Friday, July 23, 2010

An Explanation of Technical Analysis

As I have commented before, there is a lot of voodoo that comes with a lot of technical analysis, but some technical analysis has value if it explains where people might act to buy into a stock (or commodity) or to sell a position, based on an understanding of the emotional perspective of traders.

For example, if a trader bought a stock at a certain price and then sold it for a profit, he may buy at that price again because of the earlier profit he made. Thus, it makes sense to look at charts to see where a lot of stock was bought that was likely sold at a profit. Once you get the hang of it there are a lot of such cues (for buying and selling) in charts, but I like the way  Vic Scherer of Daytrends puts it:

Nothing is about patterns; it's about what other traders are COMPELLED to do, by their own weak emotions...

Traders who are about to shit their position are acting in fear. Find them; they'll do it. What are you going to do?...

People act on their emotions; only the few very best traders are on the other side. Which side r u one?

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