Today, I plan to share the investment insights Benjamin Graham, Warren Buffet’s mentor, gleane...
Debunking Technical Analysis Myths
03/19/2014 10:17 am EST
J.C. Parets offers rebuttals to several commonly held beliefs about technical analysis and its effectiveness in trading.
ROB: I am joined by J.C. Parets, a chartered market technician, and boy, J.C., I have heard it all. Technical analysis is a myth. It is a self-fulfilling prophecy. It only tells you what happened in the past. I would like to give you an opportunity to respond to that kind of criticism.
J.C. PARETS: Sure, I would actually love to and these are criticisms that I have heard my entire career. You know we can start with the fact that technical analysis and studying price only looks at the past and that is something that is somewhat humorous, because what other information do we have other than information from the past. I actually gave a presentation at Harvard University two years ago. That was one of the common themes that I kept getting from students and professors, “but J.C. it only looks at the past.” I am like, “yeah as opposed to what”, so we will dismiss that right there.
ROB: What about the idea that it is just a self-fulfilling prophecy?
J.C. PARETS: Wouldn’t it be nice if that were actually the case where a technical pattern that a book once said should always work, wouldn’t it be nice if that actually did always work, but we all know that that is not true and that is the case for a variety of reasons. First of all, let’s say we are all technicians, which we are not, and let’s say we are all looking at the exact same pattern, which we are not, now let’s say we are looking at a head and shoulders pattern on a daily timeframe. First of all, now you are just assuming that everybody is looking at that trade, everybody is on the same timeframe, everyone is trading the same asset class, everyone is trading it the same way, right, so not through options or through futures, but through equities or though futures and not equities or options. Now everyone is looking at it the same way, everyone is trading it the same way and you also have to assume that that actual pattern itself, the execution of that trading is also the same as well. Well we all know very well that we are all on different timeframes, we are all looking at different asset classes and truthfully, even if we do see eye-to-eye and even if two technicians do see the exact same pattern, we will trade it differently. Some traders might anticipate the breakout. Some traders might wait for the breakout and buy the breakout. Some might wait until the stock breaks out and then retest that level, so we are all trading it different ways, we are all looking at different timeframes, different asset classes. If people look at technical analysis and use that as a criticism, the fact that it is a self-fulfilling prophecy, I would look at it as somewhat of a compliment if a single form of analysis is so good and so powerful that it can actually make market events, I mean come on.
ROB: Where would someone start if they are interested in technical analysis? One book, one place to go to start with.
J.C. PARETS: That is a fantastic question and I wish I could tell you that there was one book to do it. My recommendation to anybody who is interested in technical analysis is join the Market Technicians Association for a very simple reason and start the chartered market technician designation process. Why, because yeah I can name a book or two books, but the process of getting the CMT designation makes you read all of the books and then you can decide what kind of technician do you want to be. Do you want to be more intermarket oriented? Do you want to be longer-term or shorter-term? Do you want to trade commodities? Do you want to trade stocks or do you want to incorporate everything you are seeing in different asset classes into your individual trading, which is the kind of technician that I am.
ROB: Well you have made me as a technical analyst very happy, J.C. Thank you very much.
J.C. PARETS: You got it.
ROB: You are watching the Money Show Video Network.
Related Articles on STRATEGIES
I spend a lot of time talking about block trades. These are the huge trades that show up on your opt...
I have been tracking a set-up for the SPDR Gold Trust ETF (GLD), which I analyze as a proxy for the ...
AllianzGI Equity & Convertible Income Fund (NIE), which yields 6.8%, invests in convertible equi...