Why is trend matching a much better approach to stock forecasting than technical indicators

Traditional technical analysis has been used by its proponents for over a hundred years. However there is still very little evidence that one can make serious money using this approach. An enormous number of technical experts have lost huge amounts of money betting on movements suggested by various indicators. The experts who have been fortunate enough not to lose much so far, argue that the analysis applied by the other experts was not good enough - that either they didn't utilize some other minute indicator information or that they didnt look at the fundamentals! The second argument is clearly self deprecating. The former one basically says that this theory is something that cannot be understood by a person even after twenty years of analysis and trading.

Why does traditional technical analysis do such a poor job of prediction? Is there no merit to it at all?

I wouldn't say that there is no merit, it is definitely better than fundamental analysis. However, the information and the power that it gives us is minimal. The primary reason behind it is that the traditional technical indicators are too generic. There are hundreds of thousands of securities that have trended hundreds of millions of patterns and we are trying to find indicators that describe all of these patterns! A curve that tries to fit such a vast number of data points is bound to fall flat. We are trying to generalize human psychology. Indeed there is a lot of common factor in psychology, however the human behaviour does vary a lot with time, culture, environment and the subject in question.

So instead of trying to find a universal equation which describes everything, a better approach is to take stocks on a case by case basis. To find if: for the behaviour that my stock is showing, the price trend that it is exhibiting, is there something very similar that has happened in the past? What were these stocks, what were their price ranges, which markets were they part of, did they belong to the same sector, and how did they perform afterwards. Once we have all this information, then the problem becomes much more simplified. We can analyze these few closely matching stocks and make forecasts based on how they performed. We can look at finding a specific solution rather than a generic one. Tools like showtrend.com provide us exactly that kind of empowering information. The information that is most relevant to our choice of stock rather than general noise.This is next generation technical analysis for those who want to make some serious money.

Shilpesh G
http://www.showtrend.com