Your overall point is not a bad one, but investors don't need "thoroughly backtested trading algorithms" to protect themselves. Frankly, many of the people who use "thoroughly backtested trading algorithms" don't do as well as they supposedly should.
It is, on the other hand, entirely possible for an average investor to learn basic technical analysis concepts and apply them visually to charts. At a minimum, for instance, if you can draw a trend line on a price chart and identify when price breaks important trend lines, you can easily avoid losses from major declines without having to write a single line of code or spend more than 5-10 minutes a day checking on your portfolio.
A decent book in this vein is The Visual Investor[1].
There's not a shred of evidence that technical analysis is anything but a charlatan's tool - same as trying to time the market. Technical analysis is bound to yield only losses for the investor and fees for the broker. The evidence points strongly against technical analysis as a method for building wealth - . And buying during upswings / selling during declines guarantees you lose.
Long-term value investing performs best, low cost index funds perform well, Wealthfront will underperform due to fees, and technical analysis will turn even a billionaire into a millionaire.
There is plenty of charlatanism in the world of technical analysis, just as there is in the world of fundamental analysis. But you're missing a key point: "technical analysis" is not monolithic. There isn't a single set of rules and indicators, all applied the same way over the same time periods. Most investors (and traders) lose money because of lack of discipline, poor money management, etc. This is true whether technical analysis is used or not.
Instead of creating a straw man argument, let's discuss something simple: trend lines. And let's discuss the most fundamental truth about trend lines: it is absolutely impossible for the current trend to reverse without key trend lines being broken.
Don't take my word for it. Pull up a chart of the S&P 500. The bull market that ended in late 2007 was easily identified by the breaking of long-term trend lines. And the bear market that ended in 2009 was easily identified by the breaking of trend lines as well. Just by use of trend lines alone (and no other technical indicators) you could have identified key turning points in the market.
How you act upon this information, if at all, is your choice. But that has nothing to do with technical analysis. That's investment/trading strategy.
>The bull market that ended in late 2007 was easily identified by the breaking of long-term trend lines. And the bear market that ended in 2009 was easily identified by the breaking of trend lines as well.
Trends are broken in periods surrounding major market corrections, indeed. How many false positives are there in between, in which you're turning over your portfolio for no reason?
Not all trend lines are created equal. Some are more important than others. You too are confusing technical analysis with investment/trading strategy. The breaking of a short or intermediate term trend line does not inherently call for "turning over your portfolio."
Depending on where you are in a trend, the breaking of a short-term trend line, for instance, could set up an opportunity to add to an existing position when the trend resumes.
Ahh, you can't have it both ways. Does a simple trend line, e.g. 12 month moving average, suffice to tell you to get in or out of a stock ("the bear market that ended in 2009 was easily identified by the breaking of trend lines")? Or does it have to be the right trend line? Moreover, how do I know what trend line to choose? I can choose great trend lines with the benefit of hindsight.
Also, forgetusername's point on false positives remains critical. Breaking trend lines is only a useful if it's right most of the time.
My advice to anyone who wants to be an enterprising investor (i.e. put more time into investing and try to achieve higher returns) is to read Ben Graham's The Intelligent Investor. Instead of trading based on the emotions in the market, invest by choosing great companies that are bargains.
A moving average is not a trend line. It's difficult to have a meaningful discussion if we are talking about two different things.
As for false positives, nobody reasonable will tell you that they don't exist. But again, there's a difference between short, intermediate and long-term trend lines. Even under the most unfavorable scenarios, anybody with a modicum of knowledge of trend lines would have been out of the market before the 2008 crash and back in the market by early 2010 because major trend lines were broken. Incidentally, I was one of those people.
As for your advice: there's nothing wrong with fundamental analysis. Although many people fail to make money using it (just like technical analysis), it's worth noting that quite a few savvy professionals use fundamental and technical analysis together.
This is downvoted to light grey, but it's excellent advice. All you really need to understand are the concepts of support, resistance, momentum, and trending.
Support: a price which a significant number of market players have decided is probably the least amount the stock could be worth. That is, if the price drops to that point, they will buy. They might be wrong, but it will require an even larger number of people who think the stock is definitely worth less to make them wrong.
Resistance: the flip side of support: a price at which a significant number of market players will sell.
Momentum: the tendency of price to continue in the direction that it's going until it encounters support or resistance. Many traders attempt to profit from the short-term price swings caused by momentum. By doing so, they tend to cause the price to continue to go in that direction.
Trending: what happens when changes in the economy are reflected in the prices of stocks. Such changes don't happen instantaneously; they take time.
Momentum and trending are obviously similar, but I distinguish them in this way: momentum is mostly caused by the flow of information within the markets; trending is caused by changes in the fundamentals.
If you understand these concepts, you can see everything a long-term investor needs to see when looking at a chart.
It is, on the other hand, entirely possible for an average investor to learn basic technical analysis concepts and apply them visually to charts. At a minimum, for instance, if you can draw a trend line on a price chart and identify when price breaks important trend lines, you can easily avoid losses from major declines without having to write a single line of code or spend more than 5-10 minutes a day checking on your portfolio.
A decent book in this vein is The Visual Investor[1].
[1] http://www.amazon.com/The-Visual-Investor-Market-Trends/dp/0...