Mainly what it isn't

What is technical analysis?

When I first started off learning TA, I thought it was ‘technical’. There is nothing technical about it. Technical tends to mean something very complex. It’s not that. TA is a strange two words. Actually, there is little in the way of analysis with pen and paper. Almost never is a calculator required. Basically you use your eyes. That’s it. You won’t find any charts or descriptions of indicators in this post.

Novices – and I was one – tend to think that it’s about a bunch of indicators, that will some how say which way a market is likely to move. Success in trading has little to do with indicators.

Sentiment

So this is a distillate of what I think and have discovered about TA. Indicators are better used to give an estimate on sentiment in the market. Sentiment is about emotions and feelings of large numbers of people. It may sound strange though, because indicators can’t say what their emotions are. In trading language there are two main sentiments: a) Bullish and b) Bearish – and these are dependent on time frame i.e. whether you’re looking at a 5 min chart of a 1D chart. The power of the sentiment may be discovered using one or more indicators.

  1. Bullish sentiment comprises greed, hope and positive expectation.
  2. Bearish sentiment comprises fear, uncertainty, doubt and negative expectation.

TA can also tell about when a market is losing or gaining steam. Again, it’s not about the indicators themselves. It is about experience in understanding the information that indicators give – then using that information with skill.

Reality v Fantasy – how it works

TA is not about ‘reality’. Rather it is about fantasy. It is about emotions of hope, greed, fear and anxiety. These drive markets beyond ‘reality’. This has never been better demonstrated that in recent moves on the Dow Jones Industrial index (aka Wall Street) – which is followed by several other world stock indices. The DJI made a terrible crash south by 40 percent in about 2 weeks. Then it rebounded madly through the worst part of the COVID-19 assault on America (and other countries).

At 22nd August 2020, Tesla shares did the seeming impossible. When TSLA had returned to $900 short sellers lost about $8 Billion. Few people expected price to reach $1000. Then TSLA charged north to $2100!

Look at the DJI (Wall Street). Fear brewing in that hyperinflated market caused it to be toppled 40% in 15 days when COVID-19 struck. Ridiculous levels of unemployment, trade wars, plummeting GDP (exceeding by several fold anything seen in the World Wars) and political uncertainty did not stop the market from rebounding north. The rebound was driven by hope, greed and fear. Greed was fuelled by the Federal Reserve loosening up monetary policy (and lots of other things). In essence the fundamental value of the market (and its stocks) did not matter. Realists like myself stood in disbelief – so powerful was the disconnect between sentiment and reality.

Concluding

  1. TA is not going to help any new trader to be successful.
  2. Experience in the markets using TA is the greater value.

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