WHY TECHNICAL ANALYSIS
There are two schools of thought regarding investment in equities on the stock exchange – technical and fundamental.
Few brokers are taught technical analysis. All are taught fundament analysis.
The latter is understanding of a company’s balance sheet and the industry therein. It requires an understanding of accounting procedures and what is standard for that particular industry – trucking, bioscience, entertainment, etc. It means you or your broker must have that knowledge.
Large brokerages have analysts who specialize in an industry or even a particular stock to make recommendations to the brokers who pass it along to their clients. Experience has shown that few of these analysts every say “sell” at the top of the market; they usually holler ‘sell’ when the stock is making new lows. In the mean time they maintain ‘hold’ while it is going down. Sorry to be so negative, but that is the truth of the matter.
Technical analysts are not as knowledgeable about a company’s inner workings as brokers and analysts. They don’t care about the fundamentals. It is the price actions of the stock and as well as the price actions of the sector of that industry.
Why do stocks go u up? A recent study showed that 49% of the move was due to the industry group, 31% due to the general market and only 20% to the company itself. Then the investor will try to find the strongest stock within the group.
I’m being a little facetious when I say ‘good luck’, but that is where technical analysis will speedily find the one or 2 best issues in any group.
How? Technical tools are available to everyone. There are literally hundreds of indicators for both long and short term trading. Some like to call it investing, but the real naked truth is it is a form of gambling. Las Vegas East is another name for Wall Street. If you don’t learn how to play the game you don’t have a chance.
The basic Bible of technical analysis since 1948 now in its 4th edition is “Technical Analysis of Stock Trends” by Edwards and Magee. Every library will have a copy to review. Today there are many web sites that have free (note I said free} information. Many brokers have tutorials on technical analysis and will allow paper trading until the trader becomes confident enough to use his money.
Some of the basic tools are Moving Averages (MA), Moving Average Convergence Divergence (MACD), Stochastics, Relative Strength Indexes (RSI), Rate of Change (ROC), chart pattern recognition and many, many more. Don’t try to learn them all. Become proficient in 2 or 3 and then wait for those situations to occur.
Technical analysis will buy near the bottom and sell near the top. I did not say “at”.
Let me warn now. Most brokers do not know technical analysis and will try to dissuade the investor. My advice. Change brokers. Technical analysis is a tool that MUST be in every investor portfolio.
Al Thomas’ new book, “If It Doesn’t Go Up, Don’t Buy It!”, 3rd edition, has helped thousands of people make money and keep their profits with his simple 2-step method.
Copyright 2010 Williamsburg Investment Co. All rights reserved.