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The November article emphasized that during this turbulent time for the legal cannabis industry, Retail Investors need to be extra vigilant focussing on due diligence and continuous monitoring. This month, we will take a brief look at how probability (Technical Analysis) may be used by the prepared Retail Investor as well as those looking to make a fast buck at the expense of others. This article is not an opinion of Technical Analysis or any other strategy as it is impossible to do the subject any justice in a short one-off article. Unscrupulous traders may use bulletin boards and forums to work their craft during this period of increased Ecoforming. Investment boards and forums are valuable to the Retail Investor because they often include: news, sentiment, Analysts’ coverage, technical analysis, and of course open forums for discussion.
Technical Analysis and investing in the legal Cannabis sector can be a precarious path yet there are those who have recently executed successful trades with near pinpoint accuracy relying solely on Technical Analysis. There are books dedicated to learning just the basics of Technical Analysis – it is not for everyone nor does it work every time. But do take caution as there is also a growing body that question the usefulness of Technical Analysis and just planting those seeds of doubt alone may translate into missed opportunities. At a basic level, Technical Analysis identifies past patterns and trends in order to predict the probable direction of, for our purposes, the share price of a company. That is why on various forums you will come across terms such as “the trend is your friend” and “follow the crowd” but do not be the “last fool”. One of the most basic tenets often sited to be successful is the need to understand crowd psychology and accept that Technical Analysis is based on the premise that history will repeat itself (cycles).
Critics of Technical Analysis appear to fall primarily within two camps. One camp that is critical of the fact that anyone, including hucksters and swindlers, can self-identify as an expert in Technical Analysis and sell systems/subscriptions with questionable value and beginner investors are lured in by what appears to be a simple foolproof system based on mathematical principles. There is no certification process or governing body for Technical Analysis. Many compare these paid for systems and subscriptions akin to the ‘take my seminar’ real estate infomercials of the late 80’s. The concept of such systems is always simple … in fact so simple it entices new investors whether it was real estate then or the stock market today – just a few easy steps to follow and watch your nest egg grow.
The other camp is critical because despite being rooted in math, Technical Analysis is considered by them to be more art than science and therefore subject to degrees of interpretation. Much like a painting, two people can look at the same chart patterns and see completely different forecasts of where the share price is headed. You can research this on your own to see the various shapes and images (teacups, smiley faces, geometric shapes forming within wave patterns, etc) that some claim can be seen and what they claim these images represent. For this reason, skeptics and critics have compared such systems to Astrology. No matter the camp, they typically agree that a Retail Investor is at a disadvantage against the boiler rooms and rows of computers dedicated to executing trades in a fraction of a second based on established algorithms. An important validation technique to determine the success of trades based on a prescribed system or strategy is through backtesting. There are many websites and even downloadable excel files that will do this.