Why Technical Analysis is So Important to the Short Term Trader

By Doug Fisher

Trading for short term profits is a profession, not unlike owning a small business. It requires dedication and a commitment to discipline just as any vocation on the professional level demands. What sets this kind of trading apart from a traditional small business is the freedom provided once the trader becomes successful. However, every year many turn to the equity markets with dreams of taking huge profits using trading methods such as day trading, swing trading or scalp trading. Unfortunately, these methods of trading require skill levels that cannot be obtained overnight.

These methods of trading primarily rely on technical analysis rather than a fundamental approach used by long term investors. Investors traditionally only consider individual companies or stocks and possibly one general sector as whole and whether it is in favor or ignored by Wall Street. This is generally the extent of a long term investor's "technical analysis" with all other research being the financial health of individual companies.

Shorter term traders, on the other hand, usually could care less about the fundamentals of a company since short term trading by definition means the trader will not be invested in the company long enough to matter fundamentally, anyway. The only concern the short term trader has is what technical analysis tells him about the stock on that day and at the most, a couple of weeks.

Chart patterns, overbought-oversold conditions, uptrend or downtrend, support and resistance, these are just a sample of the terminology the short term trader lives by. In order to be successful with short term methods and profiting in the equity markets, the trader must gain the necessary knowledge and acquire the skill level needed to compete and win. Technical analysis requires an the ability to interpret stock charts, proficiency in understanding indicators and oscillators as well as an understanding of market internals.

Once an understanding of technical analysis is obtained, the trader should then decide which short term method best fits his personality and risk tolerance. Learn more about one short term trading method, scalp trading, which is used by many traders to execute winning trades and reduce exposure time in the equity markets.