Tuesday, April 23, 2013

Technical Analysis DeMystified Book Review

I like the idea of Core and Explore investing. If you're not familiar, the approach is to safely invest the core of your retirement, +85% into low cost index funds across an appropriate asset allocation model that fits your age and risk level. The small remainder is set aside to allow you to flex your personal investing prowess. It is not money that you use to bet the farm, but money that will allow you to try your hand and test your knowledge. Your type of exploration can be fundamentalist driven or technically driven.You can still buy index funds, it's up to you.

I lost a chunk of my Explore fund with the demise of the market in 2008; and due to my inexperience and lack of sufficient study. I was disheartened, but not broke because my Core was still intact and chugging along just as it should. I am now in a position that I want to begin working proactively in my Explore fund once again. Note: This is not due to recent market sentiment and the major indices reaching new highs, but rather the re-establishment of the cash in my Explore portfolio. While I love the idea behind ShareBuilder and their automatic investing plans - it is also wise to consider transaction costs. I've read that transaction costs should not be more than 2% of any trade. If you invest at ShareBuilder, at a $4 automatic trade, it is suggested that your minimum buy order should be $200, otherwise you're losing too much to transaction fees. But I digress...

I checked out the book Technical Analysis Demystified: A Self-Teaching Guide by Constance Brown. Because of my previous investment history, I was already vaguely familiar with some of the technical indicators that are available to help you examine a stock chart and understand and predict the price movement therein. Nevertheless, I knew that I didn't know enough. It should be understood that Technical Analysis differs from Fundamental Analysis. Technical Analysis is the study of the charting and claims that the chart will hold all the price information you need to trade. Trading based on chart analysis and price projection is known as market timing. Warren Buffett doesn't follow this method. His method is that of company valuation, the Graham number, P/E, and a long term buy and hold approach. I recently reviewed a book about Buffett's investing style.

Constance Brown, however, has written several books about Fibonacci analysis, the Elliot Wave Principle, and more in depth books than this beginner's guide, Technical Analysis Demystified.
In fact, there are so many technical indicators that are covered in this book that it feels like browsing the buffet line - endless choices but not enough time to really sample any one sufficiently to form an opinion about, let alone establish any appreciable skills.
The technical indicators covered in this text include several from momentum, breadth, and sentiment. The author stresses that a trade should have two of his three non-correlated methods giving permission to enter the trade. 

For the novice trader, this book will open your eyes to another dimension of trading. The author, graciously, is not a hyped up salesperson trying to convert you. While profitable trades are set up and explained, caution and understanding and risk assessment are all equally stressed. The author quizzes your intent to make a trade.
"Do you have confirmation in other stocks in the sector?
Do you have permission from your indicators at a key support or resistance level? 
Can you find evidence to support your opinion in other makrets that correlated? Can you establish a postion risking less than 3 percent of your portfolio? Do you have a minimum 3-to-1 win-to-loss ratio?"

I think this was a very worth while read. And while I probably won't be using astrological events as part of my technical analysis toolbox, I did learn that using two oscillators, such as a fast stochastic indicator and a slow moving-average convergence divergence (MACD) indicator, provides only one market analysis approach, not two.

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