Yesterday, I explained why technical analysis is so important for investors. (Yes, even fundamentalists!)
While fundamental analysis can help you answer the question, “Should I buy this company’s stock?” technical analysis helps you answer, “When should I buy this stock?” and “When should I sell this stock?”
And “when” ultimately determines investors’ returns.
Consider this chart…
It depicts exactly how damning poor timing can be. This chart shows the results of Dalbar’s 2020 Quantitative Analysis of Investor Behavior report. The annual report tracks the performance of the average investor.
The green bar on the left of each grouping is you. Well, hopefully not you individually. It’s the collective you. It represents the returns of the average equity fund investor over one year, 10 years, 20 years and 30 years.
The average one-year return of an equity fund investor for the period ending December 31, 2019, was 26.14%. While that may sound decent, over the same period, the S&P 500 returned 31.49%. In other words, the average investor’s return was 17% lower than the S&P 500’s.
And time is not on the average investor’s side…
After 10 years, the average return of an equity fund investor was 9.43%. After 20 years, it dropped to 4.25%. After 30 years, the average return of an equity fund investor was only 5.04% – less than half of the market’s total return.
In fact, each decade, the average equity fund investor underperformed the broader market by a wider and wider margin.
How is that possible?
In short, the average investor is terrible at determining when to enter and exit a position. They buy high and sell low. They allow emotions – and the latest mainstream media headlines – to determine their next course of action. And over time, those errors add up, dooming the average investor to a life of mediocre returns.
Thankfully, this is a problem that we can solve (at least in part) using technical analysis.
In the first lesson of my free three-part technical analysis training series, How to Trade Like a Champion, I reveal the winning “World Record Pattern” that helped legendary trader Dan Zanger turn $11,000 into $18 million in 18 months.
The World Record Pattern helps investors determine when to buy a stock.
In the second lesson, I share my favorite chart pattern for doing something even harder.
The Hardest Decision a Trader Has to Make
If you’ve given short-term trading a try before, you know that buying isn’t the hard part.
“Selling requires you to be honest with yourself, which may be the biggest challenge in trading and investing,” writes TheStreet.
Singer-songwriter Neil Sedaka put it even better… “Breakin’ up is hard to do.”
But the chart pattern I share in the second lesson of How to Trade Like a Champion – a pattern I like to call “Old Reliable” – takes the guesswork and emotion out of deciding when to sell.
When Old Reliable makes an appearance, the chart is letting you know that it’s time to get out and protect your profits.
It’s been ranked the most consistent chart pattern – and for good reason. This pattern is 83% accurate in predicting a stock’s downward slide.
And if used properly, Old Reliable can even help you anticipate huge profit opportunities…
All in all, technical analysis strategies like Old Reliable can help you keep your winnings safe – and help you rest easier at night.