The market is a discounting mechanism, Shannon writes. It discounts the past and anticipates future events. I couldn't agree more, as I pressed the button to retract my last few letters typed. I found my parents to be the reactionary sort; either alarmed I might stay out all night partying or decidely adamant about investing into biotech stocks following the global pandemic. Yet, as with photography, if you waited to press the camera button to shoot once your subject was in frame, it would be too late. To capture a runner stealing a base or car passing through traffic, you must anticipate. I anticipate a record year for profits in some digital assets and technology amidst heavy losses for others and certain legacies. As a result, I delve more into understanding the depth of technical analysis.
Chapter One
Technical analysis, or TA for short, organizes market data, to provide a complete basis for all trade decisions. In fact, it does a couple things:
- generates trade ideas
- manages entries and exits
- determines position sizes
- manages risk (which, if you remember, is a trader's number one job)
The goal is to enter as the stock or asset shows momentum, either higher or lower.
TA is about understanding the motivations of participants. You can anticipate
their next moves based on historical precedents. If I understand one thing, ignoring the growing disruption of financial technology might prove detrimental to my pockets and pursuits.
Knowledge empowers, and more importantly, price is the only thing that pays! Make a note for later on.
Does it work?
Is a burger tasty? Well, that depends. To a kid who only eats rice, yes. To a vegan, maybe not. Here are the things #technicalanalysis does do:
- Give us an overall framework to make decisions
If you're thinking, "that's it", remember this.
The value of TA is not to predict every more but to make sense of price movement.
Answer that age old question from the curious and critics alike. 'Why is it going up again?'
In fact, the study of technical analysis answers two questions, in particular.
- Where has price come from?
- Where can it go?
Here's an example.
The first year I learned about Bitcoin was 2017. It would only be in August, when I had that fateful interaction with Brad. I was an office clerk intern, on my phone behind the desk.
That year, the asset began with a price about the sum of $1000. By my sister's birthday, the 22nd, it nearly kissed $3000. Christmas Eve, the gift of Bitcoin asked for about $14,000 per. I watched in 2021, while listening to this song, the price action skyrocket up to $67,000 a token of Bitcoin.
I don't have the means to accomplish what I wish, let alone ignore any phenomenon that could mirror even a fraction of the upward momentum this asset had. I knew since '17 I ought to toss in my lot, but even 6 years later and I still lacked any sort of process to accumulate, let alone profit.
Today, I observe the price would need to triple to reach levels I saw in 2021. Put another way, I still had about double the current price until I was in the money at levels previously seen. Yet, we could always go back to previous levels we reached.
Doesn't it make you even a little curious? Where, just how far, can it go?
If so, you're a speculator like myself. Speculation or not, no self-respecting go-getter could aspire to anything greater without a plan. No treasure-chasing pirate, amateur photographer or would-be writer could simply hack their way through the dense forest of information and opinion.
Where do we start?
The directions from the informational text by Brian Shannon, Technical Analysis Using Multiple Timeframes, stands on a few foundations:
- The market is a discounting mechanism. As I mentioned earlier, it discounts the past. It appreciates the future. (We pay cheaply now for its past performance. We aim to sell for more in the future.)
- Price moves in trends. A trend's more likely to continue than reverse.
- History repeats itself. Or in many ways, rhymes. As Shannon put it, many similarities, few certainties.
I, for one, can say that even if the action of the past 6 years doesn't occur exactly so in the next 6, I have a process to accumulate effectively and distribute efficiently for the most benefit to my coffers. I have pictures to take, after all.
Post Summary
- TA organizes market data to provide a basis for decisions. It creates trade ideas, management of entries and exits, determinations of position size, and most importantly, it manages risk.
- The goal is to enter an asset as it shows momentum, higher in my case. It's about understanding the motivation of participants.
- Price is the only thing that pays!