Good
investment strategies are based on the big
picture. Not just a snapshot.
To get the big
picture on the companies you want to invest
in, you should use both fundamental analysis
and technical analysis.
Fundamental
analysis
Fundamental analysis
provides you with "fundamental"
information about companies in comparison
to similar companies.This includes information
about economic factors that could influence
their performance (share value). Fundamental
analysis can give you indications about
whether or not a particular company is sustaining
positive growth. For
more information on the basics of fundamental
analysis click here.
Technical analysis
Technical analysis
is the study of charts and price trends.
It is the part of your trading system that
helps you to determine when to buy or sell.
The fact that a company is "good"
isn't an indicator of whether or not it
is a good time to buy shares in it.
Technical analysis
can also help you to expand your trading
repertoire. For example, it can be used
to provide excellent opportunities for swing
trading on fundamentally solid companies
that trade within large ranges.
A little
history on technical analysis
"Technical
analysis is perhaps the oldest device designed
to beat the market. It has secular history
given that its origins can be traced to
the seminal articles published by Charles
H. Dow in the Wall Street Journal between
1900 and 1902, and its basic concepts became
popular after contributions by Hamilton
(1922) and Rhea (1932). A complete jargon
of words and pictures has been developed
since then and many traders, nowadays, take
their buying and selling decisions on the
basis of technical analysis results appearing
on their screen." Cesari and Cremonini
(2003)
Most of today's
technical analysis is based on Charles Dow's
market observations and Dow Theory. When
Charles Dow published his observations at
the end of the 19th century in the Wall
Street Journal he, unfortunately, did not
name his observations. His theory was named
"Dow Theory" by later chartists
and it is Dow Theory in which modern technical
analysis has its roots.
Dow Theory is
based on the philosophy that market prices
reflect every significant factor that affects
supply and demand - volume of trade, fluctuations
in exchange rates, commodity prices, bank
rates, and so on. In other words, the daily
closing price reflects the psychology of
all players involved in a particular marketplace
- or the combined judgment of all market
participants.
The goal of the
theory is to determine changes in the major
trends or movements of the market. Markets
tend to move in the direction of a trend
once it becomes established, until it demonstrates
a reversal. Dow theory is interested in
the direction of a trend and doesn't offer
any forecasting ability for determining
the ultimate duration of a trend. Dow theory
has been successful in identifying 68 per
cent of the major trends over the years.
Dow's original
"trend following" system highlighted
the following points:
• Classification of a trend
• Principles of confirmation or divergence
• Use of volume to confirm trends
• Use of percentage retracement
• Recognition of major bull and bear
markets
• Signaling the large central section
of important market moves
It is with these
observations that the understanding of trend
becomes one of the most important concepts
in technical analysis.
Trends
There are three
directions a trend can have:
• Uptrend
- successively higher peaks (highs) and
higher troughs (lows)
• Downtrend - successively lower peaks
and troughs
• Sideways Channel - peaks and troughs
don't successively rise or fall
Each market trend
has three parts, which are compared to tides,
waves and ripples.
• The primary (major trend) or tide
is a long term trend lasting from a year to
several years.
• The secondary trend (or mid-term trend)
or wave, lasts three weeks to three months
and represents corrections of one third to
two thirds of the previous movement - most
often fifty percent of the movement.
• The minor trends (short-term trends)
or insignificant ripples, last less than three
weeks and represent fluctuations in the secondary
trend.
Understanding
the theory behind trends will help you stay
on the right side of the trend. Technical
analysis is the art of defining the direction
of the trend by using charts and charting
techniques. This allows the investor to
buy when the price is rising and sell when
it begins to fall.
Quick
steps to analyzing an opportunity
These steps should
always be the same regardless of the stock
you are assessing.
Step1.
Determine whether or not the company is
fundamentally sound? (don't forget to compare
your company with it's primary competitors)
Apply fundamental
checklist.
If yes, proceed
to Step 2
Step
2. Is this a good time to buy/sell
this company's stock?
