{"id":69754,"date":"2022-06-20T11:43:00","date_gmt":"2022-06-20T15:43:00","guid":{"rendered":"https:\/\/www.shortform.com\/blog\/?p=69754"},"modified":"2022-06-29T09:06:10","modified_gmt":"2022-06-29T13:06:10","slug":"trading-technical-analysis","status":"publish","type":"post","link":"https:\/\/www.shortform.com\/blog\/trading-technical-analysis\/","title":{"rendered":"Understanding Technical Analysis: Trading 101"},"content":{"rendered":"\n

What is technical analysis<\/a> in trading? How does technical analysis predict the price of financial assets? Which approach is superior: technical or fundamental analysis<\/a>? <\/p>\n\n\n\n

Technical analysis looks at patterns in the price of an investment to predict how that investment\u2019s price is likely to shift in the future. In contrast to fundamental analysis, technical analysis takes into account traders\u2019 activity by attempting to uncover behavioral patterns<\/a>. <\/p>\n\n\n\n

Keep reading to learn how technical analysis trading works, its pros and cons, and why it’s superior to fundamental analysis.<\/p>\n\n\n\n\n\n\n\n

Technical Analysis<\/h2>\n\n\n\n

Technical analysis is now the favored approach among traders. Whereas fundamental analysis predicts what the market will do based solely on what mathematical models say is logical, technical analysis makes predictions based on how current market activity relates to what\u2019s happened in the past<\/strong>. Therefore, technical analysis is more likely to accommodate nonrational activity that can radically influence prices because it factors in past <\/em>nonrational events.<\/p>\n\n\n\n

Despite the superiority of technical analysis, most traders struggle to translate insights from their analyses into steady profits. Why? Douglas says 95% of trading errors have nothing to do with knowledge<\/strong>. Instead, these errors stem from our fears<\/strong> about losing money, being wrong, or taking profits lower<\/em> than we could\u2019ve gotten if we\u2019d held onto an investment longer. Therefore, even the most sophisticated technical analysis won\u2019t turn an unsuccessful, frustrated trader into a consistent, confident winner.<\/p>\n\n\n\n

(Shortform note: It\u2019s difficult to find data that validates Douglas\u2019s claim that 95% of trading errors stem from traders\u2019 fears. Even the best traders sometimes post losing trades, but it\u2019s impossible to say whether their errors stem from fear or bad information. Whereas Douglas says the way to increase wins is by mitigating the influence of traders\u2019 emotions, others seek to improve knowledge<\/em> through new technologies such as artificial intelligence (AI) and big data<\/a>. Both AI and big data can be used to combine and test insights from fundamental and<\/em> technical analysis as well as information on market sentiment, thereby giving traders an advantage.) <\/p>\n\n\n\n

Pros and Cons of Technical Analysis<\/strong><\/h3>\n\n\n\n

Douglas presents technical analysis trading as a better option because it looks at trends over time. However, this assessment is arguably based on a shallow evaluation of the method: In reality, technical analysis has many pros and cons that may influence whether it’s suitable for individual traders. Here\u2019s what financial experts say about additional benefits and drawbacks of this approach: <\/p>\n\n\n\n

Pros<\/strong>:<\/p>\n\n\n\n