| Home | My photos | Forex | My trading | Contacts |
|
|
You Can't Become Rich In Your Pocket Until You Become Rich In Your Mind | ||||
|
Technical Analysis and Insider TradingTechnical Analysis and Insider Trading THE FIRST EDITION OF THIS BOOK WAS A SMALL SELF-PUBLISHED BOOK, and while I was pleased that many readers loved the concise and succinct way it was written, I believed I could expand it by adding more chapters on investing, including styles of investing and technical analysis. As I began to write these additional pages, I canvassed the subscribers of my retail service, the Weekly Magic T (MagicT.info). I was surprised and pleased by their enthusiastic response. Still, I was concerned. I wanted to keep the book in an autobiographical format, making it easy for first time investors to understand that knowing when to be in the market and when to be out was the most important part of their development into being a successful investor. Easy reading makes it that much easier. The second concern I had was writing a chapter on technical analysis. I know that technical analysis is very useful and almost hand in glove with insider trading analysis. I use point and figure charts to help me time buying and selling of individual stocks. One of the ingredients of the Magic T, State of the Stock Market, in fact, is a technical process. I had no problem writing the new pages in my expanded version of The Vital Few vs. The Trivial Many. I knew technical analysis would be a challenge for me, however. I use technical analysis and understand its importance. However, I reasoned that if I could find an experienced technician to blend my insider buy and sell signals into the technical picture, the overall value of my book would be enhanced. I believe my subscribers can and should use technical analysis to tweak my Magic T market calls, which are early on both the buy and sell side. The key is to never go against the Magic T, but to work with it. For example, if the Magic T is neutral or has just turned negative and you still want to trade, then use technical analysis on stocks that have insider buying and are in up trends. If you want to short an index or a stock, it would be foolish not to use a technical analysis technique to assist you. The Magic T will tell you how much market risk there is, but a chart analysis will be useful with timing. I asked a good friend of mine, Matthew Claassen, to write a piece about technical analysis. Mr. Claassen has earned the prestigious Chartered Market Technician (CMT) designation signifying his expertise as a technical analyst and market strategist. Offered by the Market Technicians Association, the CMT designation has been awarded to fewer than 900 professionals over the past 20 years. He can be reached at matthewcmt@thetechnicalview.net. I am pleased to include Matthew Claassens article. Definitions and Differences While many investors have heard the terms fundamental analysis and technical analysis, few understand the significant differences between the two disciplines. The fundamental analyst uses microeconomic data from a company and its industry to forecast future prices. The fundamental analysts tools include such things as past earnings, cash flow, and sales trends. Among the underlying beliefs of fundamental analysis is the conviction that all price movement in the market is random and that equity prices seek a fair value as defined by their fundamental qualities. Technical analysis ignores fundamental data, focusing instead on the information provided in the price and volume of the security itself. Technical analysis can be defined as the study of a securitys price and volume for the purpose of identifying or forecasting price trends. The technical analyst works with the belief that not all price movement is random. Prices tend to move in trends and since human behavior tends to repeat itself, these trends tend to repeat. The use of technical analysis to forecast prices pre-dates fundamental analysis by more than 300 years. Long before any company was required to provide an annual report, technicians were charting stocks and commodity prices and predicting future prices based on chart patterns. In the nearly 400 years since the first chart was used to predict future price movement, the foundation of technical analysis has never changed because that foundation is rooted in human behavior, the behavior of the masses. Identifying a Trend Since it is a defining tenet of technical analysis that stocks trend, identifying the trend is the market technicians first duty when analyzing a prospective investment. As the simplest of systems, an investor can be in an investment while it is rising and out of an investment while it is falling by simply correctly identifying the trend. Because no stock goes straight up or straight down, an up trend is defined as a series of higher highs and higher lows. A downtrend is defined as a series of lower highs and lower lows. Figure 11.1 shows an idealized drawing of a trending stock. The highs marked 1, 3, and 5 are the higher highs of a rising trend and are followed by higher lows marked 2 and 4. As the trend changes from up to down, the lower highs indicated by points B and D are each followed by lower lows C and E. To aid in identifying a trend or a change in a trend, we use moving averages and trendlines. To draw a trendline identifying rising trends, simply connect the higher lows and extend the line into the future. By connecting the price lows of a rising trend, we can easily identify a change in trend as the point in time when the price of the stock declines below the trendline. The trendline for a declining trend is drawn by connecting the highs of a falling stock. That point where the trendline is violated is the point where the declining trend is over. Stocks do not always go up or down. Sometimes they travel sideways, staying within a defined price range for a long period of time. These sideways movements are usually just a period of rest before a stock continues along the prevailing trend. Because of this, it is often wise to use the violation of a trendline as a warning of a change in trend. Confirmation of the end of a rising trend can be realized when the stock price falls below the previous low, creating a lower low. Confirmation of the end of a declining trend can be realized when the price of the stock rises above the previous high, creating a higher high. I have illustrated a rising and declining trend for General Electric (GE) from 1995 to April 2004. To grasp the power of this simple tool, imagine you had purchased GE in 1995 and held on to your shares until they broke the trendline and formed a lower low in 2001. Look at the bear market you would have avoided. We can also use moving averages to identify trends. In Figure 11.3, I have inserted a 40-week (200-day) moving average as a dashed line. A moving average is calculated by adding the closing prices and dividing the sum by the time period used. So a 40week moving average would sum the weekly closing prices for the previous 40 weeks and divide the total by 40. A 200-day moving average would add the closing prices for the last 200 days and divide by 200. Since a market week is made up of five days, a 200day and 40-week moving average are virtually identical. The same rules are used with a moving average as we used with the trendline, requiring a break in the moving average accompanied by the price falling below the previous low or rising above the previous high to identify a change in trend. As you can see from Figure 11.3, the results would be the same as with the trendlines. Many investors prefer the use of a moving average to trendlines because a moving average can be easily plotted using many of the free charting programs found on the Internet. |
|
|||||||||||||||
Previous Issues
|
| ©2007 Olesia | Home • My photos • Forex • News • My trading • Contacts |