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Far From Random: Using Investor Behavior and Trend Analysis to Forecast Market Movement by Richard Lehman

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Foreword

I have always believed that technical analysis is by far the most accurate approach for stock market investment. True, my degrees are scientific (math, computer science), so that may have influenced me. But I have conducted many studies of both fundamental and technical approaches in my nearly forty years of investing, and it is the rigorous, technical approach that is the clear winner.

For example, if one buys a stock and it begins to decline, what is one to do? A technician will likely see that the stock is in a down trend (or no longer in an up trend) and will sell the stock, stepping aside until the stock once again is in a rising mode. The fundamental trader, though, supposedly bought the stock because it was cheap, based on some earnings or other fundamental projection. Thus, when it declines in price, he should like it even better, unless something has changed regarding the fundamentals (unlikely). This fundamental approach is in clear conflict with the accepted principle of "cutting one's losses, and letting one's profits run." In fact, as Far From Random points out, such an attitude can lead the fundamentalist to feel that he or she is right and the market is wrong—a disastrous attitude for any trader or investor to have.

Most fundamentalists are, in fact, partly technical. In other words, they don't just look at "earnings" but are concerned with things such as the trend of earnings or the price/earnings ratio. Once "price" or "trend" is introduced into the analysis, ...

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