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I just ran into the concept of Technical Analysis and decided to go ahead and read a book about it. Before I start reading, I'm curious. Do most people use it successfully? Or is it just a waste of time? Specifically among those who only care about index funds.

By "successfully" I mean that in the long term their portfolios perform better than those that just set asset allocations and rebalance periodically. Is there any data that supports it?

Note: I'm OK with personal experiences in your answer if you have used it.

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    Why don't you do some paper trading or virtual trading and test it for yourself. It works for me, I have been using it for over 5 years and beat the market each year.
    – user9722
    Apr 14, 2015 at 21:50
  • @GeorgeRenous Because it would take years for me to find out. I'd rather have someone confirm or deny their usefulness. Otherwise, do you have any advice on good paper trading sites where I can move back and forth in time with hypothetical portfolios?
    – AxiomaticNexus
    Apr 14, 2015 at 22:48
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    @YasmaniLlanes - there are many programs that allow you to do backtesting for a particular strategy. Or you can also manually backtest in most charting packages - you can go back in time on the chart so that the right side of the chart shows a date in the past (say one year ago or 10 years ago), then you can click forward one day at a time (or one week at a time if using weekly charts). With your indicators on the chart you can pretend to buy or sell whenever a signal is given as you move forward in time. This way you may be able to check years of data in a day to see if your strategy works.
    – Victor
    Apr 15, 2015 at 1:30
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    Did you check here investopedia.com/university/technical ? Has all the pros and cons.
    – DumbCoder
    Apr 15, 2015 at 8:28

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Technical Analysis in general is something to be cognizant of, I don't use a majority of studies and consider them a waste of time.

I also use quantitative analysis more so than technical analysis, and prefer the insight it gives into the market.

The markets are more about predicting other people's behavior, psychology. So if you are trading an equity that you know retail traders love, retail traders use technical analysis and you can use their fabled channel reversals and support levels against them, as examples.

Technical analysis is an extremely broad subject. So I suggest getting familiar, but if your historical pricing charts are covered in various studies, I would say you are doing it wrong.

A more objective criticism of technical analysis is that many of the studies were created in the 1980s or earlier. Edges in the market do not typically last more than a few weeks. On the other side of that realization, some technical analysis works if everyone also thinks it will work, if everyone's charts say buy when the stock reaches the $90 price level and everyone does, the then stock will go higher.

But the market makers and the actions of the futures markets and the actions of options traders, can undermine the collective decisions of retail traders using technical analysis.

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    Great answer. Can you elaborate what you mean by quantitative analysis? Time series forecasting? ARIMA,GARCH etc? Other statistical and calculus methods?
    – Victor123
    Apr 15, 2015 at 0:41
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    @CQM, "A more objective criticism of technical analysis is that most of the studies were created in the 1980s." TA and most of the indicators (if that is what you mean by studies) were developed much earlier than the 1980s. I am with liileadv, I really am not sure what your answer is on about. Are you for or against using TA? What you have written does not make much sense to me either.
    – user9822
    Apr 16, 2015 at 0:21
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    @CQM, your point is pointless because TA worked in the 1930s, worked in the 1980s and works now if used properly. You can't just see a couple of indicators, not learn how to use them properly and then use them loosly in a non-systematic way, and then when you get bad results say that they and TA don't work.
    – user9822
    Apr 16, 2015 at 22:26
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    @CQM, the only thing you got correct is that your answer is not fit for the question or the site. The question asks whether TA can be used successfully, to which if you don't use it how could you answer it. Of course if you don't use it and don't understand it your answer is going to be useless. This question is not a bad question, and at least one answer provides an insight into how TA can work (instead of being based on useless opinion like yours).
    – user9822
    Apr 17, 2015 at 2:56
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    By the way FA and investing itself is a very broad topic, but I see plenty of opinionated answers being given to these types of questions without being closed.
    – user9822
    Apr 17, 2015 at 2:59
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The study of technical analysis is generally used (sometimes successfully) to time the markets.

There are many aspects to technical analysis, but the simplest form is to look for uptrends and downtrends in the charts.

Generally higher highs and higher lows is considered an uptrend.

