I think it might have been Mark Twain who first said it, but the quote has been around for a long time. *smile*
Some of you will know that I've been away from this chatbox over the last couple of months because I have been trading the US markets on an intra-day basis during this time.
I've also been a prolific writer in my Fusion 2 blog, writing about Intra Day trading in the US markets, and US and global markets in general, mainly with lots of tables and charts. They are mostly copy and paste from a variety of sources for my own personal future reference.
I appreciate that as a result of shifting to trading US markets, this chatbox has been quieter in my absence.
Naturally, I do have some regrets, but at the end of the day, I really can't help it, since as it always have been the case since I started blogging, that the chatbox and this blog is always a secondary consideration. I've always viewed blogging and chatting as something fun and enjoyable thing to do, and perhaps, shares my own honest views with the investment community which I hoped may have been beneficial, basically trying to do something worthwhile and interesting whilst trading during Bursa trading hours. However, now that I'm trading the US markets with a completely different time zone, and I also do have other life priorities besides trading, something has to give, and I guess it is this blog by default.
However, not all is lost. Think of it like the old days before I had a chatbox and just a blog of articles. If I do find things of interest to write about, then, I will try to pen it here, although it might not be very frequent. The difference between this blog and Fusion 2 is that this blog is primarily on Trading/Investing in Bursa, whereas the latter is mostly focused on US markets and Day Trading.
My hope is that this place can continue to be a place where everyone will feel free to discuss investment matters in a mutually beneficial and constructive way. To a lot of extent, in my absence, it will become a reflection of the investment community, i.e yourselves. And if it's quiet, then, we all know that we are all generally shy Malaysians *smile*
Anyway, as always, good luck and best wishes in your trading and investing.
Until the next article!
Cheers,
Seng.
Wednesday, February 18, 2009
Monday, February 16, 2009
Some Thoughts on Stock Calls
In general, I feel stock calls are over-rated.
There is often too much vested interest to emphasise "what to buy" than "when to buy".
To me, the WHEN is far more important than the What, although both are important. We have all seen the "anomalies" that:
- One can buy a good fundamental stock at the wrong time and lose money.
- One can buy a lousy crappy stock at the right time (usually, for a short time) and make an insane amount of money.
- And then, there is the trader who only trades one stock and lose money, and another trader who trades the same stock and made money.
The vested interest - when viewed over a fresh lens - is surprisingly prevalent.
Nearly everyone in the industry does it. They might do it with different intentions and extent. Some of the intentions are innocent (e.g. they just want to share), some as a service to their readers (e.g. with analysis of pros and cons), and they generally add some value although at a vastly different extent.
But the ones you have to watch out for are the one-sided recommendations that only tells you all the good stuff and none of the bad stuff. We all know that human beings are never perfect, and the same goes for organizations and stocks. Needless to say, the ones that employs manipulative tactics that rejoices in their new BMW, new house, shark fin soup and abalone and have dozens of fake supporters are best not touched even with a 10-foot pole *grin*
The skeptic's view (or is it the Wise View?) is that the only reason someone makes a stock call is because -- they already own the stock, and they want to sell it to YOU at a higher price. *grin*
This statement contains far more truth than you might think. *grin*
There are many types of stock calls. From a Net retailer perspective, you probably have seen
- "independent" professional stock calls like the S&P in Bursa
- "independent" stock broker reports like OSK, etc.
- personal advice from your broker/remisier
- bloggers from a wide range which includes remisiers, ex-analysts, etc.
- various websites and bloggers who explicitly recommend stocks especially during bull runs, but have rightly quieten during bear markets (partly, a reflection that timing or WHEN to buy is far more important than what stock to buy)
- And then, various blogs that shares with you publicly what they do, what stocks they buy, and of course, not to be left out ....
- the very dependent manipulator's stock calls whose primary objective is to make money at your expense (again, bring out the 10 foot pole please ... *grin*)
The best ones I find are the ones that explains his/her reasonings, and lay out the risks for all to see.
The reasonings are important - you want to know why the author thinks that the stock price will go up, the catalysts, the key drivers, and whether this is something important that the Market has mispriced.
