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Strategies for Stocks, Shares & Forex

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It's All in the Price

In my opinion, and with due respect to trading with fundamentals, all company analysis and activity culminates in only a single result at the end of the day, the price at close of trade. It is easy to get bogged down, confused, lose your way and time trying to follow the dynamics of just one company’s activity during the trading day, never mind several. There is also subjective nature of fundamentals. Who or what you think is great, and who or what the market thinks is great, is not necessarily the same thing. And, what the market thinks, will certainly impact the price and, more importantly, your pocket.

The fact of the matter is that the fundamentals are already accounted for in the price of a stock. The price contains the market sentiment, the financial results, the credibility of the company’s leader, and more. From a technical analysis perspective, price is a straightforward plot to follow. It’s a single instrument, a single observation and a single consideration.

Charting
Technical analysis invariably involves making extensive use of charting. Sophisticated charting software systems are available from a wide variety of charting providers for less than $1,000 or alternately, you could get online daily prices and do paper charting instead, after all, charting software hasn’t always been around. Obviously charting software offers versatility and speed over pencil and paper. There is also the advantage of being able to use the historical data available with most charting software in order to build up a solid picture for back testing for instance.

Getting started with charting may seem to be a formidable prospect at first. Once you get going with charting though, you will find it considerably easier than you initially anticipated. Charting involves plotting a succession of prices over a given time frame on charts, with the y-axis representing price and the x-axis representing time. The time frames can be intraday (minutes to hours), daily, weekly, monthly etc. The tighter the timeframe selected, the greater the level of detail shown in the charts.

Intraday and daily charts are normally used to predict short term price movements, whereas weekly and monthly charts are used to predict price movements and trends in the medium term. The beauty of charting is that you have complete flexibility. You can zoom to 1 year or 5 year charts to get a glimpse of the bigger picture and an overview of the history of a stock, and then zoom back in again to get into the detail.

Trend lines and Price patterns
The fundamentals of a stock, together with other economic influences, will cause trend lines and pricing patterns to form on the charts. That is why I say that the fundamentals are already in the price.

Trend lines: You will use the trend lines to identify a trend or to confirm whether a trend exists. This gives you an idea of the possible direction of a stock’s price and whether there is sufficient momentum for you to turn the trend into a profit. If the line slopes downwards, it is seen as a downtrend (bearish). If it angles upwards, it is seen as an uptrend (bullish).
Pricing patterns: One could probably describe pricing patterns as complex trend lines. The patterns are formed as the stock price oscillates between uptrends and downtrends. These pricing patterns mostly fall in either the reversal category or in the continuation category. Trend reversals appear when a trend changes direction and a trend continuation appears where the current direction in trend is set to resume after a time.

Indicators
When charting, you will make extensive use of indicators (such as Bollinger, MACD, Stochastic, Parabolic SAR etc.) in forecasting price movements. As the fundamentals are already in the price, indicators are very reliable if correctly used. Getting to know which indicators you are most comfortable with is a good idea before buying your charting software.

To conclude
Technical analysis and charting make it simple to see at a single glance and without having to spend valuable trading time studying and analysing annual reports, quarterly results and macro economic influences. Neither does one have to focus on how a stock’s price is affected by events, by its financial performance and the credibility of the management team at its lead. Charting allows you to identify, also at a single glance, how it performed during different periods in time, and where traded at a low, medium or high.

One price, one analysis; use it, with your chosen technical indicators and it should make you trading day a little easier

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