Technical Analysis

[RiverRider]

Im new to stock investing and I try to improve my knowledge in that area. I listen sometimes to a tv program where a guy who is supposely a technical analysis professionnal says he can predict the future evolution of a stock by ONLY looking at the stock graph of that company and by looking at the graph of others similar companies in the same area.

I must say that im sceptical about this method and I would like to know what you guys think about this.

[mikeczyz]

if that's all there was to stock picking...(pick any number of suffixes to complete the sentence)

[kimchi]

Nobody can predict prices. TA uses prices or derivatives of prices to paint a picture of the current opinions of market participants. The prices represent the current consensus of these people who in turn are influenced by their emotions.

A price graph leaves behind the footprints of these people and can be used to make informed decidions based on the probability of the price being higher or lower in the next hour/day/week/month or whatever timeframe the trading is trading within.

TA is neither an art nor a science - it's more of an arty science. Fundamental analysis uses company data to make investment decisions, whereas TA uses the one piece of data that can't be manipulated, massaged, or fraudulently changed - the price.

Who cares if a crappy company's stock price is increasing? If a price is likely to rise or is rising, we want to be long.

[ QUOTE ]
In a shopping centre, a fundamental analyst would go to each shop, study the product that was being sold, and then decide whether to buy it or not. By contrast, a technical analyst would sit on a bench in the shopping centre and watch people go into the shops. Disregarding the intrinsic value of the products in the shops, his or her decision would be based on the patterns or activity of people going into each one.



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[DesertCat]

[ QUOTE ]
Im new to stock investing and I try to improve my knowledge in that area. I listen sometimes to a tv program where a guy who is supposely a technical analysis professionnal says he can predict the future evolution of a stock by ONLY looking at the stock graph of that company and by looking at the graph of others similar companies in the same area.

I must say that im sceptical about this method and I would like to know what you guys think about this.

[/ QUOTE ]

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.

[gull]

Don't bother with technical analysis.

[RiverRider]

[ QUOTE ]
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.

[/ QUOTE ]

If what you're saying is true than I won't listen to this Technical Analysis tv show anymore since it looks like a fortune teller thing more than rational&studied decisions...

[pig4bill]

[ QUOTE ]
[ QUOTE ]
Im new to stock investing and I try to improve my knowledge in that area. I listen sometimes to a tv program where a guy who is supposely a technical analysis professionnal says he can predict the future evolution of a stock by ONLY looking at the stock graph of that company and by looking at the graph of others similar companies in the same area.

I must say that im sceptical about this method and I would like to know what you guys think about this.

[/ QUOTE ]

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.

[/ QUOTE ]

That's because most of the time it's a stupid test concocted by TA skeptics. There will either be an incomplete chart, like 20 bars on a daily chart, or a stupid multiple choice of which right half belongs to the left half in the test.

At any rate, as mentioned before, TA is a reflection of the psychology of the traders in a stock IN THE ABSENCE OF OTHER FORCES. Any chart pattern can be wrecked by an earnings release, unanticipated news, or the stock being manipulated.

OP, most people that flatly denounce TA know almost nothing about it. Do some study on it yourself and make up your own mind. People still make the majority of trading decisions, and TA seeks to predict their actions. The human animal hasn't changed in the last couple hundred years, fear and greed still drives it's decisions in the marketplace.

[Alfil]

[ QUOTE ]
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.

[/ QUOTE ]

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.

[mo42nyy]

yes but a fundamental analysis is not saying he can make a prediction based on half the books
A TA is saying he can make predictions based on charts which you would be giving him

[DesertCat]

[ QUOTE ]
[ QUOTE ]
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.

[/ QUOTE ]

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).