Technical Analysis doesn't work AT ALL

[Towninvestor]

My main frustration with Rule #1 is the emphasis on technical analysis. After having drafted up a list of rule #1 companies, figuring out their MOS prices, and setting up a Yahoo Technical Analysis Graph, I did some paper trading for awhile. I bought in and out using technical analysis (MACD, moving average, and stochatistic) along with the help of friend of mine and made very, very little on every trade. Sometimes I'd even lose.

The problem was that the technical indicators aren't sensitive at all. By the time it tells you to buy in, the stock is already halfway up its climb and by the time it tells you to get out, you've made almost nothing. For example, I bought WFMI recently when the technical indicators told me to buy in. I made 4% in a couple days and I was very excited. I waited for the arrows to tell me to get out, however, and by that time, I was up only 1%. This is a very frequent pattern, it seems, if you rely on technical trading.

For instance, take a look at a year-long WFMI chart using the technical indicators. If you follow the arrows, you are making a measly 1-2% on every trade. Sometimes you even lose a little money. In fact, the technical indicators don't help you much at all.

Am I the only one who feels that technical analysis doesn't help? Has anyone figured out a better way to tell when to buy and sell a stock? For myself, I'm totally disillusioned with this kind of trading. Perhaps my best bet is, rather than using technical indicators, I could just buy a stock and hang on to it for a year or two.

What do you all think?

[icedmetal]

Originally Posted by Towninvestor

My main frustration with Rule #1 is the emphasis on technical analysis. After having drafted up a list of rule #1 companies, figuring out their MOS prices, and setting up a Yahoo Technical Analysis Graph, I did some paper trading for awhile. I bought in and out using technical analysis (MACD, moving average, and stochatistic) along with the help of friend of mine and made very, very little on every trade. Sometimes I'd even lose.

The problem was that the technical indicators aren't sensitive at all. By the time it tells you to buy in, the stock is already halfway up its climb and by the time it tells you to get out, you've made almost nothing. For example, I bought WFMI recently when the technical indicators told me to buy in. I made 4% in a couple days and I was very excited. I waited for the arrows to tell me to get out, however, and by that time, I was up only 1%. This is a very frequent pattern, it seems, if you rely on technical trading.

For instance, take a look at a year-long WFMI chart using the technical indicators. If you follow the arrows, you are making a measly 1-2% on every trade. Sometimes you even lose a little money. In fact, the technical indicators don't help you much at all.

Am I the only one who feels that technical analysis doesn't help? Has anyone figured out a better way to tell when to buy and sell a stock? For myself, I'm totally disillusioned with this kind of trading. Perhaps my best bet is, rather than using technical indicators, I could just buy a stock and hang on to it for a year or two.

What do you all think?

Good for you man, you're one step closer to becoming a TRUE value investor. Benjamin Graham applauds you, and all the others who are ready to realize that technical trading is a FARCE. It may make money for you, for a little while. Sooner or later, it loses, big time.

Wanna get technical? Put a trailing 5% stop loss on all your stock picks. That's as technical as I'll ever get on a stock again.

[npg]

I found that I don't have the temperament for technical trading. I am more comfortable with fundamentals and the logic of a good, solid business operating with huge pricing power (the moat).

Once I got a stake in such business with a reasonable discount---I learned to appreciate that such opportunities don't come often. So I hold on to them indefinitely, letting compounding of value work to my advantage as long as the business is intact and able to operate giving superior returns. It would just hurt me too much having to buy it back at a higher price later on.

I would say you need to pick what's best for your temperament. After all, its your money and you can allocate and manage it any way you want.

You could also read my signature-du-jour, which states:

"Investing is where you find a few great companies and then sit on your ass." [Charlie Munger]

Sums it all up for me.

[AlexG]

Warren Buffett once said "I realized technical analysis didn't work when I turned the charts upside down and didn't get a different answer"

I have found great success buying great companies at a discount and holding on to them. I tried papertrading with technical analysis and basically had the same problem as you. When they signals told me go, the stock was already on its climb and vice versa. I suggest papertrading using a buy and hold approach and see if the results make satisfy your expectations. Also, make sure you have a workable time frame for the strategy to pan out. Do not test buy and hold for 3 months and scream Eureka!

Technicians will argue that a MA will help you preserve capital, etc... thats where the Margin of Safety concept comes in, trust me it works

[ktf]

Over the last 3 months I have been following 4 companies with the following results due to technical trading, in brackets I put the approximate buy and hold results:

APPL up 9%, (40%)
UNT up 3% (25%)
LRW up 6% (33%)
NTRI up 6% (20%)

Granted I made a lot of mistakes in trading and didn't always follow Rule #1 principles, but that is part of the point. Like others I do not have the temperment for trading.

