The beginnings of technical analysis
The basics of technical analysis have been developed by Charles Dow who is known to be the "father" of Technical Analysis. Very rarely does a person come along whose name becomes synonymous with an industry. Charles Dow, however, was such a man. He was one of the two founders of Dow Jones in 1884.
Back then, by drawing on a sheet the high, low and the closing price of each period (day, week, month or year), they obtained a chart depicting the evolution of prices over a given time period. What struck Charles was that regardless of the time frame on which they were recorded, they were always comprised of cycles and trends.
There were fewer and much less volatile stocks at the time, as everything moved slower. At that point in time, the method of drawing charts by hand was simple and effective but was nonetheless quite time consuming and laborious.
In this same period one of the first technical analysis indicators was invented: the moving average. The idea was to add the last 10 values and divide by 10. Each new day's (or week's or month's) numbers are added to the average and the oldest numbers are dropped; thus, the average "moves" over time. The Moving average data is used to create charts that show whether a stock's price is trending up or down.
By reducing or enlarging the quantity of data used, the speed of the MA changes. Although many mathematical formulas have been developed since then (MACD, relative strength, and the parabolic) the simple moving average still exists and is still widely used.
Technical analysis vis-à-vis fundamental analysis
I would not say that fundamental analysis is useless, but rather no one can doubt the usefulness of technical analysis. Today, an investor who does not take into account technical analysis is really missing a great way to further enhance their performance and they become prey to all the information that either arrives too late or is just manipulated.
There is no better proof of the merits of technical analysis than to mark, by vertical lines, the news and results on a one year daily graph. In 90% of the cases, you will discover that the news and the results appear long after the beginning of the upward or downward movements.
The stock market axiom "Buy on the Rumour, Sell on the News" is unfortunately too often true... Yet, we should be aware of the rumour, which is rarely true! Many people work or are involved in companies which are listed on stock exchanges. Suppliers as well as issuers, insiders and the holders of large positions are all individuals with potential access to non-public information about the company. When a news item is released it passes through all the internal levels of the company before it is released to the public through the media.
Before being published, a news item must be written, verified, approved by all authorities and delivered to the press to be published. The information is always spread before it is written. The Securities Act does not claim that nobody can be in possession of non-public information. It argues that we can’t take advantage of it as long as it is not known to the public. How can they control that? It also specifies that information should be disseminated to all investors simultaneously. The stock market investor is the last link of the chain. Learning everything last, they are the butt of the joke.
