The title, Technical Analysis, sounds very grand, doesn't it ? Well, it's not ! It uses price charts and past price patterns to attempt to predict probable future price evolution.
Like most subjects, it IS something almost anybody can learn if they are willing to put in some time and effort. Technical analysis (TA) can me made as complex or as simple as you desire - often the more straightforward the strategy employed, the more successful it turns out to be in the long run. So, there is nothing to fear from what, on the surface, may appear to be a complicated subject. It's not a black magic art, there's no holy grail and as long as the subject is tackled in a 'modular' basis, practising what you learn as you progress, there is no reason why you cannot employ TA in a profitable manner.
TA is a self-fulfilling prophecy. What do I mean by that ? Well, if u were the only one looking at charts it wouldn't work ! Why's that ? Because of two theories known as 'random walk' and the 'efficient markets hypothesis' . These theories effectively imply that markets move in a random fashion and it should be impossible to make money from looking at past prices. However, these theories don't take into account the fact that a lot of traders are looking at the same chart/same chart levels. So, when you hear a technician talking about a market and various levels, the only reason he has any confidence in his predictions is because he knows implicitly that there are many traders out there viewing the same chart as he is. Therefore, TA is self-fulfilling since, if he were the only trader looking at a price chart of a stock, you can be pretty certain that there would be no reason for the stock to be capped at, say, a price of 80. Why not 75, or 85 ? Because there are thousands of other traders all coming to a very similar conclusion - hence, moves through the 80 level will tend to be viewed by most market participants in the same manner.
This is what enables technical analysis to hold true. The difficult part is not looking at the price chart and drawing various studies on it. The difficult part is interpreting the data .... but, that skill can be acquired ! Finally, technical analysis is another tool in a trader's armoury. It is not the be all and end all, but you do need every aid possible. There are a great deal of professional traders out there with a huge amount of expensive technology. By understanding/employing the methods they use to trade profitably will enable you to : 1) capitalize on your instincts/hunches, 2) help you to avoid some pitfalls and 3) will certainly improve your investing skills. As a Prime Minister would say, 'I commend it to the House !'
Technical analysis is an aid to timing market investments. A result of this is that TA reduces the risk inherent in taking any position in today's markets. In other words, it improves the risk/reward ratio of a given trade as it provides traders with an objective assessment of market conditions and, therefore, enables them to remove some of the emotion from investing.
Now, most retional people would agree that anything able to reduce risk has got to be worth embracing ! As mentioned above, technical analysis, correctly interpreted, enables traders to objectively stack the odds of trading/investing in their favour.
How do they do this, you may ask ? Well, as we know successful trading in today's markets is all about probabilities or risk/reward control and, crucially, accurate market timing. It's no use buying a stock and then see it fall, before eventually doing what you initially thought it would do i.e. rise. You need something to tell you objectively when it's a good 'time' to invest - something that enables you to see when the risk/reward is in your favour. Traders who ignore the value of TA in this regard open themselves up to a whole lot more risk than they need to take on and it's a sure way of losing your capital to more 'professional' traders.
Technical analysis enables traders to set their risk parameters more accurately, through the correct setting of entry, exit and stop (both loss and win) levels. This rational, objective methodology of investing looks to put the odds in their favour and in the long run will enable them to mimimize their risks and maximize their long term profitability. Ignoring technicals, or even not knowing how to use the levels derived, puts you at a disadvantage and unnecessarily increases your risk every time you trade. By employing TA to your advantage, you remove some emotion from your trading decisions and it will help you take a more rational and profitable approach to your style of investing.
By not employing technical analysis techniques to your investing style when other traders/investors are exploiting the advantages it can offer them, you are stacking the odds of winning against yourself. A lot of private/individual investors either don't control their odds or don't know how to go about controlling their odds when investing and hence, they are on the losing end of more professional traders.
However, by using TA, coupled with sensible money management techniques, you CAN vastly enhance your profitability from trading on financial markets, whilst at the same time enabling you to set parameters to protect your capital as it grows through time. These seem to be good arguments for embracing this subject and why it's very much worth your while delving deeper into technical analysis.