I'm always baffled when I read an article that's negative about the practice of technical analysis. I probably shouldn't be surprised -- not because I don't think it works (it clearly does), but because it seems folks these days have strong opinions on the extreme ends of nearly every issue or topic.
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In the investing world, there are basically two schools of thought: fundamental analysis and technical analysis. And to a vast majority of investors, there's no middle ground. Here at my premium service, Maximum Profit, we disagree. We take what we believe is the best of both worlds and combine them to create our proprietary "MP Score." But I digress.
When I come across an article that's dismissing technical analysis, I usually read it -- even though I usually know what it's going to say, as most of the nay-sayers usually spout the same myths. That's because, at one point in my career, I espoused the same beliefs.
You see, the traditional financial path (which I took) takes you down the fundamental lane. You learn how to value a company, pick apart financial statements, examine the economic environment, and evaluate many other qualitative and quantitative factors. Of course, I think this is all important stuff to know and understand, but it only gives you half the picture.
The Very Real Value Of Technical Analysis
As I began to wade into the technical side of things, I was skeptical. My view -- very much like the folks who knock technical analysis -- was that simply looking at "charts" isn't going to tell me much. At the time I knew just enough about technical analysis to dismiss it as nothing more than witchcraft.
But I was wrong.
Technical analysis is much more than just looking at charts. More than anything, it's taught me about investor psychology, behavioral economics, and, of course, discipline. So as I was reading this particular article, one of the author's top reasons to not trust technical analysis -- namely, that "investor psychology does not move price... money moves price" -- left me puzzled.
Of course, the author isn't wrong. Money does move prices, but I would argue that the money moving prices is being dictated by the psychology of that particular investor. The human behavior component is a critical part of understanding markets, and we all know how emotions (especially when it comes to money) can have a huge impact on your decisions.
But my biggest complaint about these types of articles is that they don't do the readers one bit of good because they don't offer any advice on a better approach. Granted, one could assume that they're telling you to stick to fundamental analysis, but just like technical analysis, that's a broad term.
After reading this particular article I wanted to prove to this guy that even the simplest of "technical" analysis strategies can work quite well, and should be a part of one's overall investment strategy. So I hopped on my Bloomberg Terminal and did a simple back-test over a 20-year period. It was a "long only" test (meaning I was never short the market) on the weekly prices of the S&P 500.
My back-test parameters were based on a 50-day simple moving average and a 200-day simple moving average. I would go long the market when it crossed above its 50-day moving average and exit, or sell, when it crossed below the 200-day moving average.
As you can see, following this simple technical strategy would have helped avoid some major drawdowns in the market. And as I often stress in these pages, avoiding major capital loss is nearly as important, if not more so, than bagging a triple-digit winner.
Here are the results of this simple back-test compared with a "buy and hold" strategy over the same period:
My point here isn't that technical analysis is "better" than fundamental analysis. It's to prove that it works and that it has its advantages. I'm personally not one to believe that you're either a "chartist" or a fundamentalist. You can take advantage of both strategies. And why wouldn't you? We're talking about your hard-earned money here. If there's something out there that might give you an edge, help you generate better returns, you'd be foolish to not at least give it a look.
Articles that discount technical analysis -- or even fundamental analysis -- are doing investors more harm than good. These two schools of thought can work in tandem, and the MP Score is a testament to that.
How You Can Navigate Any Market
The reason most investors fail at investing over time is that they have a hard time executing their strategy -- if they even have a strategy. Even "buy and hold" investors fail. They end up selling at or near the bottom when they can no longer stomach the losses mounting up in their portfolios.
Investing isn't easy. If it were, everybody would be rich. The key to success is to take advantage of every tool at your disposal -- both fundamental and technical. And that's exactly the philosophy backing the MP Score.
It's how, over the past three years, my subscribers and I have seen gains like 181% on Lannett (NYSE: LCI), 135% on Westmoreland Coal (Nasdaq: WLB), and 242% from Bitauto (NYSE: BITA). Each time, the system has told us exactly when to buy and when to sell, while we just sit back and count the returns.
I strongly recommend you give Maximum Profit a risk-free trial. That way, you'll have a winning system that uses proven fundamental and technical indicators working for you. You'll no longer have to worry about what to buy, when to buy, or when to sell. Simply let Maximum Profit do the work for you.
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This article originally appeared on StreetAuthority.com.