Does technical analysis 'work'?

October 6, 2006 10:47 AM

I'm a buy and hold investor who wants to develop an interest in technical analysis.

Specifically, I want to put aside $n and try making some purchases purely on technicals. Is this a good move? I'd also like to know if buying stocks using technical analysis necessarily equates to 'trading'?

Additionally, does this method work? The only thing I really know about TA comes from what I read long ago in the Motley Fool's investment guide-they discredited this method in favor of researching a company's fundamentals.

Can anyone recommend some good websites/blogs or other places to learn about this?

posted by neilkod to work & money (19 comments total)

This book (Random Walk) was made for you.
posted by found missing at 10:56 AM on October 6, 2006

ok a couple disclaimers that should have gone into the OP: I've done well with my stock decision-making so far. I'm also not looking to trade stocks. I also have mutual funds, CDs, etc. Additionally, I'm not looking to get-rich-quick(tm). I'm just interested in learning new schools of thought with regard to investing.
posted by neilkod at 11:00 AM on October 6, 2006

Clearstation has some good pages under the education section. They are getting a bit dated now (many other sites have more indicators and such), but it is a great starting point, and the community there seems to be generally well behaved.

Don't put money into technical trading right away - spend some time papertrading first. If it looks fun and profitable, put money in. If not, stick to your buy-and-hold strategy.

There are many flavors of technical trading. some people make lots of money doing it, others lose money. It depends a lot on your willingness to learn, manage risk, and personal temperment.

I (and others) have said this before in other threads: if you have money burning a hole in your pocket, spend it on books. You can easily spend $1000 on a pile of good quality books. You will learn far more from that $1k than you will by trading the same amount. You can also get a lot of good free information on the web.

Ultimately, do lots of research and find out what works well for you.
posted by b1tr0t at 11:01 AM on October 6, 2006

I'm also not looking to trade stocks.

This doesn't make any sense - you already trade stocks. Do you mean that you don't want to your trading to be hevaily speculative?

As soon as you are buying and selling, you are trading. Doesn't matter if you hold for 50 years, you still made a trade.
posted by b1tr0t at 11:02 AM on October 6, 2006

b1tr0t I've typically equated 'trading' to buying and selling within a few days. Not something I'm looking to do.
posted by neilkod at 11:05 AM on October 6, 2006

right - so you just want to stick to low-frequency trading, and avoid day trading and other high frequency strategies. That is a good idea. I know several people who make good money trading on periods of two weeks to several months. They wake up early and run their analysis every day, but don't place many actual trades.
posted by b1tr0t at 11:12 AM on October 6, 2006

What about the Graham stock valuation methods? You can't be purely technical but it's pretty good for long-term holding.
posted by geoff. at 11:13 AM on October 6, 2006

Back in Business School, I got a lot out of The Technical Analysis Course, by John J. Murphy.

Still don't believe in the techniques myself and don't use them but a large body of traders swear by them and hey! It takes at least two different viewpoints to make a market so it would probably be a worthwhile read.

I applaud your curiosity - you can hardly disregard a technique if you're not familiar with it. And who knows? It might just work for you.

In any case b1tr0t makes a good point about reading and Murphy's book is probably as good an introduction to TA as I've seen.
posted by Mutant at 11:26 AM on October 6, 2006

Whoops! Meyers not Murphy; whilst waiting out some Meta-latency I was reading reviews of others TA books, but Murphy's book does indeed seem interesting...might just pick it up myself.
posted by Mutant at 11:30 AM on October 6, 2006

Edwards and MaGee wrote THE book on TA (Technical Analysis of Stock Trends). Also consider getting some software like Telechart that is a great tool once you learn what it is you want.

While I look at the charts, do not forget that at the bottom of every sea are ships that were relying on charts. Charts have their limitations.

I would also recommend you read Reminiscences of a Stock Operator by LeFevre which talks about stock and commodity trends intertwined with the story of Jesse Livermore's trading life.
posted by JohnnyGunn at 11:32 AM on October 6, 2006

I'm just interested in learning new schools of thought with regard to investing.

William O'Neil's book How To Make Money In Stocks is a good place to start learning about technical analysis and chart reading: pivot points, cup-and-handle patterns, etc.

My feeling is that technical analysis works better for short-term traders and that value investing the Ben Graham way works better for the long-term investor.

That being said, it is possible to make money in the stock market using almost all known investing styles. It's a question of finding out what style suits you the best (as b1tr0t said above) which is what you're doing here: researching other schools of thought.

Happy Investing, and Good Luck.
posted by Fuzzy Monster at 11:36 AM on October 6, 2006

Seconding b1tr0t's suggestions on spending a lot of time and money on books before proceeding.

Most small investors get mediocre average returns because they are working off of inferior knowledge with inferior tools, and are paying much higher commissions to do so. All of which add up to the real professionals reaming them.
posted by Tacos Are Pretty Great at 11:43 AM on October 6, 2006

The Motley Fool forums is a good place to start; although their various publications encourage you to focus on fundamentals, I've learned alot from other members about TA (especially about timing purchase decisions within a buy-and-hold strategy).

Bill Cara's blog (and comment threads) has also taught me lots about TA.
posted by RibaldOne at 12:00 PM on October 6, 2006

one book i would recommend (for starters) is the encyclopedia of technical indicators.

it's packed with hot chart-on-chart action.
posted by garfy3 at 2:01 PM on October 6, 2006

I'm with Warren Buffet who said "I realized technical analysis didn't work when I turned the charts upside down and didn't get a different answer."

You may want to do this with fantasy money before committing real dollars.

You will always hear anecdotal stories about people who "made some money" using TA, but real question is whether they could have made more money using fundamental methods or indexing.
posted by JackFlash at 2:23 PM on October 6, 2006

You should pick and choose from the MTA CMT syllabus. Also, here and here.

For the record, I believe in the weak-form EMH. YMMV.
posted by Kwantsar at 5:17 PM on October 6, 2006

On line you might also take a run through The Apprenticed Investor for some easily me timanaged introductory TA education.
posted by ptm at 9:00 PM on October 6, 2006

I'm a professional investor, and I don't know anyone in the market who makes money from charts alone on a consistent basis. My opinion is that much of the more complex technical analysis done is voodoo, and will not make you money. For what its worth, this is the consensus view amongst professional investors.

However some of the simpler chart techniques do have their uses. I do use them to time entry and exit from positions. Charts can tell you something about levels at which buyers and sellers are operating in a given stock, and also something about the weight of buyers versus sellers. However this information is short term. New buyers and sellers arrive.

I also know a very successful hedge fund manager who will not buy a stock that he otherwise likes if the chart trend is not favourable. He uses charts as a filter for his fundamental ideas. His view being similar to the keynes quote: "the market can remain irrational longer than you can remain solvent".
posted by Touchstone at 2:04 AM on October 9, 2006

Touchstone, I know plenty of money managers who use charts to time trades, but I've never heard a professional investor claim such a thing. Do you manage other people's money?

PS Keynes never said that.
posted by Kwantsar at 7:39 PM on October 9, 2006