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Zach Bass (a.k.a Ernie Varitimos) is Chief Bloviator of Investor in the Wilderness. He has 30 years experience as a Tech Maven, Investor and Consultant. Zach has been using Macs since their introduction in 1984, and investing in the markets just as long. His mission is to help guide all level of investors through the Apple Ecosphere and make sense of the markets. Zach's take on Apple, the markets, and life pursuits, will keep your mind tuned.

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Technical Analysis, What it is and What it is Not

July 16th, 2008 • Related • Filed Under
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The first misconception that must be cleared up is that Technical Analysis (TA) is not technical, it’s completely subjective. More of an art or craft. And therefore, the effectiveness and quality of result depends upon the skill of the person practicing that craft.

Secondly, TA is about identifying the extremes of behavior, the seams of events, and then putting yourself in a position to exploit those seams. It’s straight out of the philosophy encapsulated by Sun Tzu’s Art of War.

Thirdly, most professional floor traders do not use TA. Sure they may refer to trends or moving averages on occasion, but they certainly don’t practice it to the degree that non-floor traders, or so-called TA experts do. If they did, it would skew the results. Their craft is highly specialized and tuned to the market within which they work.

TA is all about sizing up the psychology of a mob, the herd mentality. The stock market is the perfect embodiment of a mob. And like it or not, humans, cows, birds and ants, behave in a predictable manner as a group, they exhibit trends, and follow patterns. They don’t do it consciously, it’s just a universal of nature, like the Golden Ratio.

So, in my opinion, TA can work in any environment, stock markets, baseball games, rumbles; whether chaotic or not. And the degree of accuracy is solely dependent upon the skill of the practitioner.

  • kylelong100
    Dear zach,

    could you summarize how the philosophy in art of war applies to exploiting the seams. the outlines of the book appears hard to understand and has a lot of military formations that I do not want to read as of this time.

    thanks
  • IC11
    The main point of Sun Tzu is that the outcome of conflict is determined by foreknowledge of enemy AND ally, acted upon with preparation, speed, surprise and timing. He essentially postulates that the battle is won or lost before the troops are ever deployed because the commanders know what they know and will act accordingly.

    TA is a supplement to doing solid research and due diligence as an investor. Solid research will tell you whether a company is making money, whether it's expanding it's business, and whether it controls intellectual, real or physical assets that you think are a money maker. All of these are most important but they can't tell you for sure whether a stock is going up or down from today's closing price. Perception sets the price on a daily basis. Fundamentals set the the trend over time. Fundamentals are the meat and potatoes that will deliver over the long term.

    After doing solid research, TA may point to entry and exit points that will maximize profits and minimize losses to a degree. TA may get you an edge when everyone else knows everything about the stock worth knowing. A trader is successful if 1 or 2 great trades will provide a 10% return behind 6 flat or loss trades. Someone that makes great trades half the time is a "phenomenon".
    Also, audacity, (guts, decisiveness) are important in conflict/competition. Having the edge of knowing what you want to do after you predicted certain herd behavior minimizes hesitation and gives an extra amount of confidence to stick with a plan and let it prosper.

    TA is the prediction of fear and greed within the herd based on accumulated observations.
  • Thom
    To me TA is like Counting Cards in Vegas. It doesn't guarantee you a winning hand but it greatly increases the odds. I don't believe in one single method to trade, Gann, Fibonacci Waves, Oscillators, FA, TA; they are part of a wise trader's arsenal.
  • lindseylohanscoinslot
    Good post, Ern. Your lead is great -- "analysis" is always subjective. An esteemed mentor told me, "Torture them long enough, and numbers will tell you anything you want them to."
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