Technical Trading and Market Timing: This style of investing may allocate assets among different asset classes or different securities depending on the manager’s view of the economic or market outlook. Portfolio emphasis may swing widely between asset classes. Unpredictability of market movements and the difficulty of timing entry and exit from markets add to the volatility. Technical traders may pay little attention to the fundamentals of a company. They believe that everything you are likely to know about a stock is incorporated into its price already and the future course of this price is best divined by looking at its chart. This is a controversial style of investing and its’ critics describe it as akin to using a Ouija board to predict stock price movements. They believe that it is a useless waste of time to analyze charts in the hope of predicting future price movement from past patterns. You should keep in mind though that most Wall Street firms have chartists on their payrolls. Even if you don’t believe in charts, you should keep in mind that others do and are influenced by them. There are thousands of traders around the globe glued to them ready to fire off orders based on their interpretations.
Amongst technical traders there are a couple of distinctions you should keep in mind. The time frame, the interval in which you work, is really the determinant of the technical trader’s style of investing. A day trader will always go home flat each day. They won’t hold a position overnight but instead try to profit from the swings in price during the day. Day traders scalp small amounts of profits and generate enormous commissions relative to the dollars they keep for themselves. A swing trading position is typically held for a few days to a few weeks. Both of these kinds of technical traders can go long or short. Contrast this with a buy and hold strategy or Buffet view point that his holding period is forever.
- Pros: Even a sound investment decision based on fundamentals can give a mediocre result if the entry and exit points of the investment are not fortuitous. Proponents of technical analysis claim it maximizes the returns on their investment. It may alert them to momentum waning and give them the opportunity to exit a stock and protect profits before they evaporate. In the kind of market we have had for the last decade trading profits have often been the only source of profits
- Cons: In the absence of news or volatile stock market conditions, it may be possible to predict short term price movements but no matter how good a technical trader may be at chart reading, one piece of significant news is going to blow apart any chart prowess they might possess. . Also a sector movement can overwhelm an individual chart pattern. For example, Intel may have a favorable chart pattern, but a general decline in the semiconductor index or ETFs can bring Intel down with it. For these reasons and others many technical traders avoid individual stocks and play market indices and ETFs where they are least likely to get ambushed by the news. Volatility is high.