There are several investors who analyze stocks according to their fundamentals like valuation, revenue and industry trends. However, it is not that fundamental factors will be reflected in the market price of stocks always. This is when technical analysis helps an investor predict movements in price by examining the data like volume and price.
Once you learn technical analysis, you can easily navigate the bridge between market price and intrinsic value by utilizing techniques like behavioural economics and statistical analysis. Given the past details, traders can understand what will happen in the near future.
Tried and tested strategies for technical analysis
- Select the ideal approach
The Top-down approach and the bottom-up approach are the two different ways of approaching technical analysis.
TOP DOWN: The top-down approach is a macroeconomic technique that looks at the economy before concentrating mainly on individual securities. A trader should focus on sectors, economies and then companies with relation to stocks.
BOTTOM-UP: The bottom-up approach deals with individual stocks as against macroeconomic view. For instance, an investor can spot an undervalued stock in a downtrend and use technical analysis to recognize an entry point.
- Choose a strategy for a trading system
The foremost step is to recognize a strategy or create a system for trading. A novice trader can decide to follow a crossover average strategy where they’ll track 2 shifting averages on a definite stock.
- Recognize different securities
Not all securities and stocks will fit into this strategy and this is ideal for volatile and liquid stocks rather than stable or illiquid stocks. Different contracts or stocks can demand different parameter choices.
- Locate the best brokerage firm
Get hold of the appropriate trading account which supports the chosen type of security. This brokerage firm should provide you with the needed functions for monitoring and supervising the chosen technical indicators. This can be done by keeping costs low and by averting eating up the profits.
- Supervise trades
Traders usually need various types of functionality based on their strategy. Day traders will need a margin account which gives them access to Level II quotes and promote maker visibility. A basic account can be preferable as a lower-cost option.
- Use tools or software
There can be several other features that are needed to enhance performance. There are few traders who need mobile alerts or trade on-the-go. Others can leverage an automated trading system to execute trades.
Few tips for beginners:
- You have to understand the logic that lies behind technical analysis
- Practice trading in a demo account before you move on to real capital
- Backtest various trading strategies to know how they may have performed previously
- Be aware of the restrictions of technical analysis to stay away from costly blunders
- You have to be versatile about future requirements and scalability
- Start small initially and expand with time
While making investment decisions, there are many investors who leverage both technical and fundamental analysis to bridge the gaps of knowledge. Keep in mind the above-mentioned strategies if you’re new to trading.