How Technical Analysis Can Help You Gain an Investing Edge

Instead of studying businesses, technical analysis means studying stock prices and trading patterns.

Technical analysts believe that all the fundamental information is already reflected in the stock's price. So they look for recurring patterns or signals that indicate where the price might go next.

To a well-known technical analyst like Greg Diamond, "The ups and downs of the market are nothing more than the graphic representation of human behavior... expressed on a chart of buyers and sellers."

Even more important, this market behavior tends to repeat...

That's why a technical trader might use charts to identify trends (is the stock in an uptrend or downtrend?), support and resistance levels (prices at which the stock tends to stop falling or rising), or indicators like moving averages.

The underlying premise is that market psychology plays out in the charts – investors' fear and greed create recognizable patterns. In other words, technical analysis zeros in on current price action and momentum.

Understanding how markets move and why – essentially the psychology behind price behavior – was crucial to achieving exceptional trading results. Technical analysts often say "history repeats itself" in the market, so studying past price patterns can help predict future moves.

In addition, technical analysis can be exceptionally useful for timing decisions. It can help you decide when to enter or exit a position by identifying trend reversals or confirming momentum.

For investors who like to trade more actively or want to manage risk with stop-loss levels, technical signals are invaluable. Another benefit is that it doesn't require deep accounting knowledge – you can apply technical tools to any stock chart, regardless of the company's industry.

However, one downside is that technical analysis can sometimes feel abstract or counterintuitive to long-term investors. The focus is on short- to mid-term price swings, which might prompt more frequent trading.

That can be good news – after all, you no longer need to speculate about the reasons behind the behavior of the market. You just have to focus on what really matters in investing... WHEN you buy and WHEN you sell.

The why is less important when it comes down to the goal of investing: Did you make or lose money?

Perhaps the greatest value in technical analysis is that it's both a trading strategy and a risk-management system wrapped into one. It shows us opportunities – and warnings. And it keeps us focused on making and preserving wealth.