Microblog: Technical Analysis classroom | Stock Gumshoe
On another thread, Clomu asked about the validity of technical analysis (candlesticks, specifically, I think). Alan, our CEO, asked me to copy it to this thread, so here it is. Maybe I’ll get a raise! :>)
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As so many people have asked about so many experts, “If he is so good, why ain’t he rich?”
My understanding about any school of technical analysis is that (a) It tries to give a pictorial indication of the overall sentiment about a stock ( or a sector or the market ) of all investors at the present moment; (b), At best, the various methods work only some percentage of the time, and (c) , No matter which system you use, it cannot predict if the next price, or series of prices, will be higher or lower than the latest price. I suppose if any “signal” works at least 60 % of the time, one learns to put at least a little faith in it, especially if the signal can be confirmed by another type of indicator.
Having said that, I daily chart the 20, 50, and 200 day moving averages (and sometimes the Williams Pitchfork) in Excel on all of the stocks I own, and most of the ones in which I am interested. So far, the number of stocks in which this information has been helpful to me has been very small. But I keep doing it in the hope that my investing judgment will get better.
Elsewhere, our CEO, Alan Harris, has mentioned the “Death Cross” and the “Golden Cross”, where the 50 day moving average falls below the 200 day moving average ( supposedly very bad news !! ) and vice versa ( supposedly very good news !! ). These are new ideas for me, and I’m going to be watching for them. I already have a problem with them, though, because the actual trend started 50 days before the cross-over point.
But what do I know? Please take anything I say about investing with a pound of salt and throw half of it over your left shoulder to keep the losses behind you. :>)
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Here’s an addendum to the original post:
I counted the various types of signals (moving average, Bollinger Bands, RSI, MACD, etc.) a few months ago. If I remember right, there are over 60 different signals. I think the two most important things about them are:
1. There is no one signal that works all of the time. Find one or more that work(s)s for you a high percentage of the time. I have yet to start actually using any, but when I do I will want one that works over 66 % of the time for me. That means that 33 % of the signals will be false, but the ratio of good to bad will be 2 to 1.
2. Do not rely on just one signal. Look for a confirmation from something else. The something else might be a technical signal that is based on an ENTIRELY DIFFERENT method of calculation, or it might be a news story, or it might be how the sector is doing and where the stock fits into that sector. Or it might be comments from several of your friends here at SGS. The more confirmations, the better.
By the way — I had never paid any attention to volume until Margaret clued us in on its importance I will start factoring it into my thinking.
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Microblog: Technical Analysis classroom | Stock Gumshoe
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