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#1 Posted : Thursday, April 24, 2008 10:44:30 AM(UTC)

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The Time Element

The discussion that began in Price Fields (page 6) explained the
open, high, low, and closing price fields. This section presents the time element.

Much of technical analysis focuses on changes in
prices over time. Consider the effect of time in the following charts, each of which show a security's price increase from $25 to around $45.

Figure 43 shows that Merck's price increased
consistently over a 12-month time period. This chart shows that investors continually reaffirmed the security's upward movement.

Figure 43

As shown in Figure 44, Disney's price also moved
from around $25 to $45, but it did so in two significant moves. This
shows that on two occasions investors believed the security's price
would move higher. But following the first bidding war, a period of
time had to pass before investors accepted the new prices and were ready to move them higher.

Figure 44

The pause after the rapid increase in Disney's
price is a typical phenomena. People have a difficult time accepting
new prices suddenly, but will accept them over time. What once looked expensive may one day look cheap as expectations evolve.

This is an interesting aspect of point and figure
charts, because point and figure charts totally disregard the passage of time and only display changes in price.

A Sample Approach

There are many technical analysis tools in this
book. The most difficult part of technical analysis may be deciding which tools to use! Here is an approach you might try.

  1. Determine the overall market condition.
    you are trading equity-based securities (e.g., stocks), determine the
    trend in interest rates, the trend of the New York Stock Exchange, and
    of investor sentiment (e.g., read the newspaper). The object is to
    determine the overall trend of the market.
  2. Pick the securities.
    suggest that you pick the securities using either a company or industry
    you are familiar with, or the recommendation of a trusted analyst
    (either fundamental or technical).
  3. Determine the overall trend of the security.
    a 200-day (or 39-week) moving average of the security's closing price.
    The best buying opportunities occur when the security has just risen
    above this long-term moving average.
  4. Pick your entry points. Buy and sell using your favorite indicator. However, only take positions that agree with overall market conditions.

Much of your success in technical analysis will
come from experience. The goal isn't to find the holy grail of
technical analysis, it is to reduce your risks (e.g., by trading with
the overall trend) while capitalizing on opportunities (e.g., using
your favorite indicator to time your trades). As you gain experience, you will make better, more informed, and more profitable investments.

"A fool sees not the same tree that a wise man sees." - William Blake, 1790

Edited by moderator Tuesday, March 20, 2018 6:25:00 PM(UTC)  | Reason: Not specified

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