Do charts and technical analysis really work?
Do charts and technical analysis really work? Isn’t that just luck? Don’t fundamentals come out at the end…?
I agree fundamentals are at the core of a company’s value and will out in the end. I am not dismissive of fundamentals and will not scoff at it (as people seem to do about charts when a non-bullish view is expressed).
Charts are about investing memory and people react the same way over and over again. That is the way we are programmed.
Charts and technical analysis are a very important weapon in trading and investing. Trading discipline/money management is another if not more so. The reason charting is important is with fundamentals, true value can take a very long time to come ‘out.’ This can result in stock prices churning for weeks, months or years and is another way of making very good money. Got no problem when investors change their minds to fundamental information change or technical change as clearly that is the right thing to do.
However charts for me show me important support/ resistance points, trading ranges etc and indicators will show when momentum is changing etc and will give clues of when/if positive momentum will return. I work mainly on technicals that’s my personal edge but I am never one to argue against fundamentals far from it. As far as I’m concerned fundamentals drive a company’s share price overall/ long term I can just normally pick up on where the smart money is being positioned in the technicals.(
Charts and technical analysis sometimes also show when companies have an issue that is not known to the masses as charts will sometimes pick up on insider trading so to speak… You can of course talk about whether insider trading happens till the cows come home but I’m sure there are always people dealing with superior information. Technical analysis can help identify what the the real insiders with the real knowledge are doing and when they are buying and selling. This can be identified by various methods and can show distribution and accumulation zones. Of course you can be wrong which is why I don’t just think about a plan A and am always open to other perspectives or other potential situations on a chart.
It also takes the fear and greed out of investing (again in my opinion) as you don’t start asking questions like why has this fallen today by x percent or risen by x percent today. There is beauty in not being bothered whether a share is going up or down – just ride the wave (so to speak) with discipline attached.
All this in conjunction with money management keeps me in check on my wrong trades and doesn’t just lead me further the wrong way up a one way street. Not saying I will get everything right that is a basic acceptance of trading and investing that you will have wrong trades and losses it just managing those losses and keeping them small that perversely allows you to make good money.
I know it’s an old cliche but for me when I trade I have plenty of losses over a year but the key for me is that I have plenty of small wins which cover the small losses and then I have some big wins. These are the trades that make the money. Discipline always keeps my losses small which I don’t allow to get big.
So if you are trading correctly in my opinion losses shouldn’t concern you or worry you as long as the other points are in place with trading discipline.