Technical Analysis: A Potential Lifeline?

Technical Analysis: A Potential Lifeline? Among people who trade the stock market, the concept of technical analysis produces a wide range of reactions. Attitudes range from "emotional voodoo" to "only fools trade without it" and plenty of ambivalence in between. As investors or traders, we need to keep our minds open to new ideas, lest we miss something that could be quite useful. If you already trade using some form of technical analysis, it's always a good idea to keep sharpening those skills. If technical analysis is new to you, then this column will provide you with a basic foundation to begin your technical analysis education.

Technical analysis simply refers to the study of price action charts, though there are many variations upon that general theme. Nay Sayers will state that there is no way a price chart (or any other permutation derived from it) can be used to predict market action. However, without a review of a stock's chart, would anyone feel comfortable buying or selling? Encompassed within that simple price chart is the whole gamut of market emotions: fear, greed and complacency. Technical analysis is simply a set of tools used with the goal of discerning some sense of order out of this volatile stew.

There is a universe of technical analysis tools out there, with strongly committed adherents to every one. Just as each of us has our own risk profile and preferred trading vehicles, there are technical analysis indicators that better suit certain styles more than others. At its most basic, technical analysis can be just a chart review of a few simple moving averages and volume. More complex approaches can use a combination of indicators (stochastics, MACD, etc.) that have been optimized for individual markets with specialized formulae for triggering a buy or sell alert. We tend to feel more comfortable with tools we understand than taking a "black box" approach, so it is wise to start your technical analysis education with indicators that you can easily become familiar and comfortable with.

As for my perspective on the subject, I have studied and tried countless number of different methodologies. Actually, I still review several different technical studies daily. However, I have yet to find a more dynamic and yet consistent method as Point and Figure charting. This method not only demonstrates clearly defined buy and sell signals, it is the most accurate way I have found to measure the general health of the markets and specific groups and sectors of the markets.

Regardless which technical tools or method you may choose to sink your teeth into, my best advice would be to stay disciplined and put pride away. Pride and greed will put a very quick and painful end to any investment plan. I realize that this is possibly one of the hardest lessons an investor will have to engrain into any investment plan. However, discipline and technical analysis will not only offer you the opportunity to succeed, it can actually provide you with the potential lifeline in successful investing.