The way I understand it, technical analysis is the application of various forms of mathematical and statistical analysis to the study and description of the price movement of an asset (for me, a stock or an exchange-traded fund usually) in a graph or data. tables, with the idea that we can increase our understanding of the behavior of the asset. This increase in understanding can lead to the identification of favorable business opportunities in the future. This is a relatively humble claim compared to what some traders will claim for technical analysis.
Depending on the school of thought or guru statements that traders follow, technical analysis can go from being a simple description and classification tool to being an insight that reveals the Universal Truth that guides the movement of planets and waves. in the ocean. and the psychology of the collective unconscious that connects all market participants at a very deep level. I have met traders who invest much of their emotional well-being and considerable sums of money in their faith in the predictive power of their favorite technical approach.
To be fair, I have met many traders who place just as much or more faith in their ability to analyze and understand a company’s future price action based on their reading of the fundamental analysis facts of their trading operations and those of their partners. peers and the markets in general based on publicly disclosed financial documents.
I’m not very interested in the philosophical disputes on the extremes of either set of claims, other than to note that the evidence for even the slightest predictive power for technical or fundamental analysis is so weak when examined academically, that I don’t . Do not place any faith in the most extreme claims. If no value can be found in the smallest of claims, I am reluctant to believe that extreme claims have much truth value.
For my short-term trading methods, with typical holding periods of 1-5 days, I find fundamental analysis to be meaningless, as trading conditions do not change enough to materially affect price. However, when fundamental changes seem to change, psychology seems to take over to anticipate changes in the future, so it would be fair to say that the reaction to news about fundamental changes seems to matter in the short term.
While I do not believe that the technical analysis tools that I use have any predictive power or Truth, I do believe that they help me understand and describe short-term market conditions in such a way that I can frame trades in terms of a reasonable ratio of risk reward that allow me to venture into favorable trading situations in the short term.
In this sense, then, technical analysis is neither true nor false for me, just useful, the simpler being the better.