If there is one thing that bugs a lot of market participants is the credibility of the Technical Analysis and understanding whether is it useful or not in actual application. Here I am trying to map out the exact myths and facts of Technical analysis in simple terms which might help us to grasp the key points.It is not the first time such a debate is proposed under the table. This is going since last 3 decades with some participants advocating technical analysis while some strongly rejecting it, citing as useless.
One of the greatest enemies of technical analyst is none other than the economist Eugene fama who proposed Efficient market Hypothesis,the theory which hammered the Wall street market players, especially technical analysts who were employed in respective research companies such as Ned-Davis etc
But again as the professions with sociological background such as Economics, Finance, Psychology where reality beats all the axioms to death EMH is not an exception.The emergence of 1982 stock market crash, soon everything was put to debate again.
While keeping all these controversies aside, Let us look at the benefits by harnessing the technical analysis and also the Myths which comes along with it.
First Let us debunk the Myths:
1.Technical analysis is a science of Predicting Market Movements
Really? No, It’s not a science, Technical analysis is more of an art than science and all it does is study the past price movements,Environments and try to guess the future price movement with some probability
2. A Technical Trading system which gives automatic buy sell signals can replace a good trader.
If You ever managed to speak with a successful trader in Wall street,try asking him this question and most likely the answer will be “No”. Whatever Trading system you might use, Without a good Trader it would not be profitable in the first place
3.Technical Analysis is all about charts and nothing else
This is a idiotic conventional wisdom that is preached since the writings of John Edwards and Robert Magee in their beloved book-“Technical analysis of stock trends”.It is considered as the bible of technical analysis! Nothing can get more worse than this, Technical analysis is used before Dow theory by pit traders with simple understanding of key levels.Even Charles Dow, the creator of Dow theory never said such a nonsense! In other words his acronym “Market discounts everything” is totally misunderstood.With simple or useful definition Technical analysis is all about understanding the Market’s behavior in simple and efficient manner or A key for reading Market psychology and making educated guesses about future Price movements.Chart is an efficient tool but not everything is in it
4.More Deeper Analysis using technical charts can lead to profitable results.
This myth haunts everyone especially if you’re a beginner, As acronym states Keep it simple stupid which applies profoundly to technical analysis Vigorously seeing the charts top to bottom doesn’t leads you to be profitable neither gives an uncanny ability to predict the market Technical analysis can only show you what has happened and what is happening, but it doesn’t say anything about what will happen in the future.
5.Technical Analysis can Make you rich within short time period
This is a basic thesis used by Jackpot tips providers and unfortunately investors fall in that vicious prey again and again, Whether you’re a technician, a Fundamental Investor or A Quant everything is boiled to one concept that is Probability.We are living in a world of probabilities there are no guarantees After all we are faced with an option of anything can happen and markets are a great example for that.
So these are the common myths associated with Technical analysis Now let’s take a look at the advantages of Technical analysis
1. Entry point and exit point
Technical analysis actually shows a more specific way of when we can go into the game, and purhcase some stock. If we are educated enough, we will have the ability to interpret the entry and exit point of the stock. It will allow us to maxmize our gain on the stock.
2. Volume trend
It tell us about the traders sentimental, and what is going through the mind of most of the traders, because the market is govern by supply and demand, we will be able to know roughly what other investors are thinking. High demand will push up the prices, and high supply will inverse push down the prices, therefore from there, we can judge how the overall market is working.Together with price, we will be able to identify correction, in which its a more advance way of looking at the prices and volume. It can also help us see a sudden increase of volume, in the intraday chart, to enable us to know if there is a community of buyers having the same sentimental, or institutional ownership, or just simply a damn rich guy.
3. Short term market indication
It provide a short term market indication, for example we want to earn a 10% profit of the stock, we can time our entry, and minimize the time usage, (because by buying one security, we are locking in our asset, and not being able to buy others) and getting the goal we want. its more specific.
4. Visual indication and Pattern Analysis
There are some chart patterns which are proven that if it happen, a very high chance of a certain pattern will follow after that. As human, we are more visual centered, we like to see more than hear, therefore by looking at diagram, we can actually track down pattern, and aid in our decision making faster. Price pattern also repeat overtime, so if we are going by technical analysis, most likely, we will not be lured to make other decision by the noise made by other investors and expert (noise refer to the senseless and meaningless talk about stocks.)
Alright in conclusion, its a powerful and valuable tools, it will be good if its use together with fundamental analysis, just like what William o Neil does, we must be open to more methods for our own financial good and in order to become Profitable.