In the previous videos we have already discussed what technical and fundamental analysis means. Undoubtedly, both the methods have their own set of advantages and limitations.
While fundamental analysis is more about reading the financial statements of the company, technical analysis focuses on the charts and the patterns of the price movements.
To many investors, technical analysis is what they count on in the stock market.
Now, let us know the reason behind the inclination of many traders and investors towards technical analysis.
Let us discuss the importance of technical analysis when trading in the stock market in this video.
First, it Helps in Identifying Support and Resistance levels:
Technical analysis helps in identifying support and resistance levels. These are the levels from where the prices may reverse.
Suppose the stock is in a downtrend, and it reached a level where the buyers are willing to buy the stock at lower prices. This level is known as support.
From here, the prices may reverse to uptrend, and buyers can buy the stock.
Similarly, when the stock is in an uptrend and reached a level from where the sellers are willing to sell the stock at higher prices, this level is known as resistance.
From here, the prices may reverse to a downtrend, and you can sell the stock.
Thus, technical analysis helps in identifying the support and resistance levels, and traders can take their trading decisions accordingly.
Next, it Helps in timely Entry and Exit:
Technical analysis helps the traders to establish an entry and exit in a particular stock.
Other than support and resistance levels, technical analysis provides other technical tools like chart patterns and indicators, which help traders analyze the price movements and make important trading decisions like when to enter and exit the stocks.
Next and an important one is that it Helps in identifying the trends.
Technical analysis is based on the assumption that prices move in a trend i.e., either uptrend or downtrend.
By observing the technical charts, traders get to know whether the stock is in an uptrend or downtrend.
Other than the above benefits, technical analysis also helps us in putting stop loss to our trades, so that if the prices move in the opposite direction than we expected, it will help us to protect our money by minimizing the losses.
A prudent technical analyst always has a stop loss when taking a trading position in a stock, by using a combination of different indicators and tools. Therefore, technical analysis, if done in a disciplined manner, helps you to curtail losses to a certain extent.
So, trading stocks using technical analysis helps the trader to earn daily or short-term gains, and also helps them to limit trading risks by following their trading strategy.
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