Skip to main content

Sound Advice: October 2, 2024

Technical Analysis of Stocks Has No Value 

The effectiveness of technical analysis in stock trading is a subject of considerable debate. While some investors swear by it, others argue that it is of limited or no use. Here’s a rundown of why some critics believe technical analysis is less effective or "useless":

1. Lack of Fundamental Basis:

  • No Consideration of Company Fundamentals: Technical analysis focuses on historical price and volume data rather than the underlying financial health or business prospects of a company. Critics argue that this means it doesn’t account for fundamental factors that drive a company’s long-term performance.

2. Predictive Challenges:

  • Historical Data Limitations: Technical analysis is based on the premise that historical price patterns can predict future movements. Critics point out that past performance is not always indicative of future results, and patterns may not reliably predict future market behavior.

3. Randomness and Market Efficiency:

  • Efficient Market Hypothesis (EMH): According to EMH, stock prices already reflect all available information. If markets are efficient, then technical analysis should not provide any advantage, as any patterns or trends would already be priced in.

4. Self-Fulfilling Prophecies:

  • Market Psychology: Some argue that technical analysis may work because a significant number of traders follow similar patterns, making the predictions a self-fulfilling prophecy. If many traders act based on certain technical signals, their collective actions can influence prices. Even so, this is not a robust or consistent basis for long-term success.

5. Subjectivity and Inconsistency:

  • Interpretation Variability: Different technical analysts may interpret the same chart patterns differently, leading to inconsistent and subjective conclusions. This variability can undermine the reliability of technical analysis.

6. Over-Reliance on Patterns:

  • Pattern Recognition Limitations: Technical analysis often relies on recognizing patterns such as head and shoulders, support and resistance levels, or moving averages. Critics argue that these patterns are not always reliable and can be interpreted in multiple ways.

7. Short-Term Focus:

  • Focus on Timing: Technical analysis often emphasizes short-term price movements and market timing, which can be challenging to master consistently. Long-term investing strategies based on fundamental analysis may provide a more stable approach.

8. Potential for Over-Trading:

  • Frequent Trading Risks: Technical analysis can lead to over-trading based on short-term signals, which may increase transaction costs and reduce overall investment returns. 

Despite the fact that there’s even a hefty textbook on the subject of technical analysis by Robert Edwards & John Magee, there have never been any legitimate studies supporting the claims made by the subject’s proponents.  Indeed, much of technical analysis resembles the patterns on old boxes of Whitman’s Sampler chocolates.

N. Russell Wayne

Weston, CT  06883

203-895-8877

www.soundasset.blogspot.com

 

 

 

Comments

Post a Comment

Popular posts from this blog

Sound Advice: March 10, 2021

The ABCs of Stock Picking After decades of analyzing stocks (and funds) and investing for clients, I'm happy to share in plain English what's involved, what works, and what doesn't.  Keep in mind the reality that successful stock picking is an effort to maintain a good batting average. In baseball, a batting average of .300 or better is considered quite good.  With stock picking, you need to do better than .600, which means you have many more winners than losers. No one gets it right all of the time.  It's not even close.  Wall Street shops all have their recommended lists and the financial media regularly hawk 10 stocks to buy now. Following that road usually is a direct route to disaster.  Don't be tempted. Let's begin with the big picture: The stock market goes up and down over time, but the long-term trend is up.  When there's a rally under way, everyone feels like a genius.  When the market hits an air pocket, though, with few exception...
Post a Comment
Read more

Sound Advice: January 3, 2025

2025 Market Forecasts: Stupidity Taken To An Extreme   If you know anything about stock market performance, you can only gag at the nonsense “esteemed forecasters” are now putting forth about the prospective path of stocks in the year ahead.   Our cousins in the UK would call this rubbish.   I would not be as kind. Leading the Ship of Fools is the forecast from the Chief Investment Strategist at Oppenheimer who is looking for a year-end 2025 level for the Standard & Poor’s Index of 7,100, a whopping 21% increase from the most recent standing.   Indeed, most of these folks are looking for double-digit gains.   Only two expect stocks to weaken. In the last 30 years, the market has risen by more than 20% only 15 times.   The exceptional span during that time was 1996-1999, which accounted for four of those jumps.   What followed in 2000 through 2002 was the polar opposite: 2000:      -9.1% 2001:     -11.9% ...
Post a Comment
Read more

Sound Advice: June 17, 2020

Rock and a Hard Place Regardless of your age, impressions from childhood linger.  As the first days of summer approach, we all remember the feeling that accompanied the end of a school year.  Yet as much as many of us would like to believe we again have the summertime freedom to do as we wish, the reality is quite the opposite. Although months of confinement and limitations on social interaction have increased our personal discomfort and severely impacted the business community, our current situation is not analogous to the end of any school year.  It’s quite the opposite. There is every reason to continue wearing face masks, social distancing, and avoiding close contact with others.  Nothing suggests that we can modify our behavior significantly or resume patterns of daily living we enjoyed only a few months ago. There are no meaningful advances in medical treatments.  At best, there are attempts to combine different approaches...
Post a Comment
Read more