Risk Control for Advisors
A risk-management tool that just might save your business
By Michael Kahn
March 31, 2009


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Clearly, there is a psychological component to all of this. Psychology, or investor perceptions, is the only thing that can explain why any stock does not trade at what might be considered fair value.

Technical analysts simply look at the chart to see what is obvious. Is the general trend of prices rising? That’s good. Is the stock trading sideways in a choppy manner? Or is the trend of prices falling? 

All of these questions help determine if a bull or bear market is in place or if the stock is just marking time.  Chartists simply buy stocks in rising trends and sell them in falling trends. When there is no trend, they wait for prices to move higher or lower from patterns and follow along with what the market is telling them.

Oversimplified, to be sure, but it really is not rocket science. . The best way novice chart readers can begin to use them is to first do their own research, whether it is fundamental or any other discipline, and then see if the chart agrees.

For example, you might believe a stock has good earnings prospects, is a leader in its industry and a respected analyst has just upgraded it to a "buy." However, the chart shows that prices have been rising nicely for nearly a year before making a sharp break lower. Could it be that the market thinks that all the good news is already priced into the stock and profit-takers have begun to get active? Perhaps this great company does not have such a great stock.

Technical analysis is widely accepted today as a valid investment approach and there are professional organizations around the world devoted to its study – including major universities teaching for-credit courses.

Don’t take my word for it. In 2005, the Financial Industry Regulatory Authority (FINRA) authorized both the NASD and the New York Stock Exchange to accept the Chartered Market Technician (CMT) exam as a substitute for the series 86 exam required of all Wall Street fundamental analysts. The regulators have put technical analysis’ CMT exam on par with fundamental analysis’ CFA.

Please take this one thought with you today: Technical analysis is the study of market action and market participants, and its goal is simply to get you on the right side of the trend.

For more information, visit the Market Technicians Association at www.mta.org or the local technical analysis society in your home country.

 

Michael Kahn, a Chartered Market Technician, writes the twice-weekly "Getting Technical" column for Barron’s Online, edits the daily Quick Takes Pro newsletter and co-manages an asset allocation mutual fund.. He is also the author of three books on charting, the most recent being "A Beginners' Guide to Charting Financial Markets." Read his blog at www.quicktakespro.com/blog

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