The risks are important - you'll want to know why things will not pan out the way the author thinks it might.
Often, by reading widely (in the Net, it's very easy to Google for example), we will come across a broader range of ideas than what we might have if we were to only think things out by ourselves.
Viewed from this angle, reading widely and discussing with others have its merits, only so that we can form our own considered opinion later.
But even then -- with all its merits - even if you think you have gathered enough reasons to think that the stock price will eventually go up - my personal view is that it is still not enough.
There is still the issue of actual entry and exit timing which is so critical before you can actually bring home the profit.
And that is still - at the end of the day - the KEY issue. And entry and exits are something that you have to learn for yourself if you wish to be independent and successful in the long term. And as a trader, knowing what to do when things turns out wrong is equally, if not more important than knowing what to do when things turns out to be right. Make no mistake - the journey to financial independence through trading/investing in the stock market is not as easy as you might think for the vast majority. The only time it looks easy is during bull market runs when everyone makes money. *grin*
There is often too much vested interest to emphasise "what to buy" than "when to buy".
To me, the WHEN is far more important than the What, although both are important. We have all seen the "anomalies" that:
- One can buy a good fundamental stock at the wrong time and lose money.
- One can buy a lousy crappy stock at the right time (usually, for a short time) and make an insane amount of money.
- And then, there is the trader who only trades one stock and lose money, and another trader who trades the same stock and made money.
The vested interest - when viewed over a fresh lens - is surprisingly prevalent.
Nearly everyone in the industry does it. They might do it with different intentions and extent. Some of the intentions are innocent (e.g. they just want to share), some as a service to their readers (e.g. with analysis of pros and cons), and they generally add some value although at a vastly different extent.
But the ones you have to watch out for are the one-sided recommendations that only tells you all the good stuff and none of the bad stuff. We all know that human beings are never perfect, and the same goes for organizations and stocks. Needless to say, the ones that employs manipulative tactics that rejoices in their new BMW, new house, shark fin soup and abalone and have dozens of fake supporters are best not touched even with a 10-foot pole *grin*
The skeptic's view (or is it the Wise View?) is that the only reason someone makes a stock call is because -- they already own the stock, and they want to sell it to YOU at a higher price. *grin*
This statement contains far more truth than you might think. *grin*
There are many types of stock calls. From a Net retailer perspective, you probably have seen
- "independent" professional stock calls like the S&P in Bursa
- "independent" stock broker reports like OSK, etc.
- personal advice from your broker/remisier
- bloggers from a wide range which includes remisiers, ex-analysts, etc.
- various websites and bloggers who explicitly recommend stocks especially during bull runs, but have rightly quieten during bear markets (partly, a reflection that timing or WHEN to buy is far more important than what stock to buy)
- And then, various blogs that shares with you publicly what they do, what stocks they buy, and of course, not to be left out ....
- the very dependent manipulator's stock calls whose primary objective is to make money at your expense (again, bring out the 10 foot pole please ... *grin*)
The best ones I find are the ones that explains his/her reasonings, and lay out the risks for all to see.
The reasonings are important - you want to know why the author thinks that the stock price will go up, the catalysts, the key drivers, and whether this is something important that the Market has mispriced.
The risks are important - you'll want to know why things will not pan out the way the author thinks it might.
Often, by reading widely (in the Net, it's very easy to Google for example), we will come across a broader range of ideas than what we might have if we were to only think things out by ourselves.
Viewed from this angle, reading widely and discussing with others have its merits, only so that we can form our own considered opinion later.
But even then -- with all its merits - even if you think you have gathered enough reasons to think that the stock price will eventually go up - my personal view is that it is still not enough.
There is still the issue of actual entry and exit timing which is so critical before you can actually bring home the profit.
And that is still - at the end of the day - the KEY issue. And entry and exits are something that you have to learn for yourself if you wish to be independent and successful in the long term. And as a trader, knowing what to do when things turns out wrong is equally, if not more important than knowing what to do when things turns out to be right. Make no mistake - the journey to financial independence through trading/investing in the stock market is not as easy as you might think for the vast majority. The only time it looks easy is during bull market runs when everyone makes money. *grin*
Tuesday, February 10, 2009
The New Hybrids
It's not exactly new technology (the technology has been around for ages), but if Honda Malaysia can promote this, then, it's just a matter of time before the rest of the car makers globally do the same thing (give and take a year or two if not sooner).
