PassionSaving.com

Technical Analysis for Non-Dummies

The Dismissive Attitude that Some Evidence Toward Technical Analysis Is a Turn-Off.

I know little about technical analysis. I don’t practice it. I don’t recommend it. But hey! Where would I be today if I let little things like that stop me from spouting off my opinions on an investing topic?

Technical Analysis for Non-Dummies
We all have too many books on our reading tables and an insufficient number of quiet hours to work our way through all of them. It’s not likely that a book on technical analysis is going to work its way to the top of my pile anytime soon. So technical analysis is probably going to remain a topic that I do not know much about.

It’s not the point of this article to tell you that. The point of this article is to tell you that, despite that, I make an effort not to be overly dismissive of technical analysis. It could be that I am wrong. It could be that my life experiences caused me to get all wrapped up in studying things other than technical analysis when it is technical analysis that would have opened all the doors a lot sooner.

I don’t think that’s right. But it could be right. I’ve run into a good number of people who follow investing strategies other than technical analysis and who feel a need to engage in all sorts of snide putdowns of those who follow it. That inspires in me doubts about the strategies being followed by the ones putting forward the snide putdowns. Why so defensive, Mr. Man?

My take is that technical analysis is probably not worth your time. But I would sure like to hear from you if you have strong feelings otherwise. My secondary take is that I hope that I never reach a point where I have so many chips riding on an investing strategy that I feel a need to direct significant amounts of my limited human energies feeling superior to people who follow an investing strategy other than the one I favor. I find the putdowns of technical analysis often put forward by those believing in the Efficient Market Theory a big-time turn-off.

Many Smart People Believe in Technical Analysis.

Those who ridicule technical analysis engage in an act of supreme arrogance, in my assessment. Can those of us who are not believers really be so certain that those who follow this approach have nothing whatsoever to teach us? If they have even a small something to teach us, we should be trying to learn from them. Every little thing we learn can bring us to financial freedom sooner. Is that not cause enough to open our minds just a wee bit? I sure think so.

There was a fellow who posted on a discussion board about technical analysis (his screen-name was “MannFM”) who was one of the smartest investing analysts I have encountered. He might have been wrong. He sure wasn’t dumb. I read a lot of the guy’s posts. I didn’t understand everything said because he discussed all sorts of technical matters. But I am able to tell whether someone is making an intelligent and well-structured argument even when I do not fully appreciate many of the points being made. You’ll have a hard time convincing me that technical analysis is for dummies after my experience seeing how strongly this very intelligent fellow believed.

This fellow lost a lot of money following technical analysis. He said so on the board. That didn’t make me dismiss what he said. If anything, it made me wonder whether he was onto something. I’ve seen lots of Big Shot investors come to discussion boards saying that they know it all and anyone who knows things other than what they know cannot possibly know much. This guy possessed the confidence it takes to acknowledge losing lots of money following his favored investing strategy (he said that he learned from his mistakes and now knew better how to employ technical analysis successfully). That impressed me.

It could be that he’s just too dumb to admit when he’s wrong. That’s the other possibility.

How do you know which it is? It’s not skills particular to investing that tell you that. It’s people-watching skills that tell you that. To the extent that I possess people-watching skills (I do not believe that I am entirely lacking in this regard), my read is that there were things that this guy could teach me if I could spend more time with him. I don’t always have that feeling when listening to some of the harsher critics of technical analysis.

The Significance of Technical Analysis Is That It Focuses on the Emotional Side of the Investing Project.

The Four Seasons of Stock Price Changes

The primary reason why technical analysis inspires dismissive reactions from the sorts of investors who buy into the Efficient Market Theory is that technical analysis focuses on the side of the investing project that the Efficient Market Theory ignores — the emotional side. The psychological reality is that the personality types who find appeal in the idea of dealing with the emotional questions by denying that they exist freak out over the idea that there are other investors getting a jump on them by exploring those very issues in depth. If there is anything at all to technical analysis, then there isn’t much to the Efficient Market Theory. These two schools of thought are naturally at odds.

Or are they?

