Is technical analysis a good way to invest?
An issue that can confuse many investors is the credibility of technical analysis and the understanding of whether or not it is useful in real application. I seek to accurately state the facts of technical analysis in simple language so that it can help us understand the key points of this type of financial market analysis. This is not the first time this issue has been discussed. This issue has been debated in all markets of the world for many years, some participants support technical analysis and others reject it seriously and read it in vain.
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Wrong views on technical analysis
Below I have found the attitudes that exist about technical analysis in various markets, including our stock market, by searching and asking different people and over the years of my teaching and investment consulting activities, the attitudes that you may have had. Be or get involved with them in the future, so it’s better to talk about them in detail here.
Attitude one: Past prices are not effective for predicting the future!
One of the most ironic criticisms of technical analysis is that there is no way past prices can be used as a magic wand to predict future prices. This argument has been severely violated. Anyone who has ever bought a stock can attest to the psychological impact of a trade going up or down. This is human nature, and there is good reason to believe that transaction prices will at least affect our future behavior. Let us not forget that we judge our performance in investing by comparing the current price of a stock with the price of our entry into that transaction and knowing that our entry prices are past prices. This is because the price of entering into a transaction is closely related to the final decisions to exit those transactions or stay in it.
It is not that past prices magically easily predict future prices that matter. Rather, past prices are important because they are the best way to predict supply and demand volumes in the market; We therefore conclude that past prices have some effect on future prices; But can we predict future prices with just a chart or charts? I believe that technical analysis predicts, not predictions! The problem with this misconception is that the word ” stock market prediction ” evokes a concept like a witch glass ball. Technical analysis of the glass ball is not a wizard to predict, and I do not know of any professional analyst who believes this to be the case.
In practice, technical analysis is a way to find a price area with a high probability of changing the strength of supply and demand, so that somewhere the possibility of supply overflowing supply as support and somewhere the possibility of supply overflowing supply over demand and thus the possibility of resistance to price growth in the chart. There is. Chart analysts do not have the ability to help investors accurately predict day-to-day stock price fluctuations for the next few years, but they can make continuous profitable trades at the current time with price targets and profit margins. Identify and help levels of damage limits.
Technical analysis helps you identify important levels in the stock price chart and then react to those levels when necessary and decide to buy or sell or even maintain. Technical analysis is in practice a tool for reacting to important price chart movements such as support and resistance, and is very different from a purely predictive tool. Technical analysis is like a steering wheel with which you can invest your capital in reaching obstacles. Guide the various correctly. So instead of looking at the wizard glass ball to predict future prices, it is better to look at technical analysis as a machine command to guide our capital in the fluctuations and turmoil of financial markets.
Attitude 2: Academic authorities do not believe in technical analysis!
In the past, academic and educational centers did not have a favorable opinion on technical analysis. According to common statistical and economic models such as efficient market hypothesis and random step hypothesis, technical analyzes will not be effective; But what critics reject is the fact that fundamental analytical tools are also not effective under these models.
While traditional academic models have empowered arguments against technical analysis in the past, in one study the efficient market hypothesis and the random step hypothesis were severely violated. An academic study in early 1996 showed that real-world market behavior (the existence of market trends and falls) makes the random step hypothesis statistically impossible. Similar results were obtained for the efficient market hypothesis, many arguments can be made against the efficient market hypothesis. One of these arguments is the “January effect”, which says that in the first month of each year, investors usually receive higher profits. In fact, these arguments suggest that there are predictable patterns in stock market pricing and, in fact, call into question the randomness of change;
Other economists argue that stock prices are always influenced by the profit-seeking behavior and feelings of investors, not by market information. Now, with a deeper and broader understanding of technical analysis than in the past and various researches, academic studies show statistically more significant efficiency in technical analysis strategies. New research on micro-investors shows that applying very simple technical strategies to buy and maintain in order to make a profit in the long run can dramatically reduce their investment risk and increase trading profits, and to benefit from Technical Analysis You do not even have to be an active and professional market analyst and trader.
Attitude 3: Big investors do not use technical analysis!
Another misconception is that technical analysis has no place for large mutual funds and large market investors who play a major role in moving cash flow in the market. In recent years, however, investment companies and individuals with high cash flow in the stock market have opened a place for technical analysis in their consulting team, and these analysts are used both as employees in the analysis team and as consultants. Take.
This is despite the fact that some of the most successful investors and traders in the world have gained a reputation using a proprietary technical strategy. Successful people like Richard Dennis and Paul Theodore Jones are on this list. Even prominent figures in fundamental analysis, such as Graham and Dawood, have referred to technical factors in their explanations of markets.
Ultimately, the effectiveness of any investment method should be based on the success of highly successful professionals and not on the failure of people who have not fully understood it. Many institutional investment managers use technical analysis as one of their inputs in investing decisions. In fact, fans of technical analysis perform significantly better than their peers.
According to research by David Smith, Christoph Fager, and Ying Wang of the University of Albania and Cage Business School in Bordeaux, the performance advantage of technical analysis is statistically significant.
Here the better performance of the dollar chart can be seen in two modes with technical analysis (continuous line) and without it (dashed line).
Although technical analysis has gained a lot of attention and popularity in recent years, there are still widespread rumors about technical analysis that confuse people. Technical analysis does not use price as a magic bullet to predict the future of the market. In fact, technical analysis does not rule out the latest academic models of the market and are used for successful capital management.
