Technical Analysis IS Like Forecasting The Weather!

[alphatrends1]

Technical analysis is often criticized because it “is great at predicting the past” or some similar argument. Without starting a debate about the debates of a technical vs fundamental approach to the market (which is a foolish argument to begin with) do what works for you! I wanted to point out that we are NOT trying to predict, but to ANTICIPATE what is likely to occur in the action of the stock or market we are looking at. We use technical analysis as a way to objectively (if we are doing it correctly) analyze price action and then come up with a trading plan based on how the stock actually trades. Do you watch the weather? At some point, everyone complains about how “the weathermen never get it right!” If you were told there was a 20% chance of rain you would probably think that the risk of getting rained on is small enough to not take an umbrella with you outside that day. If, however, the weather person saw a 100% chance of rain you would probably determine that the reward of not carrying an umbrella around is not worth the risk of being rained upon. Technical analysis is no different. We are not looking to be perfect but to assign probabilities which help us determine if the risk of getting involved in a stock is worth the potential reward. It adds structure to our plan, how could that be harmful?

[avil_saver36]

Technical analysis is often criticized because it “is great at predicting the past” or some similar argument. Without starting a debate about the debates of a technical vs fundamental approach to the market (which is a foolish argument to begin with) do what works for you! I wanted to point out that we are NOT trying to predict, but to ANTICIPATE what is likely to occur in the action of the stock or market we are looking at. We use technical analysis as a way to objectively (if we are doing it correctly) analyze price action and then come up with a trading plan based on how the stock actually trades. Do you watch the weather? At some point, everyone complains about how “the weathermen never get it right!” If you were told there was a 20% chance of rain you would probably think that the risk of getting rained on is small enough to not take an umbrella with you outside that day. If, however, the weather person saw a 100% chance of rain you would probably determine that the reward of not carrying an umbrella around is not worth the risk of being rained upon. Technical analysis is no different. We are not looking to be perfect but to assign probabilities which help us determine if the risk of getting involved in a stock is worth the potential reward. It adds structure to our plan, how could that be harmful?

In the 20th century, 2 world wars happened resulting in destruction of "old economies" - mainly the British empire and the German industrial/war economy. Medicinal sciences made leaps and eradicated major diseases that decimated human population - so the world population tripled. Manufacturing was automated and globalization was initiated to spread the goods around the world - this made companies who manufactured those goods explode in value. Hence the market produced 10%+ returns and some people keep thinking it can continue ad-infinitum.

Nothing ever grows without stopping/crashing/adjusting/correcting.

I don't know if we will continue seeing 10% or 5% of 2% returns in the 21st century or whether all countries go the way of Greece and the economies are bankrupted to start anew. I am not banking on 10% returns on the portfolio. "Technical analysis" would throw the last 100 years at my face and statistically prove beyond a reasonable doubt this is what I should expect, but 100 years is a blink even for the human civilization (which is not even a blink in the cosmic scale) and in my view, the fundamentals are totally different in the 21st century. The best result for average investors is stagnation and 2-3% long term returns in line with the inflation.