Lets Understand Why Technical Analysis reject the concept of Intrinsic Value?

Technical Analysis, as a methodology for analyzing financial markets, primarily focuses on the study of historical price and volume data to make predictions about future price movements. This approach does not directly consider the concept of intrinsic value, which is a fundamental analysis concept that attempts to determine the true worth of an asset based on its underlying characteristics. Here are the reasons why Technical Analysis tends to reject the concept of intrinsic value:

Subjectivity: Technical Analysis relies on objective data that can be observed and analyzed, such as historical price patterns and trading volumes. This data is considered more reliable and less prone to subjective interpretations compared to qualitative factors involved in determining intrinsic value. Fundamental analysis, which considers intrinsic value, requires subjective judgments about factors like management quality, competitive advantage, and future growth prospects. Technical analysts prefer to focus on quantifiable data, as it provides a more concrete basis for their analysis.

Efficient Market Hypothesis (EMH): Technical Analysis often aligns with the Efficient Market Hypothesis, which posits that financial markets quickly and accurately incorporate all available information into asset prices. According to this theory, the market price of an asset already reflects its intrinsic value, making it difficult to consistently identify undervalued or overvalued securities. Technical analysts assume that any relevant information, including the intrinsic value, is already reflected in the market price, rendering the explicit estimation of intrinsic value unnecessary.

Short-Term Perspective: Technical Analysis is frequently used by short-term traders who aim to profit from short-term price movements. In this context, the concept of intrinsic value becomes less relevant because short-term price fluctuations are influenced by various factors, including market sentiment, supply and demand dynamics, and technical indicators. Technical analysts prioritize identifying patterns and trends in price data that suggest potential buying or selling opportunities in the near term. They focus on the immediate market dynamics rather than determining the underlying value of an asset.

Lack of Precision: Estimating intrinsic value involves complex calculations and subjective assumptions, such as forecasting future cash flows, determining appropriate discount rates, and assessing growth rates. These calculations require making assumptions about future events and economic conditions, introducing a level of uncertainty and imprecision. Technical analysts argue that relying on intrinsic value estimates can introduce more room for error in decision-making. Instead, they prefer to use simple and straightforward technical tools that provide clear signals based on historical price and volume data.

Market Psychology: Technical Analysis acknowledges the influence of market psychology and investor behavior on price movements. Technical analysts believe that price patterns and trends observed in charts reflect the collective emotions and reactions of market participants to news and events. They focus on identifying repetitive patterns that indicate shifts in market sentiment, as these patterns can provide insights into future price movements. In this context, understanding the underlying value of an asset becomes less relevant compared to understanding market participants' perceptions and actions.

It's worth noting that Technical Analysis and Fundamental Analysis are not mutually exclusive. Many traders and investors use a combination of both approaches to gain a more comprehensive understanding of the market. While Technical Analysis tends to reject the concept of intrinsic value, fundamental analysis explicitly incorporates it. By considering both technical and fundamental factors, market participants can form a more well-rounded perspective when making trading or investment decisions.