If you are a stock market trader or ever been in to share market investing, you must have heard about technical analysis, price charts, support level, resistances level, retracement, stochastic, moving average, Japanese candle sticks chart etc. You must have also met technical analysts our given technical calls about various scrips listed on stock exchanges. Or you may have also attended courses on technical analysis. Almost all broking firms now a days offer their live technical analysis platforms to the traders, then there are also some specialised technical analysis software providers. There are various indicators, tools, wave theories, retracements like Fibonacci retracement, pivots point calculator built in to such software.
You must have handed over their impressive hit rate and the profit which could have been earned through their calls. All this sounds like science, isn't it?
Technical analysis is a science indeed, that is why it sounds like science. ๐
But still more than 90% of the average people who use technical analysis or follow the technical analysts recommendations lose their money. It looks like technical analysis is failing.
As per the definition of science, science shouldn't fail, if it fails then it doesn't fit in to the definition of science.(Science is a knowledge about the nature of things or about the behaviour of things which when applied by anyone in same conditions gives the same results.)
To understand how it fails we have to first know what is technical analysis? How it works? Does it have any limitations?
The basis of technical analysis is mathematical series, and some ratios. Series means a logical sequence, for example 1, 2, 3..... is a series, similarly, 1, 3, 5, 7... is a series of odd numbers, similarly, 1,2,3,5,8,13,21... is the famous Fibonacci series, it is made by starting from 1, 2 and then adding previous 2 numbers to get the next number. We all have studied these series in school but many of us didn't understood what are these series or what is their use. We study these series because they govern naturally occurring phenomenon. Naturally occurring phenomenon generally fit in to one of such series. For each series there is a ratio between each pair of numbers which is repeated again and again in the series and in nature too. These ratios govern any naturally occurring phenomenon.
Price movement of a particular scrip or the market as a whole is also governed by some rules represented by such series or ratios or wave theories.
Rather one can say that mob psychology is governed by some scientific rules. Because prices of the shares rises when people are entering in the market or scrip, thereby creating demand or doing the opposite thereby creating supply. The price of anything depends on the difference between the demand and supply. And this entry or exit of group of people can be predicted with the rules of mass psychology our mob psychology or herd mentality of humans. The science of technical analysis is based on these rules. They help in predicting the future price movements.
Basically what they predict is the psychology of humans.
Irrespective of whether you're in the stock market or not, you feel like participating in the stock market when the market is recording new peaks. Anyone can logically say that the right time to enter in the market is when the prices of the shares are depressed, that is when the market is at its low. But still anyone can check exchange data that, activity and participation of public in the market rises as the market rises. People participating are not dumb but still they have that strong inner drive which is forcing them to participate in the market when market is at top. Such kind of drives are called as biases, which makes us predictable, which makes us our behaviour fit in to some scientific ratios, formulae, wave theories, series etc.
This is the basis of technical analysis. Technical analysis provides different tools for different conditions. From the above discussion you must have understood that it is a science.
LIMITATIONS-
Now comes the most important part, the limitations of technical analysis-
Till now you must have understood that technical analysis is an art and science of predicting the behaviour of people. This is the base of technical analysis, and various tools are provided to do the same. But use of these tools and the results of technical analysis depends on the knowledge and experience of the technical analyst. But it happens in the ideal condition.
There is one more aspect in the technical analysis, it is the mental condition of the analyst.
This mental condition is the key thing or the game changer in the technical analysis. All humans have different tendencies, which are called biases. These are constantly there prompting one what to do in a particular condition, technical analysis predicts these behaviours, but the analyst himself or herself is also a human being, he or she also have the same biases.
I have learnt technical analysis,I thought its a great skill necessary in the market, but when I used to study any random unknown scrip,I used to give perfect recommendation for my client or friends but it was not working with my favourite companies, or it was not working when anyone already had any position in it and told me this fact. Then I started to find out, why this thing sometimes works perfectly and why not other times? Then on thinking I came to know that my biases used to prompt me to see the logic I wanted to see. For example, if I was holding a particular company I like and it is going down from my purchase price then despite the technical charts showing me a downtrend I was busy finding the support levels from where it can bounce back. To earn the money from market one must follow the trend, that is why the famous saying of chartists- TREND IS FRIEND.
Same thing happened when clients our friends asked me what to do about their loss making position and that they were reluctant to bear the loss or where to average.
I have seen this same thing happening with almost all technical analysts I know. They can only give good recommendations only when they are isolated from any emotional attachment. That means it is very hard to find a technical analyst who is earning money constantly through his own technical analysis.
One of my college friend was a technical analyst in one of the leading brokerage firm, once up on a time he gave technical calls with 100% accuracy for full 3 months. His record was so impeccable that he asked for pay hike 5 times in those 3 months and got the pay hike every time. After that period, the pressure to perform increased so much that his hit rate fell down drastically, just like the German flying ace Red Baron in world war one.
This happens because the analyst himself has his biases, and he is searching for the herds bias where he himself is the part of the herd. There is a very thin line between being separate from the herd and being the part of the herd. This thin line is often crossed without anyone knowing about it. Even if a technical analyst managed to stay isolated from the herd, he can't stay isolated for long.
This is the main cause of failure of technical analysis.
As far as I am concerned,I believe in developing the conviction in a company to invest and grow wealth. This conviction helps me in loading up more when the time is rough for the company and benefiting as long as the compounding machine is intact and working. And to do this I analyse the company on fundamental basis, plus the attitude of the management, if there is an intelligent manager at the top then its better, if there are good plans for more profitability, the execution ability of the management, there are many other things, or sometimes different combinations of things. Basically it boils down to your conviction. Where you can develop your conviction is a personal thing, but one thing is sure that, one cannot earn money from stock market on borrowed conviction.
