A closer look into the dark art of technical trading
By Stephen Bennie
In dozens of previous articles, we have looked to explore the benefits of being a long-term fundamental investor where the key to success, hopefully, is having a deep understanding of a business and its intrinsic value. The recent articles looking at the S&P 500 downtrend of 2022 are referencing technical analysis. This is a very different approach to investing, technical analysis does not look at company fundamentals, rather its focus is primarily on price charts.
Technical analysis is popular with traders because price charts are easy to access and are available for thousands of potential investments, ranging from equities to bonds and from currencies to commodities and beyond. Essentially using price charts gives a trader a great big universe to hunt for opportunities which is always attractive. But what is that they are doing that they hope to turn into a profit. Typically, they are searching for patterns that they believe can be used to predict future price movements.
Understandably, for many this is akin to swirling tea leaves around in the bottom of a porcelain cup at a psychic reading. However it has to be admitted that some of the basis for technical analysis has a little more substance. Take for example the Mona Lisa where Leonardo Da Vinci utilises the Fibonacci sequence to paint arguably the most perfect piece of art in history.
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