is an art of observation from which a great many useful things
can be derived. In order to determine a market’s overall direction,
and the potential extent of future movements in price, past
behavior of the price action of that market can be an insightful
guide—although, as already discussed, it is important to remember
that the sum of information taken from technical analysis
can only be historical and is not predictive by nature. To the warrior
trader, this knowledge of the dual reality of markets—that
is, the history-future that is unfolding in real time—is an invaluable
and essential element in winning the trading battles and
thus the profit war.
The study of technical analysis works, then, to fine-tune the
warrior’s instincts with regard to the next movement of the
market; however, this form of study also highlights the distinctions
between the different disciplines of battle and the varying
weapons required. Technical analysis helps warrior traders
decide on their methodology, their specific art form, and the
weapon of choice for them as individuals. I will discuss the
specialization process warrior traders must proceed through a
little later, but for now let’s look at what really does work on the
battlefield of markets as far as technical analysis is concerned.
To my mind, technical analysis has a significant and marked
advantage over fundamental analysis when it comes to practical
trading in financial markets. Technical analysis does, however,
perfectly coexist with, and is complementary to, fundamental
economic analysis. Observing an animal in its natural habitat
is a useful way of developing an ability to forecast its future
behavior. Saying this, some may wish to study the same animal
through scientific dissection and the endless analysis of the individual organs
of that creature. But it seems somewhat obvious that the former approach—that
of studying the animal in its natural environment—will be far superior to the
art of dissection in terms of predicting the animal’s actual behavior in that very
same habitat. In some ways, I believe the dissection that invariably forms part of
any fundamental analysis draws us away
from the objective at hand—that is, to understand and predict
correctly the behavior of the animal itself. No matter how correct
our fundamental insights are, we must get the price movement
right in order to achieve a material, rather than a purely
intellectual, reward. Both art forms have their place. For the
moment, however, the important point to digest is that the
observation of market behavior through technical analysis in
the real world can be valuable in predicting where those very
markets will go in the future.
As self-evident as this may seem, there are many who ridicule
technical analysis—especially those who occupy the halls
of economic academia and the research houses of most major
banks and financial institutions. Personally, I find the situation
bewildering. It has always been a puzzle to me why so many economists
have trouble accepting the value of technical analysis—it
is not a threat, but a concurrent resource.
Read More: THE THEORY OF TECHNICAL ANALYSIS VERSUS THE REALITY
