Does Technical Analysis Work? | Podcast Episode #171

0:07
Hey, I’m Ryan Mallory and this is my Swing Trading the Stock Market. I’m here to teach you how to trade in a complex ever-changing, world of Finance, learn what it means to trade, profitably and consistently managing risk, avoiding the pitfalls of trading. And most importantly, to let those winners run wild, you can succeed at the stock market and I’m ready to show you how?

0:30
Hey, everybody, this is Ryan Mallory with Swing Trading the Stock Market and I’ve got a good email for you guys today. A I’m gonna talk about an email from a person. I’m given the name the good Florida redneck named Bubba Joe. Now here’s the thing about using Bubba you can use Bubba in front of any one syllable name and it makes a good redneck name.

0:48
You got Bubba, Joe, you can take gym, which is not a redneck Name by itself. But if you throw Bubba in front of it, Bubba, Jim, there’s probably above a gym down in the Okeechobee Everglades area guarantee. It Frank not necessarily read nickname, kind of a normal name, but Bubba in front of it, Bubba, Frank.

1:05
So anyways, this email here, I’m going with Bubba, Joe and Bubba. Joe Wright’s. Hi Ryan. I am fairly new to trading and have really enjoyed listening to your podcast. I have listened to all the recent one and I’m working my way backwards and my trading, I have heeded, your advice about managing the risk and setting stop losses.

1:22
Because of this my losses have been limited. Unfortunately, my winds have also been limited most of my winners seem to go up just a little bit before coming back down. I have been able to take a little bit of profit as I go as you recommend, but But it has been mostly small. I feel like my trading is stuck in neutral.

1:39
Another piece of my background is that I am a professor, a psychology. Well, that’s pretty cool. Especially when it comes to trading having a little bit of an understanding of human psychology is really important. He says he’s also really into research. So after reading a couple of books on swing trading, I was interested in seeing whether there was research, supporting the use of particular, technical indicators or tart patterns, I did some reading and found that a lot of research doesn’t seem to support the use of technical analysis, we’ll get to that in a He says, at least for the u.s. stock markets in recent years, a lot of this work was related to the idea that the market is efficient.

2:11
I’m not an expert in this field but what I understood is that many people believe all publicly available information is already Incorporated and to stock prices ha. So, so the argument says that doesn’t work to predict what the stock market will do in the future based on past price trends and other technical indicators because that information is already incorporated into the current price.

2:33
I was curious to hear your take on This research and this This issue. Well I’m glad you reached out to me. He says, I am interested in trading but I am concerned that I ultimately will not be effective in making money relative to buy and hold strategy. Thanks for all that you do. But Joe and for today’s episode, we are going Black Eagle bourbon whiskey.

2:50
I picked this one up from a local shop for like $13. Yes. Thirteen dollar bottle of bourbon Cinema. So what do I got to lose? It doesn’t work. I’m only out 13 bucks. But it says on the bottle, it’s old style individual barreled bourbon whiskey. Distilled from only the finest quality ingredients for a genuine full bourbon character, 40%, alcohol, 80 proof, I think, in order for it to be a bourbon, it has to be at least 40 percent.

3:15
So it is right there on the edge. Now, when I pour this thing, I pour in a glen clear glass, and I’ve looked at it, and various lights, click keep looking at, it’s like, one of the lightest colored Bourbons. That you’ll see it’s very light. It’s almost got a yellow tint to it and you might might know where I’m going with this and the color doesn’t appeal to me too much.

3:34
I’ll just say it, but Well, you know what, I’ll say it looks like somebody peed in a glass, it really does. It doesn’t look that good, try it. Well, first of all, there was no smell Road. I didn’t pick up on any smells when I taste it. I gotta tell you. It doesn’t satisfy me much. I pick her up, pick up on a strong.

3:50
Licorice taste, which by itself. I’m not really too crazy about there’s no finish. It just didn’t if there is a finish that’s kind of an unpleasant finish. I don’t like it. I think it’s better than Jack Daniel’s Tennessee, Honey. I give this like a 38 could be generous. I just don’t want to put it below.

