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You can back-test the technical indicators you are using in technical analysis, how much they are effective and which indicator is more effective in various market conditions. It is not necessary technical analysis is not 100% accurate every time or your analysis or interpretation would be accurate every time you predict the stock price movement.
There are lots of uncertainties in the market and various factors work behind the movement of a stock. Economic factors, industry news and company-specific news all affect the stock price movement. In the technical analysis based on chart patterns and past price movement with current trends in stock like volume and technical indicators, the crossover can give the right signal to predict the next move of the stock, but you will be not accurate every time.
The technical analysis is no doubt effective if applied with the right tools in combination with the right technical indicators on the right time phrase chart patterns. Just like accuracy, there is no such instrument available to measure the effectiveness of technical analysis.
But when you earn the profit from your trading strategy developed on the basis of technical analysis, it means it is effective and the ratio of effectiveness can be measured when you back-test, your strategy again and again to know how many times it worked.
Many times market conditions are not favourable and do not move as per your expectations, hence technical indicators might not work and the trading strategy could fail resulting in a loss in trade. Hence, not every time technical analysis needs to be effective, sometimes it is not effective and that could be because of inappropriate analysis methods like using the wrong technical indicator misreading the chart patterns or stock moving abruptly.
The reliability of technical analysis depends on the applicability of the user and trust in technical indicators used to perform the technical analysis. If you have extensive knowledge and experience in applying the tools and techniques that work for you, you can rely on this method of analysis, and if you don’t know about this then it is not reliable for you.
However, in the stock market either you trade with a short-term earning perspective or invest with a long-term point of view. While making the investing and trading decisions you have to use the fundamental analysis and technical analysis or any one of them to pick the best stock that can give you the maximum returns in a minimum span of time.
In fact, technical analysis is more reliable for short-term trading, while selecting stocks for long-term investment, fundamental analysis is used. In the short term, if the broader market is volatile, other stocks also move with the same trend. Hence, for short-term trading, you can rely on the technical analysis, but for long-term analyses the fundamentals.
Nevertheless, the reliability of technical analysis is highly dependent on the quality of data, choosing the right technical indicators, tools or techniques and most importantly, the skill of the technical analyst to utilize and interpret the chart patterns and trends. However, Technical Analysis would be not enough for trading or even for investing.
To get the best results if you use the combination of both fundamental and technical analysis, you will get more reliable indications from your analysis and can formulate the best intraday trading strategies or pick the stocks for the medium to long term.
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