Ever heard of technical analysis? If you have been investing, or are considering investing in the near future, you have likely been doing your research. And that means you’ve likely come across the term “technical analysis” before. Wonder what that means? We’ve written this article to provide a basic introduction to this particular investment strategy. By doing so we hope we can improve your investment returns!
You might want to set a side a few minutes to really read this article as technical analysis can be a bit difficult to explain. Don’t worry, we’ll go over the concept in depth to provide you with a solid understanding of how it works. By doing so, we’ll help you decide if technical analysis is the right strategy for you.
The political economy of technical analysis
Technical analysis is a technical oriented investment strategy (surprise, surprise!). So what does that mean? It means that people using this strategy don’t focus on the specifics of a company or even an industry, but instead focus on price movements. Technical analysts use a variety of tools and programs to predict when prices will rise and fall based on demand and the price of a financial instrument.
Still a bit confused? No worries, technical analysis can be a bit hard to explain, but once you get it, it’ll all make sense. Prices are set by supply and demand. If demand is low and supply is high, prices will go down. If demand is high and supply is low, than prices will go up. These basic principals underline our entire modern global economy.
Technical analysts focus on this supply and demand, and the movement in volumes and prices, rather than the individual stock and the company it represents. If you check out a stock chart, you’ll notice that they are often very jagged, stocks tend to rise and fall frequently. Price and volume is a major part of the reason why. So technical analysts focus on tried to predict the rise and drops in price based on supply and demand.
Why some traders use technical analysis
So why do people use this particular investment strategy? If you haven’t guessed already, it can be a very complicated investment strategy, so it’s not for everyone. Still, there are tens of thousands of stocks available to be purchased. Industries can be very complex and consumer preferences can be hard to predict.
As such, conducting research on individual companies and keeping track of industry trends and shifting consumer preferences can be very difficult. Researching even an individual company can take several days. There are financial statements to pour through, news articles to read, management profiles to study, and numerous other things.
Understanding industries can be just as complex. Who are the major players? What types of products are companies working on? Who might have a major competitive advantage over the other? What do consumers in this industry want? How much money can they spend? The list of individual factors can be complex and many traders simply don’t want to have to sort through all of them.
Technical analysis allows traders to focus on a different investment strategy, and one that doesn’t require such in-depth research into minute details. Of course, this investment strategy carries its own risks and challenges with it, so it shouldn’t be under estimated.
Technical analysts have to develop their own theories for when prices will rise and fall and how volume might affect prices. They also have to learn how to master technical indicators, or software tools used to help automate the investment and research process.
Whether or not technical analysis is right for you depends on your own preferences and strengths. So consider your options carefully!