Is there one system of technical analysis that makes all the others crumble in defeat?
If there were, giant quantitative trading houses like Citadel and Renaissance Technologies would not be employing hundreds of PhDs in mathematics, engineering, and computer science to develop hundreds of new algorithmic programs to exploit market opportunities.
But does that mean we should abandon technical indicators as a bunch of inconsistent noise that we can't compete with against the quants' mega firepower?
No way! There are plenty of terrific technical tools and methods that can enhance your stock selection and swing trading. But, first you need to clear away five big myths and pitfalls that get in the way of seeing how to use them.
1) Everything Is Reflected in Price
Even though $8 trillion is indexed to the S&P 500 for fundamental reasons by mutual, pension, insurance, and hedge funds, the pure technician believes that the chart holds all the information you need about supply and demand for a stock. They say you don't need to pay attention to fundamentals because "price tells you what the institutional investors think of the fundamentals."
But using a simple fundamental indicator that measures earnings momentum -- the Zacks Rank -- I can show you how thousands of stocks were first discovered to have potential greatness that led to tremendous returns. Take NVIDIA for example. The Zacks Rank spotted this one as a winner at $25 last January, and again at $60 in late summer before it took off above $100.
If markets were completely rational and everything was reflected in NVDA's price last year, smart investors who combine "technicals" and fundamentals wouldn't have made 2 to 4x their money.
Continued . . .
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Don't Miss This Zacks Rank Enhancement
Time is running out to benefit from a new strategy designed to add even more thrust to Zacks' average gain of +26% per year.
It boosts our nearly market tripling, fundamentals-based stock system with pinpoint technical analysis. You get greater timeliness, accuracy, and profit potential. Also greater focus because it culls down Zacks' 880 best stocks to a manageable 8 to 12. Hurry -- access closes to the public Midnight Sunday, January 22.
Get details on the breakthrough now >>
------------------------------------------------------------------------------------------------------
2) Trend Lines Are Meaningful
Markets are the most complex and dynamic systems on the planet. Indeed, stock markets are social beasts with nearly infinite variables and drivers. So why do "old school" traders still draw straight lines connecting price highs and lows -- over months or even years of economic events and data -- and expect a multi-variable, geometric, non-linear system to obey them?
I predict that one day very soon the venerable leaders of technical analysis societies will abandon trend lines as mathematically absurd.
More importantly, I am busy forecasting which highly-Ranked stocks are lining up with my preferred technical indicators to signal great buying, or shorting, opportunities.
3) The Algos Have Taken Over the Game
As I mentioned in my intro, the quant houses and their computer algos have changed the game a little bit. Since they can move large amounts of money very fast, in and out of stocks with completely-automated risk control, they have no fear... and lots of profits to count.
And they also exploit lots of traditional technical analysis with their hammer-blow strikes, forcing false breakouts and breakdowns, toying with trend-line traders, and manipulating volume and price with off-exchange "dark pool" trades.
But they do not own the game because stocks and investment dollars still follow one eternal trend force: earnings momentum. And that means your job as a trader is to use technical analysis to spot killer entry and exit opportunities in fundamentally-strong stocks.
4) Magic Numbers Exist for Moving Averages
I traded currencies at the institutional "interbank" level for a decade. As an FX market maker providing liquidity to the biggest banks and hedge funds in the world, I traded an average of $100 million per day.
During that time, I ran back-tests with years of price data to find the "optimal" moving average combination for any time frame. Guess what? No combination was consistently better than any other. No magic numbers or Fibonacci sequences made any more difference than simply using multiples of 5 or 10.
In most cases, keeping it simple and consistent with technicals really works because the critical skills involve your research process, execution, discipline and risk management.
5) Trading is Simple and Requires Only a Few Chart Setups
Simplicity works to manage the info-overload of markets. But, there is a big misconception that anyone can walk into the trading arena with a few simple chart setups or indicators and cash in.
