Don’t lose the plot

The first part of Accrued Interest’s latest post strikes me as one of the few convincing statements about the use of technical indicators/charting that I’ve seen stated online. First and foremost, it’s a way to gauge the psychology of markets, which is something that can’t be done using fundamental factors. Whether it’s that effective is a good question, and whether the widespread use of charts and technical indicators is itself a cause of negative or positive feedback is another interesting line of inquiry. I agree with his view that it tends to get taken really far, often by people who put too much faith in these methods and metrics. It’s interesting to see how the more short-term a person tends to trade, the more that these technical factors seem to make sense; it’s clearly tied to the fact that psychology of market participants becomes more and more important in shorter time frames, and that in the long run, fundamental factors tend to win out after everyone’s calmed down and is seeing with clear vision. Warren Buffet never reads charts, Paul Tudor Jones claimed that he used technical factors in his decision-making about half the time, and the average daytrader probably doesn’t even place a trade without having MACD, RSI, Bollinger Bands, stochastic indicators, Fibonacci whatsits and reverse multiplier Kruchinski-Myer alpha-theta wave regressions overlayed on their chart.