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Technical Analysis 101: Warren Buffett May not Believe in it, but...



December 03, 2016

 

The idea that drawing lines on a chart can lead to incredible profits has been a matter of contention for years…

Warren Buffett, Peter Lynch, and Benjamin Graham for example aren’t exactly fans of the idea.

Even in a world of charts, trend lines, and candlesticks, they have relied entirely on fundamental analysis to earn their famous fortunes.

In fact, their disdain of technical analysis is so complete that Buffett once remarked, "I realized technical analysis didn't work when I turned the charts upside down and didn't get a different answer."  Meanwhile, Lynch observed, "Charts are great for predicting the past."

Graham before them famously said, "In the short term the market is a voting machine, but in the long run it is a weighing machine."

Instead of focusing on solely on market momentum, all three simply focused on finding long-term value.  And over time, it made all of them very wealthy.

But the fact remains that technical analysis works… and works well. Here are two reasons why...

Stock Prices Tend to Move in Trends

For a technical analyst, the trend is always his friend. That's why most technical trading strategies are trend following. That includes the broader market trends as well as those of individual stocks.

Because once a trend has been established, technicians know that the future price movement will likely continue in the same direction. Of course, any break in this trend is often where technicians decide to sell. That's why fundamentals are of little use to technicians. To them a stock is either moving up, down, or sideways.

Markets, Like People, Repeat Themselves.

Technicians believe that since markets are made up of people, they follow predictable patterns. As such, they attribute the repetitive price movements in stocks to market psychology. The belief is that once a consistent pattern of behavior has been established it can be used in the future to provide good entry and exit points.

Now which one of these schools of thought is the best remains a matter of contention. After all, they are radically different in their approach. A technical analyst believes the markets are 80% psychological and 20% logical, while the fundamental analyst believes in the reverse.

However, the truth is that a larger argument can be made for using both of them since both styles have been successful in the past.

Why ignore the opportunities that either has to offer?

We’re looking any opportunity completely maximize our ability to profit from fear and greed. And do so we must identify all opportunities available.


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