This article isn't about fundamental analysis vs technical analysis because I believe they both provide essential information for investors but they provide information about different aspects of investing. I use fundamental analysis to determine which stocks to buy and technical analysis to determine when to buy those stocks.
Along the line somewhere every trader learns methods that he feels comfortable with and confident using. People not familiar with trading would probably call these methods “tricks of the trade” but I very much dislike that phrase. They’re not tricks, they’re just things traders learn to rely on and check before they make a trading mistake. One of the greatest things I learned early on was trading in multiple time frames. Another great idea is the use of multiple moving average crossovers. While Daryl Guppy uses a dozen or more, I prefer just the 5, 10, and 20 day moving averages.
But for those investors that like to use technical analysis some, if not all, eventually run into a psychological bias of being better at either determining stocks that are bottoming and starting to turn up or stocks that are topping and starting to turn down. These things seem obvious to me today but earlier in my investing career it was something I just couldn’t seem to figure out. Every trader that wants to go long will eventually need to learn how to buy low and traders that eventually want to short stocks need to learn how to sell high.
Since my natural bias was to see stocks that were bottoming out and starting to turn up, I needed to come up with a novel idea for determining when stocks were topping out and starting to fall. But how? I eventually realized that everything I knew about a stock turning up would apply to a stock turning down if I thought of it as turning up rather than turning down. I had to fool my brain into thinking that turning down was really turning up. I had to think upside down. I realized that if I simply inverted the price chart, then I would be looking at the stock upside down. The epiphany was instantaneous. The fog lifted and the light came on. It all started to make sense. When I looked at a flipped chart and saw a stock turning up, it was in reality actually turning down. What a revelation!
Below are two charts of the Dow Jones Industrials. The left chart is right side up and the right one has been flipped upside down. After flipping the chart it's obvious that easily recognizable reversals to the upside are actually reversals to the downside. Suddenly I could identify reversal points. It became obvious where the resistance and support levels are located.
If other investors are having this same problem this may be the solution to their mental prejudice or bias toward identifying support levels and reversal points.