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2 Issues With Technical Analysis That A Long-Term Investor May Not Face

Generally speaking, market participants can be placed under two broad groups.

In one camp are those who believe that past price movements of a stock can tell us the short-term future of the stock’s movement; they focus on technical analysis.

In the other camp are those who believe that short-term stock price movements are hard to divine but that a stock’s long-term price movement is strongly tethered to the performance of its underlying business and operations; they focus on fundamental analysis.

We at the Motley Fool Singapore are fundamental investors. We believe in the merits of long-term investing and that a stock’s long-term future is more or less governed by its business results. But, I’m not here today to argue which style of analysis is better. Both the technical analysis and fundamental analysis camps have people who have demonstrated massive success in the stock market.

What I want to point out here is a personal observation I have on two issues that market participants who practice technical analysis face but which long-term business-focused investors do not.

Time

Most market participants in the technical analysis camp have very short time horizons with their investments. This means that they would have to be stationed at their trading desk – or trading smartphone – when the market’s open. This forces them to “work” during trading hours.

On the other hand, business-focused long-term investors can analyse a company whenever they are free and gather the relevant information at their own convenience. Once they are confident about the strengths of a business and the price it is trading at, they can buy the stock at the next market open.

And once the purchase is done, they do not need to monitor the stock price constantly. As long as they are up-to-date with the business developments of their investment, they very rarely need to check the share price of the company. In other words, they do not have to be glued to screens.

Leverage

Some technical strategies require the use of leverage to make the effort worthwhile. But there are risks involved with leverage.

If a market participant is using leverage for his trading, there is a chance of him seeing all his gains get wiped out in a very short period of time should a crash occur. That’s because an investor who’s leveraged 20 to 1 will see his entire portfolio go up in smoke if there’s a downward movement of just 5% – even a temporary downward movement of 5%. And when crashes occur, they go way deeper than just a 5% loss.

A long-term investor who only uses his or her personal savings to invest might suffer during a stock market crash. But it is unlikely he or she will face a complete wipeout of his portfolio even if his holdings decline by 50% in value temporarily before recovering.

Foolish Summary

Clearly, these two issues are just based on my personal observations and I have no statistical proof. Moreover, I do admit that I have never seriously tried technical analysis as a way to trade the market and I that I have an inherent bias regarding this subject. So, consider my words – but take them with a pinch of salt.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Stanley Lim do not own shares in any companies mentioned above.