4:05
Tennis. Honey from last episode. This is not that great of a bourbon. I’ll just say that. It’s just really not, I mean, it’s finishable. Do I want to drink it again? No, well, I go buy another bottle of it. No, and I don’t even think I’ll ever finish this bottle either. I’ll probably just give it to people. I don’t like it might be good for like, a Jack and Coke, I don’t know.

4:24
But let’s get back to this email here, and we’re going to dissect this email line at a time. New to trading. He doesn’t say how long he’s been trading, but I’m going to say it’s definitely post-COVID, probably since the beginning of the year. And that’s going to be my guess, and that’s what the basis that we’re going to work off here. So he’s new to trading, he’s listening to my podcast, and he’s managing the risk.

4:43
He’s kept his losses small, and that’s the good thing he’s doing that but he’s kind of frustrated because his profits aren’t all that great. Well, you’ve got to remember this: two different markets are going to give you different outcomes. When the market’s trading sideways or slightly higher, you’re not going to get a lot of big profits, and that’s what we’ve been in since February, March, and April.

5:02
And now in summer, yes, the market has moved slightly higher, but it hasn’t been that big gigantic sweep that we saw November and December of last year and then also April, May, and June of last year. Instead, we’re just really going sideways here, and it’s frustrating a lot of traders. I used to get the same emails back in like the August-September timeframe of last year when the market was also doing a little bit of a chopping pattern.

5:18
So he’s doing that and he’s struggling with it. He’s not getting the breakout. He’ll get a little bit of a breakout, and then it comes back down. I’ve had a few of those recently too. I’ve had some scalps where I’m taking about a third of my profits at like 3 or 4 percent, and then they come back down.

5:34
Now sometimes too, in trading, it’s not going to be a ton of big winners, but you’re going to have that winner here and that winner there that’s going to really make you some good profits. Like for me, for instance, my big winner right now in my portfolio is Schlumberger. It’s an energy company energy has been pretty hot and it keeps trending higher and I keep moving my stop-loss up. It’s up about 20% at this point. That’s one that’s doing really well. My other ones are not doing as great. I’ve been stopped out of a couple.

5:52
It’s that one big winner that can really carry a portfolio during some of these choppy sessions. So it’s important to identify the sectors that are running in this case, energy and to trade those industries that are doing well. Another one is industrials. I’m in Caterpillar right now. That one’s off to a pretty good start. You have some of your basic materials doing pretty well, and you have financials doing pretty well.

6:10
But if you’re just trying to trade tech, you’re going to struggle. My stops because I’m trying to play a bounce right now, because the market looks like it wants to bounce most of my stop losses have come from tech stocks, because they’re just not doing that great. But I’m also trying to play a few of the tech stocks right now because I’m already pretty much loaded up on the good sectors that I want to be in.

6:32
So I’m also trying to balance that with a little bit of tech because I do believe at some point during the sell-off that we’re in that tech will bounce. And when it does, there’s a good chance that the sectors that have been rallying are going to slow down a little bit or even see some profit taking. If that’s the case, I want something to offset that with technology stocks.

6:49
But if that’s all you’ve been trading for the last few months, you’re going to be very frustrated, and you’re not going to have a lot of breakouts that sustain themselves. And in my swingtradingthestockmarket.com website that goes along with Swing Trading the Stock Market podcast, I provide a lot of this information from the most intriguing charts of the day. I provide readers with updated watch lists each week, and I’m going to provide you daily trade setups that also highlight the trade setups that I’m following and the charts that go with it.

7:27
Now I’m also updating people on the FAANG stocks. I’m also updating people on the overall market each and every week, so check that out: swingtradingthestockmarket.com. I think you’ll really like it.

7:47
And continuing this discussion about the struggles of this trader here, because he’s frustrated Bubba Joe is that his winners just aren’t producing for him. Well, you got to remember too, if you’re new to trading, you’re not going to be an expert at trading. You’re not going to be amazing at trading. It takes time, it takes experience, it takes development kind of like knowing when not to trade also. It comes with time, recognizing some of those winners. But this podcast is to set you up for to help you identify and speed that learning curve up.

