Technical analysis – What’s the fuss about?

Rational and irrational behaviors are at play in the stock market. 

John Maynard Keynes:

‘There is nothing so disastrous as a rational investment policy in an irrational world.’

There is so much money in circulation in the stock market. It is very difficult for individuals and businesses to always stick to rational and disciplined trading. There are a number of emotions that take precedence over rational thinking. There is greed (level depends upon each participant’s risk taking and reward expectations). There is stress and anxiety. 

Market participants trading in the short term (day trade, futures & options) certainly rely on the technical analysis to place their bets. The volatility in price movements during short trading frequencies (5 min, 10 min, 30 min, 1 hour timeframe) are much higher than medium term and long term trading frequencies. Traders rely on technical charts to gauge the market behavior. Technical analysis is a potent tool to analyse stocks in the shorter time frame.

5 min frequency chart

Technical analysis is more than an efficient method for analysing long term prospects of stocks aswell. When combined with fundamental analysis, it helps to firm up medium to long term prospects of a company. Stock markets are ideally channels of communication. Messages conveyed can be comprehended by using different tools used in technical analysis. 

There are times when there is conflicting information floating in the market. Fundamentally, there may be indications that the stock might do well, but, there isn’t any upward price movement substantiating the perceived notion. Technical analysis brings forth discipline and objectivity to the thinking process and explains the reasons for this paradox.

There are umpteen examples where due to either insider information or operator actions, the fundamentals are already priced in. It would need astute trading intelligence assisted by technical tools to read the current market sentiments and take positions accordingly.