Technical Analysis: Support and Resistance points

Okay, so as I expected since covering the type of analysis I have had an influx of readers who are keen to know more.  I have previously covered the difference between technical and fundamental trading, for those who missed them have a read before you finish reading this post (http://illuminatingfinance.blogspot.com.au/2014/05/fundamental-trading.html and http://illuminatingfinance.blogspot.com.au/2014/05/fundamental-trading.html).

However, as the title of this post indicates I would like to go into slightly more detail on technical analysis. The basis of technical analysis comes from analysis of quantitative data and graphs. Using technical analysis we are able to pick points of support and resistance for price in the future. Support points are prices in the markets where large groups of traders buys will continue to buy the product. Resistance points are prices in the market where a large group of traders will sell the product. This would regularly be due to ideas of under or over pricing, which they intend to exploit. Often due to psychological reasons these tend to move towards round numbers. These points can be found through an examination of graphs, as seen below.

We can learn a lot from analyzing this graph with the benefit of hindsight. An example of a support point (a point that it is unlikely for the price to descend below), can be found on the line A. At the $33 point, the price hit this support point and then went back up 4 times. This could be because some traders believe that at the support point this stock is very cheap and undervalued and thus demand rises. The line B is a good demonstration of a resistance point (a point that the price is unlikely to rise above). The price hit the $35 mark twice before retracing and then breaking through. A breakout is a price rise beyond the resistance or support point. Once this occurs often new support and resistance points are established, often at the point that was broken (ie. Support becoming resistance points or vice versa).

This will just be the one part of many on this very large topic. If you have an idea on what you would like the next post to be on or would just like to contact me please email illuminatingfinance@gmail.com

Review of the Market wizards

I first read this book awhile go and remember the value it had. So this week I have reread it so I can provide a review for you, the readers!

The book Market Wizards by Jack D. Schwager is a Finance classic. Everyone in the trading world seems to have read it. It is the recorded conversations that Schwager had with the most successful traders in the world in the late 1980s. He speaks with 15 traders and one psychologist about their views on trading under several different topics. He talks with most of the traders on their particular method to being successful.

However, the message that came across in the book was there is more then one successful methods to making money. Each person is different and could deal with different amounts of risk and return, and thus required different strategies. This realization allowed me to stop searching for a holy grail strategy but instead work on my own strategy. This book is very well recommended to anyone interested in finance or trading, as it is a very good starting point for further research.

Enjoy reading!

Does it have to be a choice?

Okay since posting over the last two weeks on the main types of analysis (that you can see here: http://illuminatingfinance.blogspot.com.au/2014/05/fundamental-trading.html, and here: http://illuminatingfinance.blogspot.com.au/2014/05/technical-analysis.html), I need to clear up a question I have received a from a few concerned readers.

"I now understand the difference between technical and fundamental analysis, but I'm not sure which one to choose. Could you help?"

Okay let me start by saying, it doesn't have to be a choice. There are a many traders and investors who are extremely successful who use both fundamental and technical analysis. They design their trading system around the complementing elements each type of analysis provides. An example of this could be using technical analysis to indicate possible buy movements and then using fundamental analysis to decide whether to pull the trigger.

Now before the next question is asked, no you don't have to use a combination of both types of analysis. As a trader or investor you have to decide how you want to design your system. You may have more of a focus on one type of analysis, an equal mix, or even completely reliant on style. It is up to you!

Good luck!

Make sure you to let me know if anything I've said has helped you! Just email illuminatingfinance@gmail.com

Technical Analysis

Following from last week's post on Fundamental analysis (that you can see here: http://illuminatingfinance.blogspot.com.au/2014/05/fundamental-trading.html), I thought this week I would explain to the other type of analysis referred to as technical analysis.

Technical analysis uses an examination of historical data to form predictions for future price action. These are most commonly an analysis of price and volume. Traders who utilize technical analysis to make trading decisions often run very systematic trading strategies. This reduces emotional involvement to almost zero, instead using quantitative data to indicate when to enter or exit the market. The graph below shows a trend which a technical trader may have picked up using his system.

Fundamental Anlaysis

This week's post was inspired by another question from an avid reader.

 "What are people referring to when they talk about Fundamental analysis?"

Fundamental analysis uses information available about companies, industries and economies in an attempt to understand and predict price action. The more information a fundamental trader has about the trade the more informed they feel. Thus they seek to fully understand the market in which they are investing before they commit their money. The specific data on the companies can be found in the annual financial reports, which they release to market. For commodities, an examination of more macro factors can give a deeper understanding of the good and where the price may be heading. These factors may include the weather, changes in demand, and even changes in government regulation.

Some examples of types of ratios used in fundamental analysis include; Overall performance, iquidity, profitability,  efficiency and leverage ratios. Some of the most common examples are; PE ratios, dividend yield, ROA, ROE and growth forecasts. The trader would then combine these with current events and his own judgement to come to a decision to proceed with a purchase or exit a position.

ASX Share market game

ASX Share market game

The Australia Stock Exchange (ASX) is having another share market game! It is a virtual trading game based on current real world figures. It is an amazing opportunity to test all of the trading strategies you have been working on without risking any capital. It has just opened for trading and will be running for the next few months!

Game specifics:

·      You begin the game with $50,000 in capital.

·      Each transaction has a $20.00 brokerage fee.

·      You are limited to 20 transactions a day.

Link: http://www.asx.com.au/education/sharemarket-games.html

Good luck trading and remember there is a $3000 prize money if you make the most profit!

Trading Strategy

In this week's post I thought I would introduce the concept of a trading strategy. Everyone who trades, whether it is stocks, commodities or currency, needs a trading strategy. A trading strategy gives you consistency and allows you to solve problems before you are even presented with them. Without a trading strategy you are just stringing together random trades, without purpose or direction. Consistently following your trading strategy should, in the long run, lead to an edge or an advantage that leads to profit. Everyone's trading strategy will be different but anyone trading in any market should know their strategy before making a trade.

The way that you view the market will lead to different ways of trading and thus different strategies. For example, if your plan is to buy low and sell high, you are saying that you can see something in that trade that the market has missed. Possibly some potential good results, or good fundamentals in the company that you believe will eventually raise the price. The other side of this view is that the market has fairly priced the stock or commodity for what it is worth. This leads you to the buy high and sell higher approach, popular with technical traders. Thus you need to think about how you view the market to develop your approach to trading and create a strategy.

However you decide to trade, the most important point is to have a complete trading strategy before you begin to put money into the market.