Wednesday, August 13, 2008

Why use Technical Analysis?

There are a number of reasons why using technical analysis can be a great way to make money in the stock market.

1. Technical Analysis allows you to cut your losses short and let your winners ride. A good majority of trading is all about cutting your losses short. Technical Analysis allows you to enter trades where you stand to lose a little if you are wrong and make a lot if you are right.

2. Technical analysis is founded on price action. Supply and demand is the real force behind the stock market. If a stock has great Fundamentals, but no one wants to buy the stock it is not going to go up. Using price patterns is the most accurate way to determine how fear and greed are running the markets.

3. Technical Analysis allows you to make short term trades. Because it allows you to make short term trades it allows you to take advantage of compound interest. Someone who can consistently make 5% a month will far outpace someone who can consistently make 20% a year.

4. I can’t compete using Fundamental Analysis. Fundamental Analysis may be a great way to make money in the stock market but it is hard for the average person to compete. This is especially true when you consider big corporations will billions to invest in spending big money to figure out the fundamentals. It is impossible for someone to know as much as they do so why compete with them.

5. Technical Analysis allows you to find the big corporations. If a stock is in an uptrend with high volume it is safe to say someone with big money is investing in that company. Someone who most likely knows more about the company then the average person feels confident to put their money there so why not take advantage of that and trade that stock.

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