I read something on a small micro-cap stock this evening that kind of got on my nerve a bit. I didn't reply to this poster as I believe it would have only taken the thread off-topic, but it did spur me on to make a little post about technical analysis at large, and try and take some of the myth out of the idea that technical analysis is the horoscope equivalent for the stock market.
The gyst of the post went along the lines of...chartists always have a get out clause no matter which way a stock moves. If it goes the way they suggested, then they look good, and if it moves in the other way, then there is always an excuse in hindsight.
Well let's try and crunch that idea all together, because for mine, that is completely not the reason why many of us do TA on stocks.
First of all. What exactly is technical analysis? Well TA (for short) is, at the most basic level, the analysis of the sentiment of the market. It can be done for a stock market, a currency market, a futures market and also a commodity market. There is buying and selling sentiment in every one of those sectors. What is the main cause of this sentiment? Well news ofcourse. If a company announces a profit update, positive sentiment returns to a stock. If a country updates their interest rates, well, you would expect the equities and currencies to react accordingly.
But to what degree will sentiment affect the share price? This is where TA comes to the fore, and leaps ahead of fundamental analysis. So often we hear the fundamentalists of stocks saying "the news is coming, the stock is going to fly". Well how much is it going to fly? Why do you think it's going to fly? If everyone thinks it is going to fly then there won't be much surprise once the news comes will there? Technical analysis can reflect the sentiment in the stock and in this example reflect what the market is actually thinking about this 'imminent news'. You can use indicators to denote the buying/selling momentum in a stock, you can use volume to show the interest in a stock, you can use moving averages to depict the trending movement of a stock. All of these are important, and all can demonstrate just how much a stock may move, whether the 'news' comes or it doesn't.
The idea of TA, in my opinion, is not to pick out inch perfect buy/sell points. It is not supposed to be a crystal ball into the future. This is a large misconception on HotCopper. The day-traders out there will probably disagree with me a bit on this, but the point I am trying to make is that TA is just as useful for long term investors as it is for short term traders. Well for me atleast. For mine, TA is best used as a gauge of whether the market wants to take the stock lower or higher, and at what degree will it move. At the end of the day, you aren't going to always get it right. If you did, you would be a millionaire in your twenties and you could retire well short of 65. As long as you get it right over 50% of the time, the rest will look after itself for you.
As a closing thought, I read a very intelligent comment on here recently. I'm sorry, I cannot remember your moniker, but whoever said this is right on the money. FA tells you what stock to buy. TA tells you when to buy it. So true!! You have to use both if you are going to be a consistently successful investor.
