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Does Technical Analysis work?

Does Technical Analysis have any chance of working at all or is it just like reading tea leaves?

Last year same time technical analysts were giving targets of 25000 and 30000. Even a few weeks before they had said 12500 was a strong support,but today the markets is at 8700. Does Technical Analysis really work?

Technical Analysis is the study of market action, principally through the use of charts. Market action is expressed through movement of prices and the volumes that accompany them. Prices and volumes are therefore the only two variables to be studied when using technical analysis. Technical analysis is the art of interpreting stock price movements. Since financial market analysis involves some degree of subjectivity, all of them are therefore an art and not a science (which involves exact rules being met under all circumstances).

Since technical analysis addresses the market, it is actually studying the effect of action by all kinds of players. We know it to be a simple stated fact that all effects are rooted in some cause. Technical analysis is based on the fact that the market, which is made of all participants, has more knowledge than individual players. It reflects every market player’s opinion on the market. Technical analysis believes that history and patterns repeat again and again A good understanding of these underlying dynamics of market behavior will ensure that it works all the time.

Still, why does technical analysis sound so esoteric?

This is because there has not been a structured way of imparting this knowledge to people. The methods originated in the West and it was not until recently that information about technical analysis was at all available in India.
Since it deals with an entirely new subject, it has a jargon of its own which is unlike what we encounter normally in the markets, and hence, it appears esoteric. Other reasons such as ignorance, unavailability of information, no formal learning structure and a general resistance of people to change are also why the subject has remained relatively unexplored.

If I follow fundamentals, Should I know anything about technical analysis at all?

Fundamental analysis addresses all variables outside the market whereas Technical analysis deals with variables within the market. The objective of both forms of analysis is the same - it is to find future direction of stock price movements. Only the means of achieving the same differs. One of the major advantages in learning technical analysis is that it enables one to deal with market risk - this is one important area that is completely ignored by fundamental analysis.
In a statistical study done by Purdue University in the United States, it was found that the major risk faced by investors were - in order of importance - market, sector and stock. It is only technical analysis, which can give one an insight into market risk. Hence a good knowledge of both technical and fundamentals would produce a more rounded, well-informed, investor.

Successful investors like Warren Buffet don't seem to rely on technical analysis. Why is that?

Every person in the market should choose his own style of investing. People like Buffet are players over the very long term. This may sound easy and acceptable but in practice, is a very difficult job to do. Not many of us have such commitments to the very long term. Indeed, instant gratification is almost the buzzword in the markets!
Warren Buffet notwithstanding, it can be very conclusively proved that a proactive, market timing based investment model will consistently outperform a mere buy and hold strategy most of the time. There are always exceptions to any rule. From millions and millions of investors the United States could still produce only one Warren Buffet or one Peter Lynch. They are the exceptions rather than the rule.

Does technical analysis work as well in Indian markets as it does abroad?

Since technical analysis deals with the market and not geographical areas, it will work in any free trading financial markets anywhere.

Aren't technical analysts like economists? None of them seem to ever agree on anything.


Well, they make the weatherman look good!
Since analysis is an art rather than a science, every form of analysis, including technical and fundamental and economics (and maybe, even tea leaves!) would leave considerable room for individual interpretations. Non-agreement, therefore, is something quite common.

Do you know what they say about Economists?

If everybody relied on technical analysis, wouldn't their collective actions itself distort the market? The market is always residing in the future. Any form of analysis or method, which seeks to project future direction of stock prices, will develop a sense of self-fulfillment periodically, especially over the short term. However, this in itself will set up a corrective cycle, as human emotions of greed and fear will compensate for the seeming mass action. Hence such distortions remain only over the very short term.
There are so many theories in technical analysis. How do I know which one works the best?

The many theories in technical analysis are all the result of consistent and ongoing work in the subject. In essence, they are a series of different ways of looking at the same set of variables - price and volume. It is a bit like a jigsaw puzzle. Each different viewpoint is a piece which when finally put together produces a complete picture. There really isn't one method that would work all the time in all the market conditions. One has to pick and choose the method to suit the market, sector and stock.

Comments

  1. dear sir,
    what you are saying i understood but there was nothing to learn how to catch the share pulse..



    .....madhu

    ReplyDelete
  2. Sir nice blog deeply benifited from it . M a student currentpy and want to he a future trader .... i wanted to learn about the market fundamentals and also technical analysis of market .. plz help me out by suggesting books or sites ......thank you and keep the good work going

    ReplyDelete
  3. Thank you @Aakash. You could websites like investopedia and stockcharts for fundamentals and TA, respectively.
    Books - Technical Analysis Explained : The Successful Investor's Guide to Spotting Investment Trends and Turning Points By Martin J. Pring.

    ReplyDelete

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