-Technicians believe that there is wisdom in price. That price has memory. That people who were inclined to buy at a certain price are somewhat likely to buy there again. Unless something’s changed, in which case their failure to re-buy (or buy more) at that formerly significant price level can be interpreted in an entirely new way – what was once an area of support on a chart becomes an area of resistance.
-Technicians believe that trends persist, in both directions, because market participants act on “news” at different speeds and act more boldly (or fearfully) the longer a particular movement in the markets goes on. This is why bull markets often end with a buying crescendo in the riskiest securities. Risk appetites grow as an uptrend persists, the desperation to participate gets stronger, it does not fade gently.
This is also why selling becomes more fierce when the market is at a 20% discount to its previous high than when it is at a 10% discount. “How could it be even more urgent to sell down 20% than it is down 10%?” someone would ask. Going by fundamentals, it isn’t. But investors only pay lip service to fundamentals. What they are more concerned with is owning less of the thing that looks stupid to own – and the lower it goes, the stupider it looks.
Unless you buy into the idea that rational behavior rules the investment markets. In which case, you’re reading the wrong writer
-Technicians find truth in price, rather than attempting to parse the impossibly conflicted and intentionally obscured opinions of the commentariat. Technicians find meaning in the actual buying and selling activity happening today, not in the dusty old 10Q’s of 90 days ago or in the projected estimates being bandied about among the discounted cash-flow analysis crowd on the sell-side.
But above all, technicians respect the power of sentiment more than their fundamentalist counterparts. And sentiment, after all, is how valuations actually come to be – the P in the PE Ratio or the PEG Ratio or the P/B calculation. In the real equation, the only one that counts, the P is what pays, not the E, not the EG and certainly not the B. Buffett would tell you the B (book value) is what pays over time (the market going from a voting machine to a weighing machine). But Buffett can afford to ride it out, having permanent capital under management and an ocean of insurance premiums sloshing in over the transom every hour of the day. Most market players do not.
To eliminate the emotional risk of trading, you have to neutralize your expectations about what the market will or will not do at any given moment or in any given situation. You can do this by being willing to think from the markets perspective. Remember, the market is always communicating in probabilities. At the collective level, your edge may look perfect in every respect; but at the individual level, every trader who has the potential to act as a force on price movement can negate the positive outcome of that edge. To think in probabilities, you have to create a mental framework or mind-set that is consistent with the underlying principles of a probabilistic environment. A probabilistic mind-set pertaining to trading consists of five fundamental truths.