Spend a few moments reading posts on any retail investor chat board and you will likely see a lot of colorful terms such as, “double bottoms,” “buying climax,” “violating the lows,” “firmed up,” and “ascending peaks.” This isn’t an accident, as many non-professional investors are men who love to use overt sexual references to describe their mounting excitement as their stocks penetrate base formations and rise higher.
Once they have taken profits, there is a brief but intense moment of fulfillment and release that follows - they refer to this as the “afterglow.”
Now mind you, this is not the norm for conservative investors who analyse the actual financials and business operations of a company (aka fundamentals) before making a long term investment. Rather, the above is the culture and language of so-called “technical traders” who are looking to make a quick buck and use charts and complicated statistical tools to try and predict the next change in the price of a stock (or other asset).
Not surprisingly, the technical trader labels long-term investing based upon fundamentals as “marrying a stock” - of course to the typical technical trader personality, marriage is seen as a negative.
What is technical trading?
Simply put, the technical trader uses charts to have quick and casual affairs that leads to instant gratification, whereas the investor is focused on value over a period of many years. For this reason, investors typically are not found on chat boards exchanging ideas with each other, because the work is done before the purchase is made - after that we must wait years to see any type of meaningful return, so there really isn’t much to talk about.
On the contrary, the technical trader is always looking for an angle, or a new opportunity to penetrate something - “penetrate new highs” is a common phrase to describe a stock price going to a level before unseen.
Where investors looks for value based in reality, technical traders (aka chartists) look for trends. The idea is that the momentum in the market will perpetuate itself, and the stock will continue to rise (or fall). It’s sort of like if a girl winks at a guy, so he assumes that she will sleep with him, because she’s “giving him all the signals.” Indeed, traders use the same term for stocks.
However, even after some positive feedback the trader starts to encounter “resistance,” then they will be keen to look for a moment when the stock “pierces the neckline.” When this happens, traders “bail,” so that they can go “flirt with some other stocks” and score some more “in-and-out trades.”
Why this is stupid
Aside from the obvious bro culture infused into this type of short term financial speculation, Technical Analysis usually fails because it does not consider anything other than past price performance of a stock. As Random Walk Theory has shown us, looking only at past performance is not a good way to predict the future.
Remember, a stock is a portion of ownership of a company, and the value of that stock directly affects the wealth of the company owners and executives, as well as the ability of that company to remain independent (prevent a takeover).
The entire concept behind investing in a stock is that the value that a company will provide in the future will be greater than what it is today.
Technical Analysis doesn’t consider this in the least.
Financial instruments are not women
One very important concept to understand is that stocks are not females, and in fact, they are not even human beings. Stocks are tradable and exchangeable certificates, and they have very little in common with the fairer sex. For that reason, it is best to analyse these little portions of ownerships through the lens of financial statements and annual earnings reports, rather than primal and primitive mating rituals.
Short term investing is more akin to gambling than it is casual dating, and long term investing is nothing like marriage at all. When investing in a stock, the best approach is to do all of the work and research up front, and then make a firm and calculated investment decision with a clear time horizon. Once the purchase is made, an investor should only review the performance of their investment once a month at most, with quarterly, or even annual adjustments being more than sufficient.
If this is the approach you take to marriage, then may I suggest you won’t be married for very long.
Bottom line
Today, traders who use charts and Technical Analysis to win short term gains are typically embroiled in a sexist and speculative subculture fueled primarily by the encouragement of their digital counterparts. For this reason, crypto trading has emerged and become a champion within this pro-bro type of finding quick gains. Unlike the technical trading of stocks, cryptocurrency is based entirely on market perception, as crypto has no underlying fundamentals to analyse.
Regardless of how baseless an investment decision in a stock may be, at least it is an investment into something real. With cryptocurrency, traders are literally passing around a string of code that has no tangible purpose or value whatsoever other than what a population of chartists and enthusiasts have assigned to it - this is one primary reason why crypto has experienced so many sudden and wild crashes.
For anyone considering investing in anything, be it stocks, bonds, ETF’s, or even real estate, it is best to avoid the hype driven modes of technical traders, and instead learn the ropes of fundamental analysis.
If you are considering investing in cryptocurrency, it’s best to first read extensively about what you are getting yourself into. If something doesn’t make sense, it’s probably because it doesn’t make any sense.
More on fundamental analysis to come. Thanks for reading.