A random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing

WHY MIGHT CHARTING FAIL TO
WORK?
There are many logical arguments against charting. First, note
that the chartist buys only after price trends have been
established, and sells only after they have been broken.
Because sharp reversals in the market may occur quite
suddenly, the chartist often misses the boat. By the time an

---

uptrend is signaled, it may already have taken place. Second,
such techniques must ultimately be self-defeating. As more
and more people use it, the value of any technique
depreciates. No buy or sell signal can be worthwhile if
everyone tries to act on it simultaneously.
Moreover, traders tend to anticipate technical signals. If
they see a price about to break through a resistance area, they
tend to buy before, not after, it breaks through. This suggests
that others will try to anticipate the signal still earlier. Of
course, the earlier they anticipate, the less certain they are
that the signal will occur and that the trade will be profitable.
Perhaps the most telling argument against technical
methods comes from the logical implications of profit-
maximizing behavior. Suppose that Universal Polymers is
selling at around 20 when Sam, the chief research chemist,
discovers a new production technique that promises to
double the company’s earnings. Sam is convinced that the
price of Universal will hit 40 when the news of his discovery
comes out. Because any purchases below 40 will provide a
swift profit, he may well buy up all the stock he can until the
price hits 40, a process that could take no longer than a few
minutes.

---

Even if Sam doesn’t have enough money to drive up the
price himself, surely his friends and the financial institutions
do have the funds to move the price so rapidly that no
chartist could get into the act before the whole play is gone.
The point is that the market may well be a most efficient
mechanism. If some people know that the price will go to 40
tomorrow, it will go to 40 today.