TA or the Highway, by A Famous In His Own Head Grew
Attempts to understand the changes in a stock’s prices have been divided into two basic disciplines, Fundamental Analysis and Technical Analysis.
Fundamental Analysis, or FA, is the term used for the study of the value (or potential future value) of a stock based on social, economic, political, or other such “fundamental” data. FA is a very valid way of determining the value of a stock. I am not an expert on Fundamental Analysis.
Technical Analysis, or TA, is simply the study of price charts. A "chart" is a graph that shows a progression of relevant price data. People study price charts with the intention of finding and implementing investment strategies based on chart patterns that repeat. The study of TA is the study of a chart, specifically patterns on that chart that happened before and could happen again.
Never studied TA before? Excellent! You got this far! Grab a beverage!
The name of the company that issued the stock, what the company makes, where it is located, how much money it makes when it sells its products - none of these things hold the slightest interest for the TA chart reader. The underlying premise of TA is that the price that is being graphed on the chart has already discounted all fundamental data. In other words, there is no reason to study any FA because all the fundamental data about whatever you are interpreting has already been "built in" to the price chart you are looking at. A Technical Analysis “purist” cares nothing about Fundamental Analysis. He's a robot.
There are many different kinds of TA, and for every kind of TA there are a multitude of ways to interpret a chart. The field of TA is so "diverse" (or goofy, depending on your point of view) that many consider it an “art” and not a science. Indeed, TA can easily be viewed as nothing more than voodoo. Many people believe TA “works” (when it works) simply because it is followed by traders; the traders have to make sense of the market, and the mere application of TA “signals” by the people that are buying and selling stocks forms the basis for the “alleged” workability of some form of TA. They assert that it is a meaningless activity, and that TA aficionados make TA into a self-fulfilling prophecy simply by applying it.
Someone who does not believe TA has any relevance will tell you that he can show a chart to ten different TA analysts and each will give him a different interpretation of that same chart. This is very close to the truth. If a very successful method of interpreting charts were broad public knowledge, the game of interpreting charts would change immediately for obvious reasons of supply and demand. There is even a theory that the markets have no trends, and there is no way to understand what is happening in the stock market by looking at a price chart, but that theory sounds like the guy was in the middle of a bad marriage or something - "Any excuse to go on is better than the mirror."
The single thing about Technical Analysis that is agreed upon by almost all technical analysts is that "nobody really understands why" the chart patterns form, and it is evident that technical analysts don't care why they form. The simple fact that patterns form is all that is necessary for the "traditional" technical analyst. Trying to understand why chart patterns form appears to be antithetical to the traditional concepts of technical analysis - that is; why chart patterns form is Fundamental Analysis, so it need not be studied! Besides, "nobody" understands!
Factually, everyone that invests in the stock market uses a combination of FA and TA to make their decisions - they just don't totally realize it. Looking at earnings growth? It's a chart, even if it is just in your head.
It is important to understand four things about TA for it to be of any use. First, it does exist. It is a very wide field of study, with thousands of branches, just like a big ugly dead tree or something. Second, if the majority of the people that make investment decisions using TA are doing the same thing and following the same chart interpretation, the market will certainly go a different way - it has to, to even out the supply and demand. Third, there are quite a few nut bar TA people. Look at their charts, not their little explanations. Complex probably equates to confusion. Lastly, Technical Analysis works if you know how to do it right.
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