Fundamental versus Technical Analysis – Part 2 of 3

OK, let’s skip the pleasantries (or foreplay) and jump right into it! 

Technical Analysis

Traders who practice this analytical approach believe in the 3 holy grails of:

a)    Price

b)    Volume

c)    Time

Using different permutations of the above 2 or 3 holy grails, a whole plethora of indicators are invented. Some more “voodoo” than others!

And new indicators keep getting “invented” all the time – usually by “trainers” so they are market them as “proprietary systems”. Since its “voodoo”, you can put old wine in new bottles and call it whatever you like!

This is something Fundamental “trainers” watch with envy as Fundamental analysis is based on something that is taught in accounting and finance schools. If you can’t “patent” new “proprietary Fundamental systems”, how can you charge more than lecturers in the polytechnics and universities?

And you never wondered why Technical analysis trainings cost more than Fundamental Analysis trainings? LOL!

There are also 2 major sub-groups of this school:

1)    The dog that wags the tail

2)    The tail that wags the dog

The dog that wags the tail 

Exponents of this school believe the price actions and volume transactions are shadows that give clues to the below 2 “perceived realities”:

a)    Object has moved (Market fundamentals have changed).

b)    Light source has moved (Market sentiments have changed).

Just like a sun-dial, by looking at the movement of the shadow of the pin, traders try to determine the location and predict the movement of the Sun.

Not voodoo; but employing elements of science and psychology. Brains required! 

The tail that wags the dog 

Less competent exponents of Technical analysis tend to belong to this school.

These traders get excited and make their buy/sell decisions just because 1 line crosses another line, mumbling something like golden or death… Or when they spot something like a hammer or a star… Or when the price breaks through some self-drawn resistance or support lines…

Voodoo… Brains not needed. 

The untold truth about Technical analysis 

The spider weaves his web and patiently waits for his prey to get ensnared in his web.

The spider knows an insect is caught by feeling for the vibrations of his web – just like a Technical Trader will patiently wait for his indicators to signal the moment to strike.

Now there is one interesting species of jumping spiders called the Portia.

Despite the small size of their brain, these jumping spiders outwit other spiders with hunting techniques that include trial and error.

And they employ predatory tactics that are unusually complex and flexible for a creature with a pinhead-sized brain.

For instance, they might stalk a spider on its own web and employ clever mimicry, vibrating the web in ways that resemble a small insect getting ensnared. When the resident spider comes to investigate, the Portia attacks and kills it. Ouch!

Several other tricks that these jumping spiders use, including moving across a web when the wind moves it, which makes it difficult for the resident spider to notice the movement of the attacker.

These spiders even deceive and attack members of their own species. Most surprising, they fine-tune their predatory behaviour to individual encounters.

Well, I leave it to you to figure out which sub-group of Technical analysts this jumping spider Portia belongs to ;)

Now you know what it means: “Collect school fees and teach them what to do; then you go trade against them since you can predict what they will do!”