Technical analysis criticized on the markets
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Technical analysis is often undermined in the markets by fundamental analysts. For the latter, technical analysis has no logic, no reason to exist. It is amusing to note that the majority of technical analysts recognize the importance of fundamental analysis, but the opposite is far from being the case. Why? However, technical analysis is just as relevant and makes it possible to deal with both the short and long term.
In financial markets, fundamentalists are always right. This is an indisputable fact. It is the fundamentalists that create long-term trends.
For fundamental analysts, a movement that does not go in the right direction is considered illogical. They consider that a company's share price should not deviate from its intrinsic value. If so, it is an opportunity to buy or sell.
I totally agree with this reasoning and I am always surprised when I see stocks that are being slaughtered on the markets and that sometimes have market capitalization below the value of the company's assets (see subprime crisis in 2008). I am also surprised when I see great companies that suffer large overnight corrections on equity markets when there were no major announcements.
The fact that gaps are created between the company's intrinsic value and its market capitalization clearly shows that fundamental analysis cannot explain all the movements. These movements occur in the short/medium and long term. For those who practice fundamental analysis, these movements are just "noise", they have no real meaning.
To ignore them is one thing, but to deny their existence is a mistake. Other factors influence equity markets, and fundamental analysis cannot explain this. Technical analysis does not explain everything, but it allows us to take advantage of the movements. By studying probabilities, it is then possible to generate profits.
An analyst using fundamental methods spends his time being wrong, he ends up being right but only in the long term (if his analysis is good). Fundamental analysis is not performed for the short term and we can see a lot of companies are far from their real value. And they can stay that way for a long time.
Not accepting technical analysis means refusing to understand the financial markets as a whole. You have to be open-minded. Why should fundamental analysis always be right compared to technical analysis? Technical analysis also makes it possible to take advantage of long-term trends based on bullish/bearish signals.
Not believing in technical analysis, I understand that, but I don’t understand those who refuse to accept that his method of analysis is not the only one in the world. You have to be open in life. It's like listening to music and saying it's bad. No.! It's just not your type of music.
Technical analysis is not an exact science, neither is fundamental analysis, which gives way to subjectivity. But its great strength is to help us understand investor psychology. Using Japanese candlesticks, chart patterns and technical indicators, technical analysis is based on probabilities. These are the basics of technical analysis.
The study of investor psychology is very important in financial markets. It makes it possible to understand investors' intentions and therefore to establish bullish/bearish scenarios. Investors’ psychology is guided by:
- Consensus
- Appetite for risk
- Fundamentals
All economic announcements are popular on the financial markets. It is therefore possible to reach the same conclusions regarding the purchase/sale of a security by using technical analysis or fundamental analysis. With both methods, it is a question of correctly interpreting the given elements. Only the analysis method changes but it is possible to achieve the same result.
Technical analysis offers a plus. It makes it possible to decipher short-term movements that fundamental analysis cannot do. Fundamental analysis simply makes it possible to understand why prices rise or fall over the long term. In the short term, its efficiency is far from proven. You only have to read the articles that appear to explain, from a fundamental point of view, the rise or fall in world stock markets every day. We then hear everything and its opposite, each one putting forward a different explanation. Admittedly, there are many cases where there is no logical or known explanation. But it is very difficult for a fundamental analyst to admit it. Technical analysis does not concern him. He simply uses the bullish/bearish signals given to him.
I often hear that technical analysis did not succeed in predicting the crisis unlike fundamental analysis (most did not anticipated anything). Technical analysis is not there to anticipate events, it is there to exploit the signal when it is given.
Technical analysis is no better or worse than fundamental analysis. Fundamental analysis seeks to anticipate movements, while technical analysis is based on the interpretation of price movements.
With fundamental analysis, we are always right (if the analysis is good) but too early and we must be able to hold our position. With technical analysis, we just jump on the bandwagon once the signal is given. Each method has its advantages and disadvantages, but it is quite possible to achieve the same result. The two methods of analysis are not incompatible either.
