Do you believe in technical analysis?

Question

If so what about EMF?

And if you believe in EMF, which you should, is the reason that you believe that you can beat the market because you follow individual stocks rigorously, and feel out the consumer over and under reachtions to that particular stock??

Answer 1

I believe in technical analysis more than EMH.  I am not aware of all of the test parameters, but believe it to be flawed.  The problem I see is that there are many investors whom believe they can conduct technical analysis (& were used in some studies).  In rule trading tests, rules are generally almost "net casting" like -- trying to be general & applicable to most securities for testing purposes.  Most successful technical traders I know, actually do not use screening software.  They usually follow a couple companies & really get to know the charts -- as charts can change from typical activity very quickly -- like being raided by momentum traders (ex: if mentioned on Mad Money), or simply through  the popularity of technical trading itself.  If you are not aware of some of these influences, you have to wait until the technicals start to reflect it.  Then again, just because something is mentioned on Mad Money, does not guarantee it will move (as fundamentals can also come into play -- like huge market caps will not likely be impacted).  I do not think it can give you guarantee results, as there are literally dozens of other variables involved, but it can help as probability indicators.  Hearing a gun-shot very close by does not guarantee a crime, but I'm sure most people would say that the probability of a crime occuring has just increased.  I think the best Technical analysis works best in conjunction with Fundamental analysis.  

That's my 2 cents... however, I am currently working towards the CFA chartership, & the materials state historical support for most forms of EMH.  One more "however," is that this argument reminds me of East vs. West in medicine.  There are many "supported" arguments in Eastern medicine that Western does not accept -- & vice versa.  

Answer 2

For short term trading (which is about all that makes sense in the current highly volatile market) you will find that ignoring technical analysis makes your entry points incredibly more difficult.  Whether they "work" or not isn't discernable. The reason is that some who use them "follow" them to make trades, and others don't use them as decision points per se, but know if they cannot ignore the fact that many big hitters do use the trend lines.  If you are involved with a trade, and trending the S&P line on the same screen, and also monitoring the oscillator for that stock on that same screen, you'll have a far better idea than most as to when the trend is about to turn, and be able to consistently buy in in several incremental investments to maximize your chances for a move in your favor.  This requires practice and focused attention.

For longer term investments, learn to understand the "cup and a handle" method as outlined every week in Investors Business Daily, then go to your computer and do several things.  

1.  Always monitor the one year daily candlestick trend lines.  If anyone looks at these and says they're not indicative of trends, they shouldn't be investing ANY funds.

2.  Then be sure to look at the point and figure charts on stockcharts.com. Don't even think about buying a stock long term until it exceeds the last most recent high (the X column) in an upmarket trend.  This method has been successfully used for a long time and will make you money if you learn to use it.  

3.  Put alarms in your PC Trading system to let you know a couple of percent before the stock gets to that point.  

4.  There are many other trading tips in IBD that are extremely valuable. They have annihilated the S&P performance since their inception.  Ignore them at your peril.  Learn from them indeed.  Consume everything you can get your hands on about both trading and investing, and it will serve you well.

Answer 3

Uh, yes.

Answer 4

I don't particularly believe in technical analysis. There's been a bunch of math done that indicates that asset prices follow a random walk.

EMH is probably largely true, yes.

The only way to tell whether you can beat the market is to perform a very large number of trades and compare your starting balance with your ending balance. The result for most people who do this, will be a net loss. A few will experience a net gain.

Answer 5

The EMH proves that technical analysis doesn't work.

Markets are efficient in the long term, but not short term. You can profit from the short term inefficiencies.