What is technical analysis?
Technical analysis is all about studying stock price graphs and a few momentum oscillators derived thereof. It must be understood that technical studies are based entirely on prices and do not include balance sheets, P&L accounts (fundamental analysis), the assumption being that the markets are efficient and all possible price sensitive information is built into the price graph of a security / index.
Therefore, technical analysis supports the efficient market theory as against the "random walk theory" which supports the belief that stocks can be bought / sold on random events like flipping a coin!!! Technical analysis is more dynamic as compared to fundamental analysis based on one simple argument - fundamental analysts depend on corporate events like quarterly results and special announcements like earnings guidance and policy changes in operations to generate a buy / sell recommendation.
If fundamental analysis was the single most reliable indicator of trends, prices would predominantly fluctuate only 4 - 5 times a year - around quarterly results and special announcements like mergers and acquisitions etc!! Why would prices fluctuate almost daily? If the prices fluctuate ever so often, is there a way to forecast them? Yes according to technical analysis!!
Therefore, technical analysis supports the efficient market theory as against the "random walk theory" which supports the belief that stocks can be bought / sold on random events like flipping a coin!!! Technical analysis is more dynamic as compared to fundamental analysis based on one simple argument - fundamental analysts depend on corporate events like quarterly results and special announcements like earnings guidance and policy changes in operations to generate a buy / sell recommendation.
If fundamental analysis was the single most reliable indicator of trends, prices would predominantly fluctuate only 4 - 5 times a year - around quarterly results and special announcements like mergers and acquisitions etc!! Why would prices fluctuate almost daily? If the prices fluctuate ever so often, is there a way to forecast them? Yes according to technical analysis!!