I realize I never started this thread, as I said I would on OA's thread a while back. So, here goes with some OPINIONS on the broad category of technical analysis (TA). I apologize for the length of the post in advance.
My premise is that what most people refer to as technical analysis is of limited utility in trading or investing decisions. The ideas range from voodoo to hogwash to moderately helpful techniques. There is a reason it is almost never even considered by hedge funds, professional investment brokerage houses, and really by anyone but the more naive individual investors.
The Good Since TA has a lot of adherents, the most useful element is that a significant enough group of people act on certain patterns, thus creating a self-fulfilling prophecy for stock price movements. It's much like an investment analyst's Buy/Hold/Sell changes or price targets- - if enough people believe it, they create a reaction that DOES move markets. Therefore, to ignore TA for its' more unsavory tenets is probably folly. Moving averages, volume tracking, and put/call ratios, for example, are sometimes quite useful supplementary information for timing of purchases or sales. Incidentally, I don't consider items such as insider trade data, price/volume analysis, or upgrade/downgrade data to be TA they are fundamentals that should absolutely be considered.
The Bad The biggest danger, in my mind, of TA is that so many people want to use it as a sole decision method and as a shortcut to evaluating potential investments. Traders can use it to look for better entry or exit points, but for it to be the be all and end all of stock-picking is simply foolish. At the end of the day, buying a stock is OWNING a portion of a company, having a claim on its' assets, and accepting the risks of an improved or deteriorated earnings stream, which could result in a wide range of outcomes, including bankruptcy. In this way, TA tries to dumb-down the market, and takes investors eye off the ball in a way that could be dangerous to understanding what investing truly involves. The other problem is that once a trader has anecdotal success with TA, they are susceptible to becoming a true believer, and further discounting fundamentals of investing. I liken it to a gambler who comes back from Vegas stating they were a big winner, because they won an $1800.00 jackpot on a slot machine. When you delve further, they may have lost a net of $3000.00 during the rest of their trip, but it's more fun to talk about winners than losers. Also, if someone is building a bullish case for demonstrating TA success, realize that the market goes up 54%+ of trading days, and over any 20 year period, it's up 100% of the time, so the deck is stacked in favor of the bulls (which is really nice, by the way).
The Ugly Pure "chartism", as you may know by lingo like "cup and saucer", "head and shoulders" and other patterns observed as indicators or triggers to trade are the voodoo I referred to in the opening above. The basic premise is that because these patterns heralded price movement at some point in the past, they are predictive of future behavior. That is Investing 101 material THE PAST IS NOT NECESSARILY A PREDICTOR OF FUTURE RESULTS. It's kind of hilarious to watch people play with chart axes until they get a picture they want to see, and pass it off as "analysis of a technical nature". It's artwork at best, and claptrap to everyone else.
I realize others have differing opinions, and I'd love to hear them. Happy investing!
My premise is that what most people refer to as technical analysis is of limited utility in trading or investing decisions. The ideas range from voodoo to hogwash to moderately helpful techniques. There is a reason it is almost never even considered by hedge funds, professional investment brokerage houses, and really by anyone but the more naive individual investors.
The Good Since TA has a lot of adherents, the most useful element is that a significant enough group of people act on certain patterns, thus creating a self-fulfilling prophecy for stock price movements. It's much like an investment analyst's Buy/Hold/Sell changes or price targets- - if enough people believe it, they create a reaction that DOES move markets. Therefore, to ignore TA for its' more unsavory tenets is probably folly. Moving averages, volume tracking, and put/call ratios, for example, are sometimes quite useful supplementary information for timing of purchases or sales. Incidentally, I don't consider items such as insider trade data, price/volume analysis, or upgrade/downgrade data to be TA they are fundamentals that should absolutely be considered.
The Bad The biggest danger, in my mind, of TA is that so many people want to use it as a sole decision method and as a shortcut to evaluating potential investments. Traders can use it to look for better entry or exit points, but for it to be the be all and end all of stock-picking is simply foolish. At the end of the day, buying a stock is OWNING a portion of a company, having a claim on its' assets, and accepting the risks of an improved or deteriorated earnings stream, which could result in a wide range of outcomes, including bankruptcy. In this way, TA tries to dumb-down the market, and takes investors eye off the ball in a way that could be dangerous to understanding what investing truly involves. The other problem is that once a trader has anecdotal success with TA, they are susceptible to becoming a true believer, and further discounting fundamentals of investing. I liken it to a gambler who comes back from Vegas stating they were a big winner, because they won an $1800.00 jackpot on a slot machine. When you delve further, they may have lost a net of $3000.00 during the rest of their trip, but it's more fun to talk about winners than losers. Also, if someone is building a bullish case for demonstrating TA success, realize that the market goes up 54%+ of trading days, and over any 20 year period, it's up 100% of the time, so the deck is stacked in favor of the bulls (which is really nice, by the way).
The Ugly Pure "chartism", as you may know by lingo like "cup and saucer", "head and shoulders" and other patterns observed as indicators or triggers to trade are the voodoo I referred to in the opening above. The basic premise is that because these patterns heralded price movement at some point in the past, they are predictive of future behavior. That is Investing 101 material THE PAST IS NOT NECESSARILY A PREDICTOR OF FUTURE RESULTS. It's kind of hilarious to watch people play with chart axes until they get a picture they want to see, and pass it off as "analysis of a technical nature". It's artwork at best, and claptrap to everyone else.
I realize others have differing opinions, and I'd love to hear them. Happy investing!