davenport47

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    • Mon Jan 7th 23:14 PM | Rating: 0 0
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      Why Technical Analysis is Nonsense
      The false expectation that TA ought to be a scientifically accurate system for predicting stock prices may indeed kill you in the real world. First, you should get a fundamental idea or make an observation (such as the bursting of the housing bubble) and then, and only then, use charting as a tool in trying to deal with how that idea may play out in the stocks.

      My own use of TA (as a tool) is to note when a price trend has reversed. A trend reversal may be called "a change in fundamentals" as well as "a bearish chart pattern" or whatever you like. A chart is simply another way of tracking what's going on with the stock price. Why the stock price is rising or falling is important, so I disagree with those who think TA should be used in a vacuum. I didn't bail out of my short positions, for example, when the Dow went over 14K. How come? Because I decided that the market had become "irrationally exuberant"! That's was an intuitive observation, given my real-world knowledge at the time. Later, I "called" the top of the rally on Oct. 11 using TA methods.

      I also rode out all the calls for bottoms in the homebuilders because the textbook TA *coincided* with what I knew of unwinding bubble markets---that they fall far more, and have far greater consequences, than anyone first realizes. I listened seriously to Yale economist Robert Schiller, who knows far more than I about FA in housing markets.

      The mistake that people make is to attack the straw man of pure TA, as if one should expect it to provide something NO system of trading or investing can provide---which is scientific predictability. Malkiel, in A Random Walk Down Wall Street, quotes studies that show neither TA nor FA does better than chance in predicting stock prices over the short or intermediate term. And I suspect---though I am not certain---this is true. But some combination of the two, along with one's own insight---not to mention good money management---may be the ticket. It has been so for me since I began studying these matters seriously.

      On the issue of hired technical analysts, major brokerages such as Merrill Lynch and Goldman have them. You can verify this any day on CNBC when a guest is introduced as a chief technical analyst for Merrill Lynch, etc. So I have no idea about the information here. Perhaps there is an investment culture that eschews the idea of TA. That's fine with me, for one needs people on the other side of a trade made using TA.

      One disadvantage of TA is that you usually miss part of a move by waiting for confirmation. Yet that's how Jesse Livermore made his millions. "Never anticipate" was a motto of his. This means that you usually load up only when a price breakout or breakdown is confirmed. And if you get a failed signal, you get out quickly to minimize your losses. Sometimes one's intuition overrides textbook confirmation.

      Also, when someone refers disparagingly to TA as "an art" not a science, I wonder why that's a problem. TA is a tool that should be used in conjunction with one's knowledge and experience.
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