Why Technical Analysis? (Part II)
Now let’s talk of the institutional investors the so called savvy investors. Institutional investors buy or sell securities based on sound reasoned analysis. These investors have the resources to call the suppliers and customers of the firms they want to invest in. Know forex charts. Learn candlestick patterns and fibonacci retracement.
Institutional investors can determine with a degree of confidence whether a company’s earnings are on or off the track. You can imagine how much research Warren Buffet does when he wants to invest in a company.
Believe it or not, institutional investors are subject to the same whims and emotional swings experienced by all traders. Compare this with amateur investors who buy or sell securities for the thrill of investment.
The price charts show all the available public and private information, this is also known as the Efficient Market Hypothesis. Technical analysis can come handy when the prices diverge from their fundamentals.
Opportunity is greatest when you are in the minority. But you should have formed a right opinion about the market. For example, if everyone including you believes the share of Microsoft to do well, you won’t make much money because everyone else has already come to the same conclusion.
However, suppose you believe that something is terribly wrong with a company like that what happened with Enron and there were people who by reading the financial statements of Enron had formed the opinion that something was really missing in those reports.
You stand to make a large profit if you are right. The crowd has to correct its majority opinion by selling stock. Shares of Enron were tumbling in 2000. Price drops were still being met with buy recommendations by the Wall Street Analyst.
A trader using technical analysis could have concluded that something wasn’t right. Shares kept falling. Something mischievous was up and you could use your knowledge of technical analysis to determine that something was up and you need to be careful.
Now it doesn’t mean that technical analysis is always perfect. Reading a chart often requires a degree of interpretation. Sometimes there are whipsaws or indicators can give you one signal only to reverse itself a short while later. Investors using fundamental analysis are often alerted of the impending disaster often too late.
You can use it in any market like forex, stocks, commodities, futures, options, gold etc with slight modifications. Technical analysis applies consistently across time and markets.
Technical analysis depends on two tools. 1) Charts and 2) Technical Indicators! In nutshell technical analysis incorporates the psychology of the crowd whether rational or irrational. Now technical analysis has largely been rejected by the academia. However, many successful mutual fund and hedge fund managers use charts to profit on a short term and long term basis.
