What is Technical Analysis?

Like many follower of value investing I don’t believe in technical analysis. But I guess that’s a bad behavioural finance on my part not to recognise all those “goodies” inside technical analysis.

Lukas Neely forwarded a bunch of white papers, article over a period of time which includes detailed commentary on technical analysis. Lukas termed them as supply and demand situation which a value investor should know to take additional advantage post their all analysis.

His comments covered two specific aspects called “short squeeze” and “volatility squeeze”. This includes terms like Bollinger Band, some charts. As he didn’t spend much time on this subject like any other value investor I couldn’t understand objective much; more so in an Indian situation.

I would like to know from technical experts from here:

  • what type of technical analysis are performed in India?
  • what are the objective behind such technical analysis?
  • does any particular technical analysis is backed up by certain philosophy?
  • does technical analysis require sophisticated tools or can be do it yourself?
  • what are the key resources including books to understand better?

Someone referred a book called “Trading for a Living”, which I am going through. Yet to finish.

Help will appreciated, thanks in advance.


Technical Analysis is nothing but sum total of how and what investors, traders, HNIs, Institutes, Funds and other participants of market perceive the particular stock or commodity. It is overall picture of crowd behaviour and their average reaction to different circumstances. This includes fundamentals as well. I mean how crowd responds to change in fundamentals.

We all have experienced greed in case of excellent fundamentals and fear in case of poor fundamentals. But what are the limits of greed or fear? What defines the limit of greed or fear in any market? Why some of the best commodities or stock stop responding beyond certain point or worst stock refuse to fall below certain level? Why particular stock falls after posting extra ordinary results? Why worst currency or commodity bounce back after pathetic fundamentals?

Technical Analysis tries to answer above question. It is simply study of how crowd has reacted in history in similar situation of circumstances. Underlying assumption in TA ( Technical Analysis) is crowd will react in same manner as in past when thrown to similar situations in future. There might be some deviation and there is no 100% guarantee of result. But odds are in favour of similar behaviour in future rather than new one.

I have studied most of the l top rated veterans both on Fundamental as well as Technical Analysis. My conclusion is do not follow fundamentals blindly. Put your money in stock or commodity when fundamentals are supported by TA. Otherwise there are chances that you will block your fund for years to gather, if not loose.

Have you ever experienced that you buy a stock at peak and sell at the bottom? If you follow TA, I am sure this will not happen to you in future.


As from the above post-

“My conclusion is do not follow fundamentals blindly. Put your money in stock or commodity when fundamentals are supported by TA.”

This is basically the way I use TA. Like Colgate is a great stock fundamentally. It was great at 1200 and also at 800 levels. For someone who invested at 1200 will obviously have lower returns than one who has bought it lower.
One more example, if you have seen chart of SBIN, you will notice that it has bounced up from 150 levels twice in near past. This time also it did the same. The fundamentals were never in doubt (in spite of the recent scams, in fact they gave a opportunity to enter) and the ‘great’ price for that stock was 150.
Value investing is to buy great stock at ‘great’ price. This great price is given by TA.


Value investing only concerns itself with the intrinsic value of a stock and stops there. The father of value investing, Benjamin Graham said before a congressional committee that in market it is axiomatic that an undervalued stock will go up in value. But it is not known as to when it will go up or how it goes up.

Technical analysis seeks to address this gap in investing knowledge domain. When is the right time to buy an undervalued stock? How much lower can an undervalued stock go? How not to be saddled with a stock that is a value trap?

Then there is the theory that except at the turning points, crowds are always correct or to use Buffetts words… markets are efficient nost of the times. While value investing requires us to disregard the prevailung market opinion, how do we decide that for a particular stock, market is wrong and we are correct? And even if we are correct, we know that a stovk will not rally till a significant section of the crowd agrees that ut is undervalued and starts purchasing it.

Thus technical analysis seeks to study the action of all the market paticipants on a particular stock.

Also value investing seeks to benefit from market inefficiency only in one direction. It comes into play when market overreacts and pushes the stock price to low levels. But what happens after we buy an under valued stock? When do we sell it? Do we sell it when it reaches its intrinsic value? Or do we wait for the pendulum to swing the ither way, i. e ride the rally all the way to the top as market overreacts in the positive direction? How do we dcide whether a stock is topping out?

Thus a value investor without knowledge of technical analysis, knows only to buy a stock which he percieves to be undervalued… and after that he is all at sea.

And finally, there is the other important aspect of investing called momentum investing.

Benjamin Graham defines an enterprising investor as one who has purchased in a down cycle and sold in an upcycle. He further tells us that in a cyclical turnaround, the mist inefficient and debt laden stocks give the highest returns.

According to Peter Lynch, in cyclical invezting , timing is the most important factor. Thisr who mistime purchase in cyclical stocks will see the portfolio value falling very steeply in a short period of time.

