Friday, June 11, 2010

Leigh Drogen on technical analysis

Leigh Drogen, who you may know from the Stocktwits stream and Stocktwits TV, has a nice post up at his blog on the utility of technical analysis. Here's a bite:

Joe Retail Investor: But isn’t technical analysis just a religion, it’s one of those things that only works if everyone thinks it’s real. Is there anything real about technical analysis, I know when a company is cheap, can you tell when a stock is cheap based on the technicals?

: Well, no, that’s not really the point of technical analysis, and no, technical analysis isn’t just a religion. Here’s what technical analysis is. Because people are the ones buying and selling assets in the market, or writing the algorithms which buy and sell assets for them, asset prices will always be subject to the fallibility of human emotions.

Certain emotions in the market represent themselves by certain price and volume patterns, the same patterns have existed since the beginning of the market, and they will exist until the market is gone. Why? Because human emotions don’t change, the name of stocks change, the fundamentals of companies change, but human emotions never will, and the chart is the representation of that emotion..."

Check out the full post, I think Leigh has done a nice job of addressing the back and forth that occurs on this subject between TA practitioners and those who decry technical analysis.