8:05
Okay, and hopefully dramatically. I mean, let’s take for example, if you wanted to be an NFL quarterback, right? Just wanting to or reading a few books on it or throwing the football a few times for a few months or few years in the backyard with some buddies doesn’t necessarily make you NFL-ready. Heck, if you even had Tom Brady teaching you, you wouldn’t be NFL-ready. And so you’ve got to have some patience with yourself as you’re developing as a trader.

8:21
Even good traders even really good traders are going to have times where, you know, it might be a couple of months or something where you’re just really struggling to get much traction with the market. So I think you’ve got to set the expectations like, hey, I’m doing something very new here. I’m not going to be great at it right out of the gate. I’m going to learn from these experiences. I’m going to try to build on them, and I’ll have some winners along the way and I’ll have some losers along the way. Just need to make sure that I’m managing the losses so that I’m not taking big losses and wiping myself out.

8:55
I have seen a lot of people email me about how they’re just getting wiped out of this market. And it’s so depressing to me that people because they’re not managing the risk and even more reason to manage the risk when you’re first starting off. Not to mention the fact that even if you’re a seasoned veteran, you should be managing the risk too. But even more so when you’re still learning the ropes, because you want to stay in the game. You want to be able to protect yourself from some really stupid decisions.

9:10
Now he also gets into this efficient market hypothesis something that we learned in college if you took any kind of economics class. It’s about the fact that everything in the market is efficient. We don’t have any edge when it comes to trading, that technical analysis, it doesn’t work. That’s what people who trade fundamental analysis like to say about technical analysis, because they want to think that their way is the only way.

9:35
And you get a lot of people whether you’re a technical analysis guy or a fundamental analysis guy that think their way is the only way. That if you’re not trading Elliott Wave, or if you’re not trading based off of the earnings reports and what the PEs are, all these different strategies, people just think that that’s the only way to go.

9:58
But there are so many pathways to profitability in the stock market. Look, technical analysis must work, because I’ve been doing it for years, and I don’t even read anything fundamentally about a company. The only thing I sometimes care about is in some of my long-term portfolios and my dividend portfolio I like to look at what the dividend is. That’s about it.

10:13
I don’t listen to earnings calls. I don’t trade earnings calls. I don’t hold through earnings calls. I don’t look at a balance sheet, income statement. Sometimes even when I’m doing a trade on the technical side, I don’t even know what the company does specifically. I can tell you what the name is of the company, what the stock symbol is, what industry, what sector they’re in. There’s a lot of times where I’m not really all that familiar with the company, but I’m very familiar with the chart.

10:29
And so technical analysis people say, well technical analysis doesn’t work because you see that support level that broke. No, technical analysis embraces the breach of technicals, of support levels, of trend lines. They’re made to do that stuff. So support levels will either hold or not hold, and that’s your opportunities to profit off of both of those.

10:51
So on a breakout, that’s when a technical fails to hold it’s breaking through resistance. So the sellers are not keeping that stock underneath that resistance level. That’s your entry to buy, and does that kind of a strength. Now if the stock pulls back in to test the support level and it holds, well that technical’s holding up that’s your opportunity to play off of the bounce.

11:11
Now if that bounce doesn’t materialize and it goes right through that trend line, then you have a breakdown. That’s your opportunity to short. Now I’m simplifying it quite a bit because there’s other patterns that go into it and everything else, but that’s the essence of technical analysis.

11:28
So it’s impossible for it not to work because you can play both sides of whether or not the technicals work or they don’t work. In fact, most of the time I’m playing off of the fact that the technicals don’t work that the support won’t hold or that the resistance will not push back, that it will break out to the upside. Those are breakout plays.

