Markets are emotional, not cerebral

I have been a technical analyst — or chartist, if you prefer — for 55 years, since reading that the stock market is the nearest thing to the classical economists’ definition of the perfect market, where price is determined purely in accordance with the law of supply and demand. More buyers than sellers, price rises; more sellers than buyers, it falls.

Shares frequently lead separate lives from the companies they represent. Buying and selling is guesswork, but can be educated or uneducated; technical analysis being the former. Short on theory, technical analysis is long on empirical observation. Freed from unreliable intellectual and emotional preconceptions, the technician is well qualified to forecast what prices are likely to do. Technical analysis is the triumph of experience over hope; fundamental analysis, the opposite.

Fundamentalists look at what they think will affect price in the future. Technical analysts just look at price: the balance between supply and demand, including all knowable facts and fantasies.

Most people think markets are cerebral. Wrong: they’re emotional. Thinking is what causes the largest losses. The price chart is a graphic representation of a psychological state, constantly updating market-players’ recognition of fundamentals and their willingness to discount the future.

Why do people buy? They think price is going to rise. Why do people sell? They think it’s going to fall. ‘People’ and ‘think’ are what matter, and all you need know is what people are thinking. When looking at price, you are not looking at real value; there is no such thing. It isn’t real value that drives markets but people’s perception of future value. Technical analysis is concerned not with certainty (there isn’t any in this business) but with probability: getting the odds on your side.