10: The Essential Rules for Beating the Market

Chapter 3. Trade like a Technician

"If markets were efficient, traders would be extinct."

Equation 3.1. 

In this rule, you will learn how to use pricing trends to tell you when to buy a stock. In Rules 1 and 2, you learned how to find the stocks that you should consider buying. In Rule 3, you will learn the first step in timing your purchase. This is the "When to Buy" rule.

If you are new to technical analysis or have never used technicals to make trading decisions, all you have to know is that to trade like a technician, you have to learn how to read charts.

Technical Analysis

Technical analysis is a method of evaluating stocks by relying on the assumption that the future share price of those stocks can be predicted by analyzing historical share price charts, historical volume charts, sector pricing charts and industry pricing charts. Technical analysis ignores fundamental analysis. The assumption is that historical charts have well-defined patterns that are highly correlated to future pricing trends. Thereby, trading decisions (buy, sell, short, or cover) can and should be made predicated on the likelihood that future pricing trends will repeat the same or similar patterns the stock exhibited in the past.

Just as there are fundamental analysts, there are also technical analysts. These two camps have a certain distain for one another. Fundamental analysts don't believe in charting. They ...