What is most impressive is the 31 km per litre fuel consumption claim!
Whilst real life driving won't get this, apparently, you could get something like 15 km for every RM at current fuel prices. That's equivalent to 1,500 km for every RM$100!! For many, this is equivalent to at least 3 to 4 times improvement.
The technological improvement is simply fantastic!
Now, just imagine if just 10% of American drivers switch to Hybrid cars over the next few years. The fuel consumption impact globally could drop in a very significant amount.
The question - as always - is will the big oil cartels allow this? Or will we see this as one-off promotion which will die down over time as fuel prices stay low?
Looks like we do have the technology to defer "peak oil" for a few more decades yet.
What is most impressive is the 31 km per litre fuel consumption claim!
Whilst real life driving won't get this, apparently, you could get something like 15 km for every RM at current fuel prices. That's equivalent to 1,500 km for every RM$100!! For many, this is equivalent to at least 3 to 4 times improvement.
The technological improvement is simply fantastic!
Now, just imagine if just 10% of American drivers switch to Hybrid cars over the next few years. The fuel consumption impact globally could drop in a very significant amount.
The question - as always - is will the big oil cartels allow this? Or will we see this as one-off promotion which will die down over time as fuel prices stay low?
Looks like we do have the technology to defer "peak oil" for a few more decades yet.
Wednesday, February 4, 2009
Uncle Sam aritificially "goosing" the Data? lol
I didn't say it. *grin*
Barry Ritzhold said it.
And I didn't pay him to say it *grin*
Here's what he says ....
Source: http://www.ritholtz.com/blog/2009/02/gdp-goosed-by-tarp/
________________
GDP Goosed by TARP (maybe)
Over the weekend, a hedgie friend added to our understanding of how bad GDP really was.
We already knew that the rise in inventory contributed 1.29% points to GDP growth. Without the inventory build, the GDP number would have been down 5.1%.And, it means that we are likely looking at a very ugly Q1 GDP.
What we also knew that the deflator fell 0.1% — the first decline since the 1954. If on top of inventories, the deflator had risen 0.4%, as consensus expected, GDP would have been down -5.6%.
What else was buried in the GDP report besides inventory and falling prices that was artificially goosing the data?
The answer? TARP. It turns out that the TARP money given to banks as recapitalization was a major factor in the total GDP number. (but see update below)
How? Uncle Sam buying a financial asset does not contribute to GDP under normal circumstances. But the Treasury purchased these assets at prices discounted to market prices. (Not as cheap as Buffett’s purchases, but still at somewhat of a discount).
...
So, besides getting a better understanding of how bad US GDP is, I now learnt a new meaning from Barry as to what the phrase "artificially goosing the data means" ...
lol
Barry Ritzhold said it.
And I didn't pay him to say it *grin*
Here's what he says ....
Source: http://www.ritholtz.com/blog/2009/02/gdp-goosed-by-tarp/
________________
GDP Goosed by TARP (maybe)
Over the weekend, a hedgie friend added to our understanding of how bad GDP really was.
We already knew that the rise in inventory contributed 1.29% points to GDP growth. Without the inventory build, the GDP number would have been down 5.1%.And, it means that we are likely looking at a very ugly Q1 GDP.
What we also knew that the deflator fell 0.1% — the first decline since the 1954. If on top of inventories, the deflator had risen 0.4%, as consensus expected, GDP would have been down -5.6%.
What else was buried in the GDP report besides inventory and falling prices that was artificially goosing the data?
The answer? TARP. It turns out that the TARP money given to banks as recapitalization was a major factor in the total GDP number. (but see update below)
How? Uncle Sam buying a financial asset does not contribute to GDP under normal circumstances. But the Treasury purchased these assets at prices discounted to market prices. (Not as cheap as Buffett’s purchases, but still at somewhat of a discount).
...
