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Strategies & Market Trends : From the Trading Desk

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To: David Smith who wrote ()	12/16/1997 12:25:00 AM
From: Robert Graham	Read Replies (2) of 4969

Anyone who knows ANYTHING about technical analysis knows that it is most effective as a predictor of future activity for stocks OVER $10. Applying TA to stocks under $10, and especially penny stocks under $5, is completely ludicrous Chris, I would also add to your example some of the more illiquid small cap stocks that also do not lend themselves well to the application of TA. The flag and pennant patterns abound in some of these charts in place of the recognizable and more well-defined trends and trading ranges that are more manageable to a TA approach. I do see where this problem would be more pronounced with the low priced stocks. Some small cap stocks can be deceiving. The stock can go through periods where the price action more closely resembles that of a more liquid and actively traded stock. Now what is causing this to happen? How reliable will this pattern be? I suspect just a small group of people trading back and forth can create this type of pattern. And the relative liquidity that the stock is demonstrating can dry up very quickl, leaving a trader in a very vulnerable position looking at a possible loss of their paper profits or even a possible loss of part of the original investment. Even if TA could be applied to low priced and illiquid small caps, is it wise purchasing a stock where the purchase itself is likely to manipulate the price against you? Can you exit when you need to without being scalped or taken for a ride? The illiquidity involved magnifies the already significant risk in trading stocks. IMO this type of trade turns into a gamble more than a thought out and well-orchestrated trade in a stock to make money by intelligently managing the risk that is a part of trading stocks. Why would it be necissary to take on the additional risks in trading low priced or the illiquid small cap stocks? And then trade a stock like this on MM based NASDAQ, where the MM needs to be able to make their money making a market in an illiquid stock with risks that are manageable to them? This essentially requires the MM to dominating the price of the stock in order to end up ahead in this game. IMO it is eventual suicide to trade like this. But then in the past I thought there must be something I was not understanding about this type of trading. Perhaps not. Feedback? Bob Graham

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