Sunday, 17 July 2016

Technical Analysis - A Beginner's Guide

Past performance is no guarantee of future results.

Charts do not predict the future from the past.

They seek to find current buying and selling patterns in the past and plan their own course of action once those patterns end.

It is based on probabilities, not forecasting.

Why does it work?

Chart patterns are formed by the buying and selling actions of people, and people tend to act in a similar manner when faced with similar situations.

Some blame this on a self-fulfilling prophecy.

If enough investors believe in the significance of a chart pattern ending then they will act, and thus their actions will assure that the assumed result will occur.

But investors may not act the same way this time and the charts will tell us when that is the case quickly, before losses begin to mount.

Note that technical analysis expects to have losses.

It is in minimising those losses and recognizing when a winner has more room to go that there is success - read consistent profits - in a portfolio.

No other method of analysis includes as a standard feature the possibility that things will not work out as planned.  

Charts need not be adversarial with other forms of analysis.

Charts can be used as tools to help with the other forms of analysis.

Whether it is a sanity check on the fundamentals, or something that tips us off on changing fundamentals in a sector, charts will enhance investing results.

Charts are tools, not crystal balls.

They help investors find good investments and just as importantly avoid bad ones.

A picture is worth a thousand words and charts can be put into action to help investors make and keep money.

Ref:  Michael Kahn

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