My personal thoughts is a lot of TA is picking up momentum factor and the short term tendency of price mean reversion. Read the book quantative momentum for a great exploration of this factor that just uses price and time as only input.

For me this and Skinner's experiments with pigeons explains all I need to know personally about TA.

Thanks for taking the time to share this @TEPCapital!

Hi Tom. Great explanation. I do like the idea of using TA to pick entry points. However just one question i have is if for instance on ENA whether because the stock is so small and the trading volume is tiny, that TA is actually relevant? For instance yesterday there were 2 x trades for about $6k in total - and they were both me.

Hi @GazD

the way i look at it is as a quadrant being;

value cheap/ momentum poor---hold standard position

value cheap/ momentum good--hold max position

value poor/ mo poor---dont hold

value poor / mo good--trading situation

by momentum i mean share prices, earnings revisions , earnings momentum or a combination

it is harder to enact IRL than in theory i have found.

a few fund managers use this as their base philosophy eg Alphinity

Would anyone be kind enough to elaborate on reading momentum? Which measure: RSI, Momentum, OBV Oscillator, or just plain MACD?

@GazD one of the simplest way I think of TA (and the whole TA OR FA divide) is there are multiple tools in the toolbox: why limit yourself by cutting off one?

Some people swear by TA, some by FA, and in both fields there are successful investors and traders, so clearly both can work if given the right thought and techniques/skills.

I do find it harder to grasp the more tealeaf styles i.e. Gann, and eyes do glaze over as we get more to fibonacci mathematical levels , moon phases etc. They "May" work (in my own belief system) as simply as the maths or levels reflect other fundamental aspects of traders and investors that group at those levels. I'm far too unqualified to debate this though, but the direct reason that the moon impacts prices or that a certain retracement % in itself is responsible for certain price actions, is I think more an indirect causal relationship.

I do think the more mainstream TA tools are capable of much more than some FA given credit for. I think of TA as painting a picture of what the price action of a stock is doing. In its simplest form, a stock that is undervalued by FA terms, making crap tons of money, is likely to go from the bottom left of the graph, towards the top right. In essence a TA graph would capture this trend upwards, and in its simplest terms I do think they represent the same data of a company in different perspectives. Sometimes FA diverges from the price of a stock, and again TA could reflect the price action movements that you could trade or follow in the short term that defy rational FA logic.

Various momentum indicators and other tools essentially "paint' what people are buying and selling, and from this price-action behaviour I think there is a logical explanation on why these tools can work. For example, a 20day MA crossing over longer term averages say 100 or 200 MA reflect, from a "simple" price action interpretation that recent price movements are outpacing the long term, which is highly likely due to more buyers entering and being positive on the stock. This in turn could be linked to improving business conditions: macroeconomic, and company specific : new contract wins, revenue increases etc. Either way all of these fundamental factors show up in buying power, that in turn is reflected in TA indicators in some form?

Of course some indicators like MACD, RSI etc show different things, but at the end of the day they calculate their respective formulas off "price". And price is buyers vs sellers , and in turn one would reasonably expect fundamentals impact how these interact, and who holds the balance of power. So in one sense TA and FA are still , to me, reflecting good business conditions and fundamentals in their own right.

Hope that makes sense. Sorry if it came across as trying to dumb it down too much, there is of course the more 'sophisticated' explanations , but sometimes i think people in FA or TA camps try to mystify their sides to seem more poshy than what they really are. The techniques of course can get quite sophisticated, but i think they all still strip back to business basics. After all business metrics relative to price...

Edit: didn't get time (work hours now) to read @TEPCapital analogy , but seems he put the business scenario version much more eloquently into practice than my above baby talk.

One thing i would add though is that TA also is a good painted picture of behaviour - rational or irrational, of investors by analysis of the share price. In a way FA would pick this up on a valuation point of view, i.e. insane PE multiples and value relative to price being paid, whereas TA i treat this as the artists picture of what is happening (illustrated).

Thanks @markeewan appreciate the detailed explanation and thoughts.

I am new to the Technical Analysis (TA) forum. As @GazD pointed out many smart investors on Strawman have been using it in combination with Fundamental Analysis (FA) for years! I found the views in this forum incredibly interesting, which is why I subscribe to Strawman!

Muggins here has focused purely on FA and thinks it’s time to take TA into account for Buy Hold and Sell decisions.

Why? I’ve just finished reading Rule#1 by Phil Town. Most of us know Buffet’s Rule#1…Never lose money. We also know Buffet’s Rule#2…Go back to Rule #1.

Now I expected Phil Town’s book to be about FA, and to a large extent it was. However, before wrapping up Phil talked about TA.

In Chapter 11 ‘Grabbing the Stick’ Phil said “Even if we did everything totally right and didn’t make a mistake, couldn’t the couldn’t the stock price go down in the short run and cause us to lose money”

In most other books I’ve read about FA, what you expect to hear next is “in the short term the market is a voting machine, however, in the long term it is a weighing machine’ to justify when you should buy a cheap quality stock. Not Phil Town!

He said “you bought a business and the day after you bought it it started going down. And it is still going down with no sign of relenting”

Phil goes on to say “One way to look at it is, Even though the stock has gone down as long as you don’t sell it you haven’t lost any money and therefore not violating Rule#1, Right? Wrong! Big time wrong! Escaping-from-reality WRONG!”

Now he had my attention. I wasn’t expecting Phil Town to say that! This happens to me a lot…Below margin of safety on intrinsic value…Buy the stock…too early into a good business…then the falling dagger!

He goes on to say “no matter how much you know (referring to FA) Mr Market can still make your wonderful company’s share price go down. Now I’m going to show you how to take away Mr Market’s Stick”

He says investors think stock prices go up and down for many reasons based on fundamentals eg interest rates, earnings, management etc. However, he says “Stocks go up for one reason and only one reason: They go up because more money wants to buy than wants to sell”

He the goes on to explain three TA tools he uses to time the Buying and Selling of wonderful companies.

Phil uses a combination of the Moving Average Convergence Divergence (MACD), Stochastics, and the Moving Avaerage.

Now this is all new to me, but looking back on the businesses I have bought this year, I certainly could have timed my entry points much more wisely by using MACD (12,26,9). So I’ve now added MACD and the 20 day Moving Average to my Commsec Charts. For example, while Nickel Industries is a stock I like, early June was not a good time to be buying it when you look at the MACD below (Source Commsec):