I’m an investor. I buy mutual funds in my company matched 401k. I also regularly buy stock or gold outside my retirement fund. My investment choices are based on what I see to be fundamentals in the economy.
Many day traders don’t focus on fundamentals. They just look at past statistics and trends in order to predict future trends. Because they make up much of the daily trade volume, the daily market tends to follow their statistical models. If statistics say the market will go down, everyone sells, and it drives the market down. They therefore tend to drive short term price fluctuations. Smarter investors take such opportunity to buy when others are selling considering, long term, stocks follow the fundamentals.
My Question. When guys that rely and perform tecnical analysis make claims that they forsee the market forming an intermediate top, and that gold will tank, etc.. and if these claims tend to be counterintuitive, is it a big crock? From what we Austrians know about mathematical ecnomic models and statistics, trying to predict future economic activity, this statistic and modeling stuff is all a crock. Having said that, is technical analysis itself foolish?
What’s your take on technical analysis? Should investors pay any attention to it?
First of all , if you are trying to outperform historical market average returns in any particular market that you place your money into, you are not investing, but speculating.
Both technical and fundamental analysis may be useful as tools for speculating with money that you can afford to lose, but neither are infallible, which is exactly why they should be used only for “investing” money you can afford to lose.
The bottom line?: nobody can consistently predict future economic performance for any market.
As onebornfree noted, these are not investors, they are speculators. Since human behavior is neither predictable nor completely unpredictable, speculators can indeed make money if they are skilled at recognizing the predictable aspects of human behavior in the market. I think of day traders as the “arbitrageurs of market emotion.” They make money off the stampedes by knowing how to recognize them. It is not entirely unlike the way that professional poker players can make money off less talented poker players even though, in principle, the game of poker is “fair”, that is, nobody should win or lose money in the long term. This is not to say that market speculators are “just gambling” and are not providing a valuable service. By punishing emotion in the market, stock speculators are constantly squelching noise in the market by taking money away from ill-informed investors who are just stampeding with the herd.
I think the answer, when it comes to speculation, is “whatever works.” If they have success predicting moves in the market through whatever voodoo they choose to use, then so be it. However, I think that technical analysis is the worst sort of mumbo-jumbo and any speculator who primarily relies upon it is at least as irrational as his intended victims and will not last long. Just my opinion.
Technical analysis is voodoo, it’s like Bible codes. You draw lines on a graph and predict bottoms or peaks on the basis of things like “inverted-W” or by drawing a long straight line through bottoms/peaks and inferring that the market will reach the line again or not cross the line again and so on. This kind of charting is pure voodoo nonsense.
However, technical data - like trading volume, up volume, down volume, puts/calls, the P/E ratios and so on - are all crucial data points in understanding the value of a particular company. In my view, you should never buy non-preferred stocks unless you plan to engage in speculation since non-preferred stocks are only profitable if they have greater value when you sell them than when you bought them. If you want to own a piece of a company, then you should buy preferred stocks so you can earn dividends. In other words, only stocks that pay dividends actually correspond to “sharing in a piece of the profits” of a company. Preferred stocks also have a speculative component in that they, too, can go up or down in value but other classes of stock are purely speculative in nature.
The most important investing principle is stick to what you know. That’s it. I would say the second most important principle is build on what you already know. If you know how to repair small engines, your time and money may be better spent advertising your skills and working at small-engine repairs in the evenings and weekends than browsing stock charts and trying to pick stocks. Don’t just jump into the stock market because it’s the thing to do. I did that in the Nasdaq bubble and lost half my life’s savings. If you have a skill or knowledge set and you want to apply that to the market, start with what you know and build on that. If you work on a farm, start looking at agriculture stocks and particularly those stocks related to the particular type of agriculture in which you work. And, if you follow Jim Rogers’ advice, don’t buy any US stocks right now, unless you are a professional speculator and you know how to make money no matter what the market does.
Just to note, I have read his books and do follow Jim Roger’s advice. I currently don’t own US stocks and all my holdings are dividen paying stocks or income trust units (mostly commodity related). When markets go down I don’t sell. I just see it as an opportunity to buy more. Having said that, I was out of the market until last November because I was expecting a major economic collapse due to the housing bubble. I had read Peter Schiff’s Crashproof and that introduced me to Austrian Econ.