Technical Analysis – Smoke and Mirrors?

Submitted by Stock Market News on 26 April, 2011 - 11:43

The pros and cons of Technical Analysis

There are various methods in navigating the stock market. Even though it can be very unpredictable there are tools that you can use to help you gain insight on a particular stock that grabs your interest. One of the main methods in evaluating stock is technical analysis. This is used by traders to analyse the supply and demand of stocks in the market to determine their trend. The trend provides the traders signals on how the stock price will behave in the future. This can be very convenient in a highly uncertain market that enables traders to be one step ahead of the game.

However scientists are not convinced by this method. There are also a large group of traders who do not profit from it. They claim that due to market efficiency finding your entry position is no different from random selection when you use technical analysis. Market efficiency means that all information are calculated stock prices and you can only make a guess on how it will behave in the future.

But despite all of this there are a group of traders who are able to make consistent profits from it. They are winning because they know how the losing traders will react based on the data. When a price goes down investors sell to protect themselves from losses. This creates a domino effect as the stock price plummets and losing traders short sell. However successful traders know that this is just temporary and buy the stock. More often than not the price reverses. By taking advantage of the losing trader's reactions they win.

Other traders on the other hand, have a different way of interpreting technical analysis. Instead of predicting movement, its about setting boundaries - taking low risk entries and making the best exit strategy.

In conclusion, Technical analysis is just a tool that you can use in trading, but its not the whole picture. There is no exact science to be able to predict the market and every investment is always a risk.