I hope I have contributed something to your betterment. Your comments and views are welcome.
See you soon.
Till then have a nice day.
Sumit
The POWER is when,
You use ODDS,
To get EVEN.
You must have handed over their impressive hit rate and the profit which could have been earned through their calls. All this sounds like science, isn't it?
Technical analysis is a science indeed, that is why it sounds like science. ๐
But still more than 90% of the average people who use technical analysis or follow the technical analysts recommendations lose their money. It looks like technical analysis is failing.
As per the definition of science, science shouldn't fail, if it fails then it doesn't fit in to the definition of science.(Science is a knowledge about the nature of things or about the behaviour of things which when applied by anyone in same conditions gives the same results.)
To understand how it fails we have to first know what is technical analysis? How it works? Does it have any limitations?
The basis of technical analysis is mathematical series, and some ratios. Series means a logical sequence, for example 1, 2, 3..... is a series, similarly, 1, 3, 5, 7... is a series of odd numbers, similarly, 1,2,3,5,8,13,21... is the famous Fibonacci series, it is made by starting from 1, 2 and then adding previous 2 numbers to get the next number. We all have studied these series in school but many of us didn't understood what are these series or what is their use. We study these series because they govern naturally occurring phenomenon. Naturally occurring phenomenon generally fit in to one of such series. For each series there is a ratio between each pair of numbers which is repeated again and again in the series and in nature too. These ratios govern any naturally occurring phenomenon.
Price movement of a particular scrip or the market as a whole is also governed by some rules represented by such series or ratios or wave theories.
Rather one can say that mob psychology is governed by some scientific rules. Because prices of the shares rises when people are entering in the market or scrip, thereby creating demand or doing the opposite thereby creating supply. The price of anything depends on the difference between the demand and supply. And this entry or exit of group of people can be predicted with the rules of mass psychology our mob psychology or herd mentality of humans. The science of technical analysis is based on these rules. They help in predicting the future price movements.
Basically what they predict is the psychology of humans.
Irrespective of whether you're in the stock market or not, you feel like participating in the stock market when the market is recording new peaks. Anyone can logically say that the right time to enter in the market is when the prices of the shares are depressed, that is when the market is at its low. But still anyone can check exchange data that, activity and participation of public in the market rises as the market rises. People participating are not dumb but still they have that strong inner drive which is forcing them to participate in the market when market is at top. Such kind of drives are called as biases, which makes us predictable, which makes us our behaviour fit in to some scientific ratios, formulae, wave theories, series etc.
This is the basis of technical analysis. Technical analysis provides different tools for different conditions. From the above discussion you must have understood that it is a science.
LIMITATIONS-
Now comes the most important part, the limitations of technical analysis-
Till now you must have understood that technical analysis is an art and science of predicting the behaviour of people. This is the base of technical analysis, and various tools are provided to do the same. But use of these tools and the results of technical analysis depends on the knowledge and experience of the technical analyst. But it happens in the ideal condition.
There is one more aspect in the technical analysis, it is the mental condition of the analyst.
This mental condition is the key thing or the game changer in the technical analysis. All humans have different tendencies, which are called biases. These are constantly there prompting one what to do in a particular condition, technical analysis predicts these behaviours, but the analyst himself or herself is also a human being, he or she also have the same biases.
I have learnt technical analysis,I thought its a great skill necessary in the market, but when I used to study any random unknown scrip,I used to give perfect recommendation for my client or friends but it was not working with my favourite companies, or it was not working when anyone already had any position in it and told me this fact. Then I started to find out, why this thing sometimes works perfectly and why not other times? Then on thinking I came to know that my biases used to prompt me to see the logic I wanted to see. For example, if I was holding a particular company I like and it is going down from my purchase price then despite the technical charts showing me a downtrend I was busy finding the support levels from where it can bounce back. To earn the money from market one must follow the trend, that is why the famous saying of chartists- TREND IS FRIEND.
Same thing happened when clients our friends asked me what to do about their loss making position and that they were reluctant to bear the loss or where to average.
I have seen this same thing happening with almost all technical analysts I know. They can only give good recommendations only when they are isolated from any emotional attachment. That means it is very hard to find a technical analyst who is earning money constantly through his own technical analysis.
One of my college friend was a technical analyst in one of the leading brokerage firm, once up on a time he gave technical calls with 100% accuracy for full 3 months. His record was so impeccable that he asked for pay hike 5 times in those 3 months and got the pay hike every time. After that period, the pressure to perform increased so much that his hit rate fell down drastically, just like the German flying ace Red Baron in world war one.
This happens because the analyst himself has his biases, and he is searching for the herds bias where he himself is the part of the herd. There is a very thin line between being separate from the herd and being the part of the herd. This thin line is often crossed without anyone knowing about it. Even if a technical analyst managed to stay isolated from the herd, he can't stay isolated for long.
This is the main cause of failure of technical analysis.
As far as I am concerned,I believe in developing the conviction in a company to invest and grow wealth. This conviction helps me in loading up more when the time is rough for the company and benefiting as long as the compounding machine is intact and working. And to do this I analyse the company on fundamental basis, plus the attitude of the management, if there is an intelligent manager at the top then its better, if there are good plans for more profitability, the execution ability of the management, there are many other things, or sometimes different combinations of things. Basically it boils down to your conviction. Where you can develop your conviction is a personal thing, but one thing is sure that, one cannot earn money from stock market on borrowed conviction.
I hope I have contributed something to your betterment. Your comments and views are welcome.
See you soon.
Till then have a nice day.
Sumit
The POWER is when,
You use ODDS,
To get EVEN.
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