Link: Technical Analysis is about Reflection not Inflection

Jan 14, 2011: 9:13 AM CST

I wanted to share a link to a brief but helpful/thought-provoking defense of Technical Analysis as explained by Greg Harmon of Dragonfly Capital.

Entitled, “Technical Analysis is about Reflection, not Inflection,” Greg challenges some of the common complaints or misperceptions about what those who use TA do and how they study their charts.

He also adds a humorous chart of what NOT to do as a technical analyst – it’s worth a glimpse!

I wanted to pull-out a few quotes:

“Technical Analysis is based on sound reasoning about price history and investor psychology using time tested tools.”

“The key point that is usually misunderstood is that Technical Analysis looks to identify points of where something based on history may happen.”

“No technical analyst that I know looks at a chart and sets up buy and sell levels from their analysis and then just walks away.”

“All these lines are used as a guide to determine where to start paying attention, because these areas have had meaning in the past.”

A key point is that no one knows what the future will hold, for at any given moment, a significant/unexpected news event can sent price screaming in the opposite direction of even the most well-researched fundamental or technical analysis-based position.

I like to use the charts to determine IF/THEN scenarios, such as “IF this key level breaks THEN we can expect to see a move up/down to the next key reference level.”

As Greg says, you monitor price actively as it moves UP off a key inflection point towards your target, constantly monitoring for any major signs of non-confirmation or unexpected reversals in price.

If something unexpected happens, technical analysis (price levels) helps you in determining where price should NOT go, which generally gives you the risk in a trade as defined as your stop-loss.

I could go on, but always remember that trading is a game of odds/probabilities and edge, which is best revealed through objective price levels (and trends – and the trades that develop in the context of a life cycle of a price move) as seen on the charts.

Hat tip – Greg’s post was included as one of the “Overheard on StockTwits” daily morning emails via StockTwits.com.

Corey Rosenbloom, CMT

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