Why Technicians and Non-Technicians Are Both Right

Technicians say that stocks move in trends and that past chart patterns can predict future moves. Non-technicians disagree, saying that stock moves are chaotic and random. Both are right. They just interpret the same things they see differently.

Stocks do move in trends. There are only three possible directions: up, down or sideways. Although the majority of stocks usually follow the general market direction, you can find all three moves in any market. Isn't that chaos or randomness to a non-technician?

Stock moves are not linear, they resemble a staircase: spurt - consolidation - spurt - consolidation. Longer consolidations are called bases. A stock in a base moves sideways, as if it does not have enough courage or conviction to make up its mind which way to go. A base can last anywhere from several weeks to several years. That's a lot of chaos, or randomness, to a non-technician!

A more granular look will reveal that base building consists of a series of small up-and-down moves, but the problem with short-term trends is that the shorter they are, the less predictable the outcome, and the weaker the setups. That's why it's so easy for non-technicians to dismiss those moves as chaotic or random. Add to that that most day traders wash out of the market within five years after losing all their money by trying to trade those trends, and it's one more argument in the non-technicians' favor.

As a swing trader, I review dozens of charts daily, in addition to several screens and scans, and discard most stocks that are basing precisely because their moves are so chaotic and unpredictable. I'm happy if I can find one or two dozen stocks breaking out of bases at the beginning of new major uptrends that I can trade profitably, but I can see how for a non-technician even two dozen stocks in a strong uptrend out of a possible 10,000 is random.

Even well-defined trends in stocks do not last long - 3 to 9 months on average, a couple of years at the most for exceptionally strong leaders. So even a strong trend can in a way be described as a fairly random event by non-technicians.

One of the strongest arguments in favor of stocks moving in trends is a long-term market chart of the Dow or S&P 500 going from the lower left-hand to the upper right-hand corner. But adjusted for inflation, these charts look almost horizontal for extended periods of time. Going nowhere. Almost random.

The bottom line: whatever works for you. I find charts a tremendous help in profitable stock trading but can also see why so many non-technicians do not believe in them.