Technical analysis 101

This post is to inspire you to consider trend analysis when trying to predict financial markets.

Trend Analysis is seeing order in chaos – the film Limitless

Trend analysis is a tricky thing when economic indicators give you mixed signals. However, consider one of the ideas found in a film (Hollywood is sometimes a great place to get inspiration, Wall Street for example).  I watched the movie ‘Limitless’ the other night (recommended). If you watch this it will inspire you to at least consider trend analysis.

It was about a guy (Bradley Cooper) who used NTZ, a pill, which could make you significantly smarter. He used his increase in IQ to make cognitive leaps and see order and patterns, where others saw chaos in stock market price movements. He made a fortune. People were amazed by his ability to put seemingly unrelated pieces of data together and form a meaningful hypothesis that others could not see.

This is your brain, it tries to fight entropy by creating order from chaos. It connects seemingly unrelated signals to yield a meaningful pattern. Some brains do it better than others. That is one reason why some people are rich and others have less.

  • If you want a natural way to help your brain make a cognitive leap, in a similar way, write me and I can tell you. In theory it will help you in an intuitive way like it help the hero of the film ‘Limitless’.

Making sense of the random walk down Wall street

If you want to make money in stocks you have to do the same. At least be open to the possibility that your brain can do this. You have the ability, I believe everyone has.  That is discover patterns where others see nothing.  That is the real trick. To determine the stock market trend, when others only see mixed economic signals. There is always a trend by the way. The history has just not revealed itself yet.

If you are discouraged by the economy, do not be and  lets look at the current situation in our economy in a more realistic way.

Mixed Economic signals are the new trend

I know people will say, I remember when a boom was a boom and a recession was 18 months. It was clear to anyone who observed the economy that an economic cycle has definition. The problem in today’s economy is nothing is clear. Nothing is straight forward.

If the housing or job market is good one month, then the next month some other economic indicator will show something to the contrary. In a world of economic hypochondriacs, every indicator is a sign of a turning point or a new trend or economic collapse is on the way. What to do, is the question.

Reality of market trends

Look, here is the reality,  there have been many times just as confusing.  I remember when things were more certain like the 1960s and the roaring 80s, and I remember when things were equally uncertain, like the stagflation of the 70s. In fact, from 1969 to 1981 the stock market basically was flat.

The 1990s had a pretty clear trend until it was broken and then the 00s also trended with a nice strong signal before hand when it was going to break the market trend.

So the question is today, looking at the stock market, is the new trend chaos, confusion, a flat market? My take on it is a definitive ‘no’. There is order and a pattern underneath this chaos and you do not need to do fractal analysis or any higher level mathematics to see a pattern. It is up to you to discover it. I use my own set of tools but they might not be the best in the world. But they work for me.

Where to start when looking at patterns? Smart people make complex things elegantly simple (E=MC2), less intelligent people complicate things unnecessarily. There is a power and elegance in simplicity, if and only if the formula is correct. This is a hint. Before you dig out every exotic arrow in your quiver, look first at some tools that are simple and time-tested. Also use your intuition or start to train it.

Hence, even if at first glance you see no trend, so what, look at it from another angle, take a break, read more about technical analysis.

I think everything trends and nothing is truly random. You simply need to be able to discern the pattern, the signal from the noise. If alas this is too chaotic for you and you do not have the patience for trend analysis, try quantitative investing.

Demographic, political and unforeseen influences on the market

Endogenous or exogenous variables hit market psychology like meteors in our atmosphere. It does not matter. What matters is the trend and turning points.

Granted there are huge demographic and political movements world-wide that spice things up a bit, but it should not affect your ability to make money on a systematic basis. Here is my take on it. There is always a market somewhere that is trending. It might not be the Dow or the S&P or they may not be trending up. But some market is trending. If not the market, a sector.

Stan Weinstein‘s book, dealt with how to make money in a bull or bear market. If all markets are truly flat  markets, use only quantitative picks.

You should not worry too much about political economic events on the news, unless it is interesting for you. It is for me. But these news reports should not sway your investment decisions.

Find the trend where ever it is and invest with a system. Use your brain with its own unique connections and patterns formed over your lifetime to find pattern in the market. You do not need to know if NZT real or fake. Why? In the film the older wiser investor (De Niro), made investment choices the old fashion way with work and intuition and he did pretty well. My recommendation is believe in yourself and start studying trend analysis, especially things that have been statistically proven.