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Why Technical Analysis ?
When people find
out I’m a trader, one of the first things they as is “what stock should I buy
right now”? My answer, of course, is that I have no idea.
They want a buy-&-hold investment. They’re wrapped up in their own jobs and
lives, and they wouldn’t notice something like a lower high or a high-volume
reversal as a signal to bail out. They need some diversity, a long-term outlook,
and most importantly, an advancing stock market.
I’m a technical trader with a short-term horizon. If something doesn’t act
right, I can change my opinion in a heartbeat. I may even reverse my position.
The market can stagnate and I can still make money. That’s the beauty of being
short-term. I only have to be right for a limited time, ring the register, and
then move on to the next trade.
When I try to explain why I select trades on a technical basis, several reasons
always surface:
Short-term trades are all about supply
and demand. Technical analysis is founded on price action, not
fundamental trends over the course of a business cycle. I want something that
can pay me today. Waiting for next year isn’t going to work for me. Chart
patterns help me take notice of
support, resistance, and momentum which will tell me whether I should be in or
out of a stock. Knowing where buyers and sellers lurk provides me with
opportunities to make money as I consider the emotions each group may be dealing
with. Only technical analysis can reveal this.
Technical analysis of chart patterns
provides me with good risk/reward setups. Trading
is much more about money management than many give it credit for. By entering
positions where I stand to lose only a little if I’m wrong but make much more if
I’m right, my approach puts me at a big advantage. Finding chart patterns with
a nearby stop-loss allows me to put my money to work with more confidence.
Trading on fundamentals puts me at a
disadvantage. If I
try to convince myself that my research of XYZ Company will reveal the same
information that a multi-billion dollar fund can uncover, I’m kidding myself.
Scouring Yahoo Finance in my spare time and trying to guess what next quarter
will hold for a company will never compare to a research team that’s regularly
in touch with management. The little guy doesn’t have access to the same info as
the big dogs, so the playing field isn’t level.
I can compound my money faster. Technical
trades are short-term in nature, so I’m in and out of the market much more
frequently, compounding my money. Making 5 consecutive trades which each earn me
2% on my money will outpace the return of making one investment which shows me a
10% gain. Considering that fundamentals can take months, quarters, or even years
to play out, I’m convinced that consistently hitting singles in the meantime
will put me in the Hall of Fame without trying to uncover the next Microsoft or
Cisco.
“Good companies” don’t always go up. The
object is to turn a profit when my money is at risk. That means only one thing:
if I’m buying a stock, it better be moving up. I don’t care if it’s a great
company or not, if there’s no demand for it or no new money flowing into it,
then it is not going higher. While a company may be great right now, how long
will I have my money sitting in it before it is discovered? What opportunities
might I miss elsewhere because I’m waiting for this one to pan out? No thanks!
Good investments go up, not necessarily good companies.
Ultimately, I put my capital at risk only when opportunities present themselves,
and preserve it the rest of the time. Trading with a technical approach allows
me limit risk, maximize rewards. |
