The Role of Technical Analysis in Modern Trading

It’s an undeniable fact that the practice of trading has drastically changed since the dawn of the information era. Whereas in the past, trading decisions were made solely by human beings acting either for themselves or on behalf of others (i.e., brokers), as advanced technology has become more widespread in the last 40-odd years, computer-based modelling and technical analysis have come to play a much more prominent role. It is something of an understatement to say that these tools have greatly affected which trades are made and how the resulting market numbers are analyzed—it would be much more accurate to say that they have prompted a total sea change.

These are general statements, easy for those of us without backgrounds in finance or advanced academic degrees in economics to understand. What is more difficult for the average person to grasp, however, is exactly how and to what extent technical analysis influences modern trading.

“Technical analysis has fundamentally transformed trading by providing us with sophisticated tools we can use to analyze market data,” says Matt Choi, a veteran trader and founder of Certus Trading Inc., a trading firm that heavily relies on technical analysis in its decision-making process. “At Certus, we use these tools to gain insights that would be impossible to uncover through the older manual methods.”

Loosely defined, technical analysis means using computer software to study historical market data to predict future price movements. This involves tracking various indicators and patterns derived from price charts and trading volumes. By examining trends from past sessions, traders can make educated predictions about future market movements. This allows them to identify potential opportunities and risks that may not have otherwise been apparent. “Put simply, computers are far better at pattern recognition than human beings,” Matt Choi explains, adding, “And those of us in the financial sector are using them as best we can to make everyone wealthier.”

The impact of technical analysis on trading is particularly noticeable in the increased use of computer algorithms. In the past, trades were executed manually, with trading decisions based largely on personal judgment. These days, though, specially-designed advanced software enables traders from all over the world to apply complicated analysis to their plans before they make trades, usually resulting in greater accuracy and higher rates of return. “The integration of analytics tech into trading has been a game-changer,” says Choi. “With the aid of real-time data and algorithms, we can respond to market changes almost instantly, making our strategies many times more effective.”

Certus Trading Inc. is a prime example of how technical analysis is used in modern trading. The Toronto, Ontario-based firm incorporates a range of technical indicators to better inform their trading decisions. Matt Choi notes, “Part of our daily operations at Certus involves a full and comprehensive analysis of technical indicators, like moving averages and relative strength indexes. These tools help us to make well-informed decisions on our various positions and exposures.”

More recently, the meteoric rise of algorithmic trading has further entrenched the role of technical analysis in today’s market. Algorithms process vast amounts of data quickly, enabling traders to take advantage of short-term market movements that would be challenging to identify manually, to say the least. “It would be like finding a needle in a haystack,” comments Choi. “But thanks to algorithmic trading, technical analysis has been taken to a new level, giving traders the chance to seize those blink-and-you’ll-miss-it market opportunities with incredible speed and precision.”

As both time and science march staunchly forward, the role of technical analysis is likely to become even more central to every aspect of trading. Although the exact forms it may take in the future are unclear, one thing is definitely certain: the lightning-quick evolution of analytics technology will continue to reshape how trading is conducted, making it more and more data-driven and efficient. Undoubtedly, it will push the boundaries of what is thought even now to be possible—and sooner rather than later.

For Matt Choi, this is good news. “There’s no stopping progress,” he muses. “That means there are two choices in front of every modern-day trader: either resist technical analysis and lose out on its many benefits or embrace it and thrive.”