Re: Technical Analysis
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There is a simple test of this specific skill. Take a bunch of stock graphs and cut them in half, and ask the TA expert to predict the second half of each chart by viewing the first. This test has been proferred to many TA experts, and they either decline to take it or fail miserably at it.
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I'm not exactly sure what such a test could possibly accomplish since it is so skewed to begin with. A good technician already understands that they are trading off the right edge of a chart and any one can be a genius trading off the middle of the chart especially when back testing an automated black box program. I think it is biased to show a chart to a technician and ask them to determine where the price ends on the second half since that isn't neccesarily their concern. Granted some chart patterns are used to indicate potential price desitination but chartists are more concerned with price direction, momentum, and the underlying psychology of these moves and then basing their decisions to go long, short, or stand aside depending upon their interpretation. And since different chartist use different indicators that have different results and have different time horizons where a chart is 6 months from now isn't going to concern someone who is only interested in 6 days or 6 hours from now.
Give a fundemental investor a set of books with only half the years earnings and see what their prediction is going to be. I'm fairly certain a good investor will find that absurd. A good TA will be able to at least look at half a chart and still use their criteria to make a trading decision but find it equally absurd to predict where the price ends on the second half.
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What kind of chart do you need? The test can be done any way you want. TA adherents say they can predict price movements by analyzing a historical chart. We'll give you volume information, a chart coving whatever period you want, etc. Can you predict price direction over the next day, week, month, year? If you can't be more accurate than flipping a quarter, then TA has no value.
Fundamental investing relies on historical information, just like TA does. But it doesn't use that information to predict specific price movements, it uses it to estimate intrinsic value with the idea that eventually price will approach value. But no true value investor will be able to give you a specific forecast of when that will happen.
TA is pushed by brokers to promote active trading and increase their commissions. If it worked, every large mutual and hedge fund would actively use it. Look at any list of great investors who've beaten the market for decades on end. You'll find many more investors than traders, and virtually none who use TA (or astrology, tea leaf reading, etc).
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