One of the many common criticisms that could be aimed at a charting approach to the market (and there are quite a few): If it works, why aren’t all chartists fabulously rich? It’s a fair comment – but also one that could be levied at the fundamentalists’ approach as well.
The problem with most forms of market analysis, whether from a trading or investing point of view, is there is nearly always an element of subjectivity in the final call to buy, sell or do nothing. Arguably, if there wasn’t this degree of (at least) a little freedom, market movements would be very boring. Everyone would agree a fair price for a share, currency pair or bond and the market would just sit there until some new information came out to change the collective opinion. The reality is of course the polar opposite of this. Markets are fluid and constantly changing – even sometimes only by little amounts – as the tug of war between people and institutions with differing opinions rages throughout the trading day.
All we can do as investors or traders is to try to make sense of this – to have some sort of structure or roadmap to help guide our decisions when it comes to what to buy or sell. For me this is where charting and technical analysis fit in. It is most definitely not a crystal ball that aims to predict the future. Rather, it gives a structure that helps you figure out whether it is buyers or sellers that have the dominant hand at the moment. On top of this, it can also help give an idea of where the market might get to and – the most important use – where to get out if it looks like things are changing. Bearing this in mind, I thought this month it would be useful to look at some recent applications of technical analysis in the real world – one from a shorter term trading point of view, and a couple of others with an investor’s hat on….