The Advent of Technical Analysis
Technical analysis is the study of chart patterns. This particular art has evolved considerably over the years, but one of the earliest pioneers in the field was the legendary Jesse Livermore who traded in the late 1800’s into the early 1900’s. It was said that Livermore could ascertain the future direction of a stock by watching the ticker tape (a paper tape that would print out a record of price quotes and trades). By simply watching the characteristics of the tape, he could detect certain patterns that indicated an upcoming move in either direction. Although he probably didn’t articulate it fully, what he was “reading” was the mind of the market---or the composite opinion of every person involved with stocks.
“Tape reading” was further refined with the introduction of charts, and still later refined with the advent of computers, and finally, the internet. Today, there is a wealth of information on technical analysis---the reading and interpretation of charts.
The Fundamental Debate
Generally, there are two schools of thought in the world of investment: There is fundamental analysis, and technical analysis. Fundamental analysis is the study of the underlying companies, financial, and economic conditions for which a stock or commodity represents, while technical analysis is the study of chart patterns to ascertain the probable direction of a stock or commodity. Followers of each camp will usually insist that their methods are superior, and in fact, some proponents of fundamental analysis even think that “chart junkies” are no more accurate than fortune tellers or tea leaf readers.
Fundamentalists feel that their methods are superior because a stock value is ultimately driven by underlying financial and economic factors. For example, if a company shows strong growth, that growth will eventually be reflected in its stock price---the price will move higher. However, there is one problem with fundamental analysis that is impossible to work around, which is:
There is nothing you could discover or know about a company that hundreds of thousands of other people do not already know.
You could study all day and all night, you could research each company of the entire stock exchange, you could interview executives, you could do this for days, weeks, months, or years, but you would learn absolutely nothing that is not already known. At least not already known legally. You see, there are already hundreds of thousands of people doing the same thing; there are huge research firms that do this every minute of the day; there are financial firms who pay people 6-figure salaries to know everything there is to know about companies. Where is your edge? There isn’t any. Frankly, they will beat you to it. A stock will already have reflected their research---it is already “priced in.”
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