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What is technical analysis and how does it work?

 As soon as you open an account you instantly gain access to over fifty markets across thirty countries at the push of a button. What to do next is the big question. Many people already know what they want to invest in. Others want to spend some time researching where they want to put their money. When it comes to picking stocks, there are two schools of thought on how to go about things: technical and fundamental analyses. In this article, we will explain technical analysis and show you how to get started with some of the more advanced tools available on your online account.

Technical analysis of stocks

Technical analysis does not answer the question ‘what to buy’, but ‘when to buy’. It turns to statistical analysis to use trade information.

Proponents of technical analysis are not trying to find out if a stock is over or undervalued, rather if the stock can be expected to rise or fall in price based on the previous trading history in relation to previous patterns of its price movements.

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FAQ

Frequently Asked

Starting with investing – when do I step into the market?

One of the questions that starting investors often face is: when do you step into the market? For months, you’ve been seeing the stock price of a company you’re interested in rise, but you don’t dare to step in. What if it has already peaked? What if the share price collapses? If the price drops, you might ask yourself whether the bottom has already been reached. What if the price goes down even further? Timing the market is very tricky, especially in turbulent times. Nevertheless, there are ways to deal with it.

What is the ideal time to invest?

The ideal time does exist but focusing entirely on that moment is often unwise. Nobody can time the market perfectly. If you keep waiting for a low price, in many cases, you miss out on profits. Let’s look at an example using the S&P 500 index. Suppose you wanted to start investing in the middle of 2020. Let’s use 1 July 2020 as the exact date. You’re looking for the perfect time to get into the market to invest some of your savings. You choose an S&P 500 ETF, a frequently chosen product by beginners. You decide to wait until the price of this ETF takes a deep dive. After two years of waiting, the moment has finally arrived! After an upward trend, the S&P 500 falls to a price reading of 3,666 points within a few months. Almost 22% loss from its high. Your ideal time! But what if you had entered on 1 July 2020? On that day the S&P 500 was at 3,039 points. Even with the losses of the last few months, you would have gained over 20%. So, you see, the time frame over which you invest is often more important than perfectly plotting the right time to invest.

Spreading the moments you step in over time

Putting in a small amount every month is obviously less stressful than investing a big chunk of money in the stock market all at once. When investing small amounts at different times, you don’t have to worry as much about timing the market. For example, you can choose to invest some money on a fixed day every month. We call this method dollar-cost averaging. Step by step, you build up a nice investment amount. Because you do this gradually, you are less dependent on the vagaries of the market. One time you buy when the price is high, the next time when the price is lower. In the end, an average purchase amount remains and you are therefore not dependent on timing the market.

Should I step into the stock market when it’s down?

Of course, the ideal scenario is to buy shares or other investment products while they are at their lowest point. However, you can only ever know this by looking backwards. For all you know, the stock could go down even further. The idea of perfect timing is therefore better left as just that – an idea. It is more important to look at what you expect a share to do in the long term. Healthy companies that have been making profits for years and are dominant in the market do not disappear overnight.

When the stock market sharply drops, it usually affects all stocks. Even those of healthy companies. Due to negative stock market sentiment, these shares are often unfairly punished. This can be a great entry moment for you as an investor. You still do not know what exactly the lowest price will be, so investors often prefer to settle for a slightly higher purchase price over missing the boat entirely because they didn’t dare to enter.

Preventing stress

Investing can be stressful. Especially for beginning investors. Stock prices are never stable and are always moving up and down. To reduce the risk of loss and avoid stress, you can spread your investments and buy products you are confident in for the long term.

Patience is a virtue

Runners are deadbeats they often say. The same applies to investing. Making money fast is possible, but losing it all again even faster is also one of the possibilities with risky investment products. Therefore, it’s wise to invest for the long term. In addition, you can reduce your risk by diversifying with different shares from different sectors or choosing investment products such as ETFs with which you get into several companies at once. Let’s take the S&P 500 index as a long-term indicator again. Over the past 30 years, this index has risen by more than 10% per year on average. And this is despite all the major crises and stock market crashes that have occurred during this period. If you invest in a product like an S&P 500 ETF today, history shows that there is a good chance of a positive result over the long term. Note that past results are no guarantee for the future.

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