What are the advantages and disadvantages of technical analysis?

Since the advent of financial markets, investors have always tried; Predict the future of these markets through different methods . To this end, some of them resorted to using the past price to predict the future condition of assets; Which later became known as ” technical or graphical analysis “. Simply put, technical analysis involves examining all past price-related data in order to understand the typical price behavior of an asset and predict its future. This method of market analysis has gained a lot of fans over time and is no longer hidden from anyone, which is at least part of the trading strategy of most Financial market participants include technical analysis. Also, with the many researches that have been done in the last few decades, graph analysis has become very widespread and today includes various methods such as Elliott , Fibonacci , Andrews’s fork and..

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3 basic principles of technical analysis

According to historical sources, the origins of graph analysis go back to the nineteenth century and the theories of Charles Dow , and for this reason, he is known as the father of technical analysis . In general, technical analysis is based on the three basic principles mentioned in Dow’s theory.

1- Everything is summarized in the price

According to this rule, to analyze the market, you only have to look at the price ; Because the final price agreed between traders is influenced by all economic , political and ؤ components and its analysis will be related to the study of all fundamental factors !

2- Price movements have a certain trend

This principle can be considered a metaphor for Newton’s first law in technical analysis. In fact, Dow believed; Prices to the downside or the upside continues, unless other external factors leading to changes in the market.

3- History can be repeated

The use of human collective psychology is one of the main theories in graph analysis. In fact, there is a possibility ; In the event of similar situations , individuals will react predictably and jointly based on their previous perceptions and mental data .

Technical versus fundamental analysis

The two main methods of stock market analysis and other parallel markets are technical and fundamental analysis . In the analytical environment of financial markets, these two methods have always been opposed to each other, and their proponents have each tried to prove the effectiveness of their preferred method and its superiority over others. Fundamental analysis means determining the real or so-called intrinsic value of an asset based on its financial , economic , and financial components and indicators . Followers of fundamental analysis emphasize that for reasons such as the inherent valuation of assets based on real statistical data , the financial expertise of analysts and Spending more time checking the overall condition of the asset, the results of this method are more valid ! But the fact is; So far, no comprehensive study of the performance or the superiority of either of these methods proved not to be; In fact, none of them have 100% performance ! The effectiveness of these methods depends more on how they are used , the experiences of individuals, and factors such as trading strategy , capital management , and so on. Today, some analysts, in order to simultaneously enjoy the benefits of fundamental and technical analysis, use a hybrid method called ” technofandamental ” .” they are working; Which provides a more comprehensive view of both methods by examining the factors associated with them.

Advantages of technical analysis

Easy to learn: One of the undeniable features of graph analysis is the breadth of tools and methods of market analysis. Learning and understanding are often simple technical concepts and most people can in a short time ; Learn how to use this tool. There are currently many print and online educational resources in this area.
High flexibility: Using the principles of the technical method, the price chart of each asset can be analyzed. In this regard, we have almost no restrictions ; You just have to use the appropriate tools and methods according to the conditions of each symbol . Other features of this method are the possibility of analysis and trading in different time periods of the chart, including short (minute and hour), medium (daily) and long-term (weekly and monthly).
Speed of analysis process: The use of new technologies in the context of financial markets has caused; For reasons such as news and rumors, price fluctuations can sometimes be severe in an instant. Therefore, the ability to react in a timely manner is an advantage for traders . Analyzing the status of asset price charts is generally not very time consuming and complicated , and people who have relative mastery in this field; By spending a certain amount of time during the day, they will be able to analyze and review different charts .
Accurate entry and exit points: One of the main reasons for using technical analysis and trading strategy in general is to determine entry and exit points in the capital market. In fact, you will be able to accurately determine the terms of buying and selling various assets by using tools such as indicators , Fibonacci levels and.. In this way, traders’ confusion is largely avoided.
Accurate and Automated Trading Strategy: Automated trading or algorithmic trading is one of the most important topics in financial markets today. Due to the existence of specific and mostly computational parameters, technical methods can be implemented in the context of different programming languages . In fact, if we pay attention to the details of trading robots, most of them are based on graph analysis .

Disadvantages of technical analysis

Influence of personal prejudices: sometimes possible; The person may have an extreme positive or negative view of the status of an asset for reasons such as previous experiences or rumors . In such a situation, the analyst considers only the signs that are consistent with his prejudices , and consequently the output of this analysis leads to irrational results .
Different interpretations: One of the most important criticisms of graph analysis is the existence of different interpretations of the same tools and the same data. For example, an indicator in the oversold located and traders ‘A’ on the basis of a sign upside to buying them; But in the same area, person “B”, seeing the negative divergence in the price chart and indicators, will expect the price to fall further!
Multiple Trading Signals: If you are not a long-term technical trader , you will probably see many trading signals during the day or week; Not all of them are suitable for investment and may cause you loss or confusion . Determining the optimal trading position is often a difficult task .
Failure to determine the intrinsic value : being in the best areas based on chart analysis, required the Arzndgy inherent in it will not be! In fact, the market value of a stock in the price list may be several times its intrinsic value; If the market falls , traders will suffer heavy losses .
Impossibility to use in new symbols: Asset price charts such as IPOs , due to new entrants in the capital market, do not have enough data , in other words, a chart has not yet been formed for them! It is clear that technical methods cannot be used in such situations ; Because, as we mentioned, this method is based on past price analysis .

The final word

The purpose of this article is to provide a summary of all aspects of technical analysis; By traders to the analysis of financial markets, the perspective of deeper and the disadvantages and advantages of it will be over. It should be noted that the above does not in any way imply endorsement or rejection of the graph analysis method. It should always be noted that all methods of analysis, including technical , will have several strengths and weaknesses .