This post was originally written on May 12, 2013 at http://www.optiontiger.com/importance-of-technical-analysis/
You've probably wondered about the importance of Technical analysis and Volume analysis, and how much emphasis you should give to such tools when you decide your trading strategies. There are people who swear by Technical analysis - they'll take the trade only if a certain pattern is playing out. And there are others who never look at charts or rarely look at them. So who's correct ?
The answer lies in between. Any trader that understands the power of Technical analysis, but knows its limitations at the same time, is best poised to take full advantage of these tools. One thing should be clear - these analyses only works when there is an absence of "fundamental events". A fundamental event could be anything like Earnings reports, Lawsuits, Merger and acquisition talks, Global geopolitical crises, and any number of such events. No amount of technical analysis will work during these times.
On the other hand, these events don't happen all the time to companies. So, during the rest of the time (which is 60 to 70% of the time basically), professional traders have nothing else to go by, except Technical signals. Its during these times that the study and mastery of technical analysis will give every trader the edge. Technical analysis is a self-fulfilling prophecy - if enough number of traders are looking at the same thing, and decide to act, more traders will jump into the fray, and when more traders jump into the fray, even more wil jump in. This is what makes stocks move big-time even when there is an absence of any kind of good or bad news around it.
Volume analysis, on the other hand, is one of the most under-rated studies in the markets. Detailed Volume analysis can provide valuable clues about what the "Smart Money" is doing. Think about it - Volume is the only indicator that Smart Money cannot hide. They can hide everything else, but they can't hide volume (even though they try their utmost to do it.). And any smart investor can know exactly what the Smart Money is upto, way before the move actually happens. If you don't believe me, you should check out the Volume analysis on the SPY charts between March 2007 and July 2009. You could have seen Smart Money start to sell in March 2007, and the markets topped out in Oct 2007 before the financial crisis. And you can see the Smart Money buying from Jan 2009, when the markets bottomed out in March 2009. If you position your activity behind the Smart Money, you'll undoubtedly come up ahead. By the way, Volume analysis also works on Intra-day charts. I show all of this in my course below.
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And here is a Free Playlist on Technical Analysis..
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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.