Technical analysis has a range of advantages. The main is that, although the fundamental analysis and allows us to estimate the ratio of supply and demand, economic statistics, determine the ratio of stock price to earnings of the company, etc., it does not have a psychological component, so necessary for an adequate assessment of the market situation. Gram emotions sometimes equivalent to a kilogram of facts. As John Manyard Keynes: "Nothing is more disastrous than a rational investment policy in our irrational world." Technical analysis - the only one way to size this "irrational" (emotional) component necessarily present in every market.
A great example of emotions influence may be an excerpt from the book "Japaniese candlesticks." Location - The Chicago Stock Exchange.
"Soybean prices sharply leapt up. In the area of soybean belt in Illinois raged drought. If it does not end in the near future, there will be a sharp reduction in the supply of beans. Suddenly, the window glass struck a few drops of rain. "Look!" - Someone shouted: "Rain!" More than 500 pairs of eyes stared at the window. Rain pounded on the glass stronger, and finally turned into a downpour. In Chicago, there was a rain.
For Sale. Buy. Buy. For Sale. Traders mingled with the roar of thunder outside the windows. And prices for the beans slowly came down, and then, as a tropical downpour, collapsed to the ground.
It's all right - in Chicago was the rain, but nobody grows soybeans in Chicago. At the heart of the soybean belt, at 300 miles south of Chicago, the sky was blue, the sun was shining and still raging drought. But no one cared that the rain is not irrigated soybean field. It was raining in the mind of traders. And that settled the matter. For the market it only matters what the market reacts. The game involves only the thought and emotion.
References
Shiller, R. J. (2000). Irrational exuberance. Princeton, NJ: Princeton University Press.
Nison, S. (1991). Japanese candlestick charting techniques: A contemporary guide to the ancient investment techniques of the Far East. New York: New York Institute of Finance.
