Why do people try to master technical analysis when it is widely considered a pseudoscience?

CFA General
#1

Why do people try to master technical analysis when it is widely considered a pseudoscience?

#2

Then the entire CTA must be pseudoscience money managers too.

#3

In nineteenth century people strongly believed that it can be possible to know the character ot the man by outline of his skull, but later this knowledge become complete pseudoscience.

#4

You should go look up the firm “Dunn Capital”. Then read up on trend-following.

#pseudo-millions

#5

So, I would like to give a serious reply. For context, I am a technical analysis skeptic.

First, in currencies there may be some small amount of usefulness of technical analysis to aid trading. This is discussed in the curriculum. I think it is in Level 3.

Second, in markets such as stocks, bonds and derivatives, technical analysis could be useful to an analyst without being profitable for trading. People want explanations for things which are out of the ordinary. So, if you follow the trends and see something moving out of whatever range or pattern, it is a good time to update your analysis or see if there are substantive explanations. You easily will have clients who want an explanation.

#6

Market is not efficient. Stocks are only driven by fundamental factors 4 times a year. Rest of times are driven by emotions and behavior bias, which I think you will agree that behavior finance NOT a pseudoscience; and technical analysis helps to explain the behavior bias of capital market participants.

#7

To a certain degree, technical analysis is a self-fulfilling indicator. When the S&P crosses the “death cross” some people sell regardless making the market go down and thus proving the death cross correct. That’s overly simplistic but I imagine you get my point. Certain aspects of technical analysis are good to know so you can anticipate such moves, but by itself I find technical analysis pretty worthless.

The exception is gold. Technical analysis is pretty damn important there.

#8

What STL said. If everyone believes that the world is coming to an end and jump off the cliff, it leads to the end of the world. Follow any stock trading forum. You’ll see how religiously some people follow charts/patterns. It’s stupid because any exogenous shock throws any TA out the window, but it is powerful nevertheless because enough people use TA to make their trades.

#9

when i first started learning how to invest, i focused on technical analysis, then i realized its all bs. i think everyone goes to ta first cuz its easy to do and everyone loves to trade which is why most newbs gravitate to this from the get go.

the only technical analysis i do is are the prices down significantly and is there significant volume. and if it has good fundamentals, i buy with it!

#10

I hate to break it to you, but 100% of finance is some stuff people pulled from their a*ss. The entire concept of financial markets is just made up sht.

#11

The idea that fundamental analysis is the “truth” is predicated on the nonsense belief that an intrinsic value can somehow be known or estimated more accurately with fundamental techniques.

But convergence to this magic number takes on many paths, and most of the action in the markets happens along these paths which are not well defined. Think about it…an analyst suggests the fundamental value of a stock is $60. Once it gets there, does it stay put? Of course not, it’s likely to be exactly $60 for 1/10 of 1% of trading time. That’s even if he’s right, and even if the stock gets to $60. It’s all about the space in between the target and the current price, and the manner and timing of how it gets there.

In the end, all of the approaches are frameworks for how to make tough decisions in environments of low predictability.

#12

if I could like posts on AF I would like the part of your post where you talk about “it’s all about the time that it takes it to get there”.

10 out of 10 post.

#13

dow is right. ultimately intrinsic value will be subjective to your assumptions and not necessarily be the truth.

A company’s true intrinsic value is dependent on 3 things and may be hard to predict:

  1. The amount of cash flow you receive in the future.

  2. The timing at which you receive those cash flows.

  3. And the risk free rate when you receive those cash flows.

the price at which a company trades is everybody else’s expectations, essentially supply and demand on a given day. prices change every second, even when there is no news. and when there is major news, many people overreact, which is why returns vary for different types of investors even if they invest in similar assets. retail investors for instance underperform the S&P 500 by 600 bps or something like that. so the idea that markets are perfect is hilarious cuz markets are crazy, they change their mind by the second cuz its collective thought! haha

Also people seem to forget that true intrinsic value is not fixed for all eternity, it progresses through time. so when iv is say 60 right now, it wont stay 60 the following year, when your future cash flows have obviously changed. just as a company that is growing their cash flow rapidly will increase their iv, a company with falling cash flows will obviously reduce their iv. a good investor will always try to improve their odds. ie focus on companies that are growing, cheap, and predictable. they obviously dont go hand in hand so the number of stocks you look at also matters! but like people, companies that win, typically keep on winning. like djt. troof story.

#14

my TA mentor has been making money using TA the last 30 years. first you need to determine the long term trend.

then you need to buy on weakness where downside is limited and sell on strength where upside is limited.

best vehicle is 3x broad market/sector ETFs or ETNs