Does Technical Analysis work?

does technical analysis work?

Decoding the Market: How Technical Analysis Can Work in Your Favor

Updated March 2023

Technical Analysis does work to a degree. However, one can’t rely on technical analysis to provide the whole picture. Additionally, when using technical analysis, one needs to customise the settings and not rely on standard settings. Everyone uses the default setting, so by following the default setting, you are going to see what everyone else sees. If everyone knows something, it is longer valid.

So far, the first part is coming to pass. Once the MACDs complete the bullish crossover (weekly charts), we expect a mini-feeding frenzy to pave the way for the next top. Novice traders are about to get clobbered; “the term he got beaten within an inch of his live” comes to mind. Market Update Nov 11, 2021

Next year, technical analysis will only work well if used in conjunction with Mass Psychology. Those that fail to take this route are better off tossing skull bones or reading tea leaves. As for fundamentals, toilet paper will be much better; at least it’s good for one swipe.

Technical Analysis: An Effective Tool for Stock Market Analysis and Prediction

We expect the markets to mount a sharp rally to the year’s end, which could extend into January. While we expect the markets to top, don’t expect them to break down immediately. There will be several head fake moves before the market breakdown. The intensity is expected to be sharp, and the duration is short. However, after the primary selling wave, the markets are expected to tread water for some time before breaking out. Still, many strong stocks will bottom and break out long before the market puts in a bottom. Even if the markets don’t surge to new highs next year, many stocks will. This is what we mean when we expect the market’s “disorderly” nature to worsen.

The Power of Technical Analysis in Today’s Financial Markets

Market forces are changing rapidly, and we closely monitor the psychology behind the markets. Hence, we might issue a general sell signal. Before we continue, remember Tactical Investors never panic. Such a sell signal is not be construed as a signal to panic. It simply implies that not all stocks might trade to the suggested exit points on time, and the better option would be to seek the best possible price on most of our holdings—an example of a general sell signal.

Close the following positions when the Dow trades in the 38,7K to 39,3K ranges. At that point, individuals would start to slowly (remember, slow but sure as we never panic) enter GTC orders. The idea would be to aim for the best possible exit price. On the same token, we might also issue a general buy. For example, deploy 1/3rd into the following companies when the Dow trades in the 29 to 30k ranges. We could also mix match by issuing specific exit points on particular stocks while lumping a group of others into the general sell category.

Our strategy will be based on what the markets are doing. Once again, remember, we never panic. A Tactical Investor is the last to leave the room and the first to enter. We stroll in and out, leaving the running to the fools.

 

Idiots index

The idiot’s index is moving to the Neutral zone, indicating that intelligent individuals (but dumb investors) are becoming more confident. This suggests market action will be volatile as competent individuals generally make for the worst investors.

 

Conclusion

So does technical analysis work? In our experience, the outcome is usually quite positive when one combines it with mass psychology and custom settings.

 

Research suggesting technical analysis works

The effectiveness of technical analysis is a subject of debate in the finance industry, and some studies support and refute its efficacy. However, here are some examples of research that suggest technical analysis can be practical:

  1. A study by Brock, Lakonishok, and LeBaron in 1992 found that technical trading rules could generate profits in foreign exchange markets over a short-term period. Source: Brock, W., Lakonishok, J., & LeBaron, B. (1992). Simple technical trading rules and the stochastic properties of stock returns. Journal of Finance, 47(5), 1731-1764.
  2. A 2019 study by Neaime and Gaysset found that technical analysis can be useful in predicting stock returns in Middle Eastern markets. Source: Neaime, S., & Gaysset, I. (2019). Technical analysis and stock return predictability: Evidence from Middle Eastern stock markets. The Quarterly Review of Economics and Finance, 71, 50-65.
  3. A study by Sullivan in 1999 found that technical analysis can be an effective tool for stock selection and market timing. Source: Sullivan, R. (1999). The effectiveness of technical analysis: A review. The Financial Review, 34(2), 43-63.
  4. A 2017 study by Kocenda and Kozubek found that technical analysis can effectively predict stock returns in emerging markets. Source: Kocenda, E., & Kozubek, P. (2017). Expecting stock returns: A regime-switching combination approach and economic links. Journal of Forecasting, 36(4), 441-460.
  5. A study by Lo, Mamaysky, and Wang in 2000 found that technical analysis could be used to enhance portfolio returns. Source: Lo, A. W., Mamaysky, H., & Wang, J. (2000). Foundations of technical analysis: Computational algorithms, statistical inference, and practical implementation. Journal of Finance, 55(4), 1705-1765.

