Technical analysis question

[Alb]

What are the underlying assumptions of technical analysis? Are they valid? Why or why not? What is the major assumption that differentiates technical analysis from fundamental analysis? How can technical analysis help in investment decision making?

[DTfire]

You have posted a multi-part question! I'll start with one aspect.. One of the underlying principles of technical analysis is that the market reflects all there is to be known about an investment instrument. So all of the fundamental information is already included in the chart price action. The past and anticipated future of a particular company/currency is already factored into the market.

What are your thoughts about that aspect?

I'll let someone else comment on your other questions..

[minibeginner]

Fundamental Analysis is founded on the study of an organizations finance, marketing, organization, and the environment it operate in. Is that a good description? Now if you can analyze all of that, better than other traders can, the perhaps you can become a fundamental trader..

Perhaps that is why fundamental analysis is so unpopular? Or is it?

[Llamedos]

Alb – I thought I’d take a shot at giving you my opinions on each part of your question. Below I have repeated each part of your question and after it is my answer for what it is worth.

What are the underlying assumptions of technical analysis?

That the effects of all fundamental information available in the public domain at any given moment in time is instantly translated and exhibited in the price action in response to the market participants reactions to that same fundamental information.

The advantage of this to the technician is that all those very highly paid funny-mental analysts (who speed-read through sheaths of documents so they can act on the information they glean) are doing it just for us! About 10 seconds after they act on their hard work we get the same information displayed on a chart that has been created by their actions in response to all their hard work.

Are they valid? Why or why not?

The best person to answer this must be someone who has consistently made a profit from trading using technical analysis for a number of years. Fibmaster (?) - I’ll leave that up to you if you are so inclined.

What is the major assumption that differentiates technical analysis from fundamental analysis?

Fundamentals act on facts, figures and statistics that have in the past moved the market in a predictable way. Technicians act on price bars and wiggly lines that have equally predicted price movement in the past. Just remember that these price bars and wiggly lines have been created by everyone participating in the market at that moment in time and are the most readily available source of current market opinion.

How can technical analysis help in investment decision making?

In a million different ways that are all individual to each technician in the market. It is up to you to find your own unique way. The one set of indicators that makes you comfortable to put your money on the line full in the knowledge that you will profit in the long run from acting consistently in response to the signals you are seeing in front of you. You could do a lot worse than by starting your search in the Fibmaster’s video courses.

And thus are my thoughts on the subject.

[Alb]

Llamedos, thanks for your message, very helpful.

I know there are many technical strategies, using many indicators, and there are traders successful with technical strategies.

Do the fundamental traders essentially trade news announcements then? So they read the announcement quickly and make an evaluation within seconds?

Are there published strategies for trading fundamentally? I can't find much on the topic, or traders/mentors with proved success to use as a basis for ideas.

Thanks for any info on this, much appreciated.

[Llamedos]

Hi Alb

With regard to the how and when of fundamental traders I can only guess that they are likely to trade all timeframes in much the same way as techies. I can recall exchanging posts with a fundamental trader on another forum a few years ago and one of the trades he discussed was based on financial information from the 12 months prior to entering the trade. At the time of the conversation he had been in the trade for some months and was recording quite a lot of profit.

Equally, however, I would guess that there are short-term fundamental traders too. Or maybe they are one and the same - the long-term traders ‘doing a bit of scalping’ just to stay sane while they are waiting for the long term trades to pan out! This assumption is made more from observation of the obvious reactions to important announcements as can seen on the charts than confirmed knowledge. Another explanation could of course be that there are a lot of traders who ‘bracket’ the market prior to announcements so as to catch the move whichever way it goes. This may explain the violent moves soon after the announcement, much of which is recovered soon after as can been seen from, for example, the DJIA chart soon after the most recent FOMC rate announcement and the release of the corresponding minutes – more so with the minutes than the rate decision as there are some that could say that the rate decision actually changed the Dow trend. However, if you look at the Stochastic, the Elliott Waves associated with that trend change and the percentage of projection, it could also be said that the rate decision was more the ‘straw that broke the camel’s back’ as opposed to it being the prime or sole mover.

As to publications on the subject, the only one I have (partially) read is Schwager on Futures ‘Fundamental Analysis’ by Jack D Schwager. The bits that I read seemed quite well explained and simple enough to understand. But it was when he started discussing the comparison of the hog birth rate for this year as opposed to last year and the need to anticipate future demand that I decided to close the book and set it aside as one to read during my retirement. Still, if you were still interested in fundamentals (despite of all the really good technical information on this forum) it would probably be as good a place to start as any other.

I hope this helps.

[DojiSan]

What are the underlying assumptions of technical analysis? Are they valid? Why or why not? What is the major assumption that differentiates technical analysis from fundamental analysis? How can technical analysis help in investment decision making?

1. Technical analysis assumes that people will repeat the same behaviors under similar circumstances.

2. Yes they are valid.

3. Valid because you can observe these repeated behaviors under similar circumstances.

4. Fundamental analysis studies the data associated with the financial instrument in question and tries to determine the value of that instrument based on data observed.

5. TA can help because it helps you predict with higher probability of success that a certain behavior will repeat it once you see the circumstance influencing that behavior.

TA is not 100% accurate because

1. It is impossible to account for all other outside influence that will affect the behavior
2. Humans is somewhat predictable, but NOT 100% predictable :)