Getting Technical

Let me explain: While trend-following does look at various indicators, such as moving averages and volume activity, it leans most heavily on price performance.

The most basic tool in technical analysis is the trend line. By constructing a price trend line over a specified time frame, you can see beyond the short-term ups and downs and spot the trend in the chart.

Technical analysis also provides the ability to look at charts across the broad market -- rather than just examining one company or a single industry. This makes it a perfect fit for the growing trend of investing in index funds and exchange-traded funds. Because these investment vehicles cover a broad range of companies and industries, fundamental analysis becomes virtually impossible.

But the real beauty of technical analysis is that you don't have to be an expert at it. You don't have to completely understand the tools to use them. If you can apply points to a graph and draw a line between them, you can do it. Or you can choose from a variety of professional technical-analysis products widely available online.

A word of warning: If you do decide to use a service, be sure to find one that has both a back-tested model and a live track record. Hulbert Financial Digest and TimerTrac are good resources, as they both offer independent evaluations of various systems.

Ultimately, the goal of technical analysis is to eliminate all human interpretation and second-guessing. You can simply close your eyes, believe in the system and follow it -- even though intuitively it may look like the wrong time to buy or sell.

As playwright Oscar Wilde wrote, "The advantage of the emotions is that they lead us astray." So while emotions may be good for actors, they are no good for investors.

At the end of the day, it comes down to this simple distinction: Fundamentalists focus on why the price is what it is, while technicians focus on what the price is. Which homework assignment would you rather have?