Many traders are torn between using technical analysis and fundamental analysis. The two methods couldn’t be more different, the former focusing on numerical parameters and price as the main way to predict future performance of a given security. Fundamental analysis is more tied to non-numerical measurements, like the experience of the management team, whether there are any outstanding lawsuits against the company, and how the overall earnings performance is with respect to the number of outstanding shares. While fundamental analysis does include some number-based data (earnings per share, or EPS, being the best known), the centerpiece of the study is about qualitative rather than quantitative performance. So, when is technical analysis best suited to your trading style? Here are several situations when technical study will yield usable results.
When Fundamentals Don’t Make Sense
What happens is the company you’re considering doesn’t lend itself to fundamental analysis? This often happens when a basic, fundamental study brings up contradictory results, or when information is hard to come by. Anyone who has purchased unlisted shares has faced this dilemma. Sometimes, the only thing you have at your disposal is a recent price-and-volume chart.
Day Trading
Technical analysis is the backbone of day trading calculations and predictions. Even specialists, who only buy and sell one or two companies’ shares, rely on reams of technical data to make minute-by-minute decisions. In an environment like this, more information is usually better than less. If you want to learn how to day trade stocks, it’s a good idea to learn how to use several of the most common technical indicators, live moving averages and on-balance volume. Armed with statistics, past price performance, and sophisticated technical analysis tools, it’s possible to acquire the confidence and resilience that is necessary to achieve success as a day trader.
When Technical Analysis Has Worked Before
Often, history is the best way to see whether technical analysis will work in a given situation. If you’re an experienced trader and have had luck with a particular set of indicators, then there’s no reason to change course. Not every technique works forever. Some only offer worthwhile results for a few weeks or months and then begin to decline in usefulness. That’s why it’s so important to keep an open mind about your favorite technical analysis measurements. But, for example, if moving averages have served you well when analyzing XYZ Corp stock, that is a good sign that averages will continue to be the most reliable tools, until they stop delivering consistent results.
When Prices are Trending
In a trending market, up or down, technical analysis tends to do quite well. Trending markets are considered the opposite of choppy ones, in which almost no kind of analysis will serve you well. But when there is a long-term trend in effect, even if it is a generally declining price environment, turn to your preferred technical analysis indicators for the most reliable results. Sometimes it takes a bit of trial and error to discover the specific kinds of analysis that will give the clearest outcomes, but in trending price scenarios, those tools will invariably be technical ones.
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