It is worth noting that fundamental and technical analyzes of investment strategies are not exclusive. In fact, they are completely complementary. No single investing strategy works well in all market conditions, but if you are a fundamental investor, adding a few simple technical tools to your toolkit will help you differentiate between fundamental and non-fundamental stocks when the market falls. , Does not believe in good and bad, defeat it.
Attitude 4: Technical analysis is used to buy short-term sales and volatility!
Another common rumor is that technical analysis is only suitable for short-term trading based on automated computer and algorithmic methods, such as short-term daily and repetitive trading. The fact is that technical analysis was used even before computer analysis became commonplace. In the past, analysts used charts and tables to draw technical trades over days, weeks, and months. Even today, traders use concepts such as the 20-day moving average (MA) and its passage over the 50-day long-term investment average; This method is one of the simplest methods of long-term use of technical analysis, which will be explained in detail in the topics of averages.
Attitude 5: Only small traders use technical analysis!
It is not true that only home-based and so-called small traders use technical analysis. These days, large capital companies in the world also use technical analysis extensively. Capital giants that are capital market giants often have their own trading groups that use technical analysis. On the other hand, repetitive transactions or so-called high frequency (HFT), which have become very popular and considered in recent years, are highly dependent on technical transactions.
Attitude 6: Technical analysis has a low success rate!
Looking at technical analysts with more than 5 years of experience in the market, this attitude also seems wrong about technical analysis. They take full advantage of technical analysis in their transactions and believe that a high percentage affects their success, and perhaps if some people have this attitude, they are people who are either inexperienced or inexperienced, and about the low success rate of technical analysis. They comment. This attitude can be revealed by looking at the list of successful traders with decades of successful trading experience in the market. Books covering successful traders’ interviews cite a significant number of traders who owe their success to patterns and technical analysis. For example, in the book “Market Magic”: Interviews with Top Traders by Jack D. Schwagger cites many traders who have only benefited from technical indicators.
Seventh Attitude: Technical analysis of charts is simple and fast!
The Internet is full of sites and tutorials that claim to provide technical analysis and teach you a successful and guaranteed method in a short period of 20 hours. As a result, many people in the financial markets buy and sell with a superficial technical analysis and simple tools, unaware that the continuation of successful trades requires a deep understanding of technical analysis and its various tools as well as capital management. Remember that we need hours of study and practice of technical analysis, and we must have at least 100 successful transactions to be able to claim to know something about technical analysis.
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Attitude 8: Tools and software ready for technical analysis help analysts make money effortlessly!
Unfortunately, this attitude is also not correct. A number of online advertisements talk about expensive software that claims to do all the analytics for you. In addition, sometimes technical analysis tools for trading models are provided in the software, which guarantees a profit, confusing less experienced traders. Technical analysis software provides insights into trends and patterns, but does not necessarily guarantee profit. In fact, the correct interpretation of trends and information is the responsibility of the trader, and it is the trader who must work carefully on it and use these tools only as clues to the analysis.
Attitude 9: Different tools of technical analysis have the same application in all financial markets!
Although technical analysis is a chart language and all tools are used in different charts based on supply and demand, there is some difference between different technical tools such as indicators, patterns and… in markets with different assets. . Stocks, futures, option contracts, commodity exchanges and securities. Each has its own nature and the use of different tools will be somewhat different; For example, fluctuations in the futures market at the end of the contract are more specific to this market; Or the same is true for commodity market cycles that cannot be generalized to other markets and charts, and an elite analyst pays attention to this in his technical analysis.
Attitude 10: Technical analysis gives us a completely accurate and accurate forecast of the future price!
Many novices expect technical analysts or software models to be 100% accurate. For example, inexperienced traders may expect such an accuracy from a forecast: “Stocks A will reach 527 Tomans in the next 2 months”; But experienced technical analysts usually avoid expressing prices with such precision and tendency and tend to express a range, for example, “Stock A may move between 500 tomans to 550 tomans in the next 2 to 3 months.” Traders who invest their money with technical offers need to know that technical analysis predicts a range, not an exact number.
Attitude 11: Technical analysis will make you rich in a short time!
Unfortunately, this perspective often causes us to become overwhelmed when it’s time to start a new business. Novice investors also fall prey to this, and when they start and do not get this result, they blame other factors, whether they are a technician, or a fundamental analyst, or any other kind of analysis; Everything is summed up in one concept, and that concept is probability. We live in a world of possibilities. There is no guarantee when faced with different options and financial markets are a great example of this.
Attitude Twelve: Your success rate in technical analysis should be higher than your failure rate!
The common misconception is that in order to be profitable, a high percentage of our transactions must be successful; But this thinking is completely wrong. By trading at the right profit levels in mind, few successful people make a profit. Think that on average Arash makes four out of five successful trades while Sohrab makes one out of five successful trades. Who is more successful? Many answer Arash; But this answer may not be correct. Properly structured trading in the long run leads to profitability even if the number of successful trades is small. Arash or 20 million profit for each successful transaction, 100 million for unsuccessful transaction has the following calculations:
4 divided by 5 times 100 concludes that 80% of the success rate is the number of transactions, but Arash has effectively lost 20 * 4-100 = -20 million.
Sohrab with 100 million per successful transaction, 20 million per unsuccessful transaction and 1.5 = 20% of Sohrab’s success rate, Molly has effectively earned 100-4 * 20 = + 20 million. If the transaction is well structured, low losses, low returns and high returns to low returns can still be a successful overall profit strategy.
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