The Value of Technical Analysis

Skeptics of technical analysis often note that chart-reading is only an advanced form of reading tea leaves. Or entrails. Or old bones, I guess.

I take that criticism in stride: reading charts is one form of looking for clues. In this case, though, those “clues” are previous price and volume action.

And that action can often tell you something’s changed. And if you know what’s changed, you can usually trade in that direction.

Such was the case with the QQQ a few weeks ago: we knew something happened, because we saw a strong gap above a downtrend line on decent volume. That often means the new direction is now “up” and we should start looking for long plays.

However, one doesn’t always get it right. Research in Motion (NASDAQ:RIMM) is a good example where the chart completely faked me out. But, that’s why trading via technical analysis is never done alone. No, TA gives you an edge, nothing more. The real work should always be done with your money management parameters (stops, targets, etc.) to ensure a wrong chart read doesn’t result in financial catastrophe.

On the other hand, an edge is an edge. The chart had it right with Hershey (NYSE:HSY), and even with a pullback, it’s still climbing.

So, when skeptics laugh at TA, laugh along with them. It’s you that have the edge, not them.