Technical Analysis

You might’ve heard of Bollinger bands, stop losses, trading on momentum, timing the market, head and shoulders, moving averages, candlestick charting, lines of support, resistance  and double tops. And what exactly are they? They are all terms used in technical analysis, which is a means of trying to determine future price trends and patterns of stock prices using charts of historical stock price and volume data. Obviously the aim is to predict with a certain amount of certainty, the future level of a stock’s price, and then to take advantage of that by trading on that knowledge.

Now I’ve heard of so called technical analysts outperforming the market, but I’ve yet to hear about the technical analyst equivalent of Warren Buffett, the world’s greatest investor. So where are all the wealthy technical analysts? Who’s the most famous technical analyst? Do they have a high profile?

You see, I want to know if technical analysis works. I’m very skeptical, as you might’ve guessed. How can anyone make a forecast of a stock price, without having some understanding of what the company does, what its future holds, what factors affect the companies performance, and how likely the company is to continue operating or grow? In fact, making a forecast is, by nature, trying to make a prediction about the future. I don’t know anyone who can predict the future accurately and consistently. To my way of thinking, technical analysts may as well consult an astrologer for stocks to invest in.

Have you ever wondered why brokers push charting tools and technical analysis to their clients? Because it promotes trading, which in turn means revenue for brokers.

Stop Losses
As the only way to make a profit is to sell a stock at a higher price than you bought it for (ignoring dividends for now), why would you sell a stock if the price is falling? Surely by buying a stock at a low or lower price, you can make more of a profit? When stocks go on sale (or fall in price), isn’t that the best time to be buying shares? Unless they are rubbish companies in the first place, then stop losses make absolutely no sense to me. Who goes shopping and ignores all the items on sale or at reduced prices? Sounds like technical analysts would be those people. Where’s the logic in that?

How many technical analysts were buying stocks in March 2009, when the market hit a low? Surely none as their charts would all be heading downwards. Meanwhile, value investors were rubbing their hands together for all the lovely bargains that were available.

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