This requires the patience, objectivity and discipline to acquire a financial asset at a time of depression and gloom, and liquidate it in an environment of euphoria and excessive optimism.
The level of pessimism or optimism will depend on the turning point.
Short-term peaks and trough are associated with more moderate extremes in sentiment than long-term ones.
Knowing the technical characteristics to be expected at all of these market turning points, particularly the major ones, allow you to assess them objectively.
Technical analysis in Practice
In practice, it is impossible to buy and sell consistently at exactly the turning points, but the enormous potential of this approach still leaves plenty of room for error, even when commission costs and taxes are included in the calculation.
The rewards for identifying major market junctures and taking the appropriate action can be substantial.
In the days of the old market, participants had a fairly long time horizon, stretching over months or years. There have always been short-term traders and scalpers, but the technological revolution in communications has shortened the time horizon of just about everyone involved in markets.
When holding periods are lengthy, it is possible to indulge in the luxury of fundamental analysis, but when time is short, timing is everything. In such an environment, technical analysis really comes into its own.
Originally, technical analysis was applied principally in the equity market, but its popularity has gradually expanded to embrace commodities, debt instruments, currencies, and other international markets.