M1L2

Core Assumption: Market prices reflect all known information (i.e., market action discounts the future).
Technical analysts don't try to calculate intrinsic value through models like Discounted Cash Flow (DCF) — others do that, which creates price trends.
Goal: Trade these trends as they form.

Tulip Mania (1600s): First recorded speculative bubble — driven by the belief that prices would keep rising.
Dot-com Bubble (1990s): P/E ratio replaced by “Price-to-Eyeballs” – speculative valuation of internet companies.
Marijuana Stocks (Contemporary): Overhyped expectations leading to high volatility, mimicking the greed/fear cycle.

Greed and Fear are universal and timeless drivers.
Patterns repeat because human behavior is consistent over time and across cultures.
This behavior leads to predictable cycles and trends:
- Greed → Buying Frenzy → Bubble
- Fear → Panic Selling → Crash

Fundamental Analysis:
- Looks at earnings, book value, sales, dividends, cash flow, etc.
- Attempts to value the asset intrinsically.
Technical Analysis:
- Focuses on price, volume, and momentum.
- Belief: All fundamentals are already priced in unless you have inside info.

Formula Focus in Technical Analysis:

Price-related metrics like:
Dividend Yield = Annual Dividend / Share Price
- Higher yield → more value-oriented.
MACD (Moving Average Convergence Divergence):
- Trend-following momentum indicator:
  - Green = Buy signal
  - Red = Sell signal

Momentum helps time entries and exits better than fundamentals alone.
Analogy: “Don’t catch a falling knife.” Wait for confirmation (e.g., MACD turning green) instead of guessing the bottom.
Example:
- Fundamental signal: High dividend yield
- Technical signal: MACD turns green → Ideal buy point

Price Action = Function of Supply vs. Demand:
- More supply than demand → prices fall.
- More demand than supply → prices rise.
Applies universally across markets, including currencies, commodities, and equities.

All information is already reflected in the price.
No single investor can consistently “beat the market” unless they:
- Have better interpretation
- Take advantage of behavioral inefficiencies

Example: Japan’s stock market has been in a long-term downtrend (since 1989) due to demographics.
- Still contains short-term uptrends that traders can exploit.
Timeframe matters:
- Long-term investors vs. short-term scalpers view the same data differently.

"Get-even-itis": The urge to sell at breakeven to avoid the pain of loss.
- Leads to irrational selling behavior.
Loss Aversion: Pain of loss is felt more strongly than pleasure of gain.
- Results in premature exits or poor timing.

Market must be:
- Relatively free from manipulation
  - E.g., Chinese and Japanese markets have government interference.
- Liquid
  - You need to be able to enter/exit positions easily.
- Have accessible market data
  - To allow crowd behavior and pattern recognition.

Being right only 40% of the time can still lead to success if risk is managed well.
- Example: Paul Tudor Jones — Billionaire hedge fund manager with 30-40% win rate.
Key principle:
"Would you rather be right, or would you rather make money?"

For technical analysis to work, the asset must be fungible (interchangeable and consistently priced).
- Examples: Stocks, forex, futures.
- Not suitable: Real estate (illiquid, low-frequency data).

Price behavior is shaped by emotion, not logic.
Technical analysis offers tools to capitalize on human behavioral patterns through charts and indicators.
Combining technical indicators (like MACD) with basic fundamentals (like dividend yield) offers stronger entry points.
Trends are your friend—but only if you identify them early and manage your risk.
Always consider your timeframe, risk tolerance, and the psychology of other investors.