Thoughts on Technical Analysis

"It will fluctuate." -John Pierpont Morgan

Yes, this is the memorable quote from the legendary banker himself when asked what the stock market will do. Filled with lingos such as head and shoulders, resistance points and support levels. Buy a stock because it has gone up and sell it because it has gone down. This is the exact opposite of sound business sense everywhere else and it is highly unlikely to lead to success in the financial markets.

In my own experience and observation, looking all over the world, never have I known a single person who has become consistently and lastingly rich by "momentum trading". The downside of capitalism is that when people want to hear snakeoil such as a shortcut to lasting wealth, they will get it.

Beware of those, who tell you that one can make money effortlessly by following some sort of arcane technique that some guru has constructed. Though there were legendary speculators like Jesse Livermore that lived through numerous moments of ultimate riches and bankruptcies, it would be interesting to note how he ended his life. Apparently, he shot himself in the head. Whether or not he was playing a game of russian roulette in his own bathtub would be an interesting thought to hold.

I do not hesitate to declare my belief that technical analysis is fallacious as it is popular. Professor Mandelbrot in his book "The (mis)behavior of markets", has successfully replicated the stockmarket movements using unbiased random number generators that are indistinguishable from real market data. A same technical analysis person would look at such datas and start drawing lines, moving averages and MACDs which holds no true meaning or whatsoever. These witchdoctors of finance
have an ulterior motive when they promote such techniques.

The answer comes from the exhorbitant learning fees and voluminous trading which generates huge revenues for the brokerage firms. Little wonder that these techniques are hugely supported by such firms. If their techniques were to be so easy and effortless, why aren't these guys sitting at home replicating money. Why do they even bother to teach in the first place?

This brings me to the next point as well, a technique that actually works in the market once made popular ceases to work. Get enough people to learn about your money-making scheme, the market then starts to be become efficient in it. Which explains why markets are becoming pretty efficient in traditional valuation methodologies. To beat the market consistently, one will have to a higher order level of skill that is extremely unpopular. It is of high likelihood such techniques are ones which goes against the basic human psychological tendencies. Therefore, they are the very reasons why it will work.