If you have been following me for a while, you know that I’m not too much of a technician. I like the fundamental approach and make good use of timing in sector while investing through asset allocation. When it’s time to talk about technical analysis, I’m not quite sure what to think about it.
As for my personal use, I simply consider technical analysis when I’m about to buy a stock. I check a free report called Trend Analysis giving me a few indicators with a moving average. It basically tells me if the stock is on a roll or in a slump. Besides that, I don’t use any other technical metrics.
Moving Average, Fibonacci, Elliott Waves, Candle Sticks and the Others
There has always been a great fight of ideas between fundamental investors and technical analysis practitioners. On one side, fundamental investors read financial statements and look at “classic ratios”. If you follow my stock analysis template, you are pretty familiar with this investing method.
The technical analysis approach requires statistical data and multiple graphs. According to this investment technique, you should be able to determine the trend of a stock by the analysis of its past movements. You should not only be able to tell if the stock is going up or down, but you should also point out the entry levels (bottoms) and exit levels (summits).
Technically, this means that one could invest in a stock when it’s down and sell it when it goes back up and know approximately when to do it. It’s like reading the stars or doing storytelling but with the stock market.
But they don’t have to read the CEO’s palm to find the stock’s future, they use numerous statistics along with various graphs. You may have heard of moving averages, Fibonacci ratios, Elliott waves, Japanese candle sticks. I once wrote a piece about moving averages and the results are quite interesting (you can read how moving averages work for stock trading). I was shocked to see that this method seems to work but still, I’m not a believer.
Are They more than Believers?
What I find fascinating about technical analysis is not the trading process by itself. To be honest, I like math but doing technical analysis is just too much time to stare at graphs for me. However, what I truly find fascinating about technical analysis is the number of believers.
Everywhere I go, I meet with people who believe in this investment technique. They talk to me about the method to find shapes and trends within graphs. They use moving averages, Fibonacci ratios, Elliott waves, Japanese candle sticks and sometimes Shaman’s magic powder to throw at the screen.
There are so many metrics to follow that each investor builds their own system. They test and try and look at past graphics to see how it goes. But the thing is; I find it pretty easy to explain what already happened. Where were all those people when the sky was falling in 2008?
Can You Really Predict Stock Prices With Graphs and Stats?
Take the method you want, take the graphs you need, but please, tell me something that I don’t know. Maybe it’s just me and I don’t know enough about it, but let me ask you: how come all technical analysis traders didn’t become filthy rich in 2008?
I mean, it was quite hard to predict such a crisis if you were a fundamental investor. However, if you follow trends on the stock market, you could have to be able to predict trends, right? Isn’t it the ultimate goal of technical analysis; predict trends following stats and graphs?
I don’t need someone to explain me what happened on a graph, I need someone to explain me what will happen based on the same graph! You can find technical analysis believers by millions but only a handful of people made a killing in 2008. I’m not even sure if those guys were heavy technical analysis fans on top of that.
This technique wasn’t able to establish a solid ground during the most volatile market, this is why I’m not a believer. On the other hand, fundamental investors like me found great deals during that hectic period. Over the following years, we were able to make a lot of money based on real reasons such as profits and sales growth!
So I’m asking you; do you like technical analysis? Do you do it? How successful are you?
Graphics are useful to give a general historical sense of what a stock or index has been doing up until now. It is absolutely useless to predict the future.
All the different Technical Analyses (TA) are worthless.
TA is BS.
I have recently been attending a number of seminars on technical analysis sponsored by ITrade. Like you I am not a believer but the “experts” say that technical analysis is correct 80% of the time.
My take away is that these tools don’t replace fundamentals but they add to the investor’s kit when he is evaluating a purchase or sale of a stock where the fundamentals have given their signals. I think it can improve timing.
ITrade has a feature on the website that will give all the current technical events for a given stock for you if you just punch in the symbol.
@Dale,
being right 80% of the time seems to be the most awesome batting averaging you can find on the market, right? If Technical Analysis is right 80% of the time, I imagine that most investors using this technique beat the market. Unfortunately, this is not the case…
I’ve attended to a few seminars already and I don’t like the fact they show previous examples. It would be fun to see them calling 5 trades and follow them throughout the weeks. If they would email me back 5 days after telling me that 4 trades out of 5 made profit, I would probably sign-up to their system in a heartbeat, wouldn’t you?
Like you, I am a skeptic of technical analysis. To me it doesn’t make sense to purchase a business based on what indicators such as past price movements, share volume or other random statistics are saying. All that makes sense over the long term is the fundamentals of the company. Is the company growing earnings over time. Does the company have too much risk such as to much debt or not enough customer diversification.
I invest for the long term and I believe technical analysis is pointless for long term investors.
Does anyone know of any academic study that proves the efficacy of so-called “technical analysis”? Does this stuff actually work, or is it just Wall Street voo-doo?
