Technical analysts love charts. They really love line graphs that track the performance of a commodity or a stock. In fact, they don’t stop talking about them, even if there’s a fire.
By cherry picking historical data on some price charts (while ignoring many others), they’ve come up with a series of “patterns” that they believe predict future events for a stock, commodity, or other asset's price. It's honestly a little closer to palm reading than it is to actual analysis.
Just picture a chart where a line traces a stock historically and then stops at present day. Based on historical patterns that chartists use, one can supposedly forecast that the pattern will continue into the future.
These continuation patterns attempt to indicate that price trends will extend into the future, and tell us if we should buy or sell right now.
Does past performance indicate future events? Uh...no. Which is why every single prospectus deck includes that warning about the reliability of past performance as a predictor of future performance before a fund asks for your money.
Continuations patterns offer zero scientific value, and are similar to playing black in roulette simply because red has come up 13 out of the last 20 spins. It’s pattern bias, and the odds of red and black coming up haven’t changed from 50-50 simply because of previous results.
Discovering whether or not someone is engaged in technical analysis early in an article is an easy way to determine if you should move on to read something else immediately. If continuation patterns were accurate, everyone would use them.
Given that technical analysis is to stock market investing as astrology is rocket science, “continuation patterns” should be ignored by investors.
Related or Semi-related Video
Finance: What is a Chartist?26 Views
Finance allah shmoop What is a chartist Well here's a
chart and here's a chart and here's a chart All
right Well these are pages from the investing bible of
a chartist A chartist is an investor really a traitor
as they tend to own stocks for a much shorter
period of time than a longer term Really invest or
type person a chartist relies solely on the patterns The
pattern's right there These are all patterns imputed by the
charts that they you know sitting poor threw for hours
and hours So check out this chart see how the
plotted data closely follows the characteristic line there The characteristic
line basically is plodded through all those dots Yes So
they're going to stare at that try to figure out
where that line is going in the future right Get
the crystal ball or all right Well let's look at
this one where the data forms what looks like Well
the head and shoulders of someone who you know doesn't
have a neck that's Just common pattern in trading And
you know if you stopped looking at it and two
thirds of the way through there it's heading down Well
Maybe you'd be short the stock for a few days
and then you see it bottoming and then you'd be
long and try to make money that way Good luck
All right len look at this chart Where is right
here where the data appears to We'll break away from
the established pattern which was all just kind of boring
Lee along down here And then suddenly everything goes up
Yeah start doing its own thing Well maybe the company
reported a good quarter or ah you know the government
cut taxes again Everything went up So these were the
tools of the chartist The chart's a chartist is the
opposite of a fundamental investor meaning that she doesn't know
or care what the company does for a living Really
she doesn't care about their p e ratio nor their
profit margins nor their debt levels on their balance sheet
nor much of anything fundamental about how their business runs
Chartist just care about the pattern they glean from the
charts and all the charts always work until they don't
And what happens when the meteor hits that is that 00:02:06.0 --> [endTime] predictable on a chart Ah
Up Next
Technical analysts don't care how companies make their money or how they run their business; they're just interested in the numbers. The data. Yeah...
What are Triple Bottom and Triple Top? In technical analysis, a triple bottom is considered a strong bullish signal. It implies that a support leve...