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I NEVER Believed in Technical Analysis Until I Realized This...

Hi, Tom Winterstein here. I’m the ChartPros founder and a Certified Mental Performance Coach.
 
Tom Winterstein College Days!When I was in MBA school back in the late 1980s (yeah that's me back then long before gray hair) it was drilled into me that a company’s stock price was always tied to its financial statements. You know, Profit and Loss statements, Balance Sheets, etc and all that fancy financial lingo. 
 
Essentially, the company’s value was a current reflection of future cash flows and profitability.  Metrics such as Price/Earnings (PE ratio) and Net Present Value (NPV) of future cash flows dominated my thought process on company valuations and for publicly traded companies, the stock price.
 
And so I went through much of my early adult life not really ever knowing otherwise. But along the way I had heard of this “technical analysis” stuff but considered it something like voodoo or witchcraft because as far as I knew it had absolutely nothing to do with the fundamentals of a company’s financial performance.
 
And also at that time the only market strategy I knew was to buy low and sell high which during the 1990’s worked like a champ so much so I thought I was a genius for buying stock in companies like Dell, Microsoft, Intel, Cisco, etc that seemingly doubled in price every 12 months. 
 
A time period fondly known as the DotCom bubble.
 
Well, stock prices kept doubling until they didn’t.
 
The DotCom bubble burst in the late 1990s / early 2000s and formally came to an end with the tragic events of September 2001.
 
But still I believed every stock price was driven by “the fundamentals” (something you may have heard about from Jim Cramer on CNBC).
 
Until one day I saw a chart of the S&P 500 with standard deviations drawn on it based on the previous day’s settlement price. 
 
Hmmmm…. That looked interesting I thought.
 
Given my deep understanding of statistics and honestly my fondness for analytics I was curious and wanted to learn more about this technical analysis stuff (I was still considering it “stuff” at that time because I still didn’t understand it but that was all about to change).
 
Once I discovered that price on a chart could follow and respect trendlines I wanted to learn more. Next, it was support and resistance.  And wouldn’t you know it… I started becoming a believer in this “stuff” and now considered it “analysis”.
 
As a life long learner, I was hooked on price action technical analysis and started learning as much as I could about it.
 
However, I was still somewhat skeptical because it doesn’t work 100% of the time. 
 
Well guess what…
 
Neither does anything else in determining future price action but because of the underlying math and statistics behind it all I became a firm believer and user of these:
 
5 major Price Action tools that are native to every charting platform out there:
  1. Support and Resistance
  2. Trend
  3. Fibonacci (wow that really blew my mind with all the underlying stats, math, and probabilities)
  4. Supply and Demand Zones
  5. Change Control Zones

But it wasn’t a straight shot to my steadfast belief in just these five simple technical analysis tools.  I went through just about every type of indicator, signal, guru, and trade room to fully realize that it’s all about the probabilities and getting them into your favor, much like a casino.

Think about how long and how successful the gaming industry (viva Las Vegas) has been because the odds always favor the house in the long run.

That’s not to say you can’t walk into a casino and walk out a winner.  But the odds were against you before you ever set foot in the door.

That’s not to say that I think trading is like gambling. 

All I’m saying is that as a trader you must have a system that puts the odds in your favor in order to succeed in the trading business.

That’s it for now.

I just wanted to point that out that when I was younger, I NEVER believed in Price Action Technical Analysis and as I’ve matured, now I’ve learned to NEVER SAY NEVER!

Happy Trading!

Tom Winterstein

PS. - View recent Market Insights articles:

 

 

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