Are you looking for more information on technical indicators and how you can use them to build a sound and well-informed investment strategy? If so, you’ve found the right article! Not only are we going to offer a brief introduction to technical indicators, but we will also explain how such indicators can be used as part of your larger investment strategy.
Technical indicators are used by investors who use technical analysis as part or perhaps even all of their investment strategy. What’s that mean? Basically, investing strategies can be broken into two fundamental categories, technical analysis and fundamental analysis. Many strategies mix these two categories, but they represent the two ends of the spectrum.
Learn Your Fundamentals and Technicals
Fundamental analysis focuses on the individual aspects of given companies. What are their products? How skilled is their management team? So on and so forth. The problem with fundamental analysis is that it takes a ton of research, and the pay-off is always uncertain. Even after studying and studying a company and its products, the best investors can still get it wrong.
For these reasons, some investors focus on technical analysis. This type of analysis essentially ignores the individual attributes of a company and instead focuses on rising and falling prices. Basically, technical analysts believe that supply and demand, along with prices, can provide key insights into when prices will rise and fall. For example, if a stock drops by ten percent, the drop in price itself might increase demand, which will cause prices to bump up (more on that later).
Getting Technical with Technicals
Technical indicators, or technicals for short, are special tools and metrics used to predict the movement of prices. Technical indicators try to predict the direction that prices will move in by analyzing prices and their potential effects on supply and demand.
Think of it this way, if supply increases, prices will generally drop. On the other hand if prices drop, demand will increase. Now, stock markets are markets just like any other. If the supply of stocks being sold in the market suddenly increases, there’s a good chance that prices will drop. So what would cause supplies to increase? A sudden jump in stock prices could encourage some investors to offload their stocks. As investors start to sell off their stocks, suddenly supply increases, which in turn could cause prices to drop.
If you pull up a stock chart, you will notice that the up and down movement of prices is highly jagged. Stocks move back and forth by small amounts on a very frequent basis. Technical indicators try to predict those up and down movements. Even if each up and down swing is only .5%, the amount of profits can add up really quickly if you learn to predict when the stock will move up and down.
Think about it. If a stock moved up and down by 1% five times in a giving trading session, and you currently predicted it each time, you would end up producing roughly 5% in returns! Now do that over the course of a week, and the money will really start to add up! And if you did that over the course of a year? Well you’d be swimming in money!
Technically, Technicals are Good for Active Traders
So who should consider using technical indicators? Such indicators are generally used by short-term and highly active traders. Basically, long-term investors will use fundamental analysis, while many short-term investors focus on technical analysis. The reason is simple, technical indicators, and technical analysis in general, does not provide insight into the underlying value of a company. So if you are looking to be a long-term investor, technical indicators probably won’t be your thing. On the other hand, if you are looking to be a day trader, then technical indicators might just be the tools you are looking for!