Overcoming the Pitfalls in Real-World Technical Analysis
Your basic objective when it comes to investing is to profit from change. The art of investing is to recognize change and adjust to it.
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No investment approach is perfect. There are pitfalls to using any strategy, and technical analysis is no exception.
In using technical analysis, some of the problems stem from not understanding the construction and limitations of the various indicators -- the leads, lags, and faults. However, more problems come from human error and from expecting too much from these tools.
The fact that some of these tools are based on mathematical formulas does not increase or guarantee their success. In various Real Money Pro articles over the years I have noted that some technical analysis tools, such as oscillators, work better in certain environments than others.
In addition, over time some indicators have stopped working because of structural changes in the markets, so you need to develop new twists and new indicators as you go along. You need to understand the current environment to temper buy and sell signals in a bear market or a bull market, and you need to look for better setups to trade as well as to test.
Other problems come from the subjective nature of chart reading. Pattern recognition is a skill that needs to be developed with day-to-day practice and, in the end, not everyone acquires the knack for it. Even if you become good at reading charts, you can still get hurt by false breakouts and failed patterns.
In the real world away from textbook patterns you can encounter whipsaws. Moving average systems may help to cut down on whipsaws but nothing is foolproof. Losses will occur, but the key to success is in how you deal with them.
Dealing With Change
Everything you own is changing in price and value. Some things change slowly in value, like your house, condo, raw land, or antiques. Some change rapidly, like that AI stock or biotech name you recently bought.
Your basic objective when it comes to investing is to profit from change. The art of investing is to recognize change and adjust to it.
Neither you nor I will overcome all of the obstacles, but if you develop a disciplined yet dynamic approach, you will be miles ahead of the person with no plan whatsoever. The pitfalls will always change, so even if I suggest how to overcome some of them, more will spring up. The best way to deal with them is to have an approach that provides for self-analysis.