Overbought / Oversold – These terms have got to be the most over-used terms when talking about the markets. Overbought refers to the time in which the prices have risen to a level that seems as if they cannot go any higher. Oversold is the opposite, prices have dropped to a point it seems as they cannot go any lower. While this sounds simple enough, the term is usually based upon someone’s personal observation of price levels and not on sound analysis.
There are many reasons I use technical analysis instead of some of the other analysis methods, but more importantly I have faith in it. Read on!
The other popular discipline is called fundamental analysis. This method of investing is essentially based upon fundamental ratios or as they are often called on Wall Street, multiples. Many followers of fundamental analysis also break it down further into a growth or value approach. The more aggressive growth approach is the hunt for stocks that are currently not registering any multiples (no earnings, no sales, etc.) and they are sought because of the analyst’s assessment that they have potential for growth. The value approach deals with good multiples (good earnings, good dividends, etc.). The value approach is what Warren Buffet uses. Gosh, if he uses it, it must be good. Keep reading!
Why are there entire businesses setup to make forecasts? The answer is quite simple; forecasting exists because there is a giant market for it. Investors/traders thirst for forecasts. Here is the real question; why do investors want to hear/read forecasts?
“Those who have knowledge don’t predict. Those who predict don’t have knowledge.” Lao Tzu
I often hear technical analysts performing their craft on economic data, derivative data such as the AD line, and a host of other data sets that do not trade. Why would you do that? The most basic premise of technical analysis is PRICE, the price that is determined in the auction market by traders and investors making decisions. Price is an instantaneous view of supply and demand.
Webster defines Odds and Ends as different kinds of things that are usually small and unimportant. I would prefer to define them as sort of important. I’ll use this format for issues that I cannot justify an entire article on. So expect Odds and Ends II at some point.
If you buy a mutual fund you are not buying a money manager, you are buying an objective manager. Let me explain. Many, if not most will choose a mutual fund based upon its performance over a period of time or the victim of exceptional marketing. Too often I think the period of performance is void of bear markets such as the last 7 years. This does not give a valid representation of the fund’s performance over the long run. The fund rating companies show 3-year, 5-year, 10-year, and since inception or at least close to those. Many funds have only been in existence much less than the 10-year time period. Okay, I drifted off subject.
From the dictionary: Why – a noun - a reason or explanation.
I’m going to write a few articles on why technical analysis is valuable – I’m calling it the WHY series. I spent 15 years in front of advisors at the large wire houses and insurance companies selling them on technical analysis. These articles will reflect some of the concepts that seemed to work well when “selling” technical analysis. I’m sure you have been asked by non-believers why you use technical analysis; this might give you some answers.
Warning! This is a sales pitch for my latest and last book, Investing with the Trend. Instead of hearing from me, I have included a few actual reviews from readers. I basically tell people that I dumped 40+ years of experience in this book. There are many things in this book that others would never say – I did not hold back as I think some things in modern finance and technical analysis needed to be said.
Personally, I would not recommend the electronic (Kindle) version since there are hundreds of charts and tables in the book. Enjoy!
Here we are at the end of the Candlestick Analysis series; hopefully a few of you are still with me. I’m going to show in this article the process I would use to incorporate candle patterns into my trading even though I am no longer a trader; not sure I ever was. Hey, there are enough non-traders out there offering trading advice, I just wanted to be honest about it. There are some things that must be met before I would consider a Japanese candle pattern to have any validity.
Of course, this is the most important component to candle pattern analysis; a pattern must be preceding by an appropriate trend. Reversal patterns are reversing something! They are reversing the trend that was used to help identify them in the first place. See Trend Determination article.
The following tables of data reflect the performance of 14 different technical indicators using the perceived popular parameters for each one (see Table A). However, each table uses a different setting for analyzing the candle patterns. The success or failure of a candle pattern is determined by the price relative to the last day of the candle pattern. For example, in Table B, the success of a candle pattern is measured by the price two (2) days after the pattern. If the price is lower and it was a bearish reversal pattern or a bearish continuation pattern, then the pattern was deemed successful. Similarly, if the price was higher for the bearish reversal or bearish continuation pattern, then the pattern was a failure. Stated a little differently, if the candle pattern was correct after the period being used, it was considered successful.
Candle pattern filtering offers a method of trading with candlesticks that is complemented by other popular technical tools for analysis. Filtering is a concept that has been used in many other forms of technical analysis and is now a proven method with candle patterns.
Since any one indicator on its own can have inherent flaws, the synergy created by combining different methods of price movement analysis can result in some very powerful combinations. When candle patterns are combined with other indicators, the results are superb.