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Folks have asked me to comment on Smith Barney's

dismissal of its technical analysis staff, including heavyweight Louise Yamada. I've avoided the subject until now because Wall St. gossip interests me a lot less than making money. I also suspect that most technicians won't like my answer.

The bottom line is that I don't really care what happened at Smith Barney or what it says about the future of technical analysis. It's quite possible these technicians weren't helping the company's bottom line and needed to go. In reality, the most precise technical viewpoint can't generate a single dime of profit.

That's the problem with technical analysis in our modern markets. Interpreting the charts is an easy skill to learn. Applying a strategy that makes money on a consistent basis is the hard part.

Technician or Trader?

Many traders gravitate toward chart-reading because they're just plain lazy. After all, it takes less effort to play off support or resistance than to understand the multitude of forces that really move the markets. The secret is that no one is printing money, and you'll need to do a lot more than read charts to turn profits.

Everyone is an armchair technician these days because it takes little work or commitment. But putting your money on the line every day is another story. Real-life trading requires a detailed plan, a strong stomach and a ton of patience. And it's much harder to do than impressing your buddies with a sea of trend lines, flags or double bottoms.

I admit that I look at a ton of charts every day. But my objective is to find intersections of price and time where I expect other technicians to get trapped or become irrational. In this way, I can use their reliance on chart-reading to my advantage. It's just one of the methods for taking common knowledge and turning it against its disciples.

Do you flip through charts each day in a role-playing exercise, trying to visualize the rallies or selloffs where you would have been right? If so, you may be reinforcing a fantasy mindset that won't help your bottom line. In essence, you're engaged in unconscious risk-avoidance.

Take this little quiz. Your honest answers to the questions will tell you whether you're a technician or a trader:

  • Can you translate what you see on the chart into a plan that works for that market, that time frame and your pocketbook?
  • Do you see all the whipsaws that might tear through your stops before the price moves in your direction?
  • How will you deal with the panic attack that will strike when the market moves against you because large players are feeding the news flow?

Of course, there's nothing wrong with using charts to filter out noise and make better decisions. In fact, it's a required practice for most traders on the road to profitability. But be warned: Price patterns hide so many perception traps that misinformation often defines reality.

Current Problems With Technical Analysis

Let's consider another side of technical analysis that few professionals want to talk about. Institutional program trading now accounts for more than half of all market volume. Big players such as Smith-Barney don't need to read the charts anymore because they're molding them in their own image. I'm sure this isn't what technical purists want to hear.

That's one reason short-term direction is so difficult to predict this year. Just look at what happened last week. The indices whooshed lower in selling waves that signaled clear distribution on the price charts. In this scenario, most technicians would expect more selling after a short pause in the downward pressure.

But the markets rallied into the weekend, despite the seller's market earlier in the week. How could this happen so soon after buyers got crushed? You won't find the answer in technical analysis. It's more likely that institutions applied their programming muscle to carry the indices higher in time for month-end markup.

The power of market whales to paint the tape whenever they choose isn't the only problem with TA these days. So many weak players rely on chart-reading that common technical perceptions no longer define a tradable edge.

Modern markets spin off different shades of reality, and what you see depends on how you look. To succeed, you must learn the ways that technical analysis generates false information. This means developing strategies to avoid all the shakeouts, fakeouts and downright lies that charts radiate each day.

Technicians get kudos for their market calls, but the practice is often self-serving and overrated. And it raises a sports-betting mentality that does little or nothing to generate consistent income. It's also a popular deception, so the masses have someone to blame for their bad decisions.

As strange as it sounds, profits have little to do with being right or wrong. Instead, market survival depends in every respect on the ability to manage risk and compute the odds in your favor. This means living with technical friction, confusion and divergence at every turn.

In the end, you'll do a lot better to understand the paranoid mind of the markets instead of all those pretty lines on your favorite chart.

Alan Farley is a professional trader and author of

The Master Swing Trader

. Farley also runs a Web site called HardRightEdge.com, an online resource for trading education, technical analysis and short-term investment strategies. At the time of publication, Farley did not have any positions in any of the stocks mentioned in this article, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Farley appreciates your feedback and invites you to send it to

Alan.Farley@TheStreet.com.

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