The foundation for technical analysis is statistics. Technical analysis is not based on hunches or guesses. It is based on math and math never lies, unlike people. The accountants, analysts, and CEOs on Wall Street lie to the investing public on a regular basis. A good example of this is the Enron case. The accountants, CEOs, and analysts who covered Enron lied to the general public about the viability of the company. As a result many people lost a lot of money by trusting the information they received from these people. Technical analysis separates truth from lies. It cannot be manipulated because it cannot be influence by individuals. It is the only defense we have as investors against erroneous information that can devastate a portfolio.
When you look at a chart you are looking at the entire history of that company displayed in
graphical form. Everything that ever happened to that company and had an affect on it's stock price is displayed on it's chart. For instance, at point A in the chart on the right maybe a new CEO came to the company and made it profitable. The corresponding reaction was an increase in the stock price. At point B maybe he/she left and the company became less profitable. As a result the price decreases. Over a long period of time as this information is collected and graphed it becomes very accurate and useful statistical information. If you are not familiar with statistics I can tell you that it is based on probability. It is not 100% accurate but if enough information is gathered to support it, it can be accurate in the 90 percentile range.Know thy self.
We are all born with good and bad qualities and these qualities can affect they way we trade. Technical analysis can help us avoid losing money because of our personal characteristics. I'm an optimist. When I first began trading in 1998 I was always bullish because I'm optimistic. I had to learn the hard way(by losing money) that stocks don't continue to go up forever. Even after losing money it was very hard not to be optimistic and it continually got me into trouble. I finally overcame this problem and started making money when I started trading based on technical analysis. We are emotional people and our emotions can cause us to lose lots of money in the market if we are not careful. Technical analysis is not emotional. It interprets data without bias. If a stock is going to drop it shows that the stock will drop. It doesn't say "I like this company a lot and they can't lose I just know it". I stopped listening to myself a long time ago. I let my computer make the decision on whether to buy, sell, or hold because it isn't swayed by emotion. There are major hedge funds called Quant Funds that operate on this principle. Certain parameters are loaded into a computer and it makes the decision to buy sell or hold. You don't have to be a quant fund to make money in the market but you should take the emotion out of your investing if you want to make it work.
