RE Trading Channels
I use MetaStock 6.52 from Equis to draw my charts. I subscribe to Reuters Datalink for historical data. I also use Personal Stock Monitor to watch delayed quotes during the day. These can be transferred to the MetaStock charts. I don't use real-time quotes, as I am not a day trader.
MetaStock has literally hundreds of tools for Technical Analysis. I use almost none of them. Frankly, I'm very skeptical of TA. It is far too easy to lie to yourself, and believe you have found what you want to see.
About the only thing I've convinced myself is real in TA is that some stocks have trends. (And some don't. I try to avoid those.) The easiest way to spot a trendline is to see a Moving Average that looks like a straight line.
When I find a stock that seems to be moving steadily up, I try to draw a straight line under the price points such that it touches the lows of the stock price. This is the support line. The more times the stock has bounced off this line, the more validity it has. Also, the line should be parallel to a Moving Average. (This is how you keep from fooling yourself.)
Often, you are then able to draw another line that touches the tops of the price action. This is the resistance line. It gains validity the more often the stock bounces off of it, and it should be parallel to the resistance line. These two lines then form a channel.
When you find a stock trading in a channel, you can invest based on it probably staying within that channel. Thus, this is a form of momentum investing.
There are two major benefits of channel trading. First, it tells you when to get in. Obviously, you don't want to buy at the top of the channel. Invest when the stock comes back down to the resistance line.
Second, it tells you when to get out. No trend lasts forever. (The longest I've seen was KO for four years.) When a stock breaks a trendline, the probability is that it will continue to move in the direction of the break. So if the stock breaks the support line, you sell. If it breaks the resistance (upper) line, buy more.
Here's a chart of CSCO that shows many of these points.
white-crane.com
CSCO had been in a shallow up channel from Feb. 99 through Nov. I've owned CSCO for a long time. I bought more during one of the dips down to this trendline.
Then, in Nov. 99, CSCO broke through the top of the channel (right after earnings). I immediately bought more in my IRA and in another account (blue & pink arrows). CSCO formed a new channel at a steeper slope. This new channel is defined by the 50-day MA.
On Feb 9, right after earnings, CSCO hit the top of my new channel. At that point I sold just enough to get off margin (pink arrow).
In no way do these channels eliminate the need for good Fundamental Analysis. I don't trust TA that far. I am invested in CSCO and JDSU because of the fundamentals. I only use the TA to time entry and exit points. CSCO is a fantastic stock, but I wouldn't advise anybody to pay 130 for it today near the top of the channel. Instead, wait for it to come down near the bottom of the channel and then buy.
Here is my chart of JDSU:
white-crane.com
Anybody looking at a chart of JDSU could see that it's a buy every time it comes down to the 26-day MA. That's where we are today. The last time JDSU was at the 26-day MA (Jan 31) I bought more in the form of ETEK. I am now up 25% on that purchase.
Sorry to go on so long about this. But just drawing lines in MetaStock is the easy part. |
