Despite receiving offers to write technical analysis textbooks over the years, I’ve politely refused. Many good ones already exist. So rather than write an exhaustive book with lots of charts and technical commentary that caters to a narrow audience, I wanted to try to reach a far broader audience by using relationships, something each of us can relate to in some way, to communicate the principles of technical analysis—minus the “technical analysis” jargon. At least the vast majority of it. Now don’t get me wrong. That technical analysis jargon is what I preach and practice every single day of my professional life. I live it. I breathe it. No one takes it more seriously than I. It’s just that in this hectic, abbreviation-based world, I thought taking this book’s route was the best course—while hoping you’ll delve deeper into the discipline of technical analysis.
The stock market is the most humbling monetary arena I can think of. Imagine making money hand over fist every year for multiple years, and then losing the lion’s share of it in one multi-month primary bear market. It doesn’t seem fair, but that’s the market for you. Each and every day is a financial war where you’re not sure what to expect, but you need a plan to deal with it nonetheless. You can be correct in your investment assessments 60 percent, 70 percent, even 80 percent or more of the time and still lose money if you can’t successfully manage the downside portion of the investment equation. Even a single, major loss in just one or two mismanaged equity positions can have a meaningful negative effect on your entire portfolio—cumulatively outweighing your multiple gains.
Bear markets are separation specialists; they excel in parting investors from their capital, often going to extremes that consensus opinion rarely foresees. So never rest easy! The combination of money, market volatility, psychology, and a twenty-four-hour news cycle is a potent brew in the business of investing and needs to be countered by a risk management plan and investment discipline. Don’t get involved in the stock market to the point that your emotional and financial well-being are hostage to its movements. That’s a dangerous place to be.
How many years of investment experience one has means absolutely nothing to the stock market, which often moves in a fashion completely opposite to what the news background might suggest. We all have learner’s permits when it comes to investing. There are many unexpected twists and turns on its road. There are no experts. Only the market itself. And no one is immune to its risks! The more experience you have and the larger your ego, the greater the chance that you’ll forget the basics (remember chapter 8, “Basic Training”?) and be lulled into a false sense of security. Then the market has you in its financial sights, and extricating yourself from its grip, especially in a bear market, can be difficult (to put it mildly). Remember, the stock market is the monetary boss.
Trying to be too smart can lead you to outsmart yourself when it comes to investing in the stock market. Be as thorough and complete as possible in your analysis, but don’t overanalyze a situation to the extent that it causes you to freeze and fail to implement the appropriate measures that your analysis suggests are needed. Remember, there’s the analysis part of the investment equation, the risk management portion of the investment equation, and the implementation portion of that equation. The finest investment analysis and insight in the world mean nothing if you aren’t able to act on them when the situation dictates. The same is true in life; decisions need to be implemented.
One of the reasons I use technical analysis as my preferred means of both security and stock market research is that it allows me to separate a mere opinion from a view backed by investment capital—capital whose flows translate into the equity and market movements that I track with my technical analysis gauges. These instruments include various types of trend lines, price patterns, moving averages, gaps, and my own momentum barometers, among others. My primary emphasis is on the longer-term market trend, the intermediate-term trend, and the shorter-term trends—in that order.
Generally speaking (and loosely defined) for our purposes, I’ll go back several years (on a weekly basis) to assess an intermediate-term trend, and multiple years (on a monthly basis) to view the long-term technical picture. In the latter instance I may go back up to a decade or so. The short-term time frame can mean days or even hours these days. Nonetheless, I still go back multiple months (and sometimes longer) when viewing a daily chart. Suffice it to say that market volatility has compressed the time it takes for markets to move similar distances.
