Knowledge Centre

3 Reasons Technical Analysis is a must for stock investors

Updated on 12 May 2017

Technical analysis, one of the oldest form of security analysis is a vital part of stock trading. For all those who have just stepped into the world of trading, it is essential for you to understand the importance of technical analysis. To put it simple, technical analysis of stock market is a study of price charts and other information extracted from it, to forecast price movements.

The best thing about technical analysis is that, it is quite easy to understand and can be performed quickly with the help of one of its charting methods. Apart from that, unlike fundamental analysis, technical analysis doesn’t require any financial statements for valuation. Moreover, it doesn’t involve strict fundamental valuation. Rather, technical analysis depends upon how the market is moving, which is quite subjective.

Here are some of the most important benefits of technical analysis in stock market trading

  • 1. Price forecasting:
    Obviously, as mentioned earlier, price forecasting is a primary and one of the most important benefits of technical analysis of stocks. This ultimately helps stock investors to make informed decisions. While rumours may swirl, the current price is what is supposed to be focused on to make any decision. So, all we need is a price chart from where we can take a look at all the information and perception without bothering the reason behind falling or rising of prices. This makes investment easier, as you don’t have to bother about financial statements or news.
  • 2. Trend identification:
    It would arise a difficult situation if prices would move up and down randomly. Well, prices don’t go upward or downward aimlessly; they move in trend. If you are new to stock market investment, you might not know the fact that trend direction is one of the most important factors to look upon before doing an investment. This direction can be figured out using technical analysis. It can be either in uptrend, downtrend or sideways trend. There are a lot of stock technical analysis tools for that.
  • 3. History repeats (generally, not precisely!):
    Technical analysis is all about finding patterns and using them again for trading. However, history doesn’t repeats exactly. If the common chart pattern is triangle, it can again be a triangle. However, you don’t know how smaller or bigger triangle than the previous time. The technical analyst will recognize the patterns and then trade on the basis of history and current price.

The final say

Technical analysis is used mainly for the short term trading. It is based on the current price, as it reflects all the current information of an asset. Technical analysis helps you identify trends and patterns which help you make the right decision at the right time and grab maximum profit.