The general consensus among most people who seriously study markets is that technical analysis is mostly garbage.
After all, how can a investing method that completely disregards a company's fundamental business prospects in favor of tracking its stock price over time possibly ever get anything right except by chance?
In fact, the most wide-ranging study conducted to date of technical analysis as a trading strategy found that it wasn't consistently profitable in any of the stock exchanges of 49 countries. Furthermore, of the 5,806 technical analysis trading rules they tested, none provided any "value beyond what may be expected by chance".
So why would investors waste any time on it at all?
One insight to that question was provided by Morris Armstrong, who used technical analysis while working as a currency trader:
I used technical analysis quite alot when I was a currency trader and I think that it adds a lot of value in the establishment of entry and exit points when contemplating a position. It will also allow you to get a very good idea on when a trend is getting tired or is picking up steam again.
I am not sure if people think that it is a tool for investment strategy but it certainly is a good tool for trading.
Besides, in trading there is the old axiom "I'd rather be lucky than good"
Well, there is always that to stake your livelihood upon, isn't there?
The reason we're bringing this up today is because our recent discussion of the actual mechanism that might lead stock prices to "revert to the mean" as stock prices follow a trend provides an ideal opportunity to see if technical analysis might be anything other than worthless.
Political Calculations is a site that develops, applies and presents both established and cutting edge theory to the topics of investing, business and economics.
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