Technical Analysis – A Pseudo-science?

 Stock market is widely considered as the temple of Capitalism. It reflects the strength and weakness of an economy; bloom and doom of a business or a company.

Since the day, financial instruments, commodities and currencies started exchanging at the hands of buyers and sellers, started the speculation on their prices.

Speculation is almost similar to future prediction. As we all know, its nearly an impossible task. We absolutely can’t predict what happens next in our life. The same principle applies to the price of stocks and derivatives up there in the market for trading.

Technical analysis developed as a systematic approach to predict the price movements of financial instruments. It can also be used to predict the future prices of any freely traded entity with history of financial data.

Technical Analysts tend to predict the future price movements in the market using the past market data. It is investors’ and speculators’ emotions like hope, fear and greed which are driving the price in the market. Technical charts reflects behaviour of speculators based on these emotions. A seasoned chartist can recognize the trend of the market by reading the chart and place his or her trades accordingly.

Technical Analysis faces serious opposition from advocates of Efficient Market Hypothesis (EMH), Modern Portfolio Theory (MPT) and Random Walk Theory, who are firm on the opinion that prices of stocks are basically unpredictable because they are random and chaotic. To them, Technical Analysis is nothing more than ‘Financial Astrology’. Since there is not a recognized branch of science for predicting the future, the scientific world consider it as a pseudo-science.

Technical analysis of stock trends published by Robert D Edward and John Magee is widely recognized as the finest book ever written on Technical Analysis. But neither did both of the author technicians considered or stressed technical analysis as a ‘science’ but instead they claimed it as an art which can be mastered by practice and experience.

John J Murphy, widely regarded as the Father of Inter Market Technical Analysis, stressed on the fact that Technical Analysis is an art. He defines it as “the study of market action, primarily through the use of charts,for the purpose of forecasting future price trends.”

Martin J Pring, popular author and technical analyst, adds that Technical Analysis “deals in probabilities, never certainties”

Art means a skill acquired by experience,study or observation. Science is a body of knowledge with its own axioms, rules and language.

In spite of harsh criticism and a subject of constant debates, technical analysis stood the test of time. It is, today, a useful tool to predict the price movements in financial markets. Most of the highly qualified fund managers and veteran traders use technical analysis to a great extent in their trading process. Daily technical reports are published in newspapers. It shows that market participants are using Technical Analysis and it plays a contributing role in price movements in market.

When proponents of a system never claim it to be a science but as a great art, it is not logical to downgrade it as a pseudo-science.

Image Courtesy: Internet


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