Many people who invest for the long term look at current trends to indicate whether it’s a good time to buy or sell an asset. For example, if a company has a strong quarterly financial report, its shares are likely to increase in value.
However, there’s an approach that’s more popular with short-term trading called technical analysis. This approach is based on the idea that history repeats itself, so if a company’s stock followed a certain trend in the past, it’s likely to do so again. Looking at historical data can help you determine how the stock will perform in the future. Technical analysis is popular with swing trading (which has you trade every few days, weeks, or months) and with the very risky strategy of day trading, or buying and selling a stock all in the same day.
Some people prefer both methods for trading: looking at technical analysis and current trends (fundamental analysis).
Technical analysis can be a difficult strategy to understand, especially if you want to master it well enough to engage in swing or day trading, which have the potential for either great gains or great losses. We don’t recommend technical analysis for everyone, because it’s difficult to comprehend well enough to see significant gains. But if you want to get started, here are some of the best books to help you grasp technical analysis for trading.
Schwager breaks this book into four main sections: basic analysis tools, trading issues, trading systems, and practical trading guidelines. When you’re done reading, you should have a solid grasp on the basic concepts of technical analysis.
The book goes through important parts of technical analysis, such as chart patterns, when to enter and exit with an asset, which software to use, and how to set stop loss orders. Schwager also has a chapter on 82 rules and observations about the stock market, which is helpful for any beginner.
The first part of “Technical Analysis from A to Z” teaches you the basics of technical analysis, including an in-depth explanation of what it is and how it works. It also walks you through several popular types of charts used with technical analysis, and strategies like support and resistance triggers.
The second part is an extensive glossary of terms you should know. Technical analysis is a complex topic, so this glossary is a great reference both for a novice learner for people ready to move onto actual trading.
Let’s say you understand how technical analysis works and some of the most popular charts and strategies. Now you may be ready to dive into even more complex topics.
Murphy’s book starts with basic information, such as the concept of a trend and chart. Then he moves onto topics such as major reversal patterns, continuation patterns, and long-term charts. If these terms are unfamiliar to you, this could be a good book to take your understanding to the next level.
“Technical Analysis Explained” covers a variety of topics surrounding technical analysis, and by the time you’re done reading it, you should have a fairly comprehensive understanding of everything that goes into it.
Pring starts with fundamentals, like the definitions of trends and basic patterns. Then he goes in depth about the ins and outs of the market — because to use technical analysis successfully, you need to already have a strong understanding of how the stock market works. Technical analysis, along with day and swing trading, are not for people new to the stock market. Pring also covers larger topics, such as the psychology of trading and how interest rates affect the market.
There are numerous chart patterns you can use with technical analysis. These patterns show you how a stock (or other asset) has performed repeatedly in the past — and according to technical analysis, the asset will likely perform this way again.
Bulkowski starts by explaining how to trade by looking at chart patterns, then dives into over 70 patterns you can use to determine when to buy and sell an asset based on technical analysis. This level of detail can help you choose the few patterns that you want to use when you trade.
While “Encyclopedia of Chart Patterns” covers dozens of charts in technical analysis, this book focuses on one main, popular one: candlestick charting. A candlestick chart shows the movement of an asset by looking at four points: the opening price, closing price, low price, and high price. Together, these four points vertically on a chart loosely make the shape of a candle.
There are multiple types of candlestick patterns that can help you try to predict how an asset will perform in the future. This book goes through the history and significance of candlestick charts, then explains each of the pattern types.
“Technical Analysis of Stock Trends” covers a lot of the same topics our other top picks get into: charts, reversal patterns, and trends, to name a few. But it also has sections dedicated to helping you decide what to do with your money when you’re ready to actually get started.
For example, you’ll read about how to choose stocks, how to diversify your picks, and how to decide how much money to put into the market.
Technical analysis is a strategy for trading stocks and other assets. You look at historical chart patterns to determine how the asset will perform in the future, which can help you decide when to buy or sell the asset.
This is in contrast with fundamental analysis, which looks at a company’s current financial situation to figure out whether it’s a good time to buy or sell.
Yes, technical analysis works overall — if you have a deep understanding of the stock market, have done your research, and know which chart patterns you want to use. Technical analysis probably will not work for beginner investors, because it’s a complicated concept with a lot of moving parts.
Technical analysis is definitely not for everyone, and to make it work, you have to really know your stuff.
No, Warren Buffett does not use technical analysis when he invests. Buffett looks at a company’s current financial situation and chooses to invest in businesses that he believes have strong earning potential.
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