The most successful investors take a broad view of the market and don’t put too much faith in the use of any single indicator. This includes stock market technical analysis.

Small successes can precede big mistakes with stock market technical analysis

The main problem with technical analysis is that it focuses too narrowly on a stock’s past price movements in an attempt to determine its future price. It doesn’t really tell you anything about other crucial parts of a company’s business such as its financial statements or management. Rather, it just zeroes in on how a stock’s price has behaved in the past, and any clues that may offer about future price movements.

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In fact, an investor who relies solely only charts might buy and sell a stock while knowing little or nothing about the underlying company.

The appeal of reading charts is that this approach often seems to work, at least in small ways. But this may be an illusion. You may only remember your successful chart interpretations. More important, this kind of analysis tends to work in spurts. There’s a distinct risk that while it might lead you to five or even 10 small wins, it could very well steer you wrong at the worst possible moment. That next mistaken trade may cost you much more than your winnings to date.

Stock market technical analysis can be a useful investment tool, but you have little chance of profiting consistently

You need to look at the overall picture, rather than confine your view to your favourite selection of easily accessible statistical information. That’s the trouble with zeroing in on any single facet of investing. With a narrow view, you can get lucky and make a handful of brilliant trades. But to profit consistently in a long investing career, much less make any serious money, you have to take a broad view of the market and economy, you have to learn how to single out stocks that will go up and stay up, and that adhere to our Successful Investor philosophy.

Stock market technical analysis: The Successful Investor approach

Use stock market technical analysis to support—not determine—your view of a stock based on the Successful Investor philosophy. Moreover, look at a chart reading as one tool among many. But don’t look at the chart for a prediction of what’s going to happen. Look to see if the pattern on the chart seems to support your view of the stock, based on its finances and other fundamentals. But remember that the stock market follows a multitude of factors to varying extents, and the most important or influential factors continually change.

It’s encouraging if your analysis and the chart seem to match. But sometimes they don’t. If a company looks promising, but its chart shows a lengthy falling trend, insiders may know something you don’t. That’s when you know you have to dig deeper, and perhaps wait until the situation clarifies itself.

Bonus Tip: Does market timing work? No. Your bad decisions will far outweigh your good ones

Many investors start out with an exaggerated idea of the value and importance of market timing—and this includes using stock market technical analysis to pick the times to move in and out of stocks. Most eventually become disillusioned with trying to time the market, after they figure out that it’s costing them money.

Market timing can pay off sporadically, of course. Although the results are largely random, successes and failures are apt to run in spurts. The worst thing that can happen to you near the start of an investing career is that you make a series of successful timing decisions. This may lead you to believe that you have a natural talent for market timing, or that you’ve stumbled on a timing process that’s a guaranteed money maker. Either of these conclusions can spur you to back your future timing decisions with growing amounts of money.

Good timing-based decisions often produce modest profits. They tend to be smaller than the losses you get from bad timing decisions. Needless to say, one of your future decisions is bound to turn out bad. If you’ve invested enough money in it, you could wind up losing much more than your accumulated winnings from prior timing-based decisions.

The best and worst advice for market timing

The best market timing advice is to steadily and carefully buy throughout your working years stocks that meet our Successful Investor criteria. You then sell them gradually in retirement. That approach is virtually certain to enhance your investing profits. For one thing, it stops you from selling all your stocks near a market bottom, which market timers do from time to time.

The worst market timing practice you can follow is to yield to hunches or jump to conclusions.

Some skittish investors watch the market and try to spot the next “correction” or temporary market setback. Trying to foresee setbacks is sure to cost you money, however. That’s because many of the setbacks you foresee won’t occur. If you act on your prediction and sell, you’ll miss out on profits. You may buy back in at higher prices, just in time to be in the market when the next setback does occur. That’s known as a “double whipsaw.”

Eventually it happens to a lot of market timers. Some react by giving up on market timing. Others just give up on investing.

Successful investors generally come to see occasional market setbacks as something you have to live with. The best way to protect yourself against them is to put money in the stock market only if you can afford to leave it there for at least two years, if not five.

How significant a role has stock market technical analysis played in your stock picking?

There are some big cheerleaders for using technical analysis to make stock picks. Where do you stand on the issue?