| Technical analysis of stocks is no panacea - it has its strengths
and its weaknesses. Some weaknesses are disillusionment,
failures to predict, paralysis,
risk delay, and subjective bias.
What can be done? Read on below...
Disillusionment
Not all strategies work all the time. It may be that
any strategy or technique runs into a bad streak. It can happen
that an investor is unaware of this inevitable situation and simply
stops trading. There is a balance as to when you discover a strategy
is a bad strategy and to be abandoned, or it is a good strategy
and isn't working at the time.
Failure to Predict
It is generally understood at a technical analysis
indicator may predict a price rise and that rise may fail to occur.
This is a failure of prediction. What is less understood
that there may be a price rise that the indicator failed to predict.
This is a failure to predict.
Paralysis
You can spend way too much time looking for trends,
trend retracements, changes in values, changes in relationships
between values, et cetera, et cetera, ad
nauseum but you really only have from close of market to the
next market opening to make a decision. Adding to this is the reality
that there will always be another resistance level to overcome
or from which to retreat. Or, another support level to stop a
downward slide or break through it on a downward trend.
Risk Delay
It may be that by the time a series of particular events
has produced the detected price pattern the risks taken to produce
those events have already been rewarded by a price rise. If true,
then an investment after the pattern is established may not be rewarded
by a similar price rise.
Subjective Bias
To a carpenter all tools look like hammers. To a surgeon
all problems can be solved by surgery. No insult to either profession.
Our opinions are all shaped by our education and experience. If
you are a market bull you'll see
a pattern indicative of a market rise. Conversely if you are bearish
the same pattern may have a negative implication. Looking at the
same chart different people can honestly see differing implications
for market direction and risk.
So what can be done?
Overcome disillusionment
by paper
trading until you develop the confidence to overcome a streak
of poor performance. Paper trade through a good time and bad time.
Don't risk real money on untested strategies.
Reduce negative impact of failures to predict
by using multiple indicators in the generation of selections. Remember
that the market is not reality, it is the reflection of the perception
of reality. The events of the cosmos continue to unfold outside
of market hours. The analysis of price movement and volume cannot
truly anticipate the unknown.
Overcome paralysis by making a checklist
of what you consider to be due diligence in the examination of every
single investment. Make sure that list can be completed within the
time allowed.
Consider risk-delay penalties in the
overall context of your risk tolerance. Yes, the majority of risk
may have already been rewarded. Does that mean there is no reward
remaining? Maybe, maybe NOT! Don't guess. Set your parameters, do
your diligence, paper trade your strategy and see for yourself.
To resist subjective bias be a honest
with yourself. Seek opposing viewpoints that are well supported.
Become educated to see more sides that your own.
Summary
Technical analysis isn't perfect, but its imperfections
can be reduced so that as a tool it has much more strength than
weakness.
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