I’ve heard technical analysis explained and described the following ways:
“TA is the analyst attempting to read the mind of the market and predict where its going to go next.”
“Technical analysis is the use of different studies and metrics applied to various types of market data to forecast trends and prices.”
“The art of using the past to predict the future.”
“Total ********.”
“Voodoo.”
The last two are personal favorites of mine.
In total honesty, none of the above statements are completely wrong. It is, in a way, about reading the “mind” of the market. I’d prefer to call it market sentiment, but I digress. It’s also about applying different analysis and tools to historical data to forecast trends and prices. It’s definitely about using the past to predict the future, though that may be an oversimplification. And yes, there are tools and metrics, schools of thought even, within the broad category of “technical analysis” that are, in my opinion, total “nonsense” and voodoo.
In fact all of TA has a tinge of “voodoo” to it in my mind. There’s a lot of great analysis and academic study which shows many forms of TA shouldn’t work, or should under perform fundamental analysis or even the broad market as whole. The academic jury is still out, but to me it appears to be leaning strongly towards a guilty verdict on the charge of “Technical Analysis is largely ineffective.”
All that being said, there are many analysts and traders who employ either some technical analysis in their trading and investment strategies with great success – and yes, even out-performance. Some employ it to the exclusion of fundamental analysis (not recommended, the more analysis the merrier!).
Because there are many who use it successfully, myself included, I think it merits at least a cursory study. And I’m not alone in that thinking. Technical analysis has a growing following, even making an appearance (relatively briefly) in CFA curriculum.
Since I not only use it but also enjoy it quite a bit, it will get more than a cursory treatment here at 440.