Using Technical Analysis

October 11, 2007 at 7:46 pm · Filed Under Educational 

Predicting the weather for the distant future is somewhat inaccurate, but by looking at historical data you can make some assumptions that are more likely than not to hold true. While I can’t say for sure what the weather will be like next January in New York, I would probably feel pretty safe making a bet that it will be colder than next July. Using technical analysis with stocks can assist with a similar dilemma. By looking at the patterns and trends of the past, you can make some predictions that won’t be exact, but are better than a random guess.

I’m sure I don’t need to convince any traders to use technical analysis, but many longer term investors incorrectly think that charts can’t help them. If you fall into that second category, I would strongly advise you to take a second look. As stated many times on this site, you want to make the highest percentage plays to give yourself the best chance of succeeding, and technical analysis is something that can increase your odds of buying a stock that will go up (or down if that’s what you’re hoping for).

One of the beautiful things about chart patterns and technical analysis is that they can work whether you’re a day trader or a long term investor. The important thing is to match your chart to your investment time frame. If you’re day trading and watching the market every second of the day, you can use the 5 minute charts with the day’s activity filling the chart. If you only check your stocks once a quarter, you can use the weekly or even monthly charts so that you can take in the past few years. Trend lines will form on any chart along with support and resistance levels. All of the basic patterns are valid and any oscillators will also work as long as you set the periods correctly.

Typically, what I’ll do is use fundamental analysis to tell me which stocks to buy and technical analysis to tell me when to buy them. The shorter my time horizon, the less weight I’ll give to the fundamental analysis. If you’re serious about making money investing in stocks (or any other financial market), you owe it to yourself to study up on technical analysis. Learning to use all of the tools that are available to you can only increase your likelihood of success.

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