The controversial investing technique meant to save you a fortune

Investors still remember their superstitions on September and October, which are believed to be "crash months", and are worried about the state of Western economies, and the state of geopolitics too. But worry causes mistakes. We’ll do well to remember that markets climb a ‘wall of fear’. That is, whenever a market or stock hits a new high, it’s always going to be accompanied by fear.

That fear will incentivise many investors to sell into the highs. But is it right to get spooked into selling right now?

Well, the one thing on your side – in fact, the only thing that can stop you making a fear-induced mistake – is to use dispassionate, logical analysis to inform your trades.

Let's have a look at how technical analysis can help you to do just that.

A weapon in your arsenal

Technical analysis – using price charts to time entries – is one good way to analyse the markets in a dispassionate, systematic way. And there are lots of people out there who consider the whole thing a load of bunkum, that historic prices can’t tell you anything about the future.

But that misses an obvious reality. Of course, history tells us something about sentiment towards a current stock. There’s always a full and fascinating story right there on the chart – there’s always a reason for a price move.

The technicians are simply trying to piece together the story from the price movements – hoping to solve the riddle of where the price goes next.

For example, many investors will have sold into the latest rallies as the market tried to breach 6,900 on its way to the nominal highs of 6,930. Of course, these traders will hold the market in check. But if we do breach, then suddenly all those technical analysts will see it as a very positive sign. Now, why is that? Again, it’s all about the story parcelled out on the chart. Breaking into new highs is a signal that the non-believers have been outnumbered by the ‘believers’. The very fact that the market shows strength should bring in new investors from the sidelines.

It’ll also likely bring in further commitment from existing investors, now feeling emboldened. As they say – it’s climbing that wall of fear. What we saw over the summer months was a market squeezed into a couple of very buyable downswings based on a bit of summer madness and very low volumes.

The technician will beware of any price swings based on low volume, but to the uninitiated, those swings look dangerous. And a lot of people will have been frightened into selling.

Now summer’s over and volume has returned to the market, the moves on the charts are more significant – especially any break through 6,930.

The hysteric’s dilemma

Technical analysis is a tool you can incorporate into your investing. It can help you in the most useful thing for traders - to keep emotion out of investments - because a sudden rush of blood to the head can cost you a fortune.

Fear and panic is as unproductive as hysteria is to a patient. Sure, there are always reasons to worry – and we should not ignore them. But just as with health, it’s a matter of looking after yourself and doing the right things.

Discipline is what you’re after. Look at your portfolio and be absolutely certain that you’re doing the right things. Two weeks ago, we looked at how important it is to schedule time for your own investment strategy meetings. That is, time set aside to consider each position in your portfolio in a structured way. Technical analysis should be a part of that.