Here's an extract from a previous post of mine (#117614) which expresses my opinion on the subject ....
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"I'd say one has to consider how a T.A. Indicator is formulated and what goes into that formulation. Behind every Indicator is a mathematical formula which is fed Historical data resulting in a graph of some sort. And the data for virtually every Indicator is sourced from PRICE and TIME, and sometimes you may have VOLUME.
If, for example, you use Metastocks and you go to the Data table that you would refresh every day, you will see that the table, to the best of my knowledge, consists of PRICE and TIME and VOLUME(?) data.
So all that you can expect to be shown from that mathematical formula is the interaction that took place between buyers and sellers at particular times, in the past, i.e. Historical Data, because that's all that the input data is about. You will not be able to derive any information about the Financial Fundamentals of a company.
And one of the reasons that proponents of T.A. put reliance on Indicators is because of the "Efficient Market Theory". That theory assumes that the "total market" has taken everything that can be taken into account about a stock, etc.., so therefore all that needs to be considered is what is the result of the interaction between buyers and sellers. And that, they assume, comes from the various plot combinations of the various mathematical formulae behind T.A. Indicators.
Personally, the way I see it is if you put T.A. before F.A. (Fundamental Analysis) it's like putting the cart before the horse. I prefer to first take the F.A. of a company into account and if that shows evidence of a well run, profitable company then I may look at T.A. to see if "the market" is showing legitimate enthusiasm and support for that stock.
Warren Buffett, the most successful investor the world has known (to date), and his business partner, Charlie Munger, have never used T.A. They also have no regard, whatsoever, for the "Efficient Market Theory". In fact they have often taken advantage of the In-efficiences of the stock market. As Buffett has stated, "I'd be a bum on the street with a tin cup if the markets were always efficient". |
