Technical analysis is a hot topic for almost anyone who is hoping to make money from investing. Many people have tried to learn about it as a way to cash in from the stock market. The question is, is it a useful strategy to use if you want to make money from stocks?
Let's have a very quick look at what technical analysis involves. People who use this technique are often referred to as "chartists", based of course on the fact that they spend much of their day analyzing stock charts in an effort to find profitable trades.
Chartists will examine charts and price action in order to look for patterns that they believe will lead to potentially profitable trades. There are a number of patterns they look for (far too many to list) and their goal is to be able to spot their formation and then take advantage of it.
They will also use "technical indicators" which are typically calculations that use price and volume history to point out buying or selling signals along with times when the market may be overbought or oversold.
Do I know people who make money from technical analysis?
I certainly do! In my days a foreign exchange trader I met several people who had made significant amounts of money from these techniques. I remember one trader at the firm I worked at that was famous for using nothing but technical analysis to make his money.
However, these people invested HUGE amounts of time to become the trader they are. Technical analysis is – as the name suggests – very technical! This means you must spend a lot of time studying the art in order to be able to use it properly.
Most people just don't have the time to devote to learning it properly. I firmly believe that unless trading is your career, there are simpler ways for you to make money from investing. The time investment in learning technical analysis of the stock market is huge.
There is lots of money to be made from investing! I'm a firm believer in the KISS (keep it simple stupid) method and I apply this to my trading as well. In my opinion, using technical analysis is anything but simple.
The average investor should focus on finding simple, proven strategies that increase his bankroll over time. Too many times I've seen people take on techniques that they don't have time to master and then end up losing large sums of money. Don't let this be you!
At the end of the day, technical analysis of the stock market can be profitable, however one needs to understand that it takes an incredible amount of time to learn and use properly. In my opinion there are much better areas for the average investor to focus their time on.
