Technical Analysis is mathematical analysis of the market based on price action, but not the fundamentals of supply, demand, costs of production, and hundreds of other important factors (fundamental analysis). Many people will tell you Technical Analysis does not work. I disagree. If you understand its limits, it works quite well.
My View of Technical Analysis
- Keep it simple. More variables and more analysis are not necessarily better. I need it simple, or I get lost in the complexity.
- Filter out the “chart noise.” All markets jump up and down on a 5 minute, 15 minute, daily, and weekly basis. Most of the movement probably means nothing. Look at the big picture.
- Technical analysis provides the timing on when to buy or sell. It is not (in my experience) very good at picking what to buy or sell. Look at the big picture fundamentals for what, and use technical analysis for when to buy or sell.
- If you want to buy, based on daily data, make certain the weekly data is supportive; and, if not, keep a close stop. It is easy to buy on a short–term up move just before the long-term downtrend resumes.
- There is not one right answer, one analysis technique, or one indicator that is always correct or best for everyone. Find what works for you.
- If you don’t like it, don’t use it, and find another method. Your attitude and your discipline at sticking to a proven investing and trading plan are more important than what analysis process you actually use.
- Don’t trust your emotions. Trust your charts.
- Don’t give up! Surprises happen. Corrections always happen. Trust the big picture.
- Trust buy signals in bull markets and sell signals in bear markets. Be skeptical of buy signals in bear markets and sell signals in bull markets. (Easy to say, difficult to do.)
- There are many highly competent technical analysts. Read their analysis to self-educate.
Gold Analysis
- Thanks to massive government budget deficits and excessive money supply increases, gold has been in a bull market since 2001 that will last several more years. Trust it. Gold is what to buy.
- Pick your buy points based on technical analysis. Look at the following chart for weekly gold prices, and look at the turning points for my favorite oscillator. An oscillator moves from low (over-sold market) to high (over-bought market) in parallel with prices. Buy low and sell high! The chart and oscillator tell you when to buy.
Seven years of gold prices are shown in the above chart – note that the vertical scale is logarithmic. You can see that the oscillator turned up from low levels (very over-sold) in 2005, 2006, 2007, 2008, December 2011, and June 2012. These points are marked with a circle and an *, and they were excellent buy points. Note that five other minor turns in the oscillator are marked with an “M,” and these were buy points of lesser strength. Now look at the price of gold at each of those turning points.
Clearly, the price of gold was temporarily bottoming at each of those turning points. Every time, except at the minor turn in 2008, gold went much higher in the next several months. Based on the above timing data from this oscillator, do you think technical analysis can be beneficial?
No comments:
Post a Comment