Using Technical Analysis to Inform Investment Decisions | Financial advisers
Technical analysis is covered briefly in Financial Advising and broker license exams. But understanding the essential role it plays in today’s public procurement requires further investigation.
In the past, counselors could get away with rejecting cartography as some sort of mystical practice. But it is becoming increasingly evident that technical analysis, or the art and science of making investment decisions based on patterns of price charts, is driving the markets like never before.
Algorithmic traders, hedge funds and other new players that dominate the day-to-day buying and selling business use a heavy dose of price trend analysis. So by taking into account your clients’ assets, you can either synchronize with what market forces are observing or put your clients at their mercy. You don’t want to be the last to know, but the good news is you don’t have to be.
The value of technical analysis versus fundamental analysis
Investors are obsessed with Federal Reserve stocks, earnings, and other traditional market buzzes. But in today’s new investment reality, analyzing price patterns can have a bigger impact on the market. future asset-based income of your practice than any of these traditional fundamental analyzes.
One of the reasons is that so much money is being managed on the basis of non-human factors. The stock and bond markets are now more like a snowball that gains momentum and momentum as it tumbles. While fundamental value and earnings growth are useful factors in assessing the risk / return potential of an investment, all of this gets thrown out the window when price dynamics take hold. And it does, whether stocks go up or down.
The role of technical analysis in client portfolios
Technical analysis has many valuable uses in the portfolio management process. However, its most remarkable role could be that of a risk management tool. Given the impact of large losses on a retired or near-retirement client’s portfolio, financial advisers can use technical analysis to avoid large drawdowns. Once a client has accumulated most or all of the money needed to retire, one of the few things that can mess them up is that their advisor isn’t ready to manage the risk in the end. of his years of savings.
Historically, it has been easy to dismiss Market volatility as a temporary and insignificant factor for so-called long-term investors. However, today’s investor may be less patient than investors of the past. The dot-com bubble of two decades ago produced three straight years of declines for the S&P 500. If something like this were to happen again, and in an era of low and rising interest rates, how bad are your customers? will they be patient? This makes the pursuit of more than basic technical analysis training so important to financial advisers. Even if another decade passes without a significant bear market in stocks or bonds, can you afford to ignore that risk?
Advisors don’t have to master technical analysis. But they need to understand its growing importance and potential to help customers understand the impact of price patterns and trends on their wealth. Here are some key takeaways about technical analysis that every advisor should keep in mind.
Technical analysis is, in part, a self-fulfilling prophecy. Markets have a memory and recognize past levels of a stock, exchange-traded fund, or interest rate, both high and low. With so much money now focused on technical models, understanding what those levels are and how to project them forward is a practical skill.
Learning the basics isn’t difficult, but it takes thousands of hours to develop an expertise that can save or earn money while mastering errors in judgment.
It is not just a trading tool. Many investors use charts for short-term trading, even transactions of the day, but technical analysis has enormous value as an investment decision mechanism, similar to any common fundamental ratio. Having said that, you need to analyze multiple time periods to realize the full potential of charting.
Monthly price charts can help you grasp a long-term trend and identify potential long-term turning points.
Weekly charts are perhaps the best balance for identifying long term and short term patterns.
In today’s more volatile and fast-paced market environment, however, it pays to understand the charts of daily and hourly prices, and even shorter time frames.
If you are using technical analysis to make decisions in client portfolios, you can use long-term charts to identify interesting prospects and use short-term charts to help you determine the timing and price of your decisions. real investment.
Technical analysis is about price, and price doesn’t lie. Investors can speak poetically about future earnings growth, the impact of an acquisition on the potential appreciation in a stock’s price, and more. This is just speculation.
What is security really worth? The price you pay for it. And if you string together an actual price history and learn to analyze what those pricing models tell you about the risk / reward trade-off, you have something more tangible than any estimate of a brokerage firm’s profit on the market. seller.
The market is always a story, a story that technical analysis can interpret. Analyzing price charts helps you listen to market history and apply it to the benefit of your customers. Once you have done this part of the regular dialogue with your customers, you might just see doors open for you that never have before.
This commentary is provided for informational and educational purposes only. The information expressed here reflects our judgment as of the date of writing and is subject to change at any time without notice. They are not intended to be investment advice or a recommended course of action in any given situation. Rob Isbitts is an Investment Advisor representing Dynamic Wealth Advisor dba Sungarden Investment Management. All advisory services are offered by Dynamic Wealth Advisors.