I am no fan of the Efficient Market Theory. I often refer to it as the Efficient Market Disease. That’s because it ignores the emotional questions. I am not able to imagine any way that an investing approach that ignores at least 50 percent of what affects stock prices can work in the real world. So I should be a big believer in technical analysis, no?

I don’t know. I like the idea that technical analysis takes the emotional side of investing seriously. That’s the draw for me. However, I am not too comfortable with the idea that human emotions are sufficiently predictable that market turns can be identified through the examination of patterns and charts. The tendency of technical analysis to rationalize the irrational leaves me skeptical.

What I am saying here is that there are at least three types of investing personalities: (1) a type that is drawn to technical analysis; (2) a type that is drawn to the Efficient Market Theory; and (3) a type that sees strong and weak points in both. My general belief is that it is these personality matters that are responsible for most of our beliefs and that few of us are truly going with what is “proven by the studies,” as we so often pretend to be. I think that most of us are kidding ourselves about the level of proof there is backing up our investing ideas.

I don’t think that we can get around that. I think that the best we can do is to become sufficiently aware of it to cause us to open our minds a bit to ideas that do not come naturally to us. I think it is healthy for me to struggle at times to have some sympathy for ideas that arise from a belief in the Efficient Market Theory. I also believe that it is healthy for me to struggle at times to have some sympathy for ideas that arise from a belief in technical analysis.

I feel confident in saying that the issues examined by believers in technical analysis are important ones. I doubt whether they can pull off what they say they can pull off. But they are struggling with questions that matter and applying a good bit of intelligence to the task. I respect them for that.

Buffett Doesn’t Believe in Technical Analysis and I Don’t Know What That Means.

I have seen too many investing experts come to possess far too much unwarranted confidence in their understanding of the subject matter for me to allow expert opinion on any topic influence me too much. There are exceptions to that general rule, however. There are some who have been right about so many things that the fact that they say something is alone enough to give me pause in making an argument otherwise.

Stock Market News

Warren Buffett is in that group. Warren Buffet does not believe in technical analysis. He says that he studied it a great deal in his youth because he was anxious to learn about any strategies that could make him money. He came away an unbeliever.

That impresses me. Buffett is the real turtle soup and not the mock. Plus, he is not speaking out of arrogance if he went to the trouble to study technical analysis. Buffett has at least given technical analysis a fair try. His opinion should count for something, in my view.

I don’t think it is absolutely dispositive, however. Buffett has a personality, just like everybody else. Perhaps he just cannot get his head around technical analysis. Perhaps there’s just no click there, despite his intelligence. Buffett’s wife once said that, when he was asked to get a bowl for someone to throw up in, he came back with a collander. He’s plenty smart. But you know how it is with them darn humans.

Do I really believe that Buffett is wrong re this one? No. I don’t think it hurts for me to go to the trouble to construct the argument, however.

Technical Analysis Sounds Too Good to Be True.

One big problem with technical analysis is that it sounds too good to be true. If it worked, it would be possible for lots of people to make a living trading stocks. I believe that skepticism re this possibility is appropriate.

Still, I don’t know that the idea should be dismissed out of hand. There are people who make a living acting in movies. There are people who make a living catching fly balls. There are people who make a living writing novels. There aren’t many people who are good enough at these activities to be able to make big incomes engaging in them. But there are some. Perhaps that’s how it is with technical analysis. Perhaps it works for a rare sort of person, but not for the vast majority.

If that’s the case, the rest of us should not be following technical analysis. But perhaps we should be tapping into insights developed by people who do follow it. Perhaps we are hurting ourselves with our dismissive comments. I have seen so many cases in which people hurt themselves by being dismissive of the ideas of others that I cannot help but wonder if that might be what is going on here.

I am obviously not an advocate of technical analysis. It is certainly not my thing, at least not today. But it is even less my thing to make fun of technical analysis. My spidey sense tells me that the sort of investor who feels so superior as to laugh at others needs to take a hard look in the mirror before posting his (and it’s almost always a boy who is guilty of this, isn’t it?) next insincere smiley face.