Page 211 - DCOM507_STOCK_MARKET_OPERATIONS

Stock Market Operations

Notes gradually reacts to new or other factors the price change pattern is extrapolated to
predict further price changes. However, economists asserted that this is a wrong
proposition. Their random walk theory has shaken the conceptual foundation of
technical analysis. They believe that securities price changes are a series of random
numbers, which occur in reaction to the random arrival of news.

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Caution One of the major limitations of technical analysis is that the entire data is based on
the past. It is presumed that future resembles the past.
5. Less precise tools: The greatest limitation of technical analysis is perhaps the mechanical
precision it gives to the entire exercise of investment in equity shares. However, the tools
are subject to errors, breakdown and misinterpretation.
6. False signals can occur: Technical analysis is a signalling device. Like a thermometer, it
may give a false indication when there is no alarm, but when there is cause for alarm, the
signal will almost invariably be flashed.

7. No one indicator is infallible: Technical analysis includes many approaches, most requiring
a good deal of subjective judgment in applications. A number of tests have been conducted
to obtain statistically reliable estimates of the worth of various technical trading strategies.
The results have been inconclusive because of different findings of different researchers
using different procedures and different samples.
The hub of the problem as it applies to indicators is that while they may be crystal clear in
definition and theory, they often break down in practice. Each one of them has at some particular
time been ineffective, out-weighed by a number of other indicators.

Did u know? Technicians seldom rely upon a single indicator; they place reliance upon
reinforcement provided by groups of indicators.
In conclusion, it can be said that technical analysis is essentially an imperfect science and an art.
It helps those who have good skills, of course, not always.

10.7.1 The Future of Technical Analysis

Although there is much in finance that we do not completely understand, technical analysis has
been around for more than 100 years, and it is not likely to disappear from the investment scene
anytime soon. Improved quantitative methods coupled with improved behavioural research
will continue to generate ideas for analysts to test. The well-known financial behaviourist
Warner De Bont, for instance, recently reported substantial evidence that the public expects the
continuation of past price trends. That is, they are bullish in bull markets and pessimistic in bear
markets.
Perhaps within a decade or more, the fragmentation of technical analysis into such a wide-
ranging array of increasingly complex, widely differing formulae will cause a gradual movement
away from the entire quasi-science back to some form of more fundamental evaluation.

Task Prepare a short report on Technical Analysis.

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