Technical analysis is a wide domain and many potential investors use if for trying to predict future “abnormalities” on the market returns of the target companies’ stocks. Of course, this activity resembles a lot to gold mining – you have to dig a lot (or do lots of analysis) to get to the shining ore of a potential stock increase.
But this work has several advantages:
– first of all the analyst gains knowledge on the company, knowledge superior to the one of any other investor, which means that he can predict better the company movements;
– the knowledge might be transferrable to the same industry’s stocks, as we saw on our previous technical analysis blog on doitinvest and
– the technical analysis can uncover patterns in a stock trading which other investors often overlooked when they went on the same paths.
This is not to advocate fanatically about the shares technical analysis. As such, the technical analysis is oriented towards the past and can rarely predict the future. Some empirical research uncovered by doitinvest shows that quite often the past trends are reversing, making any prediction quite perverse. But, all in all, technical analysis is about gaining knowledge of a certain market, and as such offers superior competitive advantage in investing compared to only reading the news and following the market trends. So why not using it?
Of course there are cases when the stocks technical analysis does not work. For example, in the volatile stock exchanges of the few weeks, when Dow jones goes up and down 400 points in one day (or around 4%), there is a clearly indication that investors are over-trading. This means that the volatility of the stock’s prices is extremely high in this hot month of October, with the possibility that one investor can loose lots of money or gain tons in a very short timeframe, making things very risky. A good example is the Dow Jones chart at the top of this article, whereby you see the variations of today’s DJIA of hundreds of points in several hours.
Nevertheless any investor should exercise caution and use the stock’s technical analysis prudently. There is no substitute to the actual information itself, and the more you know, the better you act.