Regarding stock trading, there are broadly two methods investors follow. Fundamental analysis and technical analysis.
It is considered that fundamental analysis is for long term investment, where the investor would check the balance sheet of the company to invest in it or not. On the other hand, techincal analysis does not bother itself with balance sheets or ledgers , but on charts which depict the history of the stock so far.The trader analyze the stock history and decide when to buy it and when to sell it. The philosophy behind this technical analysis is that there will be pattern for every stock.
Now my philosophical problem, is it right to follow technical analysis or not. How can we be sure that there is a pattern and the stock follows the pattern in the future too.
Long back i denied the idea of "Circle of life", "History repeats itself" , " horoscopes can tell everything" etc etc. There is a reason for me to deny so. According to mathematics, if we toss a coin fifty times in a row, and if we toss it again, the probability of head and tails will still be fifty-fifty. It implies that, the result of game cant be predicted based on the history. My life is an example too. Since kindergarden, people consider me an above average student. I have never failed
in school or in inter. But that didn't stop me to fail in the B.Tech first year From first semester of engineering to the last but one semester, i failed a few subjects in every semester. But that history, could not stop me to clear the last semester exams in one go , achieving the degree in four years.
If we have to judge a person , or guess the result of an outcome, based on past, then there wont be any "giving second chances". It closes our minds and make us stupids. Lets take the example of Indian cricket team. It got defeated many times in a row, but won again. Australia won many matches, in row, but some point it failed. The same goes with horoscopes, astrology. If i had to believe in technical analysis to make a quick buck, i have to believe in "Circle of life" things to avoid being an hypocrite.
Later, i read an article, which eliminated that dilemma. The author explained the essence of technical analysis i.e those charts does not just show the price of the stock each day, they actually show the psychology of other investors regarding that stock. The upper limit and lower limit does not just show the performance of the company but the belief of the investors in that stock. Now that made sense. Its human psychology. We, people, as a whole, are not better than sheep. Something in our mind tells us to follow other than making a new path, so , we follow what others are following. And as humans we have mental inertia, i.e its hard to change our belief system, unless some forces us to believe otherwise. If a stock is going up, that means, the leaders, in this case, the fundamental analysis people, start investing in it, and others start buying it because the stock is going up. When the fundamental analysis people start selling the stock, because the stock value went beyond the book-value, people follow them and sell it like its end of the world, so the stock value goes down, till again a fundamental analyst finds it good to buy. Its a pattern, not of stock, but psychology of people.
However, that lead to another problem. In technical analysis i am making decisions based on opinion of other investors but not on the performance of the company. Its like judging somebody based on opinion of others, without having first hand experience, making me one of the sheep, who buys and sells based on decision of others. I guess, thats the easy way to live in this world, without wasting much energy on thinking and analysing.
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