Apply technical
checklist
Sample technical
analysis checklist for your trading system
| Example
Technical Stock Check List |
| Stock:
|
BUY/SELL
Rating: insert total point score
|
Date:
date of checklist |
Confirming:
total posistive points |
Negating:
total negative points |
| Trending
Indicators (indicators based on trend)
|
Example:
Trend indicator 1
Trendlines |
Example:
uptrending +1 |
Example:
downtrending -1 |
| Trend
indicator 2
(insert indicators
as needed) |
|
|
| Trend
indicator 3
(insert indicators
as needed) |
|
|
It is advised
to at a minimum include trendlines.
Trendlines are also important with other
indicators to show convergences and
divergences. Also when trading a stock
that is trending these are very useful
type of indicators while they are less
effective in range bound situations.
For
more information on more indicators
click here |
| Patterns
(chart patterns) |
| Example:
Candlestick
patterns |
+1 for
strong pattern,
+0.5 for weak pattern |
-1 for
strong pattern,
-0.5 for weak pattern |
| Example:
Chart patterns |
+1 for
strong pattern,
+0.5 for weak pattern |
-1 for
strong pattern,
-0.5 for weak pattern |
| Click for
more information on more candlesticks
or some
basic chart patterns |
| Volume
Indicators (indicators based on volume) |
| Example:
Volume
(Dow) |
Example:
+1 for positive trend |
Example:
-1 for negative trend |
| Volume
indicator 2
(insert indicators
as needed) |
|
|
| Volume
indicator 3
(insert indicators
as needed) |
|
|
| It is advised
to at a minimum include volume,
other volume indicators such as OBV,
PVT
can be included as well based on the
needs of the trader. For
more information on more indicators
click here |
| Overbought/Oversold
indicators |
| Example:
Stochastics |
|
|
| Indicator
2
(insert indicators
as needed) |
|
|
| Indicator
3
(insert indicators
as needed) |
|
|
| When trading
a range bound stock these types of indicators
are very useful, these are less effective
for trending stocks. For
more information on more indicators
click here |
| Strength
Indicators (momentum indicator) |
| Example:
RSI |
|
|
| Indicator
2
(insert indicators
as needed) |
|
|
| Indicator
3
(insert indicators
as needed) |
|
|
| Strength
indicators tend to reveal good examples
of convergences and divergences which
can help warn of a change in trend.
For
more information on more indicators
click here |
| ______________________________________________________________________ |
| Total
Points score: |
Positive
points: |
Negative
points: |
Notices or assumptions:
• It is assumed that every trader
has a different philosophy and level of
trading risk depending on their experience
and knowledge.
• Novice traders should "paper
trade" until they can confidently answer
questions about why it is a good time to
buy or sell a stock. Paper trading can help
to remove emotion from the decision making
process and assist new traders in building
good research methodology right from the
start.
• When looking at a potential stock
for investment, a checklist is important.
Checklists ensure that you have done your
due diligence prior to making a decision
to buy or sell. An investor should have
two checklists, one for fundamentals and
one for technical analysis.
The fundamental
checklist will represent whether the company
is solid or not. The technical checklist
will represent whether it is a good time
to buy/sell the company or not.
Reading this
section about internal
and external fundamental drivers, as
well as the following valuation methods
will be useful if you are not familiar with
fundamental analysis.
Each investor
should modify their checklist to meet their
needs and risk requirements. It is also
important to test your system and it is
advisable to paper trade a system rather
than back-test your system. The reasoning
behind paper trading versus back-testing
is that back-testing removes the human factor
which is extremely important.
Your checklist
should also have a "reason to buy"
score as well as a "reason to sell"
score. It is the technical analysis part
of an investing system where the trader
can maximize their investment potential
and beat the market average. The ability
to buy or sell a stock when the trend has
changed is a powerful tool. It's when you
sell that you make or lose your profits.
Tips
• Don't
fight the market, you won't win
• Don't fight the trend, see #1.
• Sell when you are wrong, better
to loose 5% than 50%.
• Don't sell right away when you are
right! Wait till the trend weakens or changes.
This pays for your wrongs and your bragging
rights.
• The market is always right even
when you are convinced you are.
• Don't trade with your emotions,
thinking someday it will come back up is
not a sound investment strategy. Build a
checklist and stick with it, when you are
wrong fix your checklist and get out early.
It is the long term that is important.
ChartFilter
Tips
Have a look
through our index lists and we are sure
you will find something new for your trading
strategies.
- Dow
Jones - NYSE
- AMEX
- NASDAQ
- TSE/TSX
-
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Check out the
main education page.
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