CHARTING

Back in the January issue of the Newsletter we touched briefly on some charting software both online and offline. Personally we use Metastock (who incidentally also offer some great lessons on Technical Analysis - Click Here) for our charting (end of day, we don't use intraday data) and a combination of Prophet Finance , Stockcharts.com and advfn.com (just their free service) for online charts.

• Charts are important for many market participants as they give a visual view of price history
• However the financial world seems obsessed with ever deepening forms of complexity
• But simple charting in our view is far more effective

Two Ways to Use Charts

It's worthwhile for both traders and investors to realise that there are two ways to use charts

1. Simply

• Perhaps the shape of the chart (is it trending or in a range etc)
• Coupled with some simple moving averages or trendlines

2. Complex

• Look around on the net and you'll find many websites dedicated to almost every type of technical indicator, stochastics, MACD, and the RSI being common ones
• You also have regression analysis and other forms of statistical analysis which use computer power to basically crunch numbers
• This is the important point worth noting - ALL technical tools used for analysis of the markets are derived off price
• Price consists of the open, high, low and close
• So by definition if every technical tool is derived from this simple data, then the price action must be the most significant part of one's analysis
• For this reason we prefer to utilise simple charting and disregard the complex indicators and analysis

Does Computer Power Translate Into Powerful Analysis?

Computer power (number crunching) has most probably had a detrimental effect on technical analysis because the power is now so widely available. Think about it, if back in the early 1970s you had access to a University main frame computer then you may have been able to find profitable relationships in prices and markets that few other people could discover. But now with the hardware and software available on the street, anyone can do it making most of this analysis redundant.

So whereas the industry seems to be heading towards more and more complex analysis we prefer to keep it very simple indeed with what we refer to as 10 second chart analysis.

What Is 10 Second Chart Analysis?

• Look at any daily chart covering at least six months and give it a quick rating of between 1-10, with 1 being very bearish and 10 being very bullish
• Then build your trading and investing around this view
• If a chart scores for example a 7 then look for buying opportunities only
• We have an example of this kind of investing on Page 5 of the Newsletter

To sum up, try and go the other way to what the majority of market participants are doing, if they go with complex analysis, you go with simple. This is actually the reverse of what used to work 20 years ago before the advent of the personal computer. Then those who number crunched could often find very successful trading strategies only because there were so few people who had either access to computers or could program.

The other advantage of this kind of analysis is that it's quick. One can analyse many markets in a short period of time. It also works surprisingly well.