Jaytee, I am also drawn to charts because I am a visual person, and it gives a clear picture of price action in relationship to history. Of course how and when you use charts depends very much on what type of trading you do. Are you position trading, long term, short or long options? But for nearly any type of trading, I have found that the most effective indicators tend to be RSI (relative strength) and stochastics, when they are viewed on the daily charts. Any shorter time frame is not as effective, because you are looking at noise. Both RSI and stochastics give a good feeling for when a stock is in an overbought or oversold condition. Neither is perfect, because a stock that is in a strong up or down trend may give false readings for RSI and Stoch. But a stock that is in a trading range - which most are, most of the time - can be traded very nicely by following just these two indicators. Very simply, watch for a high RSI, and when the stock starts to decline, go short or sell a call. When it bottoms to a low RSI and stochastic, wait for the move up and go long. You may have heard the analogy that watching a stock move through a trading range is very much like laying a rubber band out straight on a table, then pulling up or down. When you let go, the rubber band will tend to snap to the mid point. A third indicator which follows this picture perfectly is a linear regression, and it is also one of my favorites. It forms as a straight line running back in time, and giving you a look at the average range of prices for the stock. This is a simple, clear picture of how the current price action compares with the recent past. If it is significantly above or below this linear regression, it may be due to snap back. But one must wait for the move to begin before putting on a trade. Moving too soon in anticipating the move can get you killed.
I use these indicators not so much to tell me when to enter a trade, but to tell me when NOT to enter. They give a good reading on when it may be best to stand aside and have patience. (An extremely valuable trait when trading.) When I follow just the simple rule of NOT buying when the RSI is high, and of NOT selling when the RSI is low, then this alone keeps me from making a lot of stupid trades.
Of course, there are many more sophisticated charting techniques, but IMHO, it is best to keep things simple. A chart is only one tool, and I feel that when traders get wrapped up in trying to let charts predict price action based solely on technical data, they are fooling themselves. We would all like the think there are secrets hidden in the charts that only the experts know, but there aren't. And I think the biggest reason for this is that an individual stock is greatly influence by market or sector dynamics, and a single chart can't even begin to put this information to use. That's why we have brains.
Enough of my ramblings. Each type of trading strategy naturally requires a different perspective on the charts. So let me know what you are into, and maybe I can offer some resource material.
-David |
