Page 210 - DCOM507_STOCK_MARKET_OPERATIONS

Unit 10: Technical Analysis

Self Assessment Notes

Fill in the blanks:
10. The .........................………….. Theory is one of the oldest and most famous technical tools.
11. .........................………….. are one of the most fundamental aspects of technical analysis.

12. The market is always considered as having .........................………….. movements, all going
at the same time. The first is the narrow movement from day-to-day.

Notes Charts are one of the most fundamental aspects of technical analysis.

10.7 Criticisms of Technical Analysis

Despite the assertions of technical analysis, technical analysis is not a sure-fire method. The
various limitations of technical analysis pointed out by its critics are as given below:
1. Difficult in interpretation: Technical analysis is not as simple as it appears to be. While the
charts are fascinating to look at, interpreting them correctly is very difficult. It is always
easy to interpret the charts long after the actual point of time. As such, fundamentals argue
that charting techniques are no different from palmistry.
2. Frequent changes: With changes in market, chart patterns keep on changing. Accordingly,
technical analysts change their opinions about a particular investment very frequently.
One day they put up a buy signal. A couple of weeks later, they see a change pattern and
put up a sell signal.

3. Unreliable changes: Changes in market behaviour observed and studied by technical analyst
may not always be reliable owing to ignorance or intelligence or manipulative tendencies
of some participants.
A false piece of information or wrong judgment may result in trade at a lower than market
price. If the technicians fail to wait for confirmation, they incur losses.

With actively traded stocks, the prices may be the result of battle of wits and not the
intrinsic worth. In the game of making money, two knowledgeable persons may engage
in buying and selling every one hoping to make money at the expense of the others. In this
game, many may lose, if they are not cleverer and luckier.
The market prices of shares are sometimes the results of certain unhealthy practices like
cornering and rigging of certain shares by some stock market operators.
4. Unpredictable changes: Technicians expect changes to take place in a known and gradual
fashion.
(a) History does not repeat itself: There is no guarantee that history repeats itself. Systems
become more sophisticated and people become more mature, affecting a different
pattern of behaviour. Further, unexpected events like a change of the government,
or a violent agitation or a natural calamity may produce a different pattern of
behaviour. This contingency is not taken into account in making projections.
(b) No gradual shifts: It is presumed that shifts in supply and demand occur gradually
rather than instantaneously. Since these shifts are expected to continue as the price

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