Chapter 8. Reading the Tea Leaves: Does Technical Analysis Work?
In This Chapter
Revealing truth beyond the mythology
Understanding technical analysis procedures
Deciding whether it works
Determining whether technical analysis is for telling fortunes or trading
Everyone knows that foretelling the future is a tough thing to do, especially when money is involved. Whether your prognosticating tool of choice is a Ouija board or a Magic 8 Ball, knowing exactly what the future holds is difficult.
Investors and traders are always looking for an edge in forecasting stock prices to improve their trading results. The method of choice for many investors is fundamental analysis, which we describe in Chapters 5, 6, and 7. For traders, on the other hand, technical analysis, as described here and in Chapters 9–11, is the way to go.
Although some overlap exists between fundamental and technical analyses, you find dyed-in-the-wool, true believers in both camps, and they argue that their way is best, even going so far as to say the opposite way is worse than useless. For our money, the truth lies somewhere in between these two extremes.
Understanding the Mythology
A technician — that's someone who reads charts — believes that you can use price charts and market statistics to develop a profitable trading plan. Some technicians even say that price charts foretell where a stock's price is heading simply by showing where it has been. Detractors argue that technical analysis is merely another name for fortune ...
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