A bright yellow taxi zipped past the red light and barreled down Broadway, passing 3 inches in front of me. Phew, that was a close one. But it was my fourth day in New York City’s financial district, and I’d escaped taxi death about 10 times by now.
I was getting used to it. The city was pumped with so much adrenaline that New Yorkers seemed to be in constant fight-or-flight mode. (I kind of loved it.)
A Professional Analyst
So, as an honorary New Yorker for the week, I shook my fist at the taxi and darted across the street. In front of me stood the New York Institute of Finance, where systems expert Michael Carr was giving a class on technical analysis.
I didn’t want to be late.
Mike had invited me to sit in on his class, and I welcomed the chance to gain more insights from the Chartered Market Technician who essentially wrote the book on relative strength (a powerful momentum indicator).
Here’s what the class’s objective was: “Learn how to apply technical analysis as a trading methodology using tools based on price action and other technical principles.”
Basically, I was there to learn why stock charts look the way they do. I learned to ask: What does price action reveal about investor psychology … and how can I use this information to predict coming price moves?
Instead of focusing on what caused an event, I was looking at the event itself. I was learning how actions can lead to further actions.
Sounds pretty handy, right? I could read investors’ minds by looking at a stock chart? Sign me up!
Well, the class turned out to be just as handy as I thought. And if I found it helpful, I thought you would too. So today, I wanted to give you a brief, behind-the-curtains look at the world of technical analysis.
5 Keys of Technical Analysis
To start, here are the five basic assumptions of technical analysis:
- Price is determined by supply and demand. This is the fundamental economic idea that when supply surpasses demand, prices fall. When demand surpasses supply, prices rise. It’s a well-known concept, but it’s good to have a reminder.
- Price discounts everything. This simply means all information — past, current and even future — is incorporated into the markets and reflected in a stock’s price. Some experts criticize technical analysis, saying the field only considers price movements and ignores fundamentals. But this idea means that even fundamental factors are priced into the stock.
- Prices move in trends. This is key! This tells an investor that a stock is more likely to continue a past trend than move unpredictably. And trends can exist in varying periods, from intraday to multiyear. Just pinpoint the trend, and you can use it to make a winning trade.
- History repeats itself. This is because human nature is unchanging. For example, the dot-com bubble was similar to the 1637 Dutch tulip-bulb market bubble in terms of investor psychology. Knowing history means being prepared for the future. I suggest studying some of the big bubbles throughout history to get a leg up on the average investor!
- Emotional decisions are affected by previous emotional decisions. This explains technical concepts such as support and resistance. A support price is where buyers come into a market. A resistance price is where sellers become more active. These are prices where investors “anchored” their expectations.
This fifth point also explains behavioral finance concepts, such as loss aversion. For example, did you know that the pain of a loss hurts more than the joy of a gain? In fact, studies show that losses hurt 2.5 times more. This illustrates why many investors hold onto losing positions — and why some even add to losing positions — when they should cut and run.
It’s these ideas that have helped Chartered Market Technicians (the masters of technical analysis) make such successful systems.
So I hope this helps in your own trading — at least opening up the sometimes-secretive world of investing a little more. If you’d like to hear more, I can get into the average investors’ unconscious biases next week. Just let me know by writing me here.
The world of technical analysis has allowed traders to routinely pocket quick, triple-digit gain after triple-digit gain — all while limiting their risks.
So I urge you to start reading up on it. Or simply follow a trading system that incorporates some elements of technical analysis.
In fact, one is about to launch.
At its best, the system would have allowed you to take a stake of just $5,000 … and use it to generate more than $321,557. So if you’d like to learn more about it, we’ll have an invitation-only online broadcast at 1 p.m. EDT on June 12.
To reserve your seat, click here now.
Just secure your spot by June 11 at midnight EDT. After that, attendance will be closed.
Catch you next week.
Managing Editor, Banyan Hill Publishing