Technical Analysis 101

I’m a fundamental analyst by training, and I do still believe in fundamental analysis today, even valuation clearly doesn’t matter. But over time, I realize that a lot of price actions are not driven by fundamentals at all. In order to make money in the real world, solid fundamentals are only a piece of the story, and timing is at least as equally important. Buying at any time at any price is not a good strategy. To put the puzzle together, I want to align fundamentals with technical analysis, using fundamentals to build my investment thesis and using technical analysis to refine my entry/exit points from a timing and pricing perspective.

In Harmony with the Trend

There are two main strategies: trend following, which profits from the primary uptrend or downtrend, and counter-trend trading, which profits from corrections in a trending security and trades against the primary trend. There are successful traders in each camp.

If you want to be a counter-trend trader, you need to know that (1) Your win-loss ratio by default will be lower; (2) Relying solely on technical indicators is really difficult, successful counter-trend traders all have their own approaches and years of experiences to call the tops and bottoms; and (3) You don’t really know whether you saw the reversal points until the corrections were completed, and prices moves counter-trend are choppy.

For me, I’d like to be in harmony with the trend. The price moves align with the trend are clearer robust, which can provide a lot of confirmations so that it’s much easier to stay with the trend and the profit are larger.

Most importantly, I’d be cautious about trying to call the top or bottom, especially with a well-established trend. What appears to be the top or bottom may actually be a pullback in a well-established uptrend or downtrend, because prices will pullback, but the corrective move will not be nice smoothy. Calling the top or bottom is more like a “vanity trade” that egotistical people try to prove that they are smarter than others in the market. I’m not and don’t want to be one of them.

Applying Textbook Knowledge To Real-World Charting

I bought all three levels of CMT curriculum (for Chartered Market Technician exams) shortly after the New York shelter-in-place order, as I want to use my time during this pandemic to master technical analysis. I finished all those books while I was hunkering down in the city without leaving my apartment at all. Reading books on technical analysis is easy; topics are divided into chapters, trendlines, patterns, moving averages, oscillators, etc., and the charts (while a little outdated) are cherry-picked to demonstrate the ideal setup. CMT curriculum covers broad topics and lays out the foundation of technical analysis, as you have to know the characteristics and applications of components inside out, and be able to recognize/use every single indicator solely on the chart to begin with. But, the success rate of each indicator being used alone is usually not very good, and in real-time trading, pictures are murkier, and the setups are never ideal. Therefore, combining several indicators can increase your conviction levels and the probability of profit. Syncretizing them in a fluid market is a much different and challenging game, so it’s crucial to have the fundamental concept, trend identification, patterns recognition, implications of oscillators, etc. These building blocks form a framework for technical analysis.

In the following weeks, I plan to write up some of the most important topics here, as I come across real-time charts that I can apply these (either individually or combined):

• Trendlines
• Head & Shoulders Patterns
• Wedges/Triangles
• Elliott Wave
• Fibonacci
• RSI/Stochastic Divergence

The market is can be ambiguous. When the setup is not clear, I’d rather stay on the fence with questions, vs. trying to be decisive and make a lot of (lose) trade. Applying textbook knowledge to the real-world takes time, but engaging with real-time analysis and real money is the best way to get on the learning curve. I think I’m off to a good start here.