right trading decisions based on the research. The financial market usually has three trends: Up Trend, Down Trend, and Sideways or Ranging Market, and these trends are easy to predict with the help of technical analysis.
Technical analysis also provides early signals before the reversal of the trend so that traders can make their decision based on those signals. Simply put, it helps traders to open or close a position based on the sudden market changes. That means they can minimize losses and maximize profits.
How Technical Analysis Works?
There are two distinct methods of technical analysis: the top-down and the bottom-up approach. Short-term traders usually practice the top-down approach, and long-term traders practice the bottom-up one.
The top-down approach is a macroeconomic analysis that studies the overall economy before focusing on individual assets. A trader would first concentrate on economies, then sectors, and then companies in the case of shares. Traders using this approach focus on short-term gains as opposed to long-term valuations. For instance, a trader may be interested in shares that broke out from their 50-day moving average as a buying opportunity.
The bottom-up approach focuses on individual assets as opposed to a macroeconomic view. It involves analyzing assets that appear fundamentally interesting for potential entry and exit points. For instance, an investor may find an undervalued share in a downtrend and use technical analysis to identify a specific entry point when the asset could be bottoming out. They seek value in their decisions and intend to hold a long-term view of their trades.
However, different traders might prefer using various forms of technical analysis based on their trading strategy. Day traders might use simple trendlines and volume indicators to make decisions, while swing or position traders may like chart patterns and technical indicators. Traders who have developed automated algorithms may have an entirely different approach that uses a combination of volume indicators and technical indicators to reach their decisions.
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