Many traders analyze stocks based on fundamental facts- such as their revenues,
valuations or industry trends. Fundamentals factors are not always included in the market price definition. Technical analysis aims to forecast price movements by taking in consideration historical data, specifically price and volume.
Technical analysis guides traders what is most likely to happen while only past information is available. It helps traders and investors to understand the gap between excepted value and market price by sophisticated techniques like statistical and econometric behavior.
There are two different approaches: the top-down approach and the bottom-up approach. It is a fact that short-term traders will go for a top-down approach and long-term investors will go for a bottom-up approach.
Top-Down: The top-down approach looks at the overall economy first and then it focuses on individual assets. So, a trader focuses first on economies, sectors and then companies he is interested on. Traders who like top-down approach usually like short term profits. For example, a trader may be interested in stocks that broke out from their 50-day moving average as a buying opportunity.
Bottom-Up: The bottom-up approach looks at individual stocks. It represents analyzing a stock that appears crucial for potential entry and exit points. For example, an investor may find an undervalued stock in a downtrend and use technical analysis to identify a specific entry point when the stock could be bottoming out. They seek value in their decisions and intend to hold a long-term view on their trades.
5 CORE STEPS TO GETTING STARTED WITH TECHNICAL ANALYSIS
1. Identify a technical analysis strategy
2. Identify tradable securities that fit with the technical strategy
3. Find the right brokerage account for executing the trades
4. Select an interface to track and monitor trades
5. Identify any other applications that may be needed to implement the strategy
Trading is not an easy task, which means it’s important to learn first, and never stop learning while you trade. Some tips might be:
• Understanding the logic behind technical analysis.
• Testing trading strategies to see their past performance.
• Practicing trading in a demo account before committing real capital.
• Pay attention to the limitations of technical analysis to avoid costly failures and surprises.
• Being thoughtful and flexible about the scalability and future requirements.
• Trying to test what a trading account offers by requesting a free trial.
• Starting small in the beginning and expanding as you gain experience.