The truth is that building expertise in trading can take many years of mistakes, losses, and frustration before you cross over into a realm where you know how to balance all the macro noise and news with your own solid research and discipline.
For instance, did you know that your brain is emotionally hard-wired to break the "golden rule" of trading? "Cut thy losses short and let thy winners run" is so hard because human behavior is predisposed to overreact to green and red arrows as your account value fluctuates. In short, most traders hate to take losses and they grab any gains far too quickly.
So even if someone hands you a top trading system or set of rules, you still have to learn the mental and emotional game, and sort through the jungle of technical indicators, patterns, and advice-givers. I'm grateful I did all that work over the past 2+ decades.
But I wouldn't want to start there again without a guide to show me the way. I hope my myth-busting helped you a little, or a lot, on your journey as a trader.
More Profit Potential for Your Trades
Now if you want to make the most of technical analysis and also believe in the potency of the Zacks Rank, here's some good news:
The two successful approaches have just been combined to achieve the Best of Both Worlds. I will be directing a brand-new portfolio service called TAZR, Tactical Analysis + Zacks Rank.
Of course, you can uncover some of these enhanced trades on your own if you start with 880 Zacks Rank #1 and #2 stocks. There's no better fundamental indicator of what and when to buy. Then cull down the list to an investable few by adding technical signals for even greater accuracy and timeliness.
Sounds simple but as I suggested earlier it takes more than a few chart setups to catch the right trades at the right times. That's where TAZR comes in.
Our goal is land double-digit wins in a matter of weeks, and you are welcome to join us just as I'm getting ready to trigger the first trades. But don't wait to get more details. We can't let too many share our TAZR recommendations, so the chance for access will close this Sunday, January 22 at midnight.
Get ready for our first TAZR stocks right now >>
Good Investing,
Kevin Cook
Kevin, Senior Stock Strategist at Zacks, is a leading expert in technical analysis and what makes markets move. He provides commentary and recommendations for Zacks TAZR.
Image: Bigstock
5 Big Myths of Technical Analysis
Is there one system of technical analysis that makes all the others crumble in defeat?
If there were, giant quantitative trading houses like Citadel and Renaissance Technologies would not be employing hundreds of PhDs in mathematics, engineering, and computer science to develop hundreds of new algorithmic programs to exploit market opportunities.
But does that mean we should abandon technical indicators as a bunch of inconsistent noise that we can't compete with against the quants' mega firepower?
No way! There are plenty of terrific technical tools and methods that can enhance your stock selection and swing trading. But, first you need to clear away five big myths and pitfalls that get in the way of seeing how to use them.
1) Everything Is Reflected in Price
Even though $8 trillion is indexed to the S&P 500 for fundamental reasons by mutual, pension, insurance, and hedge funds, the pure technician believes that the chart holds all the information you need about supply and demand for a stock. They say you don't need to pay attention to fundamentals because "price tells you what the institutional investors think of the fundamentals."
But using a simple fundamental indicator that measures earnings momentum -- the Zacks Rank -- I can show you how thousands of stocks were first discovered to have potential greatness that led to tremendous returns. Take NVIDIA for example. The Zacks Rank spotted this one as a winner at $25 last January, and again at $60 in late summer before it took off above $100.
If markets were completely rational and everything was reflected in NVDA's price last year, smart investors who combine "technicals" and fundamentals wouldn't have made 2 to 4x their money.
Continued . . .
------------------------------------------------------------------------------------------------------
Don't Miss This Zacks Rank Enhancement
Time is running out to benefit from a new strategy designed to add even more thrust to Zacks' average gain of +26% per year.
It boosts our nearly market tripling, fundamentals-based stock system with pinpoint technical analysis. You get greater timeliness, accuracy, and profit potential. Also greater focus because it culls down Zacks' 880 best stocks to a manageable 8 to 12. Hurry -- access closes to the public Midnight Sunday, January 22.
