Does Technical Analysis Work?

08/15/2012 11:00 am EST

Focus: STRATEGIES

Brian Shannon, CMT

President, AlphaTrends.net

That is a subject I see debated often. As a trader who relies on technical analysis for 90%+ of my market decisions and the author of a technical analysis book, I thought I would weigh in on the subject. Of course, you might think you already know my answer based on the previous sentence, however it is not a simple “it does or does not work.” Before deciding whether or not technical analysis “works” we need to come up with a better definition of what “does it work” means. It’s kind of like asking if ice cream tastes good, you may like chocolate but cannot stand the taste of strawberry. So do you like ice cream? Yes and no. It is similar with analyzing the market; technically, fundamentally, or by any other means.

No method of picking stock market winners is without flaw; fundamental analysis or technical analysis is not going to assure you are correct every time you put your money at risk. I think that people who are taught to analyze a company based solely on its financial performance are often unfamiliar, or unsuccessful, with technical analysis and tend to dismiss its merits because their expectations are too high. In order to gain the most value from technical analysis it should be viewed as a tool to gauge the collective psychology of the participants and measure what the stock is actually doing vs. what the financial reports may say, there is often a big difference!

When used as a tool to assess the potential reward for risk taken, technical analysis is an effective way to help identify good opportunities and also avoid many poor decisions in the markets. I believe that technical analysis can help anyone to improve timing decisions in the market. Join me for my talk and we will discuss some proper techniques to implement technical analysis into your plan.

Brian Shannon is author of Technical Analysis Using Multiple Timeframes and www.alphatrends.net you can follow his work on stocktwits @alphatrends.

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