Every investor would like to find an easy-to-use market indicator that tells you when to buy and when to sell. Some look to technical analysis as a way of determining this.

Technical analysis is the process of analyzing a stock’s past price movements in an attempt to determine its future price. It’s not concerned with financial statements, management or anything else that underlies a company’s business. It only studies how stock prices have behaved in the past, and the clues that could offer about future stock-price movements. In fact, an investor who uses only technical analysis might buy and sell a stock while knowing little or nothing about the underlying company.

One tool among many

Technical analysis is a useful tool, but only if it is recognized as just one tool among many. Don’t look at the chart for a prediction of what’s going to happen. Instead, look to see if the pattern on the chart seems to support your view of the stock, based on its finances and other fundamentals. Remember that the stock market follows a multitude of factors to varying extents, and the most important or influential factors continually change.

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It’s encouraging if your analysis and your fundamental view seem congruent. But sometimes technical analysis contradicts fundamental analysis. That’s when you know you have to dig deeper, and perhaps wait until the situation clarifies itself.

In the end, we think it’s a big mistake to base investment decisions exclusively on charts or technical analysis of any kind. As investment author and renowned money manager John Train said, technical analysis-based theories are neither technical nor analytical. They can be right from time to time, like a coin flip. But eventually, they are sure to fail you.

We agree: analysis and charts always seem to provide a misleading answer when they can most damage those who rely on them.

Follow our Successful Investor Ratings instead

Instead of relying on technical analysis to make your stock selections, we think you are far better off investing with our Successful Investor Ratings.

We take a wide view of a company before we finally settle on a rating. Our judgment is based on a number of factors, but there are nine standouts. They are: a record of profit; a record of dividends; an influential industry position; balance-sheet strength; geographic diversification; freedom from business cycles; freedom from excess regulation or insider abuse; ability to profit from lasting secular trends (such as global economic liberalization); and the ability to cash in on habitual customer behaviour.

Unlike technical analysis, our Successful Investor Ratings require judgment calls. But we find they give us a deep-seated measure that goes to the heart of a company’s staying power, and yield few unfortunate surprises.