How Effective is Technical Analysis?
The technical analysis is no doubt effective if applied with the right tools in combination with the right technical indicators on the right time phrase chart patterns. Just like accuracy, there is no such instrument available to measure the effectiveness of technical analysis.
But when you earn the profit from your trading strategy developed on the basis of technical analysis, it means it is effective and the ratio of effectiveness can be measured when you back-test, your strategy again and again to know how many times it worked.
Many times market conditions are not favourable and do not move as per your expectations, hence technical indicators might not work and the trading strategy could fail resulting in a loss in trade. Hence, not every time technical analysis needs to be effective, sometimes it is not effective and that could be because of inappropriate analysis methods like using the wrong technical indicator misreading the chart patterns or stock moving abruptly.
How Reliable is Technical Analysis?
The reliability of technical analysis depends on the applicability of the user and trust in technical indicators used to perform the technical analysis. If you have extensive knowledge and experience in applying the tools and techniques that work for you, you can rely on this method of analysis, and if you don’t know about this then it is not reliable for you.
However, in the stock market either you trade with a short-term earning perspective or invest with a long-term point of view. While making the investing and trading decisions you have to use the fundamental analysis and technical analysis or any one of them to pick the best stock that can give you the maximum returns in a minimum span of time.
In fact, technical analysis is more reliable for short-term trading, while selecting stocks for long-term investment, fundamental analysis is used. In the short term, if the broader market is volatile, other stocks also move with the same trend. Hence, for short-term trading, you can rely on the technical analysis, but for long-term analyses the fundamentals.
Nevertheless, the reliability of technical analysis is highly dependent on the quality of data, choosing the right technical indicators, tools or techniques and most importantly, the skill of the technical analyst to utilize and interpret the chart patterns and trends. However, Technical Analysis would be not enough for trading or even for investing.
Also Read: What to Know Before Investing in Stocks: 10 Things to Consider
To get the best results if you use the combination of both fundamental and technical analysis, you will get more reliable indications from your analysis and can formulate the best intraday trading strategies or pick the stocks for the medium to long term.
Also Read: How to Select Stocks for Intraday: 10 Tips to Pic Best Stocks
Is Technical Analysis Enough for Trading?
As we have told you for short-term trading, technical analysis is more reliable, and for long-term investment fundamental analysis would be more effective. But is the technical analysis enough for trading, no, not at all, in some cases especially for intraday trading you can purely rely on this method of analysis, but not every time it works.
Also Read: 7 Biggest Mistakes To Avoid While Doing Intraday Trading
For trading in the stock market, either short-term or for long-term analyzing the stocks fundamentally is also very important to get the best results. Both fundamental analysis and technical analysis have their advantages and disadvantages, and a combination of both can be used for trading as well as for investing to select the most suitable stocks.
However, for intraday trading technical analysis could be enough if technical indicators give you the right signal of buying or selling the stock. Sometimes for short-term trading, it could be enough, but for long-term investment always analyse the fundamentals of the company. For long-term investment also, you can use technical analysis to find out the best levels to buy the stocks at the lowest point and sell the highest levels to earn the maximum profits.
Is Technical Analysis Useful or Useless?
Technical analysis is useful in terms of finding the stocks for intraday or short-term trading. Technical analysis takes less time compared to fundamental analysis and can be very useful to find out the trend in stock and buying and selling points on the chart.
Using the technical analysis you can find out the entry point or exit point or where you can book profit or buy the stock. The chart patterns can tell you the trend in the stock, whether it is in bullish trend or bearish trend, where its support and resistance. Apart from that Technical Analysis is very useful as there are certain indicators that can tell you the stock is in the overbought zone or overselling zone, or where there is trend reversal in the stock.
Conversely, technical analysis can be useless if not properly applied or if there is unexpected movement in the market or in any individual stock. However, if you are not able to interpret the chart patterns, or don’t have an understanding of applying the technical indicators at the right time with the right time phrase, you will be misled and can get the wrong signal in stocks.
For long-term investors technical analysis can be useless, as they don’t consider the small fluctuations in the price or do not wait for the stock to come down to its lowest levels. Though many long-term investors also use technical analysis to know the buying point, sometimes such investors don’t wait, they just pick the stock where it is right now and add it to their portfolio and forget for many years to get a good amount of returns from such investment.
Is Technical Analysis Gambling?
Trading in the stock market intraday can be a type of gambling. Though you can use or apply the various useful technical indicators, still there are uncertainties in the price movement. Your money can be gone in a day or within a few hours, especially if you bet in day trading or playing in options both are highly risky or you can say gambling.
Also Read: Types of Risks Associated with Investing in the Stock Market
Technical analysis is the process of using technical indicators to find the stock trend or where to buy or sell the stock, If your analysis doesn’t work or fails resulting in a loss in trade, means it is gambling. No, it is not betting, as you have tried to analyse the stock but your strategy failed. Gambling means when you pick any stock randomly from the market time to earn profit, it can be called a blind game or purely just like gambling.
Hence, technical analysis is not gambling, if you use the indicators, tools and techniques precisely it can give the right signal or trend in stock. Using the combination of various indicators, you can find out the best point to buy or sell the stock and book the profits or exit to minimize your losses. Based on the historical charts patterns and behaviors of stock in certain market conditions, technical indicators can give you the right indication to enter into trade.