Don’t Use Technical Analysis for Stocks
We’ve never met a successful investor that uses technical analysis to trade stocks. That’s because technical analysis does not work. If you want to stay on the right investing path, you should understand what technical analysis is and why people use it.
First, technical analysis is the analysis of stocks in order to look for patterns. When patterns are found, traders use the current price movements to predict what will happen to a stock based on these historical patterns. There are thousands of patterns that technical analysts define. Some of the more common analyses look at moving day averages, head and shoulders, candlestick patterns, and many more advanced patterns. Traders use advanced computer programs to try to find new patterns so they can form a trading strategy based on the patterns discovered.
Why technical analysis doesn’t work.
Technical analysis can add a level of knowledge to how a stock trades, however, technical analysis doesn’t work because of the principle of arbitrage. In other words, if a pattern works, then hundreds of traders will trade the stock based on the pattern and thereby eliminate any potential profits.
Also, technical analysis only looks at trading patterns and therefore offers no real insight to a company’s value. It is used to day trade and not to invest.
If you are tempted to use technical analysis, only do it on a stock that you would buy based on fundamentals. And then use it to find a good point to purchase or sell. But mind you, the analysis probably won’t work and you may miss out on a good opportunity.
Another point about technical analysis is that there are thousands of “proprietary” trading systems. If you’ve ever done a search for penny stocks of forex, you’ll find advertisements everywhere offering to sell you the use of a ”trading system”. These systems use technical analysis, and if they are selling their secrets, then they are obviously not making money on their trading.
For these reasons, we recommend being very careful when looking at stocks trading patterns. It’s easy to see patterns in historical data but it is impossible to accurately predict future movements based on these patterns.
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