What is Technical Analysis?
Believe it or not, Technical Analysis (TA) has been around dating back to the 1700s. There was a famous Japanese trader who used past price movements to predict future movements. This skill started in Japan using candlesticks to predict the rice market movements. This form of trading didn’t hit the West for quite some time until proven success was found doing it.
As mentioned earlier, technical Analysis was used to predict future price movement using previous price movement. That is the same theory behind using it to this day. As I am sure, you have all heard the saying, “History repeats itself.” This quote is right to a certain point. It is a proven fact that history tends to repeat itself, but we can’t rely solely on this to make our trading decisions. TA is used to help give us an ‘edge’ on the stock we are trading.
Why use Technical Analysis?
There are many reasons to use TA in your everyday trading. One is, as I stated earlier, that it helps give the trader an ‘edge’ when taking a trade. But, another reason is the psychological theory behind it as well. When a group of traders is looking at the same support and resistance lines, that means those levels are going to be very strong. They are going to be very well respected because so many other people see them as well. For Example, the most notorious Moving Averages used are the 200 SMA and the 50 EMA. The reason they are so well respected is that the majority of traders use those indicators.
How to use it
Technical Analysis is used for different styles of trading, such as;
- momentum trading,
- trading breakouts, and
Traders can use TA and integrate it into any form of trading niche.
Momentum Trading is among the most popular styles of trading you’ll find today. When you trade with the momentum, you are going along with an established trend and just taking pieces along the way. Traders integrate TA with this by utilizing Moving Averages to get a sense of how strong the overall trend is. A common strategy is buying a pullback into a Moving Average as it “takes a breather” before pushing higher again.
Buying breakouts is also a familiar trading style traders have to use it for. The trader looks to buy a breakout, and he has to be aware of where the breakout level is, and when the opportune moment is to buy it. A common strategy used is flat top breakouts, 52-week breakouts, etc. These strategies usually use support and resistance lines to determine the entry and exit points.
Reversal Trading is the act of trying to find the end of a trend just before it starts heading the other direction. This form of trading has a high risk to reward ration, but it is much harder than trading with the trend. Some common strategies for reversal trading are buying the dip and shorting the top.
Technical Analysis is useful for determining your risk on each trade as well. When a stock breaks through a resistance point, then resistance now becomes support. A trader can utilize this because he now knows where the support level is. So, if the stock breaks back down below the support level, then it is a good indication the stock is holding up and should cut your losses.
Technical Analysis is one of the most common trading tools and often trading styles that traders use this day and age. It has proven itself to be a successful strategy time and time again.
The Bottom Line
The bottom line is to find your own trading style. TA suits many traders. Does TA really work for Mini Traders? I rather say Mini Traders are capable to discover how to trade – or develop their knowledge, and build their unique trading style.