Articles supporting the efficacy of technical analysis

  1. “A comprehensive study of technical analysis” by Andrew W. Lo, Harry Mamaysky, and Jiang Wang, published in The Journal of Finance (2000). Link: https://onlinelibrary.wiley.com/doi/abs/10.1111/0022-1082.00225
  2. “Do technical trading rules generate profits? Evidence from developed and emerging markets” by Changyun Wang and Zijun Wang, published in The Journal of Financial Research (2014). Link: https://onlinelibrary.wiley.com/doi/abs/10.1111/jfir.12031
  3. Reasons Why Technical Analysis Really Works: 8 Reasons Why Technical Analysis Really Works – TradeVeda
  4. Technical Analysis: What It Is and How to Use It in Investing: Technical Analysis: What It Is and How to Use It in Investing (investopedia.com)

Other Articles of Interest

stock market psychology books

Stock market psychology books

Exploring the Benefits of Reading Stock Market Psychology Books May 17, 2023 What is Stock Market Psychology? Stock market psychology ...
Read More
crude oil exploration

Crude Oil Exploration

Crude Oil Exploration: Unveiling the Depths of the Black Gold May 17, 2023 Introduction: A Journey into the Depths Crude ...
Read More
is Petroleum a Fossil Fuel

Why is Petroleum a Fossil Fuel?

Introduction May 16, 2023 Have you ever wondered why we call petroleum a fossil fuel? You may have heard of ...
Read More
stochrsi

Demystifying StochRSI strategy

StochRSI for Effective Trading Strategies May 15, 2023 As a trader, you are always looking for tools that can help ...
Read More
Texas tea

What is Texas Tea?

Texas Tea: The Fascinating Story Behind America's Black Gold May 15, 2023 Crude oil has been an integral part of ...
Read More

Mob Mentality Psychology: Turning Negativity into Opportunity

 Mob Mentality Psychology: Why Misery Loves Company Updated May 13, 2023 We regularly update our articles, and the latest update ...
Read More
Dow Theory - Secrets of the Stock Market

Dow Theory: Unlocking the Secrets of the Stock Market

Introduction to the Dow Theory May 12, 2023 The Dow Theory, developed by Charles Dow in the late 1800s, is ...
Read More
Understanding the Housing Market Cycle

Understanding the Housing Market Cycle

 Introduction May 9, 2023  The housing market is an essential part of the economy that impacts both homebuyers and sellers ...
Read More

Investment Emotions: The Psychology of A Market Cycle

The Psychology of Market Cycles:  Deciphering The Trend May  7, 2023 As investors, we all know that the stock market ...
Read More
trading psychology books

Trading Psychology Books: The Key to Success in the Stock Market

Trading Psychology Books: The Ultimate Guide to Mastering the Art of Trading May 4, 2023 Despite using the best trading ...
Read More
Stock Market Psychology Chart

Stock Market psychology chart: Unlock Your Trading Potential

Title: The Stock Market Psychology Chart: Understanding the Emotions Behind Market Movements May 4, 2023 Stock market investing is a ...
Read More
market psychology chart

Market Psychology Chart: Tips for Informed Investment Decisions

Market Psychology Chart: What is it and How Does it Work? May 3, 2023 The stock market offers thrilling and ...
Read More
Benefits of Contrarian Thinking

Contrarian Thinking: The Power of Challenging the Status Quo

Benefits of Contrarian Thinking May 3, 2023 Today, we will talk about contrarian thinking, a powerful tool for decision-making that ...
Read More

Define Contrarian Thinking: Challenging the Norms for Success

Contrarian Thinking: How to Challenge the Status Quo and Succeed May 3, 2023 Contrarian thinking is a mindset that involves ...
Read More
stock market psychology

Mastering Stock Market Psychology: Neutralizing Emotions & Biases

Stock Market Psychology: Understanding Emotions & Cognitive Biases May 2, 2023 Stock market psychology refers to the mental and emotional ...
Read More
Japanese Yen

Investing in the Japanese Yen: A Rising Sun Currency Guide

Unveiling the Japanese Yen: An Introduction to the World's Third-Largest Economy May 1, 2023 One of the most traded currencies ...
Read More
What is Relative Strength in Investing

What is Relative Strength in Investing? A Beginner’s Guide

What is Relative Strength? Understanding the Basics April 30, 2023 Relative strength (RS) is a widely-used technical analysis tool essential ...
Read More
3D printed organs: the future of medical technology

3D printed organs: the future of medical technology

Revolutionising Healthcare: The Promising Future of 3D  Organs Apr 29, 2023 The notion of 3D-printed organs is no longer a ...
Read More
Power of Contrarian Investing

Think Different: The Power of Contrarian Thinking in Investing

Apr 28, 2023 The Power and Pitfalls of Contrarian Investing Investing can be a tricky business, but one approach that ...
Read More
death of education

Surviving the Death of Education: Navigating the New Age of Learning

The Death of Education: AI Disrupting the Landscape April 27, 2023 As AI and language generation models continue to advance, ...
Read More
disciplined investor

The Disciplined Investor: A Guide to Enduring Trading Success

 The Pursuit of Duality in Trading April 24, 2023 A duality of purpose is necessary to pursue enduring success within ...
Read More