>>>"...considerably better than technical stock analysis."
How would you know? <g><<<
By reading things like this (John Train is among the most sensible half-dozen financial writers):
The more people who practice technical analysis, moreover, the less likely it is to work. If hundreds of thousands of people are looking for a "pennant formation" on Cisco (Nasdaq: CSCO), for example, the chance of everyone getting in fast enough to enjoy the rise that it is supposed to predict is nil. Some would, and should Cisco in fact rise, they would then be rewarded for being superior technical analysts.
But what happens the next time, when those who did not get to enjoy the rise look for the patterns that have been shown to predict the pennant which then predicts the rise? Well, then knowing about the pennant is worthless. It's just this: If there were a surefire way of knowing that a stock would double in the next week, then the stock would double immediately in anticipation of the event. Were pennants sure signs, then they would be immediately followed, inevitably, by a spike. This would initially be self-fulfilling, and then ultimately it would collapse upon itself.
In his seminal book The Money Masters, John Train speaks of a standing wager he has with any technical analyst. It goes something like this: He will take a chart from several years ago and remove any identification from it as to company name or time. He then cuts the chart in half, giving the earlier portion to the chartist while keeping the later portion to himself. Since chart-reading is supposed to be prophetic, this should be no hardship to the technical analyst. In order to win the wager of $100 the analyst must be able to tell whether a stock was higher or lower at any point in the second period than the first. And since technical analysis is predictive and requires that the practitioner pay friction costs, Train asks for modest odds to compensate.
How have the takers of this bet fared? Hard to say, since no one ever has taken the bet. |
