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Why Use Technical Analysis?

May 29, 2022


Indicators serve three broad functions: to alert, to verify and to predict.

An indicator alerts one to price action or movement. If momentum is decreasing, it may be a sign to watch for a break of support. Or if there is a large, positive increase, it may serve as an alert to watch for a resistance breakout.

More than one indicator can be used to confirm an action or prediction of the market. For example, if there is a breakout on the price chart, a corresponding moving average together with the use of the on-balance volume (OBV) indicator, could serve to confirm this breakout. The key to successfully investing in stocks is to find the indicator or combination of indicators that are the easiest for you to work with.

The chapters on technical analysis are designed to introduce the concept of technical indicators and explain how to use them in your analysis. We will cover leading and lagging indicators and oscillators.

When choosing an indicator, choose carefully. It is recommended to use three to four indicators. Know the outcome of each indicator before applying it to a chart. Using more may result in confusion and a lack of decision-making. Try to choose indicators that complement each other, such as RSI and MACD, instead of those that move in unison and generate the same signals, such as RSI and Stochastics. For example, it would be redundant to use two indicators that are good for showing overbought and oversold levels, such as Stochastics and RSI, as both of these indicators measure momentum and both have overbought and oversold levels. They operate in unison.

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