I just ran across this post by Atlantic Cowboy...
It is very insiteful. Hey Cowboy if your still out there let us know,we miss you!
Post #396
Wize - Thoughts_ Long, but a MUST Read for ALL
I too agree with your statement. Many of the traders that I know and associate with like to tell me about all the different indicators they use and how they use these fancy systems to help tell them where the stock will go. I also have a few friend that are serious investors who like to tell me all about the extensive fundamental research they use with expensive subscriptions, and financial calculators. Both of these groups of traders and investors share one quality, they both are perplexed by my simple trading strategies and my consistent high success.
As I have reminded the board once before, all indicators are lagging indicators. Even your statements about moving averages, while helpful, follows the same line of reasoning. A stock doesn't trend to its moving averages. The average trend to the stock.
For anyone getting into trading and interested in TA, the first and most fundamental concept that nearly all traders forget is....
Indicators and moving averages don't drive stock movements, stock movements drive indicators.
(What drives stock movements, well fundamentals do!).
Well, if that is the case, than it sounds as if TA is useless and Fundamental Analysis is the only way to go, but this assumption doesn't consider the hidden cost and the random walk theory( the random occurance of news and developments).
To do an appropriate amount of fundamental analysis, not only do you face a huge level of up front search cost in gathering all the information, organizing the information and collecting and organization information regarding the sector, the economy and the companies competitors, but then you face the large cost of processing all the information and compiling the information into digestible components. You also should consider the cost in acquiring the knowledge to be able to understand and interpret financial information. Analyst sink years (time cost and $ cost) into obtaining an education and then hours (most work 10 to 15 hours a day) a day researching companies and in the process, become experts in the field of their research. Here is the kicker....Analyst are usually not able to timely predict stock moves. Just as amateur traders, statistically, analyst are wrong almost just as often as completely inexperienced investors. Economist, especially those teaching in universities, have the worst tract record in predicting stock movements. The average and above average person cannot expect to make money consistently usually FA. The cost are enormous and most do not have 16 hours a day to research companies. (What about the random walk theory thing??)
FA does not and can not predict the occurrence of an important events and/or relevant company news. All the information that FA is based on is old (lagging) and there is a time lag (different for every stock in how new information in processed(correctly) into the stock price). FA is structure for a longer time frame than what traders and short term investors use. We do not have months and years to watch for potentially uncertain events come to fruition.
It all comes down to the premium to risk probabilities. Have you ever wondered what MOMO is??? You may hear people talking about stock momentum and its importance. So what is it?
Momentum is a shifting of the risk premium probability. If all (expected)future stream of revenue are priced into a stock at 100%, there would exist little price volitility in the market. The fact is is future revenues are not priced into the market at 100%, but instead are a fractional percentage of that based on the risk probability that they will be fully realized.
So MOMO is a positive volatility in the risk premium based on the risk probability of the actual realization of future streams of revenue.
So according to my last few statements, some might feel FA and TA are both a waste of time...
TA, if used correctly, can mesh the two together. As Wise stated, charts mirror (lagging!) stock movements. If market efficiency theories are correct, then we can assume that all available information (including the stock research by all the worlds analyst) have been considered in the stock's pricing movements. If you can recognize TA for a summary sheet for the world's FA and use it as such, not only can you harness all the power of FA without the cost (both explicate and implicit), but you can do something that FA can never do, and that is time a stock! (based on interpretations of a stock's movements relating to the interpreter a shifting of the risk premium associated with the aforementioned risk probability!!).
Good luck to all
~Atlantic Cowboy
AI
