Current Beliefs on Technical Analysis

As I’m researching trading strategies for low-float penny stocks at the timescale of intraday or overnight, Technical Analysis is an unavoidable and recurring theme. There’s much academic debate about whether it’s real and works, or whether it’s akin to astrology. I’d say the truth is somewhere in between.

1. Price and volume
It’s really a matter of price action and volume, the further you get away from these, the less useful indicators are.

2. Simplicity of indicators
Simple indicators like support and resistance may be sustainably useful in more contexts (timeframe, market conditions, etc.), but more complex ones are akin to too much subjectivism and back fit bias.

3. Other participants
Simple indicators may be more real the easier they are to process by other market participants who are looking at them too (round numbers, previous support/resistance, and to lesser extent trendlines).

4. Technicals for less market efficiency
Technicals becomes more effective for lower float, lower volume, lower market cap, lower price, and generally less efficient regimes.

5. Fundamentals always useful
Fundamentals are effective at all regimes (sudden important news events will blow away all TA indicators) and more effective in the opposite regime: higher float, higher volume, higher market cap, high price, and generally more efficient regimes.

6. Effective truth
The wealthiest people in the world are not technical analysts, but fundamental analysts like Warren Buffett. Though then you have strange people like George Soros who aren’t 100% fundamental or analytical. For example, he may use backache as a trading signal.

But for example, if the entire market sees the price of a security approaching a fat round number like 100, then it’s real insofar as everyone else believes it, not due to a “real” reason.

It’s like if someone yells “bomb” in a crowded place. There doesn’t have to be a bomb, but everyone running in one direction after everyone yells it (or hears second-hand or third-hand, etc.) causes it to be “effectively real”, at least short term. You can bet that most people are running towards the exits, even though there is no “real” reason even remotely close to a physics principle, and it’s all based on the group belief.

Start of Trading Blog

I’ve decided to fund a trading account with $10,000 to day-trade nano-caps (<$50M) and microcaps ($50M – $300M). I have absolutely no illusions that this is an easy path to wealth, and so therefore I’m starting small and slow. I’ll be funding this account in $2k increments for the next 3-5 months as I learn.

My immediate goal is to allocate 20 hours per week in researching and actively monitoring and making trades.

I have a good job in software development now and I have absolutely no desire to quit this particular job or this career path, since it’s a rewarding, low-stress, and high-paying path. I’ve founded a company before and this is a low-risk and hassle-free way to start another company.

Just like with stopping Starcraft 2 multiplayer cold turkey 140 days ago after 11,000 games, I’m making the decision to stop wasting my precious brain cycles and time on politics, in order to focus on thinking about how to increase my net worth.

I view trading as very similar to both online poker and live poker since you can actually make money, but it’s extraordinarily difficult and there’s probably just as much psychology in play as the actual betting.

I’d say in general, being “too” risk averse in your investment portfolio is one of the riskiest things you can do. This also applies to your career path, your way of thinking, and living life.

My strategy is to allocate 10%-20% of my time and capital on higher risk and higher reward activities to day- and swing-trading penny stocks, as well as other things like poker and forex spot trading, while maintaining solid career development (get good experience in tech and work) and value investing via maxing out my tax-advantaged retirement accounts (401k, traditional IRA, and Health Savings Account) for the long run on small cap value index ETFs as a core 80%-90% strategy.