11:50
And if you’ve watched the stock market over the years, you know that the market is not efficient. It’s absolutely crazy. We had a president for four years and I’m not getting political here, I’m just a matter of fact stating things that when he tweeted things, the market went absolutely crazy. We’ve got things like Elon Musk does, where he might be high as a kite and he tweets something out, and it affects the stock. Did Tesla do anything to deserve a huge sell-off? No. It’s just somebody tweeted something out.

12:06
President tweeted something out. The Fed chairman says something that was taken out of context. Does that make it efficient? No. There is so much inefficiency in the stock market, and I think sometimes that can actually get you in more trouble than not by believing that it is efficient.

12:22
So no, I don’t think all publicly available information is always incorporated in the stock prices. Sometimes it’s incorporated incorrectly. In fact, I’d say a lot of times it’s incorrectly incorporated. Have you ever seen analysts’ expectations how off that they are? I mean, look at the employment number from this past week and how bad it missed. You had a couple hundred thousand jobs added when they were expecting a million.

12:39
So there is a lot of inefficiencies in the market. I also don’t get why it would not work for the U.S. market but work in like the Canadian markets, like a Mexican market or a European market that I don’t get that. I mean, trend lines and breakouts and breakdowns and bounces, they’re relevant in all markets.

13:14
I mean, you could do technical analysis on the crypto markets. In fact, you know, it’s quite easy to do because there’s never any major gaps down because they trade 24/7. That doesn’t mean I think you should trade the cryptos I think there’s a lot of other risks that you got to get into, especially with like what we just saw with the whole Saturday Night Live fiasco, where the crypto markets just see billions get wiped away in seconds off of what Elon Musk did on a Saturday Night Live skit or not.

13:35
But here’s the thing this buy-and-hold strategy works. Because Bubba Joe talked about that. He says, I’m interested in trading, but I’m concerned that ultimately, I will not be effective in making money relative to buy-and-hold. There’s benefits to every strategy. Buy-and-hold is a little bit easier on the mind. You benefit off of what a stock does in the long term rather than in the short term.

13:55
But in the short term, you can capture those gains without having to be massacred by a pullback. Buy-and-hold strategy is susceptible to the kind of things that you saw in 2008, 2020, 2018 major sell-offs. Whereas with short-term swing trading, yeah, you can get out close to the top, let it ride lower without a full portfolio or very little to no exposure, maybe even shorting the market.

14:13
Can’t short a market long term you’d be a long-term loser. Nobody wants that. But you can short the market in swing trading. So each strategy has its benefits. And I don’t necessarily say swing trading’s for everybody, just as much as day trading is not for everybody. I think day trading is probably not for most people, and for a lot of people, long-term investing is the best way to go.

14:31
But it doesn’t mean that you can’t do all of it or some of it and learn from each of them. Because even with long-term trading, there’s technical analysis that you can incorporate into it. There’s a psychology, and there’s opportunities when maybe you get into a long-term investment and it goes up 100% in the course of a few months. You weren’t expecting that.

14:51
Well, you start to take some profits off the table. You have profits. So and then wait for a pullback and add to your long-term investment then. If you enjoyed this podcast, I’d encourage you to subscribe. Please leave a five-star review and keep those emails coming. I’m trying to get to as many of these things as I can. I get to most of them.

15:07
So keep getting them to me, and I want to hear what you guys have to say your questions, your concerns. I mean, your emails are great because you guys come up with angles that I would never consider doing an episode on kind of like this one here. I’ve never even thought of this angle for an episode. So it’s really great. It’s really helpful. And I encourage you to keep sending me those.

15:27
But please leave a five-star review, because that will continue to allow me to provide this great content each and every week. Thank you guys. God bless.

15:46
Thanks for listening to my podcast, Swing Trading the Stock Market. I’d like to encourage you to join me in the SharePlanner Trading Block, where I navigate the stock market each day with traders from all around the world. With your membership, you will get a seven-day trial and access to my trading room including alerts via text, email, and WhatsApp.

16:06
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16:22
Please feel free to email me at ryan@shareplanner.com. All the best to you and I look forward to chatting with you soon.