Why does a discussion about technical analysis bring out such anger in some people? I’m always so amazed at how quickly a form of market analysis gets dismissed by certain members of the investing community. Is there something criminal about analyzing price action or market sentiment that I’m not aware of? How do people manage risk in a portfolio without studying prices? It must be extremely difficult, if not impossible. And if you’re one of those people that figured out a way to do it, great. I won’t ever tell you to stop if it works. But I’m more of a keep it simple stupid, common sense sort of guy. If I want to manage my risk, I’m going to look at supply and demand to find areas where demand deteriorates (or supply if we’re short). To me that’s as basic a solution as getting glass of water if I’m thirsty, or eating something if I’m hungry.
The reason I bring up this anger is because I see it whenever a discussion about technical analysis comes up in the in the media, both social or otherwise. My friends Phil Pearlman and Josh Brown each put up blog posts this weekend about Technical Analysis. The Comment section in these posts are hilarious. And it’s not just in these blog, I’ve witnessed this for a long time. It’s amazing how misinformed some people are about what technical analysis is and what it isn’t.
Guys, backtesting MACD and not coming up with a profitable outcome does not mean technical analysis doesn’t help manage risk. Think about how ridiculous that sounds. First of all, I am a full time market technician and have never used MACD once. And even if I did, it would be just one of many many data points that I would consider before making a decision. Anyone who uses one indicator to make all of their decisions will inevitably go broke. And this may seem like common sense, but you’d be surprised at some of the things I read out there.
Let’s go over one more time what technical analysis actually is. As I mentioned before, it is NOT looking at one indicator and making all trading decision based off it. It is NOT looking for cup and handles and head and shoulders patterns. It is NOT voodoo with circles and lines. It IS the study of the behavior of the market and its participants. I am a technician. At our shop, we look at all asset classes, not just stocks, but commodities, currencies and fixed income markets. There is information that we generate from these intermarket relationships that I promise you will not be found in a balance sheet, income statement or company conference call. We look at market sentiment, and not just retail investors, but institutions, sell side analysts, commercial hedgers and financial advisors. There are trends in seasonality that if you ignore, you’re only hurting yourself. And all this before we’ve even looked at the most basic form of securities analysis: supply and demand.
Guys, Supply and Demand has run the world since the cavemen. This is not voodoo. If there is more demand than supply, guess which way the asset in question is going to go? Is this not common sense? Am I missing something? Is there something crazy about watching price action to find areas where demand clearly dominates supply? Or recognizing that every time a stock, or Oil, or Aussie Dollar gets to a certain price area, the sellers come in hard? These are signs of an abundant amount of supply. I think these are pretty basic solutions to risk management. No?
I know this argument will never end. We’re all human and stuck in our ways. I for one, will never have any respect for the Florida Gators or the New York Jets. I just won’t. Never have, never will. I guess those journalists, fundamental analysts, and academics that have criticized the act of analyzing price to manage risk are going to continue to do so. There’s nothing anyone can do about that.
But please, for goodness’ sake, do yourselves a favor and at least get it right when you criticize it. Do your homework about what it is that you’re even talking about before you start arguing against it. Like Biff said in the movie Back to the Future, “You sound like a damn fool when you say it wrong”.
Technical Analysis, behavioral finance, the study of the market, whatever you want to call it helps manage risk. That’s it. We’re not doing magic tricks. But ask yourself a question: does momentum in something moving eventually slow down before it reverses? So isn’t it obvious that we should probably look at momentum in the stocks we own to make sure that it’s not slowing down? I don’t know. Call me crazy. I’m almost speechless sometimes at the lack of common sense in some of the things I have to hear or read.
And can someone please explain to me why people get so angry about technical analysis? Where does this hatred come from?