This difference between technical analysis versus fundamental analysis is a long-standing debate among traders, but the consensus is that technical analysis is the best way to go for both day and swing traders. Looking at price charts with details like volume analysis, cycles, and statistics can help you spot patterns to trade. Let’s take a look at some of the advantages of stock technical analysis.
The current price of a stock or asset reflects how much it is worth at that moment in time. Rumors swirl that causes the price to fluctuate one way or another, but perceptions are all you need to help you make a decision. Day traders don’t concern themselves with the why of how a stock’s price is rising or falling; they trade whichever way the stock is going. Technical analysis doesn’t rely on financial statements or fundamental data to understand whether the company is in a sound financial state.
Price Moves Are Trends
Prices that go up and down do so in trends that can be easy to spot if you’re an experienced chart reader. If you can isolate a trend to understand it, you may be able to find opportunities that line up with that trend and create good entry points for buying to ride the trend either up or down. Day traders isolate the trend and then find opportunities to enter in the same direction as the trend to make a profit, whether that’s through buying or short-selling the asset. Trends tend to occur on degrees and can be executed over hours, days, or even weeks. Day traders need to identify these trends and stick to their patterns to make the most money.
History Repeats Itself
Because the technical analysis is based around on finding patterns in data, finding patterns that will repeat themselves becomes highly profitable. History repeats itself in general patterns, which is why chart analysis is so crucial for day traders. A pattern won’t repeat itself in necessarily the same way, so traders must analyze these charts to find similar patterns. Data can be back tested against a stock’s current performance to help you find these historical trends. Back testing an entry point and exit point for a particular strategy can help day traders make split-second decisions on whether to enter the market or not.
Technical analysis is all about finding the right timing to make a trade. Technical analysis will help you identify the point in time when a stock makes sense to invest and do so right at the moment. The significant benefit is that technical analysis can be used across several different assets. There are day traders that focus entirely on the cryptocurrency market and use their chart analysis to find moves in the trading scene that generate profit. Stocks, forex, futures, binary options, CFDs, and even housing can be analyzed using technical analysis. Most financial markets are considered fractal, which means that patterns that appear on the smallest scale will also appear on the largest.