Technical traders are the kind of traders who will look into historical data to make predictions on stock movements. This method is commonly used among short-term traders (especially intraday traders).
Technical traders believe that the market moves in a repetitive pattern, so whenever they see certain events unfolding which resemble something from the past, they tend to make their trade based on what happened back then.
Technical traders would usually look for patterns in any type of data related to the company, even the stock chart movements. The advantage of the technical analysis method is that they can decide more swiftly to buy, hold or sell since they have historical data to back their decisions – that’s why most intraday traders (a.k.a day traders) are made up of technical traders.
The downside to it is despite civilization – or any form of progress, for that matter – moving in a pattern, they often move with a slight variation in the details. So, even if the market is moving in a pattern, the stock that you buy may be one of the variations which may go in an unexpected way.
Apart from that, there are many other factors that may affect how the price moves which you may have overlooked. After all, there are a million and one ways the market can suddenly change directions.
Taking a guess solely based on patterns can be like hunting for boars in the dark. You can take a shot based on the bustles in the bushes, but it doesn’t always mean you’re coming home with a boar if you do.
There are generally two types of technical analysis that are used by technical traders: chart patterns and statistical indicators.
Chart patterns refer to a method where traders look at the stock chart movement, and they try to see if the pattern indicates that the trend is going to change, or it’s going to continue, or if it’s at a point of taking a wild guess.
Statistical indicators refer to mathematical/statistical formulas that traders often apply to stock prices or volumes. These indicators can be like moving averages, trend lines, and more. It is used for traders to analyze the patterns and make better calls for their trades. This function is usually available in trading analysis software/apps used by traders.
The core difference between fundamental and technical analysis is the question that they’d ask themselves before going for certain stocks.
Fundamental traders would ask whether the data shows that this stock is fit to soar in the future, while technical traders would ask if there were a certain pattern before to indicate that this stock can soar.
Read more:
Stock chart basics for beginners