by
Ken Kozar
Copywrite 2004 - http://spot.colorado.edu/~kozar/TechAnalysis.html
Seems that the Judge believes that Wall Street lies and an investor would have to be stupid to believe otherwise. So where do we turn for help? CEOs?
CEOs tell stories. They hype and get people excited. This is why John Chambers of Cisco Systems is called "Sunshine." Others call the "hypers" on CNBC "pinochio." Witness that Enron, Global Crossing, etc. CEOs were paid to be cheerleaders and always see the bright side of things.
Nobody Cares About Your Money More Than YOU Do!"
What is Technical Analysis?
Charts Map the Crowds! "the markets are ultimately based on human psychology, and by charting the markets you're merely converting human psychology into graphic representations."
-Al Weiss in "The New Market Wizards," by Jack Schwager, page 183.
Support and resistance levels indicate where a stock price has been before and whether this price was supported or resisted. If buyers think a stock is too expensive, they will stop buying. If buyers think a stock has upward potential, they will buy more until it gets too expensive.
For the most part, you cannot hide price and volume action. It is the true story of a stock's worth, not what some human who has a reason for a stock being lower or higher telling you what it is worth.
For a stock price to go up, there must be more buyers. If everyone who intends to buy has bought, the price will stabilize or fall and the early/lower price buyers will start to sell. This sets up a movement either up or down in a stock.
You must learn to accept failure. You will not always be right. In fact, some very successful stock traders are right less than half the time. But they still make much money. They are like a casino. Yes, the casino loses and pays out a portion of its intake. This is like you taking a loss. But you must keep the percentages of amount of winning proceeds greater than the losing proceeds.
Buying and holding does not work. Contrary to what some say (Barber and Odean), you cannot make money by buying and holding in a falling market. Studies that show that buy and hold is the best policy were done in a rising market. You only want to date a stock, not marry it.
Technicals are Based on Facts
You are not on the information frontier. Others will know things before you do. They will know if their analysts are going to upgrade a stock or sector. They know if there is a large institution either going to buy or sell a large quantity of stock. How do you know what is happening? The charts will tell you.
Patterns Lead to Profits:
"I believe my most important skill is an ability to perceive patterns in the market. I think this aptitude for pattern recognition is probably related to my heavy involvement with music. …..Musical scores are just symbols and patterns. …..practicing an instrument for several hours every day helps develop discipline and concentration - two skills that are very useful as a trader.
….. A musical piece has a definite structure: there are repeating patterns with variations.
Analogously, the markets have patterns, which repeat with variations. Musical pieces have quiet interludes, theme development, and a gradual crescendo to a climax. The market counterparts are price consolidations, major trends, and runaway price moves to major tops or bottoms.
You must have patience as a musical piece unfolds and patience until a trade sets up. You can practice, practice, practice, but you're never going to play a musical piece perfectly, just as you're never going to buy the low and sell the high on a trade. All you can hope to do is to play a piece (or trade) better than before. In both music and trading, you do best when you're relaxed, and in both you have to go with the flow."
- Interview with trader Linda Bradford Raschke in "The New Market Wizards," by Jack Schwager, page 307.
Putting all the pieces together
"The Technical Analysis Approach" Technical analysis focuses on supply and demand, using charts and computer programs to identify and project price trends for a stock or for the market as a whole. The logic behind technical analysis is that although economic factors are of great importance in determining stock prices, so are psychological factors, such as greed and fear.
Technical analysts believe that these two factors, greed and fear, reinforce trends in the market. Greed pushes investors to put their money in the market when the market is rising, and fear has them pull their money out if a downturn appears. In effect, no one wants to be the last aboard a market upturn, and no one wants to be the last out if the market is failing.
Technical analysis takes a number of forms, including the interpretation of charts and graphs and mathematical calculations of trading patterns, all aimed at spotting trends or direction of stocks. Technical analysts might look into the past for trends or patterns that give some clue as to where the investors might be heading. In addition, they might look for price levels where stock prices might get stuck. These price levels are referred to as resistance or support levels.
Unfortunately, although technical analysis may appeal to the novice investor, it's been found to be of little value. Although there appear to be distinct trends in past movements of the market, the problem comes in identifying these trends before they surface. Moreover, some of these patterns have been useful in the past, but without any economic logic behind them, what's to ay they'll continue to act as good predictors?
In short, technical analysis should be viewed as something to avoid because it encourages moving in and out of the market, which is dangerous, as opposed to simply buying and holding stocks.
Keown, Arthur J. Personal Finance: Turning Money into Wealth, Third Edition, Prentice Hall, Upper Saddle River, NJ, 2003, pages 425-426.
--- a popular personal finance book even used at CU!
KK-October 2004