Understanding Technical Analysis
A recent article from Felix Salmon (I noticed via Seeking Alpha), and the comments that followed, made me realize a lot of people are far too ignorant on Technical Analysis (TA). TA can be anything, but it is more associated with reading charts or patterns as per proprietary mechanisms used to play a stock or the market.
Anyone reading this post, from my blog, obviously understands the importance of TA, simply because TA plays a huge role in the trades/investments I post here. A lot more often then not, the trades are winners, so arguing against my use of TA is a mute point.
Notice how I stated ‘MY USE of TA’. I do not state this because of arrogance. My use of TA may or may not be better than how someone else uses TA, but a surrounding principle of TA is how to understand it.
THERE ARE NO RULES OF THUMB with TA. None. Because of this, TA is very difficult to understand and many get burned with it. Many people do not know what indicator to use, and when to use the specific indicators. To make matters worse, TA is not time depended, but price dependent. (This is why some of the trades I post on here take a very short time period… once the target price is achieve, bounce!)
The above paragraph is a huge simplification of the logic needed to use TA. For instance, I read over 100 charts daily. Of these 100, approximately 40 are specific individual stocks I focus on. The rest are index/sector specific charts that give me a better sense of the macro economic back-drop. When I post my trades, I include some relevant TA indicator that sticks out, but the one indiator I mention is not the only thing I focus on. There are more behind the scene info I take into account. How the various information gets correlated is what makes TA very difficult.
Also, TA is not a means to say, stock XYZ will, with certainty rise or fall. It is a tool that allows an investor to reduce the risk of uncertainty, with only an increased probability of knowing if a stock (or the market) will rise or fall. And when we are dealing with markets, entering an investment with an increased probability of the next movement gives an investor a huge advantage.
Anyone who does not understand TA principles brushes it off to the side. Some of my friends in finance call me ‘lucky’. (Completely discounting my time and effort to be successful, and consistency of winning trades… quite insulting, really.) But I always respond…
“Luck is when preparation meets opportunity.”
