Dated: May 28, 2020
Technical analysis is a methodology by which the volume and price movement of certain stocks over the course of time is plotted on a graph or chart to predict its future performance and facilitate trading for profit. For example, if the chart shows a certain pattern of stock investment activities, it is supposed to portend either upward or downward movement of stock prices, allowing the investor to make decisions to buy or sell. In my humble opinion, this is an exercise in self-delusion. Warren Buffett, one of the most successful people in the history of stock investment, often emphasizes that his investment strategy focuses on the long haul and that he has no way of predicting how the stock market will behave in the short run. The cause of stock price movement is often multifactorial—the soundness of the business, which may not always be apparent to the public; the ever-changing economic and political forces, both domestically and internationally; and the emotional and psychological state of the investors, regardless of their purse size. How can such complexities be boiled down into a two-dimensional chart? The mood swings of the stock market, reflecting those of the investors at large, are hardly predictable. There is no way a chartist or technical analysist can quantify such powerful forces. These technical analysts would have you believe that they hold the secret to successful investing. They even try to impress you by conjuring up fancy terms such as golden cross, death cross, Bollinger Bands, and Fibonacci ratio (named after a famous mathematician) to justify the existence of their trade. If charting is such a powerful tool, these analysts should all have become multimillionaires without having to share the secret with everyone. In reality, technical analysis is just a way of making a good living.
But should their analyses be entirely ignored? The answer is not necessarily. Why? If at a given moment enough people choose to believe in charts, they can become the instrument for self-fulfilling prophecy, and in some instances the stock prices will move in concert with their predictions. An investor can sometimes use them as one of many indicators, but never the sole indicator. As I wrote in my previous blog on May 27, 2020, Socrates defines a fool as someone who doesn’t have the necessary knowledge while being entirely oblivious to his lack of knowledge. It would be foolish to dance to the tune of technical analysis. When it comes to stock investment, I would much rather use my own “charts” based on calculations and deductions from the principles of I Ching. It would be rather involved to explain how such a system works at the moment; however, the details will be spelled out extensively in my upcoming book.