Uptrend

And lower lows and lower highs is considered a downtrend.

Downtrend

A trend follower would go with the trend, for example see a dip to the trend-line and buy on the rebound. A simple strategy for this is shown in the chart below:

Uptrend broken

I would be buying this stock when the price hits or gets very close to the trendline and then it bounces back above it. I would then have sold this stock once it has broken through below the trendline. This may also be an appropriate time if you were looking to short this stock. Other indicators could also be used in combination for additional confirmation of what is happening to the price.

Another type of trader is called a bottom fisher. A bottom fisher would wait until a break above the downtrend line (second chart) and buy after confirmation of a higher high and possibly a higher low (as this could be the start of a new uptrend).

There are many more strategies dealing with the study of technical analysis, and if you are interested you would need to find and learn about ones that suit your investment styles, whether you prefer short term trading or longer term investing, and your appetite for risk.

You can develop strategies using various indicators and then paper trade or backtest these strategies. You can also manually backtest a strategy in most charting packages. You can go back in time on the chart so that the right side of the chart shows a date in the past (say one year ago or 10 years ago), then you can click forward one day at a time (or one week at a time if using weekly charts). With your indicators on the chart you can do virtual trades to buy or sell whenever a signal is given as you move forward in time. This way you may be able to check years of data in a day to see if your strategy works.

Whatever you do, you need to document your strategies in writing in a written trading or investment plan together with a risk management strategy. You should always follow the rules in your written plan to avoid you making decisions based on emotions. By backtesting or paper trading your strategies it will give you confidence that they will work over the long term.

There is a lot of work involved at the start, but once you have developed a documented strategy that has been thoroughly backtested, it will take you minimal time to successfully manage your investments. In my shorter term trading (positions held from a couple of days to a few weeks) I spend about half an hour per night to manage my trades and am up about 50% over the last 7 months. For my longer term investing (positions held from months to years) I spend about an hour per week and have been averaging over 25% over the last 4 years.

Technical Analysis does work for those who have a documented plan, have approached it in a systematic way and use risk management to protect their existing and future capital. Most people who say that is doesn't work either have not used it themselves or have used it ad-hock without putting in the initial time and work to develop a documented and systematic approach to their trading or investing.

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    My problem with technical analysis is that it doesn't detail the WHY the price "bounced off an arbitrary trendline angled at 69% when using this arbitrary timeframe", technical analysis is merely hoping herd mentality takes place during the price levels you pinpointed, and hoping the amount of adherents to TA are more than white noise. Whereas quantitative analysis looks at what could happen based on market participants here right now, the guy flashing an 100000 size ask doesn't get filled or printed on the chart, technical analysis is going to completely miss the crash
    – CQM
    Apr 17, 2015 at 2:33
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    @CQM - your problem with TA is that you don't understand it. As I said proper TA is done in a systematic way with a documented plan and incorporates Risk Management. If you took the time to learn about TA you would find that it does describe the "WHY" prices bounce off trend lines, support and resistance lines, and the reasoning behind the patterns and indicators. This is the typical response, as I suggested, from someone who doesn't understand or use TA.
    – Victor
    Apr 17, 2015 at 4:48
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    I am telling the reason I disagree, the limitations of technical analysis from someone who does understand the ins and outs of practically every technical indicator's 50 year old formula. You can put all the stop losses in the world to manage risk, and be profitable when you let your winners run. Technical Analysis misses a lot of information and is only based on what happened, what was printing on a chart. There are a couple leading indicators in TA but even those are not using anything from the order flow.
    – CQM
    Apr 17, 2015 at 13:05
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    @CQM, "...from someone who does understand the ins and outs of practically every technical indicator's 50 year old formula." Really, yet you don't know "...WHY the price bounced off an arbitrary trend-line..." Regarding your order flow, I suppose you also pick up hidden orders which don't get executed. By the way as part of my entries and exits I usually look at the market depth as do many TAs.
    – user9822
    Apr 17, 2015 at 22:21
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    @CQM, that proves that you don't know what you are talking about. All you would need to do is read a good book on TA and it would explain it. You are just full of it. What you say makes no sense.
    – user9822
    Apr 18, 2015 at 14:22

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