An interesting discussion we have here...
The main assumption of this thread is not quite true - economists do not ignore technical traders and they are well aware of their existence. If you take a book on "Market Microstructure" you'll find that the economists regard technical traders mostly as parasytes. Their classical approach to trading and assets value in short can be summarised as follows.
Every asset/instrument has it's
fundamental value which has to be distinguished from it's "true" value. Fundamental value is a price to which market would momentarily come if every market participant had all the information. Such information that can affect market price forcing it to converge to the fundamental value is called
material information. Difference between gambling and trading financial instruments can be stated in a way that the financials ultimately converge to their fundamental value once the material information is uncovered. The market as a whole is populated by
informed traders and
uninformed ones. Informed traders force the price to converge to its fundamental value. Uninformed traders only create market noise (it includes hedgers and utilitarian traders, like steel importers, or tourists when they convert currency).
Now about the famous "markets can stay irrational longer then you can stay solvent".
If material information is distributed frequently and fairly then, according to the theory, big swings of price away from the fundamental value should not occur very often or very large
And if it happens then mean reversion will unavoidably follow. Regulators therefore should promote good information distribution in order to avoid unfair prices, booms and crashes. Yes, this is the same theory that says markets are efficient. But anyway.
Informed traders are either aware of the fundamental assets values (
value traders) or learn about it through price discrepancies (
arbs). One more category of informed traders -
technical value-oriented traders who try to learn about the fundamental value by recognising patterns of value traders behaviour. As the professional value traders progress they change their patterns and so have to change their tactics the technical traders.
Uninformed traders very often do not derive any profits from the instrument. They use it for their utilitarian purposes (to hedge, to supply, to study markets etc..). But uninformed traders do also include a sort of technical traders for profit -
technical sentiment-oriented traders, who do not try to learn fundamental values but rather steal liquidity when crowds move in the same direction. Their main tool - entry stop orders.
To sum up, technical traders are mostly not bringing any liquidity or information into the common marketplace. They also do not influence much the price and economy as a whole. Price is influenced by material information (i.e. fundamentals) and if it is affected by technical or other reasons - then not for a long. That is the official theory.