Discover the 7 Core Benefits of Technical Analysis

“Technical analysis is a skill that improves with experience and study. Always be a student and keep learning.” – John Murphy

Technical analysis helps us to forecast the future price movements based on the price fluctuations in the past. As you know, while trading in the stock market, the timing of entering and exiting the trade matters the most. Some traders think that trading in the stock market is a game of gamble but it is not.

Technical analysis provides a number of technical tools and techniques which help us in analyzing the price movement of a particular stock. After the analysis, it helps us in making trading decisions i.e. whether to enter the stock or not.

Benefits of Technical Analysis

Apart from making enter and exit decisions, learning technical analysis has some other core benefits which we will be discussing in this article:

1. Helps in Identifying Trend:

By analyzing the price charts of a specific stock we are able to identify the ongoing trend of the stock whether it is uptrend and downtrend. One should always try to trade with the trend. When the stock is uptrend one should take a long position. When the stock is in a downtrend, one should take a short position. Trading against the trend is riskier but can sometimes also give you good gains. Thus, trading with the trend is the safest and easier way.

2. Helps in Identifying Supply and Demand:

Technical analysis helps in identifying the price levels where there is maximum demand for the stock and maximum supply for the stock. When the prices of the stock are following down, then at certain level buyers create demand for that stock at a lower price. At this level, the prices stop falling and the prices start moving upwards where the traders can enter a buy position.

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Similarly, when the stock prices are rising up then at certain level suppliers create a supply for that stock at a higher price. At this level, the stock prices stop rising and start moving downwards where the traders can enter a sell position or exit their buy position.

3. Stock Prices Reflect the Market News:

The stock prices reflect the news which is prevailing in that company. The fundamentals news has a huge impact on the trading decisions which we make. As the prices already reflect the impact of the news, traders can easily make trading decisions. It is important to take into account crowd psychology when making trading decisions.

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4. Recommends Timely Entry or Exit:

As technical analysis provides a lot of technical techniques and tools, one can easily use them to identify entry and exit points to enter and exit the stock. For example, we can use 52-week high and 52-week low as resistance and support. When the stock is trading near a 52-week low, one can enter the stock for a long position as it turns out to be a support level for that stock.

Similarly, when the stock is trading near a 52-week high, one can exit the stock as it acts as the resistance for that stock. If the stock breaks it 52 week high, then you can enter the stock as it is going to make a new 52- week high.

5. Helps in Identifying Patterns:

The price patterns on the charts tend to repeat itself. Therefore, we should analyse those price patterns. The analysis of those price patterns helps to check whether the movement of prices had gone up or down after the formation of them. Thus in future, if the formation of any such price patterns takes place then we will be able to predict the price movement. This helps in boosting your trading skills and making decisions accordingly.

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6. Give a lot of Informative Data:

Technical indicators, as well as charts, provide us with a lot of information within a specific time frame. Firstly,with the help of technical analysis trends, momentum, volatility, and trading patterns of a particular stock can be easily found. There are many technical indicators which provide us with information on various aspects of the movement in stock prices. This information is of great importance for the traders to make wise trading decisions.

7. Can be Applied in Different Types of Market:

Technical charts can be used to analyse the price movements in any markets whether be commodity market, security market, forex market etc. Thus, to analyse different markets, one does not need to use a different set of indicators and other technical analysis techniques.

Technical charts tell us the story of the price movements of the stocks which can be complex with a lot of highs and lows. One should wisely use technical tools and indicators when analysing the price movement on the technical charts. Sometimes these indicators may give us a false signal so be sure to use at least two technical indicators when analysing the charts.

One can easily analyse any type of market using these technical trading indicators and techniques.

This is a guest post by Sakshi Agarwal, a post graduate from a financial background and a research analyst. Her favourite topics of interest include technical analysis and investing.  

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