Today has been a period of great change for me.
I have ended a two-year period on air each morning… and with that came a startling realization.
I’ve largely missed my daughter each trading day before she went to pre-kindergarten to do pre-market analysis… and today she graduates from pre-K. Wow… times change. I look forward to breakfast with her.
But I’m also realigning my content as a market expert and analyst. And this publication will be the primary place where I discuss the ideas of trading… of momentum… and of digging deeper into the world of technical analysis.
Within the world of trading – it’s quite narrow, niche, and specialized.
The CFA I books – which I own and studied cover to cover – only have a sliver on technical analysis. This submission to the CFA catalog admits that technical analysis is important… but not as much as CFAs and the financial minds center on fundamentals.
Traders, however? Technical analysis is critical to success at all levels.
Today, I want to talk about the importance of technical analysis… and more importantly, the nature of behavioral insight.
What is Technical Analysis?
When we talk about technical analysis, we’re focused on predicting future prices of stocks and other assets based on behavior and information.
It can involve the analysis of historical data, volume patterns, trend lines and much more. Historical prices and volume can tell us a lot about how stocks or other assets tend to move.
Market technical analysts believe that history repeats itself (or rhymes) due to a few simple things: Human behavior, market psychology, and historical bias.
We might look at any of the following to try to predict the future and capitalize on it:
- Chart patterns – like trendlines, resistance and support levels, and other patterns – have the ability to get a crowd of people excited to trade based on these metrics.
- Indicators like MACD, Relative Strength Index (RSI), ADX, and Money Flow Index (the four technical indicators that I use together), can help us understand overbought and oversold conditions, trend movements, and (of course) momentum.
- Volume analysis can help us understand price trends, identify gaps in price support, and tell us the strength of a trend. We also know where bearish and bullish traders are looking to exploit various indicators.
Palm Reading or Something Better?
Now, I’ve read that some people suggest technical analysis is like Palm Reading… the idea that if a specific stock price crosses a specific line, something significant will happen in the future.
Of course, we know that things are random – and we know that the market can go in a different direction at any point.
But there’s an important component of technical trading that a lot of the people who believe in efficient markets ignore: Human behavior.
There is a reality to technical analysis: If enough people believe it to be true (or enough human-coded algorithms are programmed to buy or sell at a specific technical condition), then by default “IT IS TRUE.”
Sure, things will sometimes break above technical lines, and then breakdown – but that’s where it’s critical to engage in active trading risk management.
If you use a moving average as a possible breakout point, then it’s important to set a stop… right back at that breakout point.
Sure, your trade might net a 0% gain, but 0% gains are a lot better than losses (especially in an era of zero-cost trading.)
As I prepare to kick the wheels up, I’ll be discussing a series of risk management tools and trading concepts all next week that will serve as a guide to your success.
On Monday, it’s Memorial Day, and we’ll be taking the day off. But we’ll talk about the importance of active stops in trading on Tuesday.
To your wealth,
Garrett Baldwin
*This is for informational and educational purposes only. There is an inherent risk in trading, so trade at your own risk.
Market Momentum is Green
This chop is incredible, and weekly momentum measurements are largely broken at the moment by algorithms and a lack of trend. This is one reason why we shouldn’t just focus on day-to-day training. If you’re making gains in trading, I encourage you to think long-term and own stocks in Tactical Wealth Investor. I will reveal my latest value and income play next week, and this one is absolutely red-hot.