In the indian market, 80% of the stocks belong to cyclicals. So 80% of the market favours momentum investing where timing is the most critical factor.

Finally, i strongly doubt if a lay investor can practice value investing in India given his limited knowledge, expertise and access to latest information.

@Mehnazfatima You are doing nice work with technical analysis. Thanks for sharing your analysis :slight_smile:
Can you suggest what essential technical patterns, indicators should be followed by fundamental investors. I would like to use them in conjunction with fundamental analysis of stocks.

I have posted sime charts and described a bearish pattern under the discussion thread on… the case against technical analysis.

Using this particular signal, i was able to exit some of my holdings just before the stocks collapsed.

Magic of practising behavioural finance- Speculation and Technical Analysis

Watershed moment in my investing career, for twenty years or so I never bothered to venture out to know technical analysis. To me they were abstract of numbers, diagrams which seldom established meaningful relationship with business of company.

As we all know price appreciation is attributed to 1. Earnings growth or fundamental appreciation 2. Market perceptions or speculation growth. I focussed on fundamental growth , to me and millions of value investor investing is about finding a good business at a good valuation.

This is precisely my stand even on March 2016, you can see the note on top when I started this thread . What changed now, am I trying to tell you that I become a trader or even remotely advising you to do so? NO, I still remain a dedicated value investor if I can say so but not the way what is written during 1930 to 1980’s even.

During my quest in last few months I met more than 20-25 speculators, spoke to them for hours. This include my new mentor who is a seasoned speculator apart from being a fundamental investor. I attended couple of classroom sessions, red few dozen books. Why I am telling you all this, to reiterate simple point….nothing is substitute for hard work. Money is unit of account only.

There is much more to venture out in dark world of speculation, fascinating stories of wealth making, high flying life style to clinical depression and suicides. The excitement of short selling, adrenaline rush shoots through your vein when you are leveraged.

Let’s catch some of defining moment of speculation world:

1929- William Durant (Founder of General Motors) and Arthur Cutten (commodity trader) lost everything in a week. Jesse Livermore made the greatest money in quickest time during same week by short selling in history of man kind. Apparently Livermore shorted 500 million dollars in 1929 which is between 2-4 trillion dollars in current terms, higher than GDP of 95% of countries even now.

2007- John Paulson made 20 billion with sub prime mortgage by short selling when every one went bust.

1992- George Soros broke Bank of England by shorting 10 billion pound forcing UK to withdraw from European rate mechanism.

1987- Paul Tudor Jones again short sold during 1987 crash making 3 times money in a week.

Now the odd moment:

  1. Durant went bankrupt, Livermore committed suicide.
  2. Wei Dong a known Chinese speculator committed suicide.
  3. Grandiose life style- can you believe Livermore had a dining table in his long island mansion which can accommodate land of helicopter (46 people can sit together), never waited in a traffic signal (all traffic cops in his route were paid off). Baruch impersonated US President by having his own cavalry! Six-Seven people manipulated whole financial world including US , UK administration which eventually pushed world to a hard depression by 10 years followed by a soft reaction for another ten years.

No wonder fabulous stories of speculators, technically all of them were brilliant, flamboyant. But something gone wrong somewhere which made the end unique.

Nevertheless let us focus the technical brilliance which may help us in our methods. What I can gather so far (still infant!):

  • exceptional strong behavioural finance practice (particularly in area of risk management, money management, position management).
  • meticulous and unemotional approach towards market. A seasoned speculator works like a machine, honour the code (rules).
  • flexibility in adopting different market situations like sitting on cash, no work during some part of the year, change methods when it doesn’t work.

And good news for me was all of these can be blended with value investing and more so it may help in asking questions like:

  • how do I protect capital, raise capital and manage capital?
  • sizing a position while investing?
  • include economics of market psychology during buy and sell decisions?
  • expectancy of a portfolio than CAGR.
  • exit strategy for different situations
  • holding expectation which works well during sideways market.

And at the cost of not sacrificing any of activity we do while assess a stock fundamentally. A disciplined position management can increase substantially your return by proper capital allocation.

Before I move forward, 80% of speculation focus on mass psychology, biases, prejudices and fallacies. What better way to practise behavioural finance? Speculation not necessarily means intra day or commodity trading. It’s the act of intellectual estimation basis rules before you conclude decision making.

Going forward I am planning to share few of the speculation framework which helping me well in managing portfolio. I hope it may serve you well, please educate me further and question me whenever you want to.


Presentation on Technical analysis which I did at investor meet…Hope this helps…

Technical analysis_Basics_v2.pdf (1.2 MB)

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Overview of Technical analysis with reasoning as to why it works. Also, given some examples why it works as complementary tool to fundamental analysis.

Ed Riley, one of the US based investors who is active on Twitter is holding free gyan sessions this August. Requires basic knowledge of Technicals - its based on the CANSLIM approach. You can follow him at @EdRileyAugust on twitter