Part of what makes technical analysis of securities work is that so many people use it. ie, it is a self-actualizing result by traders. And because other traders use it, I’ll use it.
The greatest fraud perpetrated upon the investing public in the last 30 years have been two theories about securities:
1. That securities price movements are random, and can be modeled with Gaussian distributions.
2. The Efficient Markets Hypothesis, wherein advocates claim that everything known and unknown is priced into a security.
Since Rick has spent quite a bit of time in trading pits before he became an on-air color commentator for CNBC, he’s got some perspective of what he speaks on trading. There are some guys who trade on chart patterns, some who use Fib fans/retracements, some who are advocates of Gann patterns, some who use candlestick patterns, some who use point-n-figure charts to find patterns... they all work to some degree on some securities some of the time.
The secret to making a profit in using these things in trading is to contain your losses. There are really only four things that can happen to the price of a security:
1. It goes up a lot.
2. It goes up a little.
3. It goes down a little.
4. It goes down a lot.
In trading, I insure that I avoid 4 and some of 3 through loss containment. The rest of condition 3 that I don’t contain by pruning losses is equalled over time by condition 2.
Too many people look for the “magic predictor” that gives them a home run every time. No such thing exists. If I’m doing everything correctly, only about 55 to 65% of my trades are profitable. Maybe one in 15 are over 10%.
IMO, too many “professionals” fed the retail investing public utter pablum about “buy and hold” and these poor people have been screwed out of huge sums in the last 10 years. We’ve had 10+ years now of sideways movement in the equities markets in the US, and we’re bound to have at least another five years of really choppy markets.
Where I would take issue ( as pertains to investment advice given to the general public) is your knock on "buy and hold."
I believe in that firmly, especially when an investor is in the accumulation phase of his lifetime, AS LONG AS IT IS ACCOMPANIED BY THE FOLLOWING PARAMETERS:
1. Continuous reinvestment..the old "dollar cost averaging"..which most people do via 401ks and other self-directed plans.
2. Focus on investments that pay dividends..and keep reinvesting them. Many studies have shown the value of reinvesting over time.
3. Focus on costs. Investors are absolutely slaughtered by a fee structure that rapes them..from wrap accounts, to sales charges, to commissions, to variable annuities, to 12(b)1 fees..and the list continues..these can average as much as 2% a year over time...and it's hard to make money with a perpetual 2% haircut...
Alot of the old guys were tape readers. That’s the trading technique I’ve adopted and it works extremely well.