Technical analysis has been around for many hundreds of years, dating back to the 18th century, when a Japanese rice trader developed Japanese candlestick charts.
Just after the turn of the 20th century, the contributions of Charles H. Dow (as in Dow Jones) greatly increased the prominence of the discipline, and his works were most notably expanded upon by Hamilton (1922) and Rhea (1932), and many others. after that.
Despite the continued development of the theoretical side of the discipline, until very recently technical analysis remained confined to the realm of large institutions that possessed the money and resources to use it effectively.
Initially the money and resources were spent employing research analysts who would build and maintain hand-drawn charts, but this eventually gave way to computers. However, in the early days, computers filled entire rooms and, once again, only large institutions could afford them.
Just in the last 10-15 years, the power of the personal computer has allowed retail traders/investors the opportunity to use technical analysis as a tool to analyze financial instruments which, in all honesty, has proven to be both a good thing and a good thing. an advantage. bad thing.
To see an example of how far we’ve come in this area, one need look no further than the I-phone which already allows traders/investors to access trading platforms and charts to trade anytime, wherever they are. . worldwide.
Interestingly, technical analysis has also become a major source of income and profit for major financial institutions due to technological advancements, i.e. the Goldman Sachs of this world.
Algorithmic and high-frequency trading have developed because computers can read information, interpret it, and execute orders much, much faster than humans. The vast majority of these systems are based on price action and technical rules, not fundamental ones.
While discussion of these types of trading is beyond the scope and purpose of this article, it is interesting to note that the traditional broker/dealer model, whereby research analysts provide recommendations based on fundamental analysis for brokers to sell and, in turn, dealers execute, is being undermined by computer-executed, technical analysis-driven, algorithmic trading methodologies.
The growth of technology and the subsequent ease with which retail traders/investors can access the market has also given rise to a new class of people who have embraced the mistaken belief that they can achieve success in the market by using the technical analysis, despite the fact that they have very little education or experience.
And this is not entirely the fault of the individual. Much of the blame must lie with the many and varied ‘traders’ who have hijacked technical analysis and promoted it as a means by which people can get rich quickly and easily.
The quick and easy part couldn’t be further from the truth and it is the promotion of discipline in this way that, in my opinion, does significant damage to new traders/investors and, as an extension of that, to discipline. same.
Technical analysis, like any other method of financial analysis, is not something that can be learned overnight and should never be promoted as such. It requires a considerable amount of focused learning before one can be considered competent in the area.
Once a proficient level is reached, many more years of study and application are needed before one can be considered an expert in the field. To put it in perspective, I’ve been studying technical analysis for five years (both privately and accredited) and would consider myself a bit more competent. That being said, technical analysis does not necessarily require as much learning as other areas of financial analysis which, once again, creates a double-edged sword.
To develop this claim, consider the following comparison between technical analysis and fundamental analysis.
Fundamental analysis is a traditional discipline that is taught in the most prestigious business schools in the world. It involves looking at a company’s income, expenses, assets, liabilities, and all other financial aspects to determine its value.
The process can and should involve an in-depth analysis of the company’s balance sheet and income statement, which often requires the application of some very complex mathematical formulas and quantitative models.
However, there is more to fundamental analysis than just number crunching, which is where qualitative analysis comes into play.
Qualitative analysis refers to breaking down all the hard-to-measure and intangible aspects of a company. This process requires bold assumptions regarding a range of micro and macroeconomic considerations, many of which will simply not even be known to a retail trader/investor.
For example, understanding and quantifying the effect of proposed changes in tariff laws in a country to which the company in question exports 40% of its production is not something that retail traders/investors are likely to be able to do, let alone consider. account your needs. Decision-making process.
As you can imagine, many years of study are required to become a fundamental analyst and the completion of the discipline by a retail trader/investor who has not studied the principles is essentially impossible.
That’s right folks, knowing a company’s current P/E and comparing it to other stocks in the industry to decide if it’s cheap or expensive is NOT fancy fundamental analysis, just like saying a company is great because it just printed a max of 52 weeks is not a worthwhile technical analysis.
It stands to reason, therefore, that most retail traders/investors simply do not use this method of analyzing financial instruments and, if they do, it is largely ineffective. I certainly don’t know many retail clerks, doctors, or taxi drivers who study fundamental analysis for pleasure.
Therefore, given the difficulty of obtaining and applying the necessary skill set to perform fundamental analysis, people have invariably turned to other, seemingly simpler methods. One of these methods is technical analysis.
As mentioned above, there are many ‘traders’ who have promoted technical analysis as an easy method to master not only stocks, but other more complex financial instruments as well. Websites with slogans like “sign up and learn how to trade like a pro” have popped up on the internet like pimples on the face of a teenager.
In my opinion, this is extremely damaging to the discipline because it creates unrealistic expectations for new investors/traders that cannot inevitably be met. When these expectations are not met, many retail clients believe that technical analysis is nothing more than glorified guesswork or reading tea leaves. And, in all honesty, I don’t blame them.
The point is, however, that technical analysis is a useful, valuable, and easily accessible tool for analyzing financial markets, but it should only be used after proper study and research has been done.
Just as you wouldn’t put a scalpel in the hands of a first-year medical student to perform open-heart surgery, don’t think that because you read a book or attended a seminar on technical analysis and know what a moving average is that you are able to use it to make sound business/investment decisions.
While he might have ostensibly attempted to promote technical analysis to an intellectual status beyond the common man, while at the same time eviscerating the usefulness of fundamental analysis for retail investors, that is by no means the intent of this article.
The intention is to encourage retail clients to develop their knowledge and skills before committing their hard-earned money to the marketplace. The intent is to ensure that new traders/investors do not get caught up in get-rich-quick schemes. The intention is to empower you as a trader/investor.
One of the clear benefits of technical analysis is its accessibility; If you have a computer, an internet connection, and access to a trading platform with decent charts, you can perform technical analysis. However, you must recognize that just because something is easily accessible does not make its application easy. This is one of the key themes that I intend to convey through this article.
Let me put it another way for you.
Driving at 200 km/h is easily accessible. If you have a reasonably modern car and a stretch of road, you can do it… but does that mean you have to? Absolutely not. Because? Because you will most likely hurt yourself and/or someone else.
The same applies to technical analysis and trading/investing. If you try to go 200 km/h with your trading, you will put your trading account on the wall. So, before you start your technically driven trading/investing career (or even if you’ve already started), don’t just read one book, read a lot, and then read a few more.
Don’t just attend a seminar; attend an intensive workshop where presenters trade real markets, in real time. You should even consider a formal study. In Australia, FINSIA (the Financial Services Institute of Australia) offers courses in technical analysis and advanced technical analysis.
Educate yourselves and for God’s sake don’t believe the slogans!!!
