The limits of technical analysis

Technical analysis provokes arguments because it is defended and refuted in terms of prediction. It is more useful to look at what it actually does.

What it does well

Describes what happened, compactly. A chart with levels and volume replaces a table of thousands of rows.

Imposes discipline: predefined entry and exit levels turn a decision into a rule — A strategy without exit rules is not a strategy.

Helps choose the moment of executing a decision already made.

What it does not do

Explain causes. A chart does not know why the price is moving.

Predict. Any pattern is obvious on history; at the right-hand edge of the chart it is indistinguishable from a dozen others.

The self-fulfilling part

Some effects work because people believe in them: if many participants place orders at one level, the level becomes observable. That is a real mechanism, but it is limited by the number of believers and disappears with them.

How to combine it with fundamentals

Fundamental analysis answers "what to buy"; technical analysis sometimes answers "when to execute". The reverse order — buying a security because "the chart looks good" — leaves the decision without a basis.

Related: Price and value: how a market quote differs from what a business is worth.