Technical Knowledge and Experience Risk

In Investment Risks, knowledge and experience risk for fundamental investors was analyzed and explained. This referred to the actual investing background an individual needs to have before being able to realistically understand the stock market and how it works.

Of equal importance is a variation of the same idea, or technical knowledge and experience risk. This is quite different than the fundamental risk requiring an understanding of financial statements and trends.
On the technical side is the range of price and volume trends and measurements of price movement. This includes a lot of formulation and the study of how different moving averages converge or diverge; how subtle shifts in price patterns or gaps in between trading sessions change the picture and anticipate what comes next. The name 'technical' analysis is accurate because it is very technical and in many instances difficult to grasp.

The need for a keenly developed interpretive skill cannot be emphasized too much. Technical analysis is focused primarily on price trends or, more to the point, on anticipating price direction based on the most recent indicators. Many of these are hard to spot or can be misread; even the best-understood technical signal can also turn out to be a failed signal, meaning that an indicated direction simply does not materialize. Technicians attempt to manage or spot failed signals by confirming what appears to be going on or by waiting for a secondary change in the current trend.

The technician who relies on the study of price indicators is also called a chartist because he or she studies price charts of selected stocks in the attempt to spot entry and exit signals, and to make a move before the larger market also recognizes what is going on. A chartist who succeeds in the early detection of developing price changes is probably more experienced than the average trader, and knows how to interpret signals as well as spot a potential failed signal.
By Michael C. Thomsett
Michael Thomsett is a British-born American author who has written over 75 books covering investing, business and real estate topics.

Copyrighted 2020. Content published with author's permission.

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