One of the main values of technical analysis is that if one has beliefs that other traders are using the same non-scientific amalyses of charts in the same way then these analyses can act as devices which can co-ordinate trading activity. If I believe that a certain configuration of an indicator like a japanese candlestick is taken by other traders as a convention signalling that the security will rise then it may be rational for me to buy the security on the basis of this. If all traders accept the same interpretation of devices then they can be useful in the short-run. I agree with Max that in the longer term there is no advantage to using technical analysis or indeed that there is no scientific value inherant in technical analysis.
From: Max More <email@example.com>
To: firstname.lastname@example.org <email@example.com> Cc: firstname.lastname@example.org <email@example.com>
Date: 22 October 1999 10:16
Subject: Re: Dow 36,000
>At 01:42 PM 10/21/99 -0400, you wrote:
>>I'm not sure what you mean by "technical analysis" here.
>>(I presume you don't mean than you dislike analyses
>>which contain numbers.)
>You might want to read a primer on technical analysis if you want to know
>what people mean when they say they don't trust technical analysis. The
>term has a specific meaning in the world of stocks -- it most certainly
>does not mean anything like academic or scientific studies. It involves
>pouring over charts of moving averages, MACD, Bollinger Bands, Stochastic
>Occillators, On Balance Volume, and so on.
>I see no verified evidence that investors relying on this kind of technical
>analysis make more money than those who buy and hold based on fundamental
>analysis (which could just as reasonably lay claim to the term "technical
>analysis"). I am willing to agree that technical analysis in this form of
>charting may possibly sometimes be useful in giving the investor a
>(fallible) guide to *short-term* stock price movements. But over the medium
>to long term, it is not patterns on a chart that determine stocks prices,
>it is things like changing profit margins, new product introductions,
>changes in competition, rising or falling expenses, management changes, and
>external economic factors such as interest rates and inflation.
>So, no, disliking "technical analysis" does *not* mean "disliking analysis
>that contains numbers". Good fundamental analysis (contrary to technical
>analysis) *does* involve looking at lots of numbers -- gross and net
>margins, debt-to-equity ratios, growth rates, return on equity, net cash
>flow, and price/sales and price/earnings ratios.
>The only thing that looks at all like "technical analysis" that I give any
>credence to are back-tested stock screens (the most well-known being the
>"Dogs of the Dow". Many of these I would not touch, but those that make
>sense in terms of underlying fundamentals have value because they give you
>a mechanical buy and sell strategy, thereby minimizing emotional investing
>(buying or selling based on greed or fear being a major cause of poor