In study after study, technical analysis gets crushed by dart throwing or indexing in the long run. I stick to value investing.
I think you hit the nail on the head when you said millions of people follow it! If millions of people trading my stock believed in the tooth fairy too, and she had an opinion on my stock, I’d pay some attention. Because a lot of people follow the RSI, I can guess if a stock is overbought that many may wait for a pullback. If it gets to the 50-day MA, I expect some buyers who use that tool to enter at that point. While I do agree with some of the “theory” behind it too, I think the cause and effect are often reversed – because so many follow technicals, they end up working precisely because so many make their decisions based on them.
Another reason I like technicals is because sometimes a chart will tell you something before an earnings report does. And I’m not talking conspiracies or inside information…perhaps investors with a good “fashion” sense will start selling an apparel stock long before earnings come out and the rest of us figure out the clothes are now a flop.
I stick to the simplest technicals because they are the easiest to review and I figure have the most following. An obscure technical probably has less followers and less influence.
I don’t think technicals are necessarily about predicting the future, but they can tell you something potentially big just happened. A change in trend or a price level breach is like a sign that says “deer ahead.” Does this mean you’ll hit a deer? When the technicals turn bad it’s a good time to get cautious and take some profits.
Finally I come to this blog for the fundamental analysis, and I have learned a lot so far and appreciate it. I come to stock trading from forex and futures. A nice looking chart may not tell the long term health of a company. I don’t want to get caught up in a high dividend payout ratio unstable company. Fundamentals tell you more than technicals for these. Appreciate your writing and the comments!
So I started following technical analysis a few years ago. I noticed when the whole Euro thing happened that everything went down, and probably by way more, when not everything was really affected. So I did make a killing on Vodafone as it bounced. The BP spill was also overkill, when the total estimated cost was 1-2 times earnings, I mean, there’s no way that would sink a company, yet it dropped to half before rebounding.
So yeah, I follow the market now, not fundamentals. There are generally clues based purely on price and volume. The moving averages are a guide. I don’t trust patterns so much, or fib, or any of that BS. Basically if a stock starts having high volume up days when it’s been relatively flat, or even better hardly went down during a correction, it’s a buy 7 times out of 10 I would say (But you have to buy all 10). If it goes down, you sell. If you see churning or a lot of high volume down days, and no support, especially at the 50 day SMA you sell. It really is that simple.
I think what really differs is time frame. Some people day trade (crazy to me), others do a 2-5 day trade, or more week-monthly (More my preference) or focus more on quarters to years. The fundamentalist is generally looking more long term. But you might be high on Best Buy, but why hold it the last 2 years when it kept having high volume down days? Similarly the last couple months it’s been different, so buy it when you start seeing volume spikes with the price move.
A lot of what I’m working on now is the patience part. I mean I might see some scary stuff on a chart, or it might correct 3-5% after I buy after a gap up, but how long and when do you buy versus sell. There’s a lot of psycology to it, which I think most people are bad at.
But if you start looking at 20-50 charts daily, or perhaps more you should start noticing stuff. And if you can’t be patient, decisive, and handle not being perfect, you will loose money. How many people do you know who really know themselves? Let alone have self control.
So I started following technical analysis a few years ago. I noticed when the whole Euro thing happened that everything went down, and probably by way more, when not everything was really affected. I did make a killing on Vodafone as it bounced. The BP spill was also overkill, when the total estimated cost was 1-2 times earnings, I mean, there’s no way that would sink a company, yet it dropped to half before rebounding.
So yeah, I follow the market now, not fundamentals. There are generally clues based purely on price and volume. The moving averages are a guide. I don’t trust patterns so much, or fib, or any of that BS. Basically if a stock starts having high volume up days when it’s been relatively flat, or even better hardly went down during a correction, it’s a buy 7 times out of 10 I would say (But you have to buy all 10). If it goes down, you sell. If you see churning or a lot of high volume down days, and no support, especially at the 50 day SMA you sell. It really is that simple.
I think what really differs is time frame. Some people day trade (crazy to me), others do a 2-5 day trade, or more week-monthly (More my preference) or focus more on quarters to years. The fundamentalist is generally looking more long term. But you might be high on Best Buy, but why hold it the last 2 years when it kept having high volume down days? Similarly the last couple months it’s been different, so buy it when you
start seeing volume spikes with the price move.
A lot of what I’m working on now is the patience part. I mean I might see some scary stuff on a chart, or it might correct 3-5% after I buy after a gap up, but how long and when do you buy versus sell. There’s a lot of psycology to it, which I think most people are bad at.
But if you start looking at 20-50 charts daily, or perhaps more you should start noticing stuff. And if you can’t be patient, decisive, and handle not being perfect, you will loose money. How many people do you know who really know themselves? Let alone have self control.