Get details on the breakthrough now >>
------------------------------------------------------------------------------------------------------
2) Trend Lines Are Meaningful
Markets are the most complex and dynamic systems on the planet. Indeed, stock markets are social beasts with nearly infinite variables and drivers. So why do "old school" traders still draw straight lines connecting price highs and lows -- over months or even years of economic events and data -- and expect a multi-variable, geometric, non-linear system to obey them?
I predict that one day very soon the venerable leaders of technical analysis societies will abandon trend lines as mathematically absurd.
More importantly, I am busy forecasting which highly-Ranked stocks are lining up with my preferred technical indicators to signal great buying, or shorting, opportunities.
3) The Algos Have Taken Over the Game
As I mentioned in my intro, the quant houses and their computer algos have changed the game a little bit. Since they can move large amounts of money very fast, in and out of stocks with completely-automated risk control, they have no fear... and lots of profits to count.
And they also exploit lots of traditional technical analysis with their hammer-blow strikes, forcing false breakouts and breakdowns, toying with trend-line traders, and manipulating volume and price with off-exchange "dark pool" trades.
But they do not own the game because stocks and investment dollars still follow one eternal trend force: earnings momentum. And that means your job as a trader is to use technical analysis to spot killer entry and exit opportunities in fundamentally-strong stocks.
4) Magic Numbers Exist for Moving Averages
I traded currencies at the institutional "interbank" level for a decade. As an FX market maker providing liquidity to the biggest banks and hedge funds in the world, I traded an average of $100 million per day.
During that time, I ran back-tests with years of price data to find the "optimal" moving average combination for any time frame. Guess what? No combination was consistently better than any other. No magic numbers or Fibonacci sequences made any more difference than simply using multiples of 5 or 10.
In most cases, keeping it simple and consistent with technicals really works because the critical skills involve your research process, execution, discipline and risk management.
5) Trading is Simple and Requires Only a Few Chart Setups
Simplicity works to manage the info-overload of markets. But, there is a big misconception that anyone can walk into the trading arena with a few simple chart setups or indicators and cash in.
The truth is that building expertise in trading can take many years of mistakes, losses, and frustration before you cross over into a realm where you know how to balance all the macro noise and news with your own solid research and discipline.
For instance, did you know that your brain is emotionally hard-wired to break the "golden rule" of trading? "Cut thy losses short and let thy winners run" is so hard because human behavior is predisposed to overreact to green and red arrows as your account value fluctuates. In short, most traders hate to take losses and they grab any gains far too quickly.
So even if someone hands you a top trading system or set of rules, you still have to learn the mental and emotional game, and sort through the jungle of technical indicators, patterns, and advice-givers. I'm grateful I did all that work over the past 2+ decades.
But I wouldn't want to start there again without a guide to show me the way. I hope my myth-busting helped you a little, or a lot, on your journey as a trader.
More Profit Potential for Your Trades
Now if you want to make the most of technical analysis and also believe in the potency of the Zacks Rank, here's some good news:
The two successful approaches have just been combined to achieve the Best of Both Worlds. I will be directing a brand-new portfolio service called TAZR, Tactical Analysis + Zacks Rank.
Of course, you can uncover some of these enhanced trades on your own if you start with 880 Zacks Rank #1 and #2 stocks. There's no better fundamental indicator of what and when to buy. Then cull down the list to an investable few by adding technical signals for even greater accuracy and timeliness.
Sounds simple but as I suggested earlier it takes more than a few chart setups to catch the right trades at the right times. That's where TAZR comes in.
Our goal is land double-digit wins in a matter of weeks, and you are welcome to join us just as I'm getting ready to trigger the first trades. But don't wait to get more details. We can't let too many share our TAZR recommendations, so the chance for access will close this Sunday, January 22 at midnight.
Get ready for our first TAZR stocks right now >>
Good Investing,
Kevin Cook
Kevin, Senior Stock Strategist at Zacks, is a leading expert in technical analysis and what makes markets move. He provides commentary and recommendations for Zacks TAZR.