When I first got back to Malaysia, I had a few job offers and one of them was with a small Japanese broking house in Kuala Lumpur. When I thought of broking house, I told myself, finally, a chance to put all those silly call and put options calculation into practice. Instead, I discovered what nonsense chartist brokers speak in; the way they work is so repulsive and that became one of few jobs that I am glad that I gave a solid no.

I always find it surprising how elaborate technical analysts or chartists go to extrapolate past prices into the future without any regard to fundamentals of companies. What is more shocking is the number of people in the public that believe in sophisticated senseless rationale and jargons used by chartists to predict future prices. Just open the business section of any local mainstream newspaper and observe how many chartists speaking bullshit there. But then again, these newspapers take feng shui seriously…

I have a real issue with individuals that try to forecast the economy through feng shui but I am going off tangent.

Anyway, how senseless is technical analysis?

Two of the common jargons used by chartists are support and resistance lines. Chartists believe — I stress: believe. You know, like tooth fairy godmother kind of thing — that these are the lines which prices find it hard to cross. But how do they derive these lines?

They basically choose a time frame at their wimp and then draw a line that corresponds to a couple of local minimums, or maximums, depending whether one is referring to support or resistance. After drawing the lines, chartists pretend that prices would have a hard time crossing the lines. If prices do go over these lines, chartists would find new lines based on past prices and say the same thing all over again. The problem with this is that these lines almost never able to help in making reliable forecasts.

In fact, these lines are so ridiculous that anybody could draw it. You do not need a broker to draw a freaking straight line for you. Go ahead, try it yourself. You can do it.

Another term, which I hate so much is correction. What the do they mean by correction? Do they mean somebody made a mistake in recording of prices? The only correction to be made is to their support and resistance lines, which by the way, are never right in the first place. Prices reflect the available information at a particular point of time. If information changes, so would the prices.

As if these support and resistance lines are reliable to forecast prices, chartists have the cheeks to even forecast their forecast! They call such forecast of forecast as pivot point calculation. I call it bullshit.

I do admit that superficial forecasting like this may hit the bull eyes from time to time. However, it is so only when enough people actually believe in that rubbish; very much self-fulfilling prophecies. Or mostly, it is just coincidence. At least one third of the time, a chart could get it right because of pure probability, not due to piercing insight.

In actual fact, prices depend on firms’ fundamental information like growth expectation and ability of management, not past market prices. Past market prices only reflect past information and do not incorporate relevant new information. That is why forecasting future prices cannot be done by reading past prices. If chartists are so good, tell me, how many chartists predicted the fall of Transmile from RM14 to merely RM4?

Oh, oh. Please do not tell me the support line right now is somewhere above RM4. And please, do not compare technical analysis with econometrics. Most of these chartists do not have an idea what time-series analysis is.

I will say this and I will say this only once: technical analysis or whatever you would like to call it is not economics.

7 Responses to “[1327] Of that rubbish that is technical analysis”

  1. on 09 Aug 2007 at 00:26 moo_t

    Warren Buffet are no.1 enemy of all chartist.

    IMHO, if I shake off some of my laziness, I will earn more money in with payperpost writing than invest Malaysia stock market.

  2. on 09 Aug 2007 at 09:50 Hafiz Noor Shams

    Oh, I donno about that. The stock market does offer substantial returns (much more than payperpost, that much I can guarantee, given sufficient capital).

  3. on 09 Aug 2007 at 11:19 moo_t

    given sufficient capital

  4. on 10 Aug 2007 at 13:32 mr duh

    i think you need to combine both tech and fund analysis to make your investment work. at least for me, fund analysis is used to see if a company is worth going for or not. tech comes in after i have zone into a particular company, but now need to time when to go in to buy and what market price is logical. fund analysis can help you with timing too, but i use tech to fine tune it more. i am not comfy using tech to select a company, but i am also not as comfy using fund to time my entry too…. but with investment, with money, what ever you feel more comfy with and makes more money for you works. hahahaha

  5. […] it is future performance that matters, not past performance, regardless what many chartists, the practitioners of pseudoscience, say. That same is true with any political […]

  6. […] And screw the smart ass broker too. You and your stupid and worthless advice as well as those useless technical graphs. […]

  7. […] In times of rapid changes, historical facts may even be irrelevant. Frequently, the only relevant historical trend is that of seasonal in nature, meaning, if I may, the frequency of changes. By the frequency itself, cycles are dependent on certain factors that do not necessarily occur cyclically. As for amplitude, projection requires more than historical data. It requires plans which by themselves are based on both facts and assumptions. Chartists for one rely too much on historical data without regard to change. Mainstream economics may be too static to describe our world but at least economics understands how changes affect projection. Chartists do not. […]

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