Quick Note Regarding Technical Analysis

It seems that everyone in the investment community these days does technical analysis whether they admit it or not. Indeed it seems to be the driving factor in markets these days with market professionals drawing squiggly lines on charts, memorizing vital support and resistence levels, and desperately searching for noticible patterns. I would caution investors from soley following this method for one primary reason. As the noted investor Jim Sinclair (Jsmineset.com) noted recently, technical analysis is so dominate in the market that it can be used to manipulate asset prices. All it takes is for speculative interests to use important technical patterns to sucker investors into a trap and then they can pick their pockets.

A great example of this is in EUR/USD in December 2009. If you were a technical analysis trader who looked at the chart below in December you would have bought EUR/USD because of a perceived "double top breakout" which is considered bullish. However the COT reports showed that the major commerials were heavily short the Euro and long the dollar. You can see what occurred. The tech traders were tricked into buying right before the Euro collapsed. I have noticed over the last year how many times this happens. So my warning would be to always see where the big players in the market are positioned and think twice before following seemingly obvious techinal patterns.





Black Swan Insights



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2 comments:

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