If one takes a close look at the trading world, it revolves entirely around "predictions". Every trader or investor would like to have an inkling of the outcome (technical analysis) for a particular security or stock, before parting with his/her hard-earned money!
In fact, seasoned veterans are able to correctly predict the ups and downs of financial securities. That is how they make oodles of money!
But this "predicting ability" is absent in most people. Even experts can go wrong at times, forget novices to this community! Therefore, a new tool called "technical analysis" has come into the market to help out in such matters. Since the results of using it have proved favorable, more and more traders and investors are going in for it.
Let us examine all the characteristics of this new tool--
(1) The correct definition of technical analysis is "the skill of being able to predict a particular security in the financial market".
(2) This type of analysis revolves around the actual movement of the market; this is not the case with fundamental analysis. Factors related to politics or economics are pushed aside, though they do have an impact on a market's movement.
(3) It searches for patterns or trends that can recur in the future. When this knowledge becomes available, prediction of what will happen in the future becomes easy.
(4) Despite this analysis being quite reliable, it is advisable to go in for fundamental analysis also. A comparison between the results of both will give a double edge to accuracy.
(5) How is fundamental analysis different?
If a fundamental analysis is to be done about a particular company, it includes factors like--how money is being managed by the company, how its performance has been in the past and how stable the current government is regarding trading currency. Thus, this analysis probes the reasons for the market's movement.
Technical analysis is only bothered with how the market is actually going to move. The company's present or past performance, how it takes care of its money--all these are irrelevant!
(6) Anything that claims to be perfect, is naturally viewed with skepticism! So also this new tool, and its claims to being efficient and accurate! People wonder how past movements of the market can aid in predicting the future?
(7) Technical analysis will have to take the help of quite a few indicators for predicting the future of financial securities, such as--volatility indicators, price change indicators, strength indicators, and so on.
(8) Just indicators are not enough, some type of software is also necessary for the purpose of monitoring the results. The software should have these features--real time data streaming, zoom features to be able to view the changes clearly and charts to base predictions on, among others.
(9) There is plenty of software available in the market, but it is advisable to choose one that studies how a particular security has performed in the past and predicts its future accurately.
(10) How are market patterns detected?
Each day, the opening price for a particular security, its highest price for the day, the lowest price for the day, and its closing price at the end of the day--have to be taken into consideration. Daily data collection leads to the setting of a pattern for the future.
(11) The most important thing to remember is tha no technical analysis can be 100% successful in its predictions, despite the best software in place. This type of tool is only meant to serve the purpose of a guide.
(12) Finally, whatever be the software, whatever be the technical analysis, the ultimate decision-maker is "the person"! Yes, this tool with its software gives very good guidelines, but instinct or a sixth sense should play a greater role if the trader or investor wants to achieve great success!
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