Even Long-Term Investors Can Benefit from Short-Term Technical Analysis
Posted by admin on July 7, 2011
Investing
Many long-term, “buy-and-hold” investors often scoff at those that rely upon technical analysis and the benefits that these methods purport to produce. Academic studies tend to refute these benefits, but the active trading profession would not persist as long as it has if price arbitrage opportunities in our trading markets were not available for the taking. Analyzing previous pricing behavior can produce predictive models that yield better than a “50/50” result when applied appropriately in trending markets. The art form depends on selecting your most opportune moments and applying a disciplined approach to all actions taken.
Technical Analysis, or “TA” for short, has been with us for hundreds of years. It relies on three simple principles as the foundation of its research studies:
1) Price is the ultimate measure of all known information and its impact on supply and demand forces in the market;
2) Pricing behavior tends to move in trends;
3) Historical pricing patterns tend to repeat themselves.
To the regret of many politicians and government officials the world over, all market prices fluctuate, sometimes second-by-second, seemingly replicating the ebbs and flows apparent in nature when various forces interact. This “volatility” is the basis for the trading profession, because without volatility, there would be no apparent trading opportunities to leverage for profit. From these basic assumptions, “TA” has evolved in complexity over time, but today’s technology and software tools instantly do all the heavy computational work, leaving adequate time for interpretation, strategy development, and eventual execution of a trading plan.
TA is flexible and can be effectively used in all trading markets, but its uses are easily apparent in the world of foreign exchange where the average forex platform provided by industry brokers is a sophisticated example of how far the art form has progressed. Technical indicators abound, and other software can help with pattern recognition that may produce potential trading set ups. There are also alerting services that use TA to broadcast signals to their user groups, leaving much of the tedious research effort to computers and freeing up a trader’s time to focus primarily on execution strategies.
Long-term investors tend to rely more on fundamental analysis, much like a banker that reviews credit information for small business loans. Much of this focus tends to be on prior financial statements and economic reports on the respective sector of a selected company’s involvement. Care is given to screening for undervalued securities, but little care is given to the current “technical” state of the company’s stock pricing charts. Technical analysts, or “chartists”, can quickly assess if an anticipated entry point is optimal from a market perspective, similarly to a business cycle not favoring small business loans. Timing the market is not the objective, but preventing an entry at an overbought level can produce immediate benefits that do last for the security’s holding period.
Long-term investors would be wise to leverage TA benefits when entering any market.
