Tuesday 21 August 2007

Does Technical Analysis really work?

One of the most common questions that i get quite very often is, “Does Technical Analysis really work“? It is easy to assume that such doubts would come into mind only if one has lost money Using Technical Analysis or if one Never used Technical Analysis. Having spent a significant amount of my life towards learning, understanding, using and eventually mastering (so to speak) Technical Analysis, i have my reservations too.
Technical Analysis or TA as it is commonly referred as, is a art of understanding Chart Pattern and predicting future stock movements.


Is Technical Analysis a fluke?

Technical Analysis is Not a fluke. It is a study that involves some of the most complex algorithms and spin off, of Statistics. Similar to statistics where one uses past information/data to predict future course of action, TA too follows on the very same path.

Can someone really predict future Stock Prices using TA

There are over 150 actively used Technical tools, popularly known as Technical indicators that traders across the world use to conduct their Technical Analysis and research on stocks. With so many Indicators it is easy to imagine that the number of ways in which one can try and predict future stock prices is huge. Picking the right indicators at the right time is important for the success of such predictions. But to answer the question, yes, if used properly TA can predict future stock prices with a fair amount of certainty.

Does Technicals Analysis have a timeframe?

Sure. It is easy. If you are a day-trader, you would use price charts less than 1 day, which would be hourly or minute charts. If you are a swing trader, you would use Daily stock price charts. If you are a long termer, you might want to use weekly or monthly Stock price Charts. As you can imagine, the results would be completely different for different timeframes and hence, Timeframe in TA is pretty much the most important criteria.

What is the success percentage?

Honestly speaking, if someone says that he or she has been able to predict stock prices for all stocks that they analyzed, then they are clearly buffing. With so much experience behind me, i would say, i am about 70%+ times correct. One of the most important thing to remember while trading is that you must have an Exit strategy decided even before you have bought the stock. Proper money management is what saves you at the end of the day. Remember, having a good plan in place will help protect your capital, which would otherwise just deplete away.

There are so many indicators, which one should i use?

Answer to this question is extremely difficult. Not because the question is difficult, but because there are so many unknowns. For example, a Glass filled hall with water can be viewed by one person as “Glass Half Full” while another person views the very same glass as “Glass Half Empty". Likewise, one trader may like MACD, while other may like Bollinger Bands. Most often traders establish a comfort level with the indicator that they are using. The more you use an indicator AND taste success, the more confidence and faith you gain over that indicator.
By nature, NO one indicator is good or better than the other.
In fact, one must Always get confirmation from at least 3-5 different indicators before placing a trade. For example, if you decided to go long on a stock looking at MACD and say moving averages, make sure you get a second confirmation using at least 3-5 other indicators such as rsi, mfi etc. It is like this. If someone is down with a disease and was asked to operate, he/she will ideally NOT go to the operation theater right away. Instead he/she prefers to take a Second opinion from another doctor. Why? Because, it is always possible that the 1% doubt that the first doctor had, was answered by the other doctor. The same is applicable to stock picking too.

In the end, i would like to say that Technical Analysis is a Great Art/Science that is equipped with tons of Technical Indicators/tools and when used properly can work wonders for you. However, it requires lot of patience and dedicated learning effort….