There are many different ways of investing in stocks and shares. Some invest in stocks based on the core fundamentals. So, things like the industry need, valuation, and revenue. These factors do not always give you the correct market evaluation though. This is where technical analysis comes in. And this guide will be all about how to work with technical analysis.
Technical analysis has two main approaches and 5 core steps. The main goal is to predict the price movements by taking metrics like historical price and volume data into account. Investors can use it to navigate between intrinsic value and market price.
Just knowing the core steps is not enough though. You should always do proper research and know the limits of technical analysis. That way you will not be caught completely off guard when something unexpected happens.
The Two Technical Analysis Approaches
The main goal of technical analysis is to predict price movements. And it does this by taking some metrics into account. Things like historical data of the price and volume. With the help of statistical analysis and behavioral economics, investors can navigate between intrinsic value and market price.
Usually, there are two main approaches for technical analysis:
Top-Down Approach
This one is more common with short-term traders. In this approach, you will look at the whole economy even before you focus on security. It is a macroeconomic analysis. As I said already, traders that use the approach will be more inclined to quick and instant gains.
They would first look into the economics of it all, sectors come in second, and then comes companies when buying stocks. When I say economics, I mean the macro factors of economics like the GDP (Gross Domestic Product), interest, inflation, current movements, and also trade balances.
Bottom-Up Approach
The bottom-up method is somewhat of the opposite. It focuses on the stocks rather than the macroeconomic factors. By analyzing individual stocks, you pull the focus more towards the fundamentals.
That means the revenue, earnings compared to the overall economy. This approach is adopted by investors who have a more long-term approach. And since you will be considering the more microeconomic factors like the company’s financial health, it assumes that the company will be performing well even when the industry is underperforming.
Maybe a company has very strong advertising or its organizational structure is very efficient. Things like these will usually draw bottom-up investors to invest.
5 Core Steps of Getting Started
Apart from the two approaches, there are mainly 5 core steps for getting started with technical analysis. You should know all these since they are quite important.
The steps are pretty simple to understand. You need to start by picking your strategy and also developing a trading system. Then the rest will follow
- Picking a strategy and developing a trading system
The number one thing you will need is to pick a strategy and also create an efficient system for trading. As a beginner investor, you can have a strategy that works. For example, making your own moving average strategy.
In this strategy, the investor will keep track of 2 moving averages of a price movement. There will be one short term strategy and one long term strategy. And the fluctuations between them will indicate if you should sell, hold or buy.
- Security Identification
Different stocks may require slightly different parameter choices as well. The strategy I just mentioned above will not work well with all securities or stocks. This strategy is right for stocks that are liquid or volatile. That is something you need to keep in mind.
- Finding The Right Broker
Honestly, finding the right broker will help you every step of the way. And more importantly, it will give you some peace of mind as well. You need to get an account for trading that will support the right security type.
Things like the future, penny stock, common stocks, and more. Another thing the brokerage should have been necessary functionalities for monitoring and tracking selected indicators. This needs to be done while maintaining the costs to be as low as possible. Otherwise, it might eat into the profits.
- Track Your Trades
Tracking and monitoring trades is another very important thing you cannot miss. Traders sometimes need different extent of functionalities. This depends mostly on the strategy they develop. Day traders can make use of margin accounts, for example.
- Additional Software and Tools
Additional software and tools will help you maximize your performance and get the most out of your trading. Things like automated systems or mobile trading services are not only convenient but can be a very powerful and complementary tool!
Some Tips For Technical Analysis
The thing you should always keep in mind is that doing your homework is the best way to make sure you do not get any kind of nasty surprise. Without proper market knowledge and analysis, trading could be challenging.
Note that I said that it is challenging and not impossible. But yeah, you need to do proper research. Just the above criteria are not the holy grail of technical analysis. There are more beyond the basics.
Here are some pointers:
- Make sure to understand the logic behind it
- If you are a beginner, always practice using a demo account first before using actual money
- Always start small. Then build up slowly.
- Technical analysis has its limits. You need to be aware of those.
- You can backset trading strategies to get an idea of how they would have performed earlier
Wrapping Up
Now that you know how to work with technical analysis, you have another tool in your trading arsenal. Technical analysis can be useful. But it has its limitations as well. Keep the limits in mind and always be ready to study the market.
One of the first things you need to decide on when crafting your trading strategy is picking the right trading platform. We at RoboMarkets provide an easy, and efficient mobile trading platform that allows you to trade from wherever you are. And with over 9000 tools available for you to make accurate market predictions and sell, you will become a master trader in no time. Join Us today to begin trading.