[npg]

Originally Posted by ktf

Over the last 3 months I have been following 4 companies with the following results due to technical trading, in brackets I put the approximate buy and hold results:

APPL up 9%, (40%)
UNT up 3% (25%)
LRW up 6% (33%)
NTRI up 6% (20%)

Granted I made a lot of mistakes in trading and didn't always follow Rule #1 principles, but that is part of the point. Like others I do not have the temperment for trading.

My figures were almost in the same range. A few points higher maybe but almost similar. It's easy to see why I gave that one up after trying it for 3 months. I really should have known better but the enthusiasm got me.

Incidentally, I made mistakes too. And that's the point! Every sell and buy action is a call you can get potentially wrong. The more you make in your investment, the higher your risk of wrong calls. Simple.

I am sure there are a lot of people out there who would confirm that they had problems following the 'simple' technical strategy and therefore had losses. Little did we know that it was not our inability following that strategy, but the probabilities that were against us.

LTB&H!!!! Make your broker poor ;)

[capp53]

I think they do work. While I agree they are back looking indicators if you can spot early trends, you can ride the wave. Even if you are wrong transaction costs are so low you can quickly exit a position. You might miss a quick jump but the goal here is for a 15% return. The two most important features to me are they prevent you from losing money and it takes the emotion out of investing!

[SeanieT]

Originally Posted by capp53

I think they do work. While I agree they are back looking indicators if you can spot early trends, you can ride the wave. Even if you are wrong transaction costs are so low you can quickly exit a position. You might miss a quick jump but the goal here is for a 15% return. The two most important features to me are they prevent you from losing money and it takes the emotion out of investing!

I Agree. I feel that the whole package work. You just have to watch your basket! You have to be careful not to invest in anything that you have'nt given th 4m lookover. Then you have to watch the Basket! If you do rule out a business to be a Rule#1 Business, you have to purchase it under the MOS in an upward trend. I feel that it all works, we just have to be patient and let a True Rule# 1 business do it's work. So with all that said, watch your basket.

[SeanieT]

Originally Posted by Towninvestor

My main frustration with Rule #1 is the emphasis on technical analysis. After having drafted up a list of rule #1 companies, figuring out their MOS prices, and setting up a Yahoo Technical Analysis Graph, I did some paper trading for awhile. I bought in and out using technical analysis (MACD, moving average, and stochatistic) along with the help of friend of mine and made very, very little on every trade. Sometimes I'd even lose.

The problem was that the technical indicators aren't sensitive at all. By the time it tells you to buy in, the stock is already halfway up its climb and by the time it tells you to get out, you've made almost nothing. For example, I bought WFMI recently when the technical indicators told me to buy in. I made 4% in a couple days and I was very excited. I waited for the arrows to tell me to get out, however, and by that time, I was up only 1%. This is a very frequent pattern, it seems, if you rely on technical trading.

For instance, take a look at a year-long WFMI chart using the technical indicators. If you follow the arrows, you are making a measly 1-2% on every trade. Sometimes you even lose a little money. In fact, the technical indicators don't help you much at all.

Am I the only one who feels that technical analysis doesn't help? Has anyone figured out a better way to tell when to buy and sell a stock? For myself, I'm totally disillusioned with this kind of trading. Perhaps my best bet is, rather than using technical indicators, I could just buy a stock and hang on to it for a year or two.

What do you all think?

Let me ask you this. Was WFMI under the MOS when you bought it and did the price peak over the Sticker Price? Also where you looking at the tools per Daily or Weekly with a 10-30 MA?

[lee810]

Originally Posted by SeanieT

Let me ask you this. Was WFMI under the MOS when you bought it and did the price peak over the Sticker Price? Also where you looking at the tools per Daily or Weekly with a 10-30 MA?

That's a good question. Although Whole Foods (WFMI) figured prominently in the Rule#1 book, I've noticed that its equity growth went flat from 2005 to 2006. That will take the MOS price from whatever it was down to near 0, particularly if you're using a conservative estimate, like the spreadsheet does. Looking at the stock price, it's been on a decline over the past year (down nearly 30%) while the S&P is up 20%.

I don't know if this is an example of technical analysis not working, or if it's a case of having a bad stock to work with. Even the 50-day moving average is so smooth in its decline that it looks just like a straight line downward except for a 2 month period around last November. With technical analysis, you still need to have a stock price that moves up and down to get in and out of with some profits, whereas the WFMI stock has been more of a slow steady slide and so it may not be a good stock to use as an example of how technical trading works or doesn't work.

I believe that the technical analysis part of Rule#1 investing is just to let you know when to get out of a stock after the MOS calculator has told you gone near or above sticker price. If you want to do purely technical trading, then that sort of violates the fundamentals of Rule#1, i.e., buying value stocks to begin with.

-Lee