Wednesday, December 05, 2007

Bruce Kovner on Technical Analysis


Q: Is the generalization of that example that when an important fundamental development occurs, the initial direction of the market move is often a good tip off of the longer term trend?

A: Exactly. The market usually leads because there are people who know more than you do. For example, the Soviet union is a very good trader.

Q: In which markets?

A: In currencies, and in grains to some degree.

My point is that there are thousands of difficult to understand mechanisms that lead the market, which come into play before the news reaches some poor trader sitting at his desk. But one thing that does hit the market is a huge sale or purchase.

Technical analysis, I think has a great deal that is right and a great deal that is mumbo jumbo.

There is a great deal of hype attached to technical analysis by some technicians who claim that it does predict the future. Technical analysis tracks the past, it does not predict the future. You have to use your own intelligence to draw conclusions about what the past activity of some traders may say about the future activity of other traders.

For me technical analysis is like a thermometer.

Fundamentalists who say they are not going to pay any attention to the charts are like a doctor who says he’s not going to take a patient’s temperature. But of course that would be sheer folly. If you are a responsible participant in the market, you always want to know where the market is- whether it is hot and excitable, or cold and stagnant. You want to know everything you can about the market to give you an edge.

Technical analysis reflects the vote of the entire marketplace and, therefore, does pick up unusual behavior. By definition, anything that creates a new chart pattern is something unusual. It is very important for me to study the details of price action to see if I can observe something about how everyone is voting.

Studying the charts is absolutely crucial and alerts me to potential disequilibria and potential changes


Jack Schwager, Market Wizards, pp. 61-63

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