There's only one thing to remember. You can do the best analysis in the world, the results are never guaranteed. It’s the market (composed of traders using technical analysis and fundamental analysis) which decides.
Why do fundamental analysts refuse to accept technical analysis?
In financial markets, fundamentalists are always right. This is an indisputable fact. It is the fundamentalists that create long-term trends.
For fundamental analysts, a movement that does not go in the right direction is considered illogical. They consider that a company's share price should not deviate from its intrinsic value. If so, it is an opportunity to buy or sell.
I totally agree with this reasoning and I am always surprised when I see stocks that are being slaughtered on the markets and that sometimes have market capitalization below the value of the company's assets (see subprime crisis in 2008). I am also surprised when I see great companies that suffer large overnight corrections on equity markets when there were no major announcements.
The fact that gaps are created between the company's intrinsic value and its market capitalization clearly shows that fundamental analysis cannot explain all the movements. These movements occur in the short/medium and long term. For those who practice fundamental analysis, these movements are just "noise", they have no real meaning.
To ignore them is one thing, but to deny their existence is a mistake. Other factors influence equity markets, and fundamental analysis cannot explain this. Technical analysis does not explain everything, but it allows us to take advantage of the movements. By studying probabilities, it is then possible to generate profits.
An analyst using fundamental methods spends his time being wrong, he ends up being right but only in the long term (if his analysis is good). Fundamental analysis is not performed for the short term and we can see a lot of companies are far from their real value. And they can stay that way for a long time.
Not accepting technical analysis means refusing to understand the financial markets as a whole. You have to be open-minded. Why should fundamental analysis always be right compared to technical analysis? Technical analysis also makes it possible to take advantage of long-term trends based on bullish/bearish signals.
Not believing in technical analysis, I understand that, but I don’t understand those who refuse to accept that his method of analysis is not the only one in the world. You have to be open in life. It's like listening to music and saying it's bad. No.! It's just not your type of music.
Why is technical analysis relevant in financial markets?
Technical analysis is not an exact science, neither is fundamental analysis, which gives way to subjectivity. But its great strength is to help us understand investor psychology. Using Japanese candlesticks, chart patterns and technical indicators, technical analysis is based on probabilities. These are the basics of technical analysis.
The study of investor psychology is very important in financial markets. It makes it possible to understand investors' intentions and therefore to establish bullish/bearish scenarios. Investors’ psychology is guided by:
- Consensus
- Appetite for risk
- Fundamentals
All economic announcements are popular on the financial markets. It is therefore possible to reach the same conclusions regarding the purchase/sale of a security by using technical analysis or fundamental analysis. With both methods, it is a question of correctly interpreting the given elements. Only the analysis method changes but it is possible to achieve the same result.
Technical analysis offers a plus. It makes it possible to decipher short-term movements that fundamental analysis cannot do. Fundamental analysis simply makes it possible to understand why prices rise or fall over the long term. In the short term, its efficiency is far from proven. You only have to read the articles that appear to explain, from a fundamental point of view, the rise or fall in world stock markets every day. We then hear everything and its opposite, each one putting forward a different explanation. Admittedly, there are many cases where there is no logical or known explanation. But it is very difficult for a fundamental analyst to admit it. Technical analysis does not concern him. He simply uses the bullish/bearish signals given to him.
I often hear that technical analysis did not succeed in predicting the crisis unlike fundamental analysis (most did not anticipated anything). Technical analysis is not there to anticipate events, it is there to exploit the signal when it is given.
Conclusion
Technical analysis is no better or worse than fundamental analysis. Fundamental analysis seeks to anticipate movements, while technical analysis is based on the interpretation of price movements.
With fundamental analysis, we are always right (if the analysis is good) but too early and we must be able to hold our position. With technical analysis, we just jump on the bandwagon once the signal is given. Each method has its advantages and disadvantages, but it is quite possible to achieve the same result. The two methods of analysis are not incompatible either.
There's only one thing to remember. You can do the best analysis in the world, the results are never guaranteed. It’s the market (composed of traders using technical analysis and fundamental analysis) which decides.
