TME 014: Technical Analysis



A method of evaluating securities by analyzing statistics generated by market activity, such as past prices and volume. Technical analysts do not attempt to measure a security’s intrinsic value, but instead use charts and other tools to identify patterns that can suggest future activity.

We agree with most of Investopedia’s definition of technical analysis except the last part that talks about trying to predict future activity. No one can predict future activity. In our system we do not expect a loss or a gain we just take what the market gives us.


What is technical analysis?

Technical analysis is doing market research with mathematics instead of news or circumstances. The technical analyst follows a repeatable process for entry and exit.  Profit is made from moves in the market. Stops are used to minimize loses and trailing stops are used to maximize gains.


Does technical analysis work?

Many people might be uncomfortable with technical analysis because decisions are made based on mathematical calculations instead of fundamental analysis.

Lets look at the following example to illustrate. Apple (aapl) comes out with a new iPhone investors are happy. The release date comes and it’s a flop. You check the stock price and for some reason the price moves up. The sales report comes out and sales are down. The stock continues to go up. The fundamentals say that apple is a hold or a sell. The technical analysis would say buy, based on price movement. The fundamental would miss the trade and the technical would make a profit. Technical analysis not only works but it is one of the best methods to making a profit in up and down market.

Again we are not talking about the type of technical analysis that claims to predict markets.


 Technical Analysis Patterns

Markets trend up and down. This is the type of pattern we look for in our technical analysis. If we get a signal that the trend has turned up then we buy. If we get the opposite signal then we sell.

We do not look at charts and try to find Elliot’s wave or any other pattern only trend up and trend down.


How technical analysis works

There are millions of ways to evaluate markets based on technical analysis. We use equations. Some use charts. The main factor in our analysis is price. We like to keep it simple. The calculations are made day after day. The signals are given daily.

Some people use charts and when they see a trend in the charts they make a move in or out of the market.

Some people day trade and spend every minute in front of a computer when the market is open.

The output of technical analysis is buy and sell signals. This is just one part in the trade. The trading system is what really matters. The trading system answers these important questions.

-Where should my stop be?

-How much risk should I take?

-How much is my position size?

Technical analysis without a good system will lead to failure.


Technical Analysis Tools

Some people use charts when they are doing technical analysis. The Chartists looks at trends in stock charts to determine buy and sell signals. The Chartists can look at multiple charts and see the trends by flipping thru them.

Look at the following charts. What do you see?

Up Trend
Up Trending Market
Sideways Market (no trend)
Sideways Market (no trend)

Stock Technical Analysis Software

Many people who practice technical analysis have moved to computer software. The beauty of technical analysis software is that it takes the human element out of the equation. The computer makes the decisions while the trader plays golf. Then all the trader has to do is monitor the system to make sure it is operating correctly.


Journal of technical analysis

A trading journal is a must that every trader should have. It can show you opportunities for improvement. When I first started trading I used a journal to track trades. How good did my trade do? Was it a win or a loss? Did I risk too much?

It became tedious and time consuming. Some of this was due to trading too much. Now my journal looks much different. I don’t keep a journal primarily to track profit and loss. That type of data is captured in our journal but its not primary data. Our journal is not to show us what happened on each individual trade.  That type of data is also captured in our journal but it is not primary data.

The goal of our journal is to show us how we did against the system. Did our performance match the systems performance? If not why? Did we get in to late? Did we buy too much? Did we not buy enough? If we gained too much did we have too much risk? Our trades should mirror the systems trades if they don’t then why?


Example of technical analysis

It is good to have examples when you are trying to learn. Sometimes this stuff can seem complicated. It’s like math once you finally get it you got it. Once you see it then it can never be unseen.

AAPL Technical Analysis

We will look at technical analysis using trend following. We believe that the only output technical analysis should give you is buy and sell signals.

Let’s use a simple 20-day high as the buy signal and a 20-day low as the short signal.  Once the buy or short is given then the 10-day low becomes the sell signal or the 10-day high becomes the cover short signal.

Let’s use the following variables

   -Current price = $100

   -20 day high= $101.23

   -20 day low= $97.28


What price gives a buy signal? Answer: $101.24

What price gives the short signal?Answer: $97.27


That’s pretty simple right?

Once you are in a position then your system dictates when you sell due to money management or if it hits the 10-day low or high. That depends on whether you bought or sold short.


Become a Technical Trader

Anything that we don’t understand can be scary at first. We don’t need to be scared of what we do not understand. You can learn technical analysis. It’s not that hard and it is definitely nothing to be afraid of.

We do offer a short cut. Our memberships include the technical analysis as well as the system based on your account value.  All you have to do is follow the system. Click here if you would like to join one of our systems.


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