So, besides getting a better understanding of how bad US GDP is, I now learnt a new meaning from Barry as to what the phrase "artificially goosing the data means" ...
lol
Tuesday, February 3, 2009
January Barometer
According to Investopedia, the January Barometer is "A theory stating that the movement of the S&P 500 during the month of January sets the stock market’s direction for the year (as measured by the S&P 500). The January Barometer states that if the S&P 500 was up at the end of January compared to the beginning of the month, proponents would expect the stock market to rise during the rest of the year. " - http://www.investopedia.com/terms/j/januarybarometer.asp
Personally, I'm not a fan. I think it's a theory that the mass (i.e. generally ignorant public) can be easily duped with figures, but the reality is that it's not that simple, and probably does more harm than good if followed blindly. Just take a look at the table below:
At first glance, it seems to work - there are more years where the full year's returns are the same direction as January returns.
But a closer examination shows that there are at least 3 problems -- there may be more.
First, the full year returns include January returns. To be a predictor, it needs to separate out January, from the rest of the other 11 months (Feb to Dec), so, strictly speaking, January return should be EXCLUDED. So, in the table above, if January is down, it doesn't mean that the rest of the year is down. In fact, as shown below, in 6 out of 7 times that January is down, the next 11 months is actually UP! *grin*
Second, it doesn't work equally well when January is up versus when January is down. I leave this to you to study the table in detail, and to not blindly accept what Investopedia and any other newspaper columnist says about the January Barometer.
Consider the following years when January is negative.
- 1990 - Jan -5.9%, Year -4.3%, i.e. the rest of the year is actually positive!
- 1998 - Jan -0.02%, Year +16%, i.e. the rest of the year is actually positive!
- 2000 - same pattern - rest of the year is actually positive.
- 2002 - same pattern
- 2003 - same pattern
- 2005 - same pattern
- 2008 - this is the only year where the January Barometer actually works when January is a negative month!!!
In other words, when January is negative, history says that the rest of the year (i.e. the other 11 months) is 6 out of 7 times the OPPOSITE.
Third, such comparisons are far too simplistic, and ignores the high and lows that occurs DURING the year. For example, in 2008 --- yes, January 2008 was a negative month. Yes, entire 2008 was a negative year, and hugely negative too. But the S&P itself went up from March to May 2008. In other words, this January Barometer is far too simplistic to be of any use to the serious trader.
So, treat the January Barometer as something interesting for mass consumption, but don't let it influence your trades unnecessarily.
Personally, I'm not a fan. I think it's a theory that the mass (i.e. generally ignorant public) can be easily duped with figures, but the reality is that it's not that simple, and probably does more harm than good if followed blindly. Just take a look at the table below:
At first glance, it seems to work - there are more years where the full year's returns are the same direction as January returns.
But a closer examination shows that there are at least 3 problems -- there may be more.
First, the full year returns include January returns. To be a predictor, it needs to separate out January, from the rest of the other 11 months (Feb to Dec), so, strictly speaking, January return should be EXCLUDED. So, in the table above, if January is down, it doesn't mean that the rest of the year is down. In fact, as shown below, in 6 out of 7 times that January is down, the next 11 months is actually UP! *grin*
Second, it doesn't work equally well when January is up versus when January is down. I leave this to you to study the table in detail, and to not blindly accept what Investopedia and any other newspaper columnist says about the January Barometer.
Consider the following years when January is negative.
- 1990 - Jan -5.9%, Year -4.3%, i.e. the rest of the year is actually positive!
- 1998 - Jan -0.02%, Year +16%, i.e. the rest of the year is actually positive!
- 2000 - same pattern - rest of the year is actually positive.
- 2002 - same pattern
- 2003 - same pattern
- 2005 - same pattern
- 2008 - this is the only year where the January Barometer actually works when January is a negative month!!!
In other words, when January is negative, history says that the rest of the year (i.e. the other 11 months) is 6 out of 7 times the OPPOSITE.
Third, such comparisons are far too simplistic, and ignores the high and lows that occurs DURING the year. For example, in 2008 --- yes, January 2008 was a negative month. Yes, entire 2008 was a negative year, and hugely negative too. But the S&P itself went up from March to May 2008. In other words, this January Barometer is far too simplistic to be of any use to the serious trader.
So, treat the January Barometer as something interesting for mass consumption, but don't let it influence your trades unnecessarily.
Some Thoughts on Trends
One of my deep beliefs about financial markets is that trends exist all the time.
As a trader, trends are very important. Ideally, you want to identify trends "early" (and this definition of "early" might not be what you think), jump on it, and hopefully, the trend will continue in the same direction, allowing you to profit from it "before it bends".
But do trends exist all the time?
In my opinion, yes. But it doesn't mean that all trends are exploitable profitably to you as an individual, and we'll come to that later. But trends do exist everywhere and all the time - the secret to understanding lies in the time-frame selected, and finding the right instruments with large enough volatility and liquidity to make it good odds to trade.
For example, in forex, there is bound to be some currency pairs that will exhibit bull market characteristics -- if the currency pair you happen to be looking is bearish, simply invert that pair and you now have a bullish price *grin*.
Similarly, if the trend is going down, there are financial instruments overseas that will allow you to invert that, turning it into a bull market.
Even if the price appears range-bound -- say, moving in between trading channels -- if you split it into shorter time-frames, then, you have a smaller trend that goes up before it hits the upper part of the channel, and then, another smaller trend that goes down before it hits the lower end of the channel. In other words, trends do exist if you drill down deeper.
Whilst trends always exist, it is a completely different question on whether - YOU - as a trader - can profitably exploit it. If you have been trading for some time, I'm sure you understand what I mean.
But this article is NOT about reasons why one CANNOT exploit trends profitably. Actually, I believe this is an extremely important question - one which every trader must personally answer that question for him/herself. For me, it's too complex, and too long an answer to answer here, and it's not my reason for writing this article *grin*.
But a simpler question is do you know how to identify trends in prices? Actually, that's a possible trick question. If you see a price/volume chart, and you cannot tell from a quick visual inspection whether the price is trending or not, then, chances are there is NO trend in the time-frame given to you. (of course, if you drill down, there will be mini-trends as mentioned above).
One successful trader apparently decides whether to enter a trade or not by quick visual inspection of the charts. He used to say that he made his final decision -- after analysis -- by posting the chart at the other end of the room, and then, taking a quick look at the chart for confirmation. More often than not, that quick visual inspection turns out correct. Of course, he is a close student of the markets, and has personally examined millions of price charts over his lifetime.
So, if you're experienced, you can easily tell whether a stock / index is trending or not by quick visual inspection of the price/volume chart. But what if you're not? How do you tell?
Well, a simple rule is to look at the "lows" and "highs" of the price chart. When a stock is making a lower "low", and a lower "high", it suggests that price is trending down. And vice versa. That's one quick way. And in fact, when an experienced trader looks at the charts, he no longer need to consciously look for these lower / higher lows/highs - he merely, with a quick glance, subconsciously absorb whether the stock price is making a higher or lower "lows"/"highs", and is able to quickly determine - in a split second - whether the stock price is trending up or down.
But sometimes, when you look at a given time-frame on the screen -- prices might not fit in more than 3 to 6 months prices. Most traders use short-cuts, by plotting longer-term Moving Averages. Typically 200 day and 50 day Moving Averages or EMAs. When a stock is trading below the 200 day MA, it's generally regarded as bearish because the price is below the average of the last 200 day prices. Whilst these are short-cuts, they obviously have their limitations too. Ultimately, these Moving Averages are just tools created to assist one in deciding whether a stock has been trending in the past or not. These tools should be your servant, not your master.
Other traders uses Multiple Screens or Triple Screen approach, which is to consciously examine a longer-time frame chart such as weekly or monthly candles instead of daily. This would allow one a wider view, and you can see the last 5 or 10 years data in just one screen, to view the trend better.
And then, in the world of Technical Analysis, there are many people who thought a lot about this problem about finding trends "early", and have developed a large variety of technical indicators, generally classed as "trend following indicators". The Moving Average and EMAs are just one small example of a "trend following indicator". Another common one is MACD. You can google stockcharts.com to learn more about it. There are literally dozens (or hundreds of smaller variations) of such trend following indicators in the TA universe.
Personally, I - and a million other traders - like Trend Lines. These are lines drawn that connects the higher lows in a bull market (I call it Up Trend Line or UTL), and the lower highs in a bear market (I call it DTL for Down Trend Line). Trend Lines are a fascinating topic, where the breadth and depth are actually very interesting. For example, Bulkowski has done a lot of work studying this and many other fascinating topic. Not all trend lines are the same, some - with certain characteristics - are more reliable than others, and have more profitable impact than others. However, as a general comment, bear in mind that in recent times, there have been studies overseas done that shows that they have not worked as well as they used to work say 20 years ago. However, they still work enough time and to an extent large enough that it is still generally profitable for a disciplined trader to trade using these tools.
In practice, I use a variety of methods to establish trends, and whether trends is likely to continue or not. A visual inspection of the charts across various time-frames, Trend Lines, EMAs, MACD, Bollinger Bands -- these are the more common ones, and for me, it's more important to develop an excellent understanding on how these works over time. I don't necessarily always look at default parameters, the choice of parameters depends on the actual situation, usually in reference to what works in the past, or what works similarly, but not always.
Naturally, I also fuse what I observe and synthesized from the charts with what I know from the market/stock fundamentals, news, sentiment, etc. The ideal situation is of course when all these analysis matches. Even the risks/price falls should match as well. This is much harder to do in real life, and whenever I'm wrong, hindsight will show me that I've missed something. This is the learning process which I find thoroughly enjoyable.
As I alluded to earlier, knowing if a stock is trending in the past doesn't necessarily mean that the trend will continue. The general rule is that momentum will tend to push prices in the same direction, but this is only a general rule -- exceptions exist all the time, and blind adherence to this rule can be expensive.
So, say you're able to see past trends occuring. The key question is how likely will this trend continue in future, where the future is always an uncertain question?
This is where nothing beats personal and close observation of prices in my experience. You have support and resistance studies, and supports and resistance have many forms - such as past peaks, past valleys, trend line supports, fibonacci levels (and there are always more than 1 fibonacci levels usually), pivot calculations, etc. etc. etc. In fact, the entire study of support and resistance is a fascinating topic in itself too. A deep understanding and observation of how prices behave around these critical areas will tell you much about how prices are likely to develop later, although not in as reliable a way as an exact science. Sometimes, price reversals can happen faster too.
But at the end of the day, trends -- the ones that have happened in the past, and the ones that are "likely" or not continue in future -- means nothing to a trader, unless his money is in the trade.
And when he puts his money in the trade, his opinions cease to matter. What's more important is how prices behaves after he enters the trade. And he obviously must have clear ideas on how to exit the trade when it goes right and when it goes wrong, BEFORE he enters the trade. Trade long enough, and some will go right, and others will go wrong. It's not a matter of if, but when.
So ... what are your thoughts on trends? Is the KLCI going to go up, down or sideways? *grin*
Actually, this is probably one of the less useful but more common questions I've heard, because much depends on the time-frame. And even if KLCI is going to be higher/lower than today in a months time, it doesn't mean it won't go down lower/higher first. And of course, stocks and markets are 2 completely different things -- when markets go up, it doesn't mean your stock will go up by as much or if at all, and vice versa.
But it won't stop those who doesn't know from telling, and it won't stop those who knows from keeping it to themselves *grin*
And ultimately, to a trader, what's far more important is that his equity actually grows, rather than being right publicly or privately. *grin*
As a trader, trends are very important. Ideally, you want to identify trends "early" (and this definition of "early" might not be what you think), jump on it, and hopefully, the trend will continue in the same direction, allowing you to profit from it "before it bends".
But do trends exist all the time?
In my opinion, yes. But it doesn't mean that all trends are exploitable profitably to you as an individual, and we'll come to that later. But trends do exist everywhere and all the time - the secret to understanding lies in the time-frame selected, and finding the right instruments with large enough volatility and liquidity to make it good odds to trade.
For example, in forex, there is bound to be some currency pairs that will exhibit bull market characteristics -- if the currency pair you happen to be looking is bearish, simply invert that pair and you now have a bullish price *grin*.
Similarly, if the trend is going down, there are financial instruments overseas that will allow you to invert that, turning it into a bull market.
Even if the price appears range-bound -- say, moving in between trading channels -- if you split it into shorter time-frames, then, you have a smaller trend that goes up before it hits the upper part of the channel, and then, another smaller trend that goes down before it hits the lower end of the channel. In other words, trends do exist if you drill down deeper.
Whilst trends always exist, it is a completely different question on whether - YOU - as a trader - can profitably exploit it. If you have been trading for some time, I'm sure you understand what I mean.
But this article is NOT about reasons why one CANNOT exploit trends profitably. Actually, I believe this is an extremely important question - one which every trader must personally answer that question for him/herself. For me, it's too complex, and too long an answer to answer here, and it's not my reason for writing this article *grin*.
But a simpler question is do you know how to identify trends in prices? Actually, that's a possible trick question. If you see a price/volume chart, and you cannot tell from a quick visual inspection whether the price is trending or not, then, chances are there is NO trend in the time-frame given to you. (of course, if you drill down, there will be mini-trends as mentioned above).
One successful trader apparently decides whether to enter a trade or not by quick visual inspection of the charts. He used to say that he made his final decision -- after analysis -- by posting the chart at the other end of the room, and then, taking a quick look at the chart for confirmation. More often than not, that quick visual inspection turns out correct. Of course, he is a close student of the markets, and has personally examined millions of price charts over his lifetime.
So, if you're experienced, you can easily tell whether a stock / index is trending or not by quick visual inspection of the price/volume chart. But what if you're not? How do you tell?
Well, a simple rule is to look at the "lows" and "highs" of the price chart. When a stock is making a lower "low", and a lower "high", it suggests that price is trending down. And vice versa. That's one quick way. And in fact, when an experienced trader looks at the charts, he no longer need to consciously look for these lower / higher lows/highs - he merely, with a quick glance, subconsciously absorb whether the stock price is making a higher or lower "lows"/"highs", and is able to quickly determine - in a split second - whether the stock price is trending up or down.
But sometimes, when you look at a given time-frame on the screen -- prices might not fit in more than 3 to 6 months prices. Most traders use short-cuts, by plotting longer-term Moving Averages. Typically 200 day and 50 day Moving Averages or EMAs. When a stock is trading below the 200 day MA, it's generally regarded as bearish because the price is below the average of the last 200 day prices. Whilst these are short-cuts, they obviously have their limitations too. Ultimately, these Moving Averages are just tools created to assist one in deciding whether a stock has been trending in the past or not. These tools should be your servant, not your master.
Other traders uses Multiple Screens or Triple Screen approach, which is to consciously examine a longer-time frame chart such as weekly or monthly candles instead of daily. This would allow one a wider view, and you can see the last 5 or 10 years data in just one screen, to view the trend better.
And then, in the world of Technical Analysis, there are many people who thought a lot about this problem about finding trends "early", and have developed a large variety of technical indicators, generally classed as "trend following indicators". The Moving Average and EMAs are just one small example of a "trend following indicator". Another common one is MACD. You can google stockcharts.com to learn more about it. There are literally dozens (or hundreds of smaller variations) of such trend following indicators in the TA universe.
Personally, I - and a million other traders - like Trend Lines. These are lines drawn that connects the higher lows in a bull market (I call it Up Trend Line or UTL), and the lower highs in a bear market (I call it DTL for Down Trend Line). Trend Lines are a fascinating topic, where the breadth and depth are actually very interesting. For example, Bulkowski has done a lot of work studying this and many other fascinating topic. Not all trend lines are the same, some - with certain characteristics - are more reliable than others, and have more profitable impact than others. However, as a general comment, bear in mind that in recent times, there have been studies overseas done that shows that they have not worked as well as they used to work say 20 years ago. However, they still work enough time and to an extent large enough that it is still generally profitable for a disciplined trader to trade using these tools.
In practice, I use a variety of methods to establish trends, and whether trends is likely to continue or not. A visual inspection of the charts across various time-frames, Trend Lines, EMAs, MACD, Bollinger Bands -- these are the more common ones, and for me, it's more important to develop an excellent understanding on how these works over time. I don't necessarily always look at default parameters, the choice of parameters depends on the actual situation, usually in reference to what works in the past, or what works similarly, but not always.
Naturally, I also fuse what I observe and synthesized from the charts with what I know from the market/stock fundamentals, news, sentiment, etc. The ideal situation is of course when all these analysis matches. Even the risks/price falls should match as well. This is much harder to do in real life, and whenever I'm wrong, hindsight will show me that I've missed something. This is the learning process which I find thoroughly enjoyable.
As I alluded to earlier, knowing if a stock is trending in the past doesn't necessarily mean that the trend will continue. The general rule is that momentum will tend to push prices in the same direction, but this is only a general rule -- exceptions exist all the time, and blind adherence to this rule can be expensive.
So, say you're able to see past trends occuring. The key question is how likely will this trend continue in future, where the future is always an uncertain question?
This is where nothing beats personal and close observation of prices in my experience. You have support and resistance studies, and supports and resistance have many forms - such as past peaks, past valleys, trend line supports, fibonacci levels (and there are always more than 1 fibonacci levels usually), pivot calculations, etc. etc. etc. In fact, the entire study of support and resistance is a fascinating topic in itself too. A deep understanding and observation of how prices behave around these critical areas will tell you much about how prices are likely to develop later, although not in as reliable a way as an exact science. Sometimes, price reversals can happen faster too.
But at the end of the day, trends -- the ones that have happened in the past, and the ones that are "likely" or not continue in future -- means nothing to a trader, unless his money is in the trade.
And when he puts his money in the trade, his opinions cease to matter. What's more important is how prices behaves after he enters the trade. And he obviously must have clear ideas on how to exit the trade when it goes right and when it goes wrong, BEFORE he enters the trade. Trade long enough, and some will go right, and others will go wrong. It's not a matter of if, but when.
So ... what are your thoughts on trends? Is the KLCI going to go up, down or sideways? *grin*
Actually, this is probably one of the less useful but more common questions I've heard, because much depends on the time-frame. And even if KLCI is going to be higher/lower than today in a months time, it doesn't mean it won't go down lower/higher first. And of course, stocks and markets are 2 completely different things -- when markets go up, it doesn't mean your stock will go up by as much or if at all, and vice versa.
But it won't stop those who doesn't know from telling, and it won't stop those who knows from keeping it to themselves *grin*
And ultimately, to a trader, what's far more important is that his equity actually grows, rather than being right publicly or privately. *grin*
Tidying Up the Chatbox
Just a short note to let you know that for this New Year, I have decided to tidy up the cbox users - there are far too many dormant members whom since registration, have never activated their accounts, so, I've just decided to delete all of them. This brings the number of users down to below 200.
Also, since the chatbox belongs to me, and I have a certain objective that I want to achieve with the chatbox before the subscription expires in 2010 -- and they primarily focus on encouraging a positive and constructive atmostphere -- I have also taken the liberty to remove a handful of chatters whom - in my opinion - do not reflect nor share the same positive values. The real world equivalent is like building a fence on one's house, or only letting guests whom you respect to enter your home. In the past, I have clearly been too generous in letting any Tom, Dick and Harry enter this cbox, and sadly, a small handful have chosen to abuse the privilege. Hence, the door.
Take care, be positive and constructive, and all the best wishes for your trading in 2009!
Also, since the chatbox belongs to me, and I have a certain objective that I want to achieve with the chatbox before the subscription expires in 2010 -- and they primarily focus on encouraging a positive and constructive atmostphere -- I have also taken the liberty to remove a handful of chatters whom - in my opinion - do not reflect nor share the same positive values. The real world equivalent is like building a fence on one's house, or only letting guests whom you respect to enter your home. In the past, I have clearly been too generous in letting any Tom, Dick and Harry enter this cbox, and sadly, a small handful have chosen to abuse the privilege. Hence, the door.
Take care, be positive and constructive, and all the best wishes for your trading in 2009!
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