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Is Stock Market Technical Analysis Useful or a Hoax?

By Jason Markum

Investing in the stock market is incredibly hard to do, or at least hard to do correctly! Make even one simple mistake and you can see years and years of hard work and careful savings disappear quicker than the blink of an eye!

Because of this, it’s not hard to understand why so many investors, both professional investors as well as amateur individual investors like you and me try to find methods of trading to stack the deck in our favor.

We all wish we had a magic crystal ball or special tea leaves that would tell us the future. But those tools were the tools of the dark ages. Today we live in the computer age where our tea leaves come from technology and things like charts and stock market technical analysis.

But does technical analysis really work? That’s exactly what I’m going to discuss in this article today.

First off, what is technical analysis? To define it simply, it is the use of past historical charts of a stocks performance in order to predict how that same stock will act tomorrow or down the line even further.

It uses very snazzy looking charts, and difficult seeming math and statistics (and statistical software packages) to give “signals” that are supposed to give you a leg up and predict how well a particular stock will do.

Many traders live and die by these charts (they even call themselves “Chartists”). But does this method really work?? I have the answer.

College researchers have long ago answered this question. The answer is a resounding NO! Even so, the charting industry lives on….it “seems” like it should work, but it doesn’t for a very specific reason. Well, two reasons actually.

The first main reason why it doesn’t work is called transaction costs. Charting DOES work. It WILL show you ways to make a penny here, and a penny there, almost guaranteed. But it doesn’t take into consideration the transaction costs. You might be guaranteed to make 12 cents on the trade, but it costs $9 to trade stock at your online brokerage account.

Also, many times to make a profit you have to buy and sell hundreds of times, earning pennies per trade. Again the problem is transaction costs eating away at those profits.

The second reason charting doesn’t work is more esoteric. If everyone can read a chart and buy a certain stock based on what the chart says, then suddenly you get a bunch of people all buying the same stock for the same reason. This massive out of the ordinary buying changes the supply and demand picture of the stock and moves the price on its own, throwing off your charts projections!

It’s sort of like when the world found out that stocks go down right before Christmas. Investors noticed this, and started buying right before Christmas when they “knew” stocks would go down. So many started doing this, that their own buying started making prices go up around Christmas. It’s the same problem that chartists face.

So there you have it…stay away from technical analysis and all chartists!

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