The Objectives Of Technical Analysis

The main objectives of technical analysis are to be able to profit from trading
by observing market patterns and statistics, to know when to enter and exit a
market, especially when it starts to shift, and to not let emotions influence
trading decisions.

Because technical analysis is based on the emotional trading of the

uninformed masses, it is only effective in auction markets, where many
buyers and sellers converge to 1 point—be it the floor of an exchange or a
website—where the public price is determined by the highest bid price and
the lowest ask price.

Although technical analysis takes some of the emotion out of trading by

relying on specific signals, it does require intuition and interpretation, since
technical information is rarely unambiguous. Patterns will rarely be the exact
shape that the trader is looking for and the value of ratios will often border on
blurry edges. Furthermore, even if the pattern or ratio is unambiguous, it
doesn't mean that the trader will profit, even if the trades are executed
flawlessly, because almost all of the predictive value of technical analysis is
based on probabilities. Furthermore, these probabilities cannot be
determined precisely, because there is a great deal of interpretation in
technical analysis, so differing probabilities may be due to different
interpretations. Oftentimes, rules have to be changed, because what worked
before no longer works. Hence, there will be times—maybe many times—
when the expected doesn't happen. The primary hope of the technical
analyst is that he will be right more often than he will be wrong.

Does Technical Analysis Work?

There are many websites that offer extensive information on technical

analysis, and websites that publish market data also offer many tools used in
technical analysis.
The weak form of the efficient market hypothesis hypothecates that since
past market information provides no clues about the future market, and that
trades exhibit a random walk, making market prices unpredictable, technical
analysis can't work. While there are many arguments for and against
technical analysis, stock market bubbles and their aftermath do seem to
support the idea that market sentiment moves the market at least
significantly, if not more than fundamental data.

So, does technical analysis work? It seems to work for some people, but the
question you have to ask yourself is, Is it worth the amount of time that you
will spend analyzing prices, volumes, and other market data? Will you enjoy
such detailed analysis? Will the market consume your consciousness? Will
your profits exceed your losses? While I have read about people, such as
Warren Buffett, becoming rich by their fundamental analysis of individual
companies and their prospects, I have never read about anybody becoming
rich through technical analysis. This is not to say that it doesn't work, but it
may not work as well as other methods.