Quote from OldTrader:
When you use the term "work" as applied to technical analysis, I think you begin with the wrong premise.
We all look at prices. Those prices give you information. That information may lead you to draw a conclusion about the future. If you act on that conclusion, and act incorrectly, then you might think that technical analysis does not "work"...when in actually, what does not work may well be your thought processes.
But certainly prices give you information. For instance, let's imagine the price trading between 990 and 1000. As the prices travel between these two boundaries, we might conclude that the buyers step in to buy at 990, and the sellers step in to sell at 1000. This is information.
Then one day, the price moves past 1000. More information. Evidently the sellers are no longer willing or able to sell at 1000. Or perhaps the buyers have bought all of their offerings at 1000. This gives you information that for the time being demand has exceeded supply at a previous point of contention. From this you might conclude that the price is headed to some higher point where sellers are willing to make a stand once again. Meanwhile, you may also conclude that the 1000 area will be an area where all those people who sold at 1000 in the past may be willing to buy.
Now notice we are not talking about whether "it works". We're talking about information, and conclusions based on the information.
Going on, we have concluded that the 1000 area was an area where buyers eventually overwhelmed sellers. But the market is not always easy. Sometimes it moves back down through 1000. Now if that were to happen, you might throw your hands up and say "it doesn't work". But again, the price is simply giving you information. It was temporarily true that buyers overwhelmed sellers at 1000. But then they evidently ran out of steam, and the sellers reemerged. More information. The sellers were able to move the price back down through 1000. You might conclude from this that the sellers are back in charge. In fact, you might conclude that the buyers are in trouble in that they were unable to defend an important point.
But again, it's not a question of "whether it works". Its a question of information, drawing conclusions from that information, acting on the conclusions, knowing that such action is based on information which may change in the future and lead you in a different direction.
The point of technical analysis is to discern information and draw a conclusion which will lead you to an action at an important point. If that action turns out to be incorrect, you will know it, and will know what to do as a result.
There is no holy grail however....not technical, not fundamental. If everyone agreed on the underlying fundamentals, then there would be no trading. High cash on the balance sheet may lead you to conclude that there is "value". But if that cash cannot be employed in a business that generates profit, then ultimately the business will eat the cash, and the value will not be there, thus rendering your conclusion wrong.
There we are again, conclusion, action, results. Doesn't make much difference which method you use, technical or fundamental, as long as you have a way to recognize information, draw conclusions, and then recognize when you're wrong.
OldTrader
