Technical Analysis always works, subject to the fact that we keep following the infamous technique of KISS – ‘Keep it Simple Stupid method’, means just do not over blend it with hundreds of Indicators or Trendlines
This is a question which I have had asked myself when I had started using Technical Analysis for Day Tradingaround Year – 2016 as I was unable to make money consistently. I always used to think that companies which are performing better, i.e. Increase in Sales/Profit on YoY basis etc. makes sense that these companies are generating extra cash hence their share price must rise along with their profit as more and more people would be willing to buy these kinds of shares on even higher price with a hope that it’s price will rise further and therefore fundamental analysis is something which must work always however what is the rationale behind any Trendline, Support or Resistance, Indicator Crossover and so on… which shall make me be assured that Technical Analysis will definitely work.
In a nutshell, we will understand this logic with below example:
Quarterly Results of Reliance Industries Ltd (RELIANCE) taken from Screener.in
In the Net Profit row, we can observe that ‘Net Profit’ had increased during Point ‘A’ (13,806 – June 2021) to Point ‘B’(20,539- December 2021) therefore retail investors would have become hopeful that as Net Revenue has been rising for three consecutive quarters i.e. June 2021 to Sep 2021 to Dec 2021 hence fundamentals are damn good and we must purchase this stock as it must continue its acceleration.
Let’s check the same case, if one was looking at this data and was hopeful, if he could had taken entry even before end of December 2021 quarter to reap some extra gain or was just tracking this price chart to stay ahead of the crowd:
Price Chart of Reliance Industries Ltd. Plotted using TradingView platform
Point ‘A’ is the stock price as on start of June 2021 i.e. 2202
Point ‘B’ is the stock price as on end of December 2021 i.e. 2368
It means that while people were watching quarterly results of Reliance Industries Ltd. for a confirmed entry, their share price would have already jumped by 166 points (2368 – 2202) and suppose if the person was aware of using Technical Analysis he would have already observed a beautiful Breakout on Point ‘C’ and had already entered in this stock during first week of September 2021 only.
Hence, Technical Analysis always works, subject to the fact that we keep following the infamous technique of KISS – ‘Keep it Simple Stupid method’, means just do not over blend it with hundreds of Indicators or Trendlines, I personally had been using Volume Indicator and as on today I do not use any other Indicator apart from Volume Indicator along with Candlestick Chart and this system is running as charm for me.
|| Pro Tip: This example was taken intentionally by the Author as in this example gave entry signal almost a quarter before however the price level was almost the same as December 2021 end quarter to show that Price discounts everything and using Technical Analysis will almost always signal you in advance that there is something going on in the security you are watching right now. You may also refer to our beautiful post – How to use Technical Analysis for trading/investing? to understand how Technical Analysis will actually help you stay ahead of the crowd. ||