Finance 101 – Technical Analysis

Written by Nicholas Stotz, Investment Research Analyst

Technical Analysis

Whilst perusing the interwebs earlier this week we came across this doozy of a headline from CNBC, which is supposedly “The world leader in business news and real-time financial market coverage”.

bad headline

We were expecting gibberish, and boy did we get gibberish!

poor technical analysis

The kind of analysis above (if you could call it analysis) is known as Technical Analysis, which is an attempt to predict the price of an asset by studying its past price movements. This has been compared to forecasting tomorrow’s weather by studying yesterday’s weather. Technical analysts believe that prices follow patterns, and if you can correctly identify the pattern (the one above is known as a rising wedge) before it plays out, you can make handsome returns.

There’s no intelligent reason to believe that prices follow predetermined patterns based on their previous movements, so why does Technical Analysis still get press time?

It helps that Technical Analysis is full of fancy names. Fibonacci ratios, stochastic oscillators, triple exponential moving averages – you may have no idea what any of this means but gee-wiz does it sound impressive! These impressive terms are then thrown at unwitting investors, who are “let in” on the big secrets to making easy money using Technical Analysis and encouraged to open a brokerage account to give it a go!

The vast majority of investors subsequently lose a bunch of money trading obscure assets such as binary options on foreign exchange rates, which isn’t too surprising as there is no intelligent reason to think that Technical Analysis works. Having lightened their pockets, the investors subsequently close their trading account and the unscrupulous broker moves on to their next victim.

Whenever investors are offered to learn more about exotic investment strategies like these, they should keep in mind that if someone had actually developed a strategy to beat the market consistently, they wouldn’t be sharing it for free on the internet!

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