Technical trading is one of the most widely criticized forms of investment. While the majority of the criticism comes from fundamental analysts – like Warren Buffet who said “I realized technical analysis didn’t work when I turned the charts upside down and didn’t get a different answer” and “If past history was all there was… the richest people would be librarians.”

There are two major flaws to technical analysis:

The first is simply that tech traders are what are also referred to as intra-day or day traders. Many day traders make upwards of 500 in and out transactions in a single day of trading. With per-trade fees running in at about $.30 for in-and-out buy or sell orders, that’s $150.00 per day just in fees, not to mention charting software and all the other tools (some traders pay over $1500.00 per month for screening programs).

In order to be a profitable tech trader, one has to make sure that their trades are at least marginally profitable the entire time lest they slowly dig a whole for themselves.

The second major flaw is that tech analysis as a standalone uses chart-only indicators of trend movements and support/resistance points for intra-day trading. With the thousands of computers trading algorithmically now, there are many stocks where tech analysis can accurately predict momentum movements based on buy-and-sell volume created by computers trading stocks based on mathematical equations.

However what tech analysis lacks is the factoring-in of an extremely volatile influencer of stock price: Human Emotion. For example, it is statistically proven that just under 80% of the time an original AFL team wins the superbowl, the Dow posts gains over 10% (CNNMoney.com). Why? Call it patriotism and a bevy of football fans at the broker desks.

The market is growing ever-sensitive to economic data announcements (For example the S&P 500 drop today simply based on the minutes of the Federal Reserve Meeting.) A tech situation can look absolutely perfect, but an oil number can post huge price gains and tank the stock when a trader is going long on it. To be a successful tech junkie, a trader needs to factor these things in. When an oil number is coming out and the odds are good that it’ll be significantly higher, play a few oil stocks that look good on the tech analysis side. It’s a safer way to marginalize risk.

Fundamental analysis has proven the strongest over the long-term course of things. The S&P500 has posted just over 10.5% gains annually since its inception on March 4, 1957. An initial investment of 10,000.00 would be worth almost $1,000,000.00 today. Other success stories like Warren Buffet’s Berkshire Hathaway follow fundamental analysis to discover discounted value stocks. Every $10,000.00 initially invested in Berkshire Hathaway would be worth around $30,000,000.00 today!

So which is the best way to go about things? Since tech analysis is the riskier of the two, and requires a much more hands-on approach, it is only useful to someone who has time and money to invest. The average intra-day trader doesn’t become profitable until 12 months after they make their first trade, and that’s if they do it an average of 30+ hours per week.

I am both a day trader for a proprietary firm, and a “hobby” stock investor. Day trading tech analysis takes a lot of experience and gut feel. There are successful day traders but they generally don’t have an easy time getting there.

A better bet for the average person is to find companies that pay decent dividends to re-invest, have strong earnings and an established market, but still have room for expansion. The buy and hold method is tried and true for over 80 years (72% of stocks increased in value from Jan 1 to December 31 last year).

by D. Blain