A:

This has been a topic of much controversy since the invention of technical analysis, and it remains a very heated debate. A self-fulfilling prophecy is an event that is caused only by the preceding prediction or expectation that it was going to occur.

On the one hand, the tools used in technical analysis - such as support and resistance, trendlines, major daily moving averages and other types of indicators - do seem to have predictive qualities. Often the price of an asset does move in the direction foretold by these indicators.

However, those who see technical analysis as a self-fulfilling prophecy argue that these indicators are "right" only because extremely large numbers of people base trading decisions on these same indicators, thereby using the same information to take their positions, and, in turn, pushing the price in the predicted direction. Others argue that technical indicators can predict future price movements because the basic tenets of technical analysis, on which the design of these indicators is based, are valid and provide real insight into the market and the intrinsic forces that move it.

However, both sides of the debate may be right to some extent. It is true that common signals generated by technical analysis can be self fulfilling and push the price of a security higher or lower, reinforcing the strength of the signal. That said, it's likely this may last only for a short time. Because the goals of participating investors and traders are different and there are hundreds of indicators informing these market players- not to mention fundamental forces that drive prices - it becomes nearly impossible for technical analysis to be self fulfilling in the long run.

For example, many technical traders will place a stop-loss order below the 200-day moving average of a certain company. If a large number of traders have done so and the stock reaches this price, there will be a large number of sell orders, which will push the stock down, confirming the movement traders anticipated. Then, other traders will see the price decrease and also sell their positions, reinforcing the strength of the trend. This short-term selling pressure can be considered self-fulfilling, but it will have little bearing on where the asset's price will be weeks or months from now. In sum, if enough people use the same signals, they could cause the movement foretold by the signal, but over the long run this sole group of traders cannot drive price.

To learn more about technical analysis see the tutorial The Basics Of Technical Analysis and Analyzing Chart Patterns.

RELATED FAQS

  1. Does increasing health consciousness among consumers make investing in fast food ...

    Examine the effect of increased health consciousness on fast food companies, and learn metrics investors can use to determine ...
  2. How will consumer packaged goods companies' stocks react to changes in oil prices?

    Learn about the consumer packaged goods sector and how the share prices of companies that produce CPGs react to changes in ...
  3. How do I Implement a Forex Strategy when spotting a Sanku (Three Gaps) Pattern?

    Understand the significance of the sanku candlestick pattern, and learn a forex trading strategy to employ when recognizing ...
  4. How can I profit from monitoring open interest?

    Find out more about open interest, what the open interest indicates about an option and its underlying asset and how to profit ...
RELATED TERMS
  1. Fintech

    Fintech is a portmanteau of financial technology that describes ...
  2. Indicator

    Indicators are statistics used to measure current conditions ...
  3. Intraday Momentum Index (IMI)

    A technical indicator that combines aspects of candlestick analysis ...
  4. Appraised Equity Capital

    The excess of the market value of an asset over its book value. ...
  5. Asset Valuation Review (AVR)

    A process that establishes an estimate of the value of a failed ...
  6. Derived Investment Value (DIV)

    A valuation methodology used to calculate the present value of ...

You May Also Like

Related Articles
  1. Trading Systems & Software

    How To Trade In The Hong Kong Stock ...

  2. Trading Systems & Software

    Want To Trade Stocks In College? 5 Tips ...

  3. Trading Strategies

    The Pros & Cons Of Being A Trader On ...

  4. Chart Advisor

    Trade These Stocks on a Re-test of Breakout ...

  5. Chart Advisor

    Cup and Handle Chart Patterns Forming ...

Trading Center