Just what is charting all about – MoneyWeek

Sowhatischarting?

Alotofjargonsurroundschartinganddozensoftradingstrategieshavebeenbuiltuparoundodd-soundingpricepatterns,suchasdoubletops,roundingbottomsandtriangles。

Butthebasicconceptsaresimpleandalsotendtobethemostreliable。

Chartistsbelievethepastisaguidetothefutureandthatyoucanprojectpastbehaviourtopredictfutureprices。

Theyassumethatallavailableinformationaboutastockisalreadyreflectedinshareprices,sothere’snopointtryingtoidentify“fundamental”mispricingusingratios;butyoumightmakemoneyifyouspotthedirectionashareisheadinginearlyandbuyorsellitbeforeeveryoneelsedoes。

Spottingtrends–themovingaverage

Attheheartoftechnicalanalysisistheobservationthatsharepricesfollowoneofthreeunderlyingtrends:up,downorsideways。

Thetrickisspottingtherightoneandstickingwithituntilyougetasignalthatthingshavechanged。

Onewaytospotatrendandtestwhetherit’sintactistofollowmovingaverages。

Oneofthemostwidelyusedisbasedonclosingprices。

Toworkoutafive-daymovingaverageyouwouldtakethetotalofagivenshare’sclosingpricesforthelastfivedaysanddividebyfive。

Sofrompricesof10,10,12,13,and15,themovingaverageis60/5=12。

Ifthenextdaythepriceclosesat15,thefive-daymovingaverageis65/5=13,andsoon。

Byitself,arisingaveragecanindicateanuptrend,afallingoneadowntrend。

Youcanalsogaugethetrendbylookingatwhetherthelateststockpriceisaboveorbelowthemovingaverage。

Finally,ifthemovingaverageof13forashortperiodexceedstheaveragetakenoveralongerperiod,yougetabuysignal,whereasifit“crossesbelow”,youhaveasellsignal。

Alloftheseareparticularlypowerfulwhensupportedbyincreasingtradingvolumes,whichcanindicatethatbig,institutionalbuyersorsellersmaybebuyingorsellingtoreinforcethetrend。

Unfortunately,trendsdon’tlastforever。

AnthonyBoltonwarnedinthespringthatafouryear,almostunbroken,upwardrunfortheFTSE100wasunprecedentedandforthatreasonalone,acorrectionwasdueregardlessofwhatthelatestshort-termmovingaveragesmaysuggest。

Buyingthedips–resistancepoints

Ratherthanheadingupordowninastraightline,sharepricestendtozigzagaboveandbelowtheoveralltrendline。

Soashort-termtraderwilltrytomaximiseprofitsfromarisingtrendbybuyingonallthedipsonthewayup。

Howoftenyoudothisdependsonyourenthusiasmfortradingandyourdealingcosts;butthegoldenruleistousethelonger-termcharttomonitortheoveralltrend,andshorter-termcharts(hourlyordailyfortraders)tospotindividualbuying/sellingopportunities。

Resistancepointsoccuratthetopofeachmini-rally,astraderscashinthatday’sprofits;andatthebottomofeachmini-dip,asscavengerspickupcheapshares。

Bylinkingtogetherpastpricesandpreviousresistancepointsonashare-pricechartandthenextendingthelineforward,chartistshopetoanticipatethepricetrendandwherethenextresistancepointswilloccur,thenbuyorsellaccordingly。

Charting,like‘fundamental’investing,canprovidesomeusefultools–butthey’reonlyasgoodasthepersonusingthem。

Abullishorbearishchartistcanalwaysfindatrendline/movingaveragetosuittheirviews。

Andthefactthatastockisinarisingtrendwon’thelpifitsuddenlyhastoissueaprofitwarning。

Sowhilewewouldn’tentirelydismisscharting,it’sjustasmallpartofasuccessfulinvestingstrategy。

Although‘fundamental’analysiscantakealongtimetoshowresults,atleastifyoubuyastockwhenit’scheap,themarketwillhopefullywakeuptothateventually。

Followingtheherdmovementsofthemarketaschartistsdocanmakeyouprofitsintheshort-term,butitcanalsoleaveyouexposedtosuddenswitchesinsentiment,asmanytradershavelearnedtotheircostinrecentweeks。

Formorearticlesontechnicalanalysis,seeMoneyWeek。

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