Stock Investing Course (Technical)

[Highest Prime]

^{Aloha to all those of you who followed the trail of bread crumbs over from the Overview and Fundamental investing thread! Here we leave behind much of the more quantitative measures of the market for those that are "fuzzier" and more qualitative. For those who are visual learners, you're in for a treat! Hold on tight as we begin the ...}
Basics of Technical Investing

Chapter 1: Why is Technical Investing Different?

At the beginning of the Fundamental Investing course (right around Reply 26), I mentioned the "one simple notion" that underlies fundamental investing as a discipline. In the interest of drawing parallels, I shall attempt to do the same for technical investing:

Today's optimal actions are often determined by examining those of others yesterday and forecasting those of others tomorrow.

In discussing technical investing, we leave behind much (but not all!) of the "science" - mathematics and finance - of the stock market in favor of the "art" (or, as some would say, the "voodoo") of the markets: determining and acting upon crowd psychology.

I should point out, before we begin, that my brain isn't hard-wired for greatness in this sort of arena. I play almost exclusively limit poker because I am much better at calculating and acting upon the mathematics of the game than I am at determining and acting upon the psychology of my opponents. Likewise, I am in my element analyzing and comparing elements of financial statements, but only through years of studying, literally, thousands of stock charts have I begun to acquire a sense of comfort with "when to get in" and "when to get out" that is the hallmark of the successful technical investor.

The good news is that those with knowledge of poker - and specifically winning no-limit and tournament players - have a gigantic head start on mastering technical investing. Which includes, as luck would have it, a fair percentage of those on this board!

Short-Term vs. Long-Term

Note, if you will, the differences in the core notions of fundamental and technical investing. The former stresses "over time," while the latter deals with "yesterday", "today" and "tomorrow". As you might surmise, what is the "long term" to fundamental investors is nothing more than a series of "short terms" to technical investors.

As usual, a poker analogy: Learning and understanding, with 100% confidence, the mathematics underlying Hold-'Em (or any poker game) will go a long way towards making you a lifelong winner at the game. But it won't determine whether you'll finish your next session with more money than you started. Fundamentally solid play, even at no-limit, drives long-term expectation; but human psychology ¹ drives short-term results.

So it is in the stock market: merely buying a "great" stock at the "right time" doesn't mean it will turn around and run higher after you buy it. Just as an expert poker player can have a string of a half-dozen losing sessions, expert investors occasionally string together a half-dozen losing trades. But, just as the expert player doesn't stop raising before the flop with Queens simply because he's been drawn out on five times in a row, the expert investor has the discipline to stick to his guns, and his methods, even when things go wrong.

And speaking of discipline ... that brings us to our most important point of the whole course. Next post, that is.

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¹ - And, it must be added, a fair bit of luck.