All language subtitles for 2. Why Technical Analysis Works...But Not Every Time

Let's talk about why technical analysis works, and it works very, very well most of the time, but

not every time.

And so we'll get into that a little bit.

And the underlying concepts around technical analysis, when you're looking at a security and a lot

of it gets back to the whole idea of supply and demand.

Right.

If you have a lot of demand for something, the prices will will rise up.

You know, if somebody really wants a whole bunch of people are buying a certain product, for example,

you know, the person who sells that product could raise the price.

Same thing with trading of a security.

If there's a lot of demand for security, the price will rise.

And so what?

This leads with the supply and demand.

It leads to predictable behaviors.

If we start seeing certain patterns or certain things happening, we can anticipate that there's going

to be changes or things that are going to happen as a result of that supply and demand.

And it's been around a long time.

I mean, it's been around since like the first time was ever talked about in the book I read was in

nineteen forty eight, you know, so it's not something that's like just brand new that you've never

been really proven or tested.

It's been used for a very long time.

In fact, you know, some things like candlestick price patterns and all that go way back, you know,

hundreds and hundreds of years back in Japan.

But certainly the term technical now, certainly since 1948 and many different things around that improving

why that works, but not all the time.

So let's talk about what's the idea behind this.

And one way to think about it is how, you know, people will travel together or people will invest

together.

Traders will get an idea and they'll kind of start moving together.

Right.

And that's kind of what we think about as trends.

Right?

I think we're all kind of moving in the same direction.

It's almost like like a herd mentality.

Right.

OK, so I'm not going to say that people are like sheep, OK?

People are not sheep, OK?

But it's the idea of of a number of people or animals traveling together, going in the same direction,

you know.

So like, if you look at this picture, for example, you could see that these sheep are traveling in

a certain direction.

Right.

They're headed downhill on a road and nice and easy for them to, you know, walk down the road and

they're all kind of headed in that same direction.

For the most part.

You can even consider that momentum investing.

Right.

And we'll talk about momentum indicators where they're all kind of headed in this easy trend going down

the down the road.

But you might also notice something that's going on that's a little different in the upper left.

You know, do you see the little grass there?

On the left, there's a few sheep, one on the grass that, hey, this looks pretty good over here.

Let's go over here and have some grass.

Now, they're not following the trend.

Like, if we were investors, we might say that this is a definite downward trend.

Right.

Look at how everything's kind of moving down the hill and it's easy to move down the hill.

But we want to watch what's going on in that hill over there, because that might be what we would call

a technical analysis, a breakout or a changing of the trend.

And this is going to be a real breakout.

It's going to change the trend.

Are the sheep going to change the direction and now go to the hill?

So if we think of this as terms of a security, let's say prices have been falling, going down the

hill, but now something's happening, something in the news or people are just for whatever reason,

are changing that supply and demand, then they're going to now go on the hill and the prices are going

to start to rise.

So if we have an indicator that says, oh, when certain things happen, people are going to start seeing

the prices are going to start rising, kind of the idea of just like we see enough sheep that go up

on the hill, the sheep will change direction, too.

So maybe it's a break up.

Maybe a trend is forming.

Maybe it's just a retracement, which is another term for a just a temporary move where it kind of goes

up for a little bit, then comes back right away.

It's a temporary move.

So we're going to learn all about that.

So that's the underlying idea of why and why it works, because it's looking at these kind of macro

type trends now.

It doesn't work every time because one, nothing's 100 percent perfect, of course.

And then there's unexpected random events that can occur.

And these random events could come at a company level.

Let's say the CEO unexpectedly dies or gets fired or something happens.

You know, there's something that can happen at a company level or the earnings announcement unexpectedly

can drive prices up and down.

But the things that can happen at a big country or global levels, too, that are really beyond our

control and even beyond our analysis, because something really unexpected happens.

I mean, if we think about something that was really a big unexpected thing or had a certain shock to

all the scary markets for the time being was like covid-19 remember back twenty twenty.

You know, we had covid-19.

And if we look at this chart here, you could go on the left.

This represents prices.

Amazon's in the blue for Amazon as a stock.

And then they've got we've got on here Norwegian cruise lines.

Right.

So cruise ship and we've got the S&P 500 like five hundred large U.S. stocks to just compare them.

If you look to the left, you can see how the lines are together and how this represents prices.

And so they're all kind of trending together as far as the prices.

And then in February and March, it becomes known that covid is really going to be a problem, becomes

a global pandemic and gets announced that when governments start talking about it in that way.

So it sends all the prices down, no matter how good a stock is or how good a security is, it sends

all everything down because there's this big, unexpected event.

Now, once the event happens, then things change or can change, you can see where people would look

at Amazon and say, whoa, wait a minute.

In a pandemic where we can't get out and we're locked down and we need goods supplied to us that our

home maybe write directly to our door, where are you going to buy from?

Amazon.

This is good for Amazon.

And as you can see, Amazon's price took off for the rest of the year from that S&P 500 rebounded a

little bit to team actually finish the year up a little bit.

But if you look at Norwegian Cruise Line, they went way down and had recovered at least during the

year of 2020.

A little bit of recovery, but not a lot because, again, this unexpected event had a bigger impact

on them.

I mean, who wants to be on a cruise line when you got a pandemic?

And they remember the early stories about covid-19, it was people trapped on cruise ships and they

couldn't get home and in covid was raging.

So you can see the impact of this unexpected event happen.

So sometimes it happens and you're going to learn about how we're going to put in built him, you know,

protections and things like that to, you know, limit our losses, like stop loss orders.

And things are going to learn about and how we can recognize these trends so we can get out quickly

to its technical analysis about buying at the right time, but also selling at the right time and avoiding

big losses like that.

So, again, nothing is 100 percent foolproof, but having an exit strategy really helps if you had

no exit strategy.

Norwegian cruise lines, you rode that way down like I think was down 70 percent or something.

And if you're like, say, a buy and hold investor, which is different than trading and more and certainly

different the technical training, you know, you can suffer through that and then you just don't get

out.

You don't get out and you try to ride out the storm.

Now you see Norwegian go down so far, it's going to take a longer time to ride out that storm than,

let's say, Amazon would.

So but with technical trading ideas that I'm actually an active trader around that.

So another thing with technical analysis, too, is it doesn't tell you how much to invest.

It tells you with indicators and things whether you should invest it, how, but it doesn't tell you

how much.

We'll talk a little bit about some money investment strategies at the very end of the course to help

you with that.

The actual indicators and things don't tell you like or if I see this price bar or I see this moving

average go like this, I should invest X number of whatever of my money.

It doesn't tell you that just tells you what's happening and then you decide what action you want to

take on that.

So technical analysis is terrific.

Been around a long time, works but not perfect.

You know, nothing's perfect, right?