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Posted April 30, 2001
Much Too Advanced for Beginners! Good for Intermediates
Experts can make the mistake of forgetting how little people know when they first get started. That is clearly the case with this book by Mr. Schwager. If you really want to get started with technical analysis for trading, you will need to find something simpler! Then you can graduate to this overview. I have had the benefit of reading many books on technical analysis and having discussed it with many technicians. From that perspective, I found the book to be a delightful, down-to-earth, nondoctrinaire explanation. But I wouldn't have made it past the first five chapters when I was just getting started with technical analysis. I graded the book as a one star for beginners and as a five star for intermediates, and that averaged to three stars. Judge accordingly! Most investors argue strongly in favor of or against price-based analysis. Those who trade a lot usually swear by charts, and those who are long-term investors usually ignore charts. The classic debate is between the 'random walkers' who say there ae no patterns in the markets and the chartists. No one has ever proven definitively that charting does or doesn't work for investing. The key problem is nicely stated by the author, ' . . . [C]hart analysis is based on general principles, its application depends on individual interpretation.' The book operates on the principle that '[c]hart analysis provides a means of acquiring common sense in trading.' The book articulates a variety of reasons why charting can be helpful. I think the best reasons are for helping you explicitly manage the risk you want to take on. This book has a very helpful discussion on that subject. Before you are done, you will know about different types of charts, trends, trading ranges and their support and resistance levels, chart patterns, oscillators, and how people apply these analytical tools now. The book goes on to show how to apply these tools to trading issues, including what software to use. My favorite part of the book contained a set of problems to work through using the book. In that section, you can get a feel for charting and your comfort level with it. The author also explains how trend-following systems can be developed (a fairly conservative use of charting), and provides some useful trading guidelines. These last could have saved many on-line traders a fortune. So who should learn this material? I would argue that almost no one should. Long-term investors would rarely use it, and can probably rely on fundamental analysis adequately for making entry point decisions. Those who have limited skill in investing should probably be in stock index funds, and do not need this knowledge. Perhaps the best reason to be interested is simply to have a better understanding of the thinking processes that traders use. But that's a human interest application, rather than a financial one. Some people have compared technical analysis to astrology. After reading the book, you might want to think about that comparison to come to your own conclusions. Certainly, there is no proof offered in this book that these patterns do foretell the future. At least in that element, technical analysis and
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