Is technical analysis an art or an exact science? I think the truth is somewhere in the middle. Senior analysts in Tradenet’s trading room often ask me whether it’s worth buying this or that stock, and my answer could very well be that it’s actually worth selling the stock. If technical analysis were an exact science, there’d be no room for two differing opinions on the same stock. By the way, even within the science of economics, disputes are abundant, and what one economist considers a solid company will be viewed as unstable by another.
If that is how things operate, you will surely be asking yourself what function technical analysis holds. At the start of this chapter, I noted that the market is like a giant of tremendous proportions, and in a constant state of change. Technical analysis helps create order in the chaos and allows the trader to read the market through stock prices and chart action. Moreover, from the moment traders learn how to read the market, they no longer need to examine it constantly from the technical perspective in order to understand what they see; they simply understand (rather than ”read”) the market.
Technical Analysis – A Tool we Need Until we Don’t
Technical analysis is therefore a tool that ripens in the trader’s awareness: we use it to learn how to read the market, and once we know that, we no longer need it except in instances when reading is difficult. Traders who understand the market can identify market directions at early stages, long before the regular technical signals, and trade accordingly. Obviously, once the technical picture is completely clear, it’s clear to everyone, and at that point, you no longer have any advantage.
While technical analysis is not an exact science, there are technical analysts, many of whom are well-known, that frequently fail in their analyses. Young traders seeking to coerce technical methods onto the market will fail time after time. When the market is collapsing, there is no significance to technical support levels; when it is euphoric, technical resistance levels are broken without a fight.
Some technical analysts have given a bad name to the field, and threaten the livelihood of astrologers and coffee-grounds readers. Among such analysts, you will find charts with so many indices, lines, and figures that you no longer know whether you're looking at a graph or a map of the constellations. Technical analysts who provide forecasts for several months ahead are not professionals, but charlatans.
Leave the Box– Trade Manually
The laws of technical trading are known to all trading parties. The specialists and market makers in the New York Stock Exchange know your stop loss order point and your entry orders points, and will often take advantage of this information for their own benefit. Take this into account when you're trading. The resistance line is not a solid wall, and the support line is not stable ground. This is why we first talk about “support levels” and “resistance levels” rather than precise science. Young traders in the trading room often tell me they have sold a stock because it broke the support level, while experienced traders and I have held the stock and in the end, profited. Don’t let your hand be too easy with the mouse. Remember that trading is a battle of the minds and always involves two parties: buyer and seller.
This is also why I guide my traders not to place a stop order, but to wait for that moment when the stock reaches the stop and then exit manually. The specialists and market makers know where most traders’ stop orders are, and use them to their own advantage.
To learn more about the stock market and to begin your own journey toward financial independence, visit Meir Barak's site Tradenet and check out his book "The Market Whisperer."
DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer