Charting
Many people use charting, or
'technical analysis', to help them make decisions
about timing. The idea behind charting seems to be
that whilst it is impossible to know all the fundamentals
behind a stock, all relevant information is revealed
in its price movement. Of course this is a very dangerous
assumption, as share price manipulation is common
on the Australian stock market, especially in the
speculative sectors. A stock could also be rising
or falling due to general market or sector sentiment,
which is not always soundly based and can quickly
change.
My own attempt at a humorous summary
of the basic philosophy behind charting is that
A trend will continue
until it doesn't.
So, you simply buy when the trend is
up, ride the trend until it stops and then sell at
a profit. Very simple in theory, not so simple in
practice. There are a number
of problems with using only charting as a basis
for timing decisions. Here are a few that can occur
in practice.
1. By the time the chart
unequivocally suggests a buy, most of the run may
have already occurred.
2. By the time the chart unequivocally suggests
a sell, it may be difficult to do so because of illiquidity.
3. Many charts are choppy and would entail
frequent buying and selling, but this creates significant
transaction costs.
4. Charts are open to interpretation and sometimes
even experienced chartists cannot agree, except in
hindsight.
Add this to the fact that charting has to be learned
and this inevitably entails a cost, and you will realise
that technical analysis is not the magic wand that
some sellers of charting seminars, software programs
and books would have you believe.
If someone claims that it is
easy to make money through charting then, as suggested
earlier, politely ask to see their tax returns for
the years they made their big killing from it. There
is a famous quote that goes,
'I've never yet met a rich
chartist'.
A bit harsh, but like the mining
company definition, possibly containing a hint of
truth.
It is worth mentioning at this
point that not all chartists are the same. There are
followers of Elliot Wave theory, Fibbonaci sequences
and so forth. They all have one thing in common though,
a belief that certain patterns occur and recur for
some often hidden reason and that it doesn't matter
why
something happens in the market, as
long as you know that it is
happening or will
happen.
As I have made clear, I am a
little skeptical of the chances of doing well in the
sharemarket using only charting, but there
are those who swear by it. Charting
can however no doubt, be a useful tool in your arsenal
and at least a rudimentary knowledge is worthwhile
if only because there are so many chartists and it's
good to know what they're likely to do.
The futures markets too, may
be a different kettle of Plankton and appear to lend
themselves much better to technical analyses. The
whole argument about exactly what sort of chaotic
system the sharemarket represents and whether any
kind of mathematical or charting based predictive
technique can ever be reliable is a very interesting
one.
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