The incomplete tool

If technical analysis is part of investing theory, it must count as knowledge. To define it accurately is impossible, but I will try. It is based on the premise that stock prices determine stock prices and stands on certain belief systems: 1. If enough people think it will happen, it will happen. 2. If the future is like the past, certain mean-reverting tendencies will manifest and hence secular trends can be discerned. 3. The Fibonacci ratio shows up in certain evolving natural phenomena, human behaviour being one of them. Technical analysis is approximately right, enough for some people to use it as 'technology'. But it is enough wrong to be very dangerous if not used carefully. The key is to note its failure rate. Some empirical studies have showed this to be about 44 per cent, the proportion of times that a strong support/resistance breaks. Votaries of the subject argue that this can be got round with a 'stop loss'. But tell me, if money is not made in a crowd, then how can you use technical analysis to be in a minority? If I know that all the adherents of technical analysis are going to be buying stop-loss protection at a particular level, wouldn't I be more assured of 'crowding' at that price level, and hence, isn't it a better idea to wait for the support to break or to sell insura

This article was originally published on November 14, 2018.