Technical analysis assumes that price reflects all that is known about a company at any given point in time. Of course, the disciplines can be combined. History repeats in many walks of life and price action that represents supply and demand, driven by the psychology of market participants, should be no different. Therefore it makes sense to me, that analysis of historical data is really a search for repeatable patterns or occurrences within that data that may repeat in real time over and over. It is a process of stacking the odds in your favour rather than one of prediction. It is a process of utilising probabilities and statistics.
What made me become a share trader? Having an early mid-life crisis in my thirties, I came to the realisation that the career path I had been blindly following for many years was not fulfilling me at all. As a result, I started to look for something else, but had no real idea in which direction I wanted to now travel, especially as far as employment was concerned.
During my search for career change ideas and potential businesses to start, I came across several advertisements for share trading software or stock market newsletters. I had previously had reasonable results buying shares and holding them for a while so the idea of trading appealed to me.
A few people have commented, after reading Unholy Grails, that they had no idea The Chartist did anything other than charting analysis. So I would like to introduce you to the strategy I use for managing our SMSF: the Growth Portfolio. The Growth Portfolio is designed to captures trends - trends in the market and trends in individual stocks. The Growth Portfolio is a pure trend following strategy designed to keep you fully invested during bull markets and in cash during prolonged bear markets. Its unique Index Filter ensures that your capital is protected during events such as the Global Financial Crisis.
Investment Talk with John Hallows Sunday Telegraph, 27th November 2005 Over the years I’ve has a lot of fun being rude about technical analysis – to give what’s usually called “charting” its proper name. What always sparks my doubt is that the markets generally rise or crash as a result of outside, non-market events, which market graphs can’t predict, whatever enthusiastic chartists suggest. But now I have to haul up the white flag on this long-cherished position.
I’ve finally found someone who makes sense with technical analysis. And he spells out two important points that every direct share investor should know about. This light on the M4 to Damascus was shone by Nick Radge, a one-time Macquarie Bank Associate-director who’s still under 40 and lives comfortably in Noosa, playing the active investor on the markets and the charting guru for clients. His first principle should strike chords with finance professionals as well as normal investors.
Stock market trading systems are often touted by slick sales spruikers at expos and in the media. These spruikers are selling a dream, a "get rich quick" scheme via their stock market trading systems that are apparently so simple that anyone can make millions and sit back on a beach with their laptop trading the markets - yes, even you! (BTW - that's you in the tree.) However, the reality is that these trading systems were designed for someone else, not you. The system may not suit your personality, risk appetite (to achieve the amazing results they spruik generally requires massive levels of risk) or lifestyle (do you have the time to sit in front of a computer all day punting?) So let's get real. Stock market trading systems can be designed by anyone. Let's start at the beginning and see how it's done. Many beginners, when learning to trade, are told to create or develop a trading plan.
When new participants enter the speculative arena, most time is generally spent using technical analysis to look for a high probability entry technique. Technical analysis is the use of price, volume and chart patterns to make trading and investment decisions. Amateur traders believe that with a ‘sure-thing’ entry technique, profits are sure to follow. This could not be further from the truth. I’m sure you realize that the ‘Holy Grail’ does not exist and yet, how many hours do you currently spend looking for that perfect entry or indicator?
In the last article I discussed two examples of how and why volume can show the changing face of supply and demand. When the order of supply and demand is change we will get a change in market direction, sometimes a significant change in trend or otherwise some degree of retracement of the prior move. We will now continue on from that discussion and show larger periods of transition which can lead to quite substantial turning points in the major trends. These can be easy to identify, but do require some patience. If you did not read the prior article it would now be worth reviewing that before going on.
The power of correct volume analysis cannot be overlooked. Unfortunately the ability to read volume correctly is not readily discussed or freely available. Off-the-cuff remarks such as, “increased volume on advances is bullish and increased volume on declines is bearish” are bantered around but that’s as far as it goes. The correct use and application of volume can make for some quite startling insights into price action, especially when one is swing trading or leaning against support and resistance points or zones of confluence.
I set up my charts with a couple of extra volume measures. I use a normal volume histogram that can be found with almost all software packages. However, if there is a larger volume spike skewing the ability to read the volume properly I will edit the data accordingly. Next, I add a 10-day moving average of the volume.
The most important part of investing and trading is psychology. Investing is a constant struggle where the battleground is not the market or advice given but comes from within you. You will face stress over losses, you will be in turmoil in deciding to enter or exit a position and you will be forced to think of about who you are and what you’re trying to achieve. But the crux comes when you learn things about yourself that you’d prefer not to acknowledge. You will automatically push them aside into your subconscious and be left with the easy part, such as laying blame or exploring a better way.
This theme runs through all our lives in various formats. Unfortunately the decision making processes throughout our lives, including ongoing management of investments, are formed within our belief systems that in turn have been seeded by our early childhood experiences and, less so, our experiences since then. I say unfortunately because talking a person out of their misconceived investment beliefs is like trying to talk someone out of their religion. It doesn’t matter that they can’t demonstrate positive results. They believe anyway, and that is that. Of course that is good for the rest of us, because if some didn’t lose there would be nothing to win.