Caveats
Technical analysis attempts to portray market price
action as a kind of science, using price charts to help predict the future
evolution of the market being analysed. However, when employing TA to
make investment decisions it's important to bear in mind certain caveats.
- whilst its use is undeniable in assisting timing when investing, technical
analysis is not a perfect science, since we are dealing with an imperfect
science - i.e. we are dealing with human behaviour and, to date, this
is still beyond our modelling processes !
- when looking at a market on one time basis e.g. a 60min chart it's important
to look at the time scales around the current chart. For example, if you
follow 60min charts and you think you have spotted something, take a moment
to look at say the 30min or the daily chart to see if they concur with
what you are seeing on the original time basis. If the other scales confirm
your initial thought then this should give you some additional confidence
when investing.
- also remember that the 'Intelligence of the market is not equal to
the sum of its constituents !' What do we mean by this ? Well, the market
can behave illogically at times and if you follow the technicals to the
letter with a disregard for what is happening in the 'real world' you
could find yourself getting burnt ! Remember that the market has a 'herd'
instinct and the best way of employing TA is to use it to supplement what
you can determine from closely studying the psychology/underlying position
of the market.
- finally, use TA slowly at first until you get a feel for how the different
studies interact with the market's price action. Don't jump in thinking
you have found the Holy Grail - you haven't ! What TA will do though is
give you a valuable and somewhat impartial aid to supplement/confirm/negate
what you initally think when looking at a market.
Remember, before you invest - always, always take a look at the chart
- it will help you control your risk and if you can achieve that you are
well on your way to becoming a successful investor in the long run.