Why both Technical Analysis & Fundamentals fail

 Technical analysis of stock trends Technical analysis of stock trends: why Technical Analysis and Fundamental Analysis fails  

Individuals have been lead to believe that to succeed in the markets they should embrace mechanical systems (Technical analysis) or fundamental analysis. If the premise is wrong then no matter how hard you look, you will not find an answer.  (Mainstream) Technical analysis is based on a fixed set of rules and in that sense does not differ much from Fundamental analysis. Fundamental data is provided in a standard format, so anyone that has access to that data will arrive at the same conclusion.  The same holds true for technical analysis that is based on a fixed set of rules.  The only way to win is to see things that most people will not see, and so anything that is standardised will not work.  The mass mindset wants to feel safe and deems that there is safety in numbers, but when it comes to the markets, there is only danger in numbers.

This brings the theory of paradoxes to mind, which states that one will get exactly the opposite of what one chases.  At any given time in the markets, the masses are always on the receiving end of the stick.  Another name for the masses is cannon fodder.  Those ruled by the mass mindset have only one function; that is to be milked like cows.

Technical analysis of stock trends is usually based on systems that are  Mechanical In Nature

Technical analysis of stock trends is mostly based on systems that are Mechanical In Nature

The word mechanical already informs you that at some point the system is going to fail; to succeed in the market you need adaptive systems, and that can only come about if you add Mass psychology to your methodology.

” One of the definitions by Merriam’s Webster online dictionary for the word Mechanical is “done as if by machine: seemingly uninfluenced by the mind or emotions.”

Pay attention to the keywords influenced by the mind or emotions, and that vital piece of data informs you that these systems will fail.  Once emotions start to make the talking money does the walking.

The market is nothing but a cesspool of the worst human emotions out there, so using a system that is based on rules invented by the mind of one of these insane persons is not the smartest route to take. As stated the market is a cesspool of emotions; lust, greed, power, hate, fear, etc. swirling through the markets like a hurricane. Therefore you need to understand the emotion driving the market; understand the emotion, and you come one step closer to identifying the trend. Again, every system needs to incorporate an element of psychology, and you are dealing with human emotions and not mechanical computers.

By default a mechanical trading system has to fail; all mechanical objects eventually break down or fall apart.  It is interesting to note the choice of words marketers use to push their systems out, and despite seeing this data, the masses embrace these systems as if they are the holy grail.  It’s almost as if we have nothing but a secret programmed desire to lose syndrome ingrained deep with our psyches.

Technical analysis of stock trends: why Technical Analysis and Fundamental Analysis fails  

Technical Analysis and Fundamental Analysis can’t detect emotions, so we don’t understand why the experts focus on either one only.  The study of crowds is essential if one is to gain the upper hand in the stock markets.

Look at the words investors use to define sentiment; Bullish and bearish.  These are two of the most stupid, dumbest, irrational and easily angered animals and yet they aptly describe the mass mindset. Let’s take it a step further; individuals that are infatuated with one sector invent repulsive names to separate them from the pack. One example “Gold bugs”. Why not Gold Dolphins or Gold Gods. Most humans react in an adverse way to bugs, the first thought that springs to mind are to crush them.

The language used in the markets is also very revealing;  scalp, plunge, up thrust, perfect bottom, down thrust, flip, climactic sell-off, etc. Adding insult to injury is that the masses are perfectly happy to pass this rubbish to the next generation. Hence no one learns anything, and they are doomed to repeat history again. Is it any wonder then that we keep repeating the previous generation’s mistakes but do so in a much more grandiose manner? The masses always fear stock market crashes and or severe stock market corrections. They fail to understand that when the masses are scared, it’s time to jump up in Joy.

Just look at the speculative phase we have entered now, and it makes all the mistakes our ancestors made pale in comparison. We leverage ourselves to our necks with debt to buy goods we don’t need and use the money we don’t have to pay for them; the real estate bubble is one classic example of madness and history repeating itself on a gigantic scale. Individuals take home equity loans against the rising values of their homes and use this to finance their extravagant lifestyles. Is there anything more insane, taking credit to buy something more on credit?

The way to master Technical analysis of stock trends is first to understand who your enemy is.  Your enemy is your emotion and once you know that you can focus on the studying the masses. How can you use a tool if you don’t know what you are going to use it for?  Once you can spot the emotion that’s driving the masses, you can start allocating time to mastering 2-4 technical analysis tools.  Adjust the settings of the tools and look for patterns that catch your eye. Don’t follow the nonsense laid out in textbooks. Identify your patterns for that’s what will separate you from the masses. 

Each should see something different when it comes to Technical Analysis. Invest time in identifying indicators that speak out to you and then spend time mastering them.

To a great extent, mechanical systems are reflective of our lifestyle.  People prefer to work in groups; they prefer to have a fixed schedule as in a 9-5 job, better known as the race to the bottom. You work hard, and you get hardly any time off. Your reward for giving up the best years of your life, in general, is a pension that can barely support you; take a look around, America is in the midst of a massive pension crisis.

 A mechanical system fits perfectly into the lifestyle of the dumbed down masses; they want to master Technical analysis of stock trends without lifting a finger. They want everything handed down to them, and when they get slammed to the ground, they scream like spoilt brats. Well guess what, there is no free lunch and if it’s free, it usually tainted with toxic matter. The early bird gets the worm and the late bird the bullet.

History replete with mistakes and the masses seem to pay no heed to history; they seem determined to repeat the same mistakes but on a grandiose scale. There is nothing wrong with making a mistake because you might learn something as a result of one; perpetuating someone else’s mistakes provides no clues for improvement but only rules for self-destruction.

Technical analysis of stock trends can be used to improve your  Trading results 

If you want to spot the right trends then at the very least you should customise the settings on the tools you use. Technical analysis of stock trends can’t be conducted accurately if one is going to rely on standardised settings.  Every Tom, Dick and Harry are using those settings so if you use the same ones don’t expect a different outcome, because there will be none. Doing the same thing over and over again and expecting a different result is called madness.

One of the simplest and most efficient tools that can be used to improve your  Technical analysis of stock trends is something called Trend Analysis. All you do is spot a new trend and stay on board till the trend ends. Trend analysis involves the drawing of simple lines; it takes practice, but it is worth the effort.  However, do not only rely on trend analysis as it has its limitation and we cover that in the article titled “the limitations of trend analysis“. To address the limitations of many technical analysis tools, we developed the trend indicator which  is in our opinion the ultimate “Technical analysis of stock trends indicator.”

Key factors to master to improve your Technical analysis of stock trends Skills 

You need to understand that emotions drive the markets; Identify the emotion is driving the markets, and you stand to profit handsomely. You should be able to differentiate between Contrarian investing and investing based on the principles of Mass Psychology 

Contrarian investing is a very simple system as it involves taking a position against the masses. Mass psychology focusses on the intensity of the emotion. Whereas the contrarian would take an opposing position the moment the masses jumped on board the investment, the mass psychology player would focus on the intensity of the emotion.  A student of mass psychology will only abandon the investment after the bandwagon is almost about to buckle under its weight.  In other words, the masses need to be euphoric, and this is why we at the  Tactical Investor have been on the right side one of the most hated bull stock markets of all time.

Patience and discipline are key concepts you need to master if you want to be successful in the long run. Sometimes you might have to wait for months on end before you can take a position, on the same token you could find a winning play the very next day.

The last concept and just because it is listed last should not dwindle its relevance; the very important concept of portfolio management must be understood. We cover that topic in detail in this article Portfolio management suggestions

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