Technical Analysis
The elite school of thought called "Technical Analysis." refers to the study of stock price action within the stock market itself. The technical investor could not care less about understanding the business of a company. In fact, the technical analyst will argue that any fundamental information is already priced into the stock, and that what is going to move a stock only has to do with what is going to happen in the future.
The stock market is nothing more than a never-ending battle between those who think a stock should be going down (the bears) and those who think it should be going up (the bulls.) Both parties are constantly engaged in this battle, and while no one may be able to know all the reasons for why each side acts the way it does, the results of their actions are etched clearly, and forever, on a stock chart. Hence the fingerprints that are left behind for further analysis. This never-ending battle matrix of bulls v. bears has been occurring for centuries leaving traders with a significant historical record of how these past battles evolved and how they played out in the global arena. And while there might have been amazing changes in technology, the fundamental drivers of human primal instinct behaviour in the stock market has not changed. Traders are still plagued and possessed by fear and greed today, just as they were 100 years ago.
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The Stock Market will always be driven by a whirlpool of emotions,
oscillating between extremes of panic and greed. |
Investor Emotion through Market Cycles
Chartists
Technical analysts are sometimes referred to as chartists because they rely almost exclusively on charts for their analysis. Technical analysis is applicable to stocks, indices, commodities, futures or any tradable instrument where the price is influenced by the forces of supply and demand.
By examining price action to determine which force is prevailing, technical analysts interpret the following specific criteria:
1. What is the current price of the security ?
2. What is the price history of the security ?
3. What is the probable direction of any future price movement.
The actual price is the end result of the battle forged between the forces of supply ( Bears / Sellers ) and demand ( Greed / Buyers ).
“Chartists are Cheaters. Why? Because charting is a shortcut form of fundamental analysis. It enables a chartist to analyze a stock or an industry without doing all the work of a fundamental analyst. How does it do that? Simply by telling the chartist whether the fundamentals of a stock are bullish or bearish by the direction its price is moving. If the market perceives the fundamentals are bullish, the stock will be rewarded with a higher price. ’’
Technical analysis is more an art form than a science. As an art form, it is subject to interpretation. A trader requires to be flexible in their approach and each investor should use only that which suits his or her style. Developing a style takes time, effort and dedication, but the rewards can be significant.
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Economists used to dismiss as mere snake-oil salesmen technical analysts who use simple patterns in past data to predict share prices. Now, some think that stock charts can reveal valuable information. |
[The Economist, August 19th, 2000]
The Benefits of Technical Analysis
There are many benefits to the technical investing approach, including, but not limited to:
1. Ability to profit in both a bull and a bear market.
2. A strategy with over 100 years of solid historical performance.
3. The ability to maintain the opportunity for significant wealth creation while minimizing risk at all times.
The Foundations of Technical Analysis
The most famous work done in technical analysis was begun by a gentleman named Charles H. Dow. Over 100 years ago, he left a local small town rag to found a newspaper called, "The Wall Street Journal." Mr. Dow, in 1884, made up an average of the daily closing prices of eleven important stocks and began to record the fluctuations of this average.
Rolling out the Random Walk theory long before it was so named, Mr. Dow believed that everything known about the future business of a company was already priced into its stock. Therefore, he felt this tool was the best predictor there could be of future economic activity. And, by choosing the most important stocks in the United States to compose his index, he could determine where the economy of the country was headed. Mr. Dow's work led to what is commonly referred to as the Dow Theory. This Dow Theory, which started to include investigations into the trends and cycles of the stock market, created the foundation for what we interpret today as technical analysis.
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