The Alchemists of Wall Street

The practitioners of technical analysis are the alchemists of our modern financial world, attempting to conjure gold out of stock charts. Whole careers have been made out of calling out buy and sell signals based on this line crossing that line and the like without regard to the fundamentals or economic cycles. Does it work? Sometimes it does.

Does it work because it is true, or because people believe it is true and therefore act on it? I believe that more often than not it is self-fulfilling prophecy. People believe in it and trade based on it so it becomes true. I suppose in some ways it is a way of understanding one element of investor psychology.

The result is that you have to pay attention to it, because so many people ascribe to it and buy and sell based on it. But do I think that the dreaded "double top" is all powerful? Not really. Like the alchemists of old, technical traders are always trying to find that "system" or "formula" that is guarranteed to make them money without having to understand the underlying company. It apparently is seductive because almost all of the adds I see on CNBC for trading systems are marketed on this basis. Many newletters are based on one flavor or another of technical analysis too.

I invest and trade based on fundamentals, the economic cycle, psychology and yes, technicals. But I take it with a grain of salt.