Why technical analysis is (usually) hokum.
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Name five biggest, most successful investors you know. How many of them have you heard saying things like, “I bought the stock because it made a J.Lo Bottom” or “I sold it because I saw a Bearish Harami”?
How many technical analysts do you know who are currently selling trading seminars?
If you know where the gold is, get digging. Don’t waste time selling shovels.
If you know where the gold is, get digging. Don’t waste time selling shovels.
By TA here I mean lines on charts and patterns and bands and hanging mans and shaved bottoms and GAN and Wave Theory - the hokum.
Pick a book on TA and within minutes you will feel armed with tools to tackle the mysteries of why stocks go up or down. On the other hand developing even a rudimentary understanding of a business takes weeks and months.
This is the primary reason why TA is appealing to beginners. It’s more accessible. It’s easier to understand. It looks like a shortcut.
Once you have gone through this your commitment escalates because the other road is much tougher, much longer.
Once you have gone through this your commitment escalates because the other road is much tougher, much longer.
Note down the 9:10 and Closing Bell calls on business news channels of some of these experts for a week and you will be cured of the illusion of their expertise.
There are idiots recommending you can make 50% on your trading books using these techniques. Block them.
There are idiots recommending you can make 50% on your trading books using these techniques. Block them.
Not all TA is useless. Patterns don’t drive the fundamentals. They could be, at times, reflections of them. A simple DMA on price volume can flag action suggesting you need to dig further to figure out the underlying reasons.
For a trader managing 150 positions (when depth of idea is low) price actions can help cut losses early. For investors with 10 positions price action is irrelevant (unless it’s a sign of underlying change in fundamentals).
What if patterns are backtested? But 1.) Most people don’t know the difference between in sample and out of sample results 2. There are large firms and huge resources that are being poured into finding any such patterns 3. Such strategies have a short shelf live.
Among all the worthy endeavors that I know of, the chasm between how easy something looks and how difficult it actually is, is the widest for Investing.
You have to choose your pain. Years of effort to understand businesses and develop a circle of competence or decades of underperformance at best and blowouts at worst (unless you can start selling seminars).
You can simply Index (@passivefool ) or go for a rule based factor investing (@anishteli, @Prashanth_Krish). In general I don’t recommend anybody to subject themselves to the agonies of stock picking.
Then there is Astro-Finance. What the hell is wrong with you people?
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