Technical analysis – advantages and disadvantages
Advantages of Technical Analysis
Ease and simplicity of application – this is the main advantage of this method. Most investors begin their adventure with trading on the stock exchange from technical analysis.
The sentiment barometer – technical analysis allows you to quickly examine the balance of forces in the market, who has control over the price: supply or demand.
A wide range of markets – technical analysis gives the opportunity to assess the situation on the cryptocurrency market, as well as stocks, futures, bonds, commodities or currencies.
Tool for day traders – where there is no access to an order booklet, technical analysis is the basic tool in the hands of day traders. It is necessary for players operating on low time intervals, e.g. on minute charts.
It allows you to make decisions quickly – technical analysis ensures the speed of making investment decisions, without the need to observe a huge amount of incoming data, e.g. financial reports, macroeconomic publications, etc.
It allows you to automate your trading – technical analysis is the basic tool used to build automatic trading systems. A growing number of investors use advanced computer programs to build their own investment works.
Disadvantages of Technical Analysis
Blind faith in history – technical analysis assumes that history repeats itself, that is, at certain price levels, market participants react the same as they did in the past. According to the opponents of technical analysis, this is too naive approach to the way of reading the chart, mainly due to the changing market context.
Self-fulfilling prophecy – technical analysis is based on the assumption that if a sufficiently large number of people position themselves to play against a stock market scenario and take positions under it, it will come true. On the other hand, if a relatively small number of market participants align themselves with an equally clear stock market scenario or market signal, this will not come true.
High subjectivity of the analysis – each investor may interpret some signals in his own way, price patterns. Moreover, there are no statistical and mathematical statements that would confirm the prognostic value of many tools used by technical analysis.
It’s more art than science – technical analysis is partly science and partly true art. It is worth noting that this opinion is shared even by professional technical analysts working in brokerage houses.