the hAnDbook of teChnICAl AnAlysIs■ (^) It provides timely and precise entry and exit price levels, preceded by technical
signals indicating potential bullishness or bearishness. It has the ability to also
pinpoint potential time of entry via time projection techniques not available
to fundamentalists. Fundamental analysis does not provide the exact price or
time of entry.
■ (^) It makes the gauging of market risk much easier to visualize. Volatility is more
obvious on the charts than it is in numerical form.
■ (^) The concerted effort of market participants acting on significantly clear
and obvious price triggers in the markets helps create the reaction required
for a more reliable trade. This is the consequence of the self‐fulfilling
prophecy.
The disadvantages of applying technical analysis are:
■ (^) It is subjective in its interpretation. A certain price pattern may be perceived in
numerous ways. Since every bullish interpretation has an equal and opposite
bearish interpretation, all analysis is susceptible to the possibility of interpre-
tational ambiguity. Unfortunately, all manners of interpretation, regardless of
the underlying analysis employed—be it fundamental, statistical, or behav-
ioral—are equally subjective in content and form.
■ (^) A basic assumption of technical analysis is that price behavior tends to repeat,
making it possible to forecast potential future price action. Unfortunately this
tendency to repeat may be disrupted by unexpected volatility in the markets
caused by geopolitical, economic, or other factors. Popular price patterns may
also be distorted by new forms of trade execution that may impact market
action, like automated, algorithmic, or high‐frequency program trading where
trades are initiated in the markets based on non‐classical patterns. This inter-
feres with the repeatability of classic chart patterns.
■ (^) Charts provide a historical record of price action. It takes practice and ex-
perience to be able to identify classical patterns in price. Though this skill
can be mastered with enough practice, the art of inferring or forecasting
future price action based on past prices is much more difficult to master.
The practitioner needs to be intimately familiar with the behavior of price
at various timeframes and in different markets. Although classical patterns
may be applied equally across all markets and timeframes equally, there
is still an element of uniqueness associated with each market action and
timeframe.
■ (^) It is argued that all market action is essentially a random walk process, and
as such applying technical analysis is pointless as all chart patterns arise out
of pure chance and are of no significance in the markets. One must remem-
ber that if this is the case, then all forms of analysis are ineffective, whether
fundamental, statistical, or behavioral. Since the market is primarily driven
by perception, we know that the random‐walk process is not a true represen-
tation of market action, since market participants react in very specific and
predictable ways. Though there is always some element of randomness in the
markets caused by the uncoordinated actions of a large number of market