OK, here you go:
First of all, I want to say that I have no beef with these guys, what they are doing or
how they are doing it, regarding choosing investments. I don't know them, or their
business, and I wish them well. I'm making comments about stuff that is copyrighted by
them, so this is my opinion only
The "tutorial" appears to have been written by someone that does not understand, or
has an extremely limited understanding of TA.
Let's take it one step at a time. Let's assume that I know nothing about TA. The first
step is to get a chart. The link gives me a choice. What I get is a daily 12 month bar
chart, with volume. What's that? Is the volume important? I don't know.
OK, I want to see if it is "obvious" that my stock is going up. I click on that link and I
get a 9 year weekly chart of SWY, with some arrows that show an incremental
increase in the up move. So maybe (I don't know for sure) I need to be looking for a
rise that gets faster as we go along. I see that a trendline is a line that you 'eyeball' and
it doesn't touch the actual prices. Also, I probably don't realize that the first chart I
looked at was a daily bar, and this one I am comparing it to is a weekly bar.
Now I go to "not obvious" and get these arrows again. This is a weekly on MCD, that
shows a sideways range and then a breakout. Then the stock goes up. So now I get
the idea. This is real simple. If my mental red arrows go up, I'm cool. It's a buy. (The
example chart doesn't show "higher highs and higher lows", the last high is a lower high,
but I won't get picky, I got the concept.)
Then the "ultimate test", which is 'Do I wish I already owned the stock?' Ok, fine. I'm have no idea how this has anything to do with Technical Analysis or reading a chart, (in fact, it has nothing to do with TA, or fundamental analysis either, it's a a request for an emotional judgement which can be dangerous) but I'll go with it, that's TA I guess.
Now, when to sell. I sell when the "uptrend line is broken". We get a weekly chart, but
this time the trendline is touching one of the price bottoms. Hum. OK, let's see about
this. The curvy thing from the first example chart is gone. Now I have a straight line.
And it touches the price. Now I have some trouble.
If I connect the first three bottoms on this chart to make a trendline, then the rule says
that I should have sold the stock in January of 1998. Well, OK, let's say I bought it
after January first of 1998. Then this example chart says I sell in Sept. of 1998,
significantly below the top.
Now I am a bit confused. This all looks like horse puckey to me, and my
conclusion is that TA is pretty useless if it can't tell me to sell a 71 dollar stock
before it backs off to a couple of bucks above where I bought it (after January
1998). In fact, if I waited till Feb of 1998, I might have lost some money on the
trade.
That's it. That's how you do TA.
Well, that may be somebody's idea, but it ain't mine.
There are thousands and thousands of ways to interpret a price chart. It is so
screwy that you could consider it all to be just voodoo and most people would
not argue with you.
Many very smart investors, many very astute people, think that TA is, in fact,
useless.
I am not one of them, simply because I make money every day using TA.
Here is what I would do if it were up to me to write that tutorial (and by the way,
the following is (c) by me and may not be reproduced without my permission):
Technical Analysis (TA) is the use of price charts and other relevant data such as
volume, to attempt to predict the future. It is considered by some people to be
useless, by some to be an "art" with loose rules, and a few to be a science.
It has its roots in the Far East, but the "modern" use of TA is based on a rather
simple methodology which uses consecutive periods of price movement. For
example, a "daily" chart would show price movements broken down into days, a
"weekly" chart would show consecutive weeks, etc.
A simple and effective use of charts to give clues as to entry and exit points
involves the use of "trend" lines. A "trend" is just what the name implies; the
movement of a price either up (uptrend) or down (downtrend). Uptrends are
tradtionally drawn by connecting 2 or more bottom points as the overall trend
moves up. Downtrends are drawn by connecting 2 or more top points as the
overall trend moves down.
The most important consideration the buyer should have when using trend lines
is his expectation of the amount of time he wants to hold the investment after he
buys it. If he anticipates holding the stock for a period of over one year, it might
make more sense for him to observe the weekly trend as opposed to a chart that
shows price changes every 60 minutes. Conversely, if the buyer is anticipating
holding the investment for less than three months, he may wish to use the daily
chart trend lines as well as the weekly chart.
For example, a long term investor who wants to use TA and trendlines, and who
does not use the weekly chart to help him form an opinion, may be missing some
of the benefits that TA proponents claim. Similarly, an investor who wants to
choose an entry point using TA, and who anticipates holding the stock for less
than 3 months, might be less able to make a valuable judgement based solely
upon the trend of a monthly chart. How trendlines change, how to interpret these
changes, how they are violated, and how to interpret such violations, are beyond
the scope of this tutorial. Many books exist on Technical Analysis. The interested
reader is encouraged to learn as much as he wishes about it.
Trendlines are a very small part of the world of Technical Analysis, but for the
beginner, they are an excellent place to start. Although there are several ways to
interpret trend lines, we will discuss only one: the traditional uptrend. Here is
how you draw a traditional uptrend line, and here is what you will see if it is
violated. |
