There are many experts and books telling you how to pick stocks. You can turn on the TV and you are going to get a stock recommendation if you watch financial news. But most people never tell you when to buy or sell.
You see you have to do more than just get an idea from TV or read about a hot stock in a magazine to make money. You have to know basic trading tactics and fundamentals and put them to use. That is where understanding price action and stock charts comes in.
There are three principles to technical analysis. First is that market action discounts everything. In other words all of the known information is already factored in price. Knowing information won’t give you an edge, because the price already has it factored in.
The second principle is that prices move in trends. There are predictable trends that repeat over and over again that you can take advantage of. The trader’s mantra is “the trend is your friend.”
The third principle of technical analysis is that patterns happen over and over again. Traders and investors tend to move in herds and do the same thing over again, because people don’t change. This enables the technician to profit from the behavior of the crowd in the market.
The key is to distinguish important trends from meaningless short-term fluctuations in the stock market. That is why you want to combine some sort of fundamental analysis with technical analysis. You want to use price charts as a tool.
This requires a degree of skill, judgment, and interpretation. Mechanical trading systems attempt to do away with subjectivity by basing investment decisions on mathematical indicators calculated with the variables of price and volume.
Money doesn’t fall from the sky. Making money in the stock market requires guts, grits, and tough work. You need to educate yourself on technical analysis in order to use stock charts and make money off of price action in the stock market.
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