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  • Writer's pictureIshfaaq Peerally

Technical Analysis Doesn't Work

“𝙄 𝙧𝙚𝙖𝙡𝙞𝙯𝙚𝙙 𝙩𝙝𝙖𝙩 𝙩𝙚𝙘𝙝𝙣𝙞𝙘𝙖𝙡 𝙖𝙣𝙖𝙡𝙮𝙨𝙞𝙨 𝙙𝙞𝙙𝙣'𝙩 𝙬𝙤𝙧𝙠 𝙬𝙝𝙚𝙣 𝙄 𝙩𝙪𝙧𝙣𝙚𝙙 𝙩𝙝𝙚 𝙘𝙝𝙖𝙧𝙩 𝙪𝙥𝙨𝙞𝙙𝙚 𝙙𝙤𝙬𝙣 𝙖𝙣𝙙 𝙙𝙞𝙙𝙣'𝙩 𝙜𝙚𝙩 𝙖 𝙙𝙞𝙛𝙛𝙚𝙧𝙚𝙣𝙩 𝙖𝙣𝙨𝙬𝙚𝙧”

- 𝙒𝙖𝙧𝙧𝙚𝙣 𝘽𝙪𝙛𝙛𝙚𝙩𝙩

📚 There are two main approaches to investing, 𝙛𝙪𝙣𝙙𝙖𝙢𝙚𝙣𝙩𝙖𝙡 𝙖𝙣𝙖𝙡𝙮𝙨𝙞𝙨 𝙖𝙣𝙙 𝙩𝙚𝙘𝙝𝙣𝙞𝙘𝙖𝙡 𝙖𝙣𝙖𝙡𝙮𝙨𝙞𝙨. A fundamental analyst will look at the income statement, cash flow statement, balance sheet and all other information about a certain business to make their analysis. A technical analyst will look at patterns on the price charts and try to predict future price movements.

📈 For example, for a fundamental analyst, investing in copper miner, FreePort-McMoran $FCX to know about the demand/supply of copper along with inventories and from these try to see how the business will do in different scenarios. The technical analyst will just look at some patterns on how the stock did in the past and try to predict the future.

"𝘾𝙝𝙖𝙧𝙩𝙨 𝙖𝙧𝙚 𝙜𝙧𝙚𝙖𝙩 𝙛𝙤𝙧 𝙥𝙧𝙚𝙙𝙞𝙘𝙩𝙞𝙣𝙜 𝙩𝙝𝙚 𝙥𝙖𝙨𝙩” - 𝙋𝙚𝙩𝙚𝙧 𝙇𝙮𝙣𝙘𝙝

⌛ Most people, however, are technical analysts and there are some good reasons for that. People don't want to be bored and 𝙜𝙤𝙤𝙙 𝙞𝙣𝙫𝙚𝙨𝙩𝙞𝙣𝙜 𝙝𝙖𝙨 𝙩𝙤 𝙗𝙚 𝙗𝙤𝙧𝙞𝙣𝙜. So, they would rather look at charts everyday. If millions of people react to the same trend the same way, it works. Does it?

🚀 According to the 𝙀𝙛𝙛𝙞𝙘𝙞𝙚𝙣𝙩 𝙈𝙖𝙧𝙠𝙚𝙩 𝙃𝙮𝙥𝙤𝙩𝙝𝙚𝙨𝙞𝙨 (𝙀𝙈𝙃), stock investing should not work and everybody are better off investing in the S&P 500 $SPX500 . But we know that this is not true. I saw a market inefficiency in GameStop $GME and made over 3300% profits. Warren Buffett wrote an article, "The Superinvestors of Graham and Doddsville" explaining why EMH is not true. Then, those economists came up with three versions of the EMH and in the weak version, technical analysis only is not supposed to work while fundamental analysis works.

🤖 Fundamental analysis works because you can find market inefficiencies while reading financial reports. The inefficiencies with GameStop that I saw were that the losses were not real and were just because of impairment of goodwill and also over 200% of float was short. The 𝙗𝙚𝙨𝙩 𝙩𝙚𝙘𝙝𝙣𝙞𝙘𝙖𝙡 𝙖𝙣𝙖𝙡𝙮𝙨𝙩𝙨 𝙩𝙤𝙙𝙖𝙮 𝙖𝙧𝙚 𝙘𝙤𝙢𝙥𝙪𝙩𝙚𝙧𝙨 which will never find these market inefficiencies. And trying to beat these computers as a technical analyst is getting harder and harder and is not worth the time.

Maybe sometimes technical analysis works, but fundamental analysis is much more reliable, can make you much more and with less work.

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