Buying a stock? Read this first
Posted
Dec 19 2008, 08:00 PM
by
Andrew Horowitz
Rating:
Whether you are looking at technology stocks like Apple or Microsoft,or looking at old favorites like General Electric or Consolidated Edison, there are good times to buy and bad times to sell. After the fundamental analysis is done and you are as confident as you can be that your research is solid, the timing of the buy is critical.
Technical analysis can be an intimidating subject and it is often made more confusing than it needs to be with the addition of some esoteric oscillators and indicators. The goal of every market participant is to make money and when properly understood, technical analysis is a tool which can help you better time investing and trading decisions. Brian Shannon's new book, Technical Analysis Using Multiple Timeframes focuses on trend recognition and teaches how to spot low risk/ high profit potential opportunities.
Here are 10 useful points from the book:
- Understanding the motivations of market participants is more important than memorizing certain technical patterns. There is a constant emphasis on market psychology through out the book which helps the reader attain a deeper understanding of market structure. Once market action is thoroughly understood the participant is in a better position to anticipate rather than react.
- Only Price Pays. We all have our biases, but in the end, the market does not value our opinion. It is our job to listen to its message and not let our own opinions get in the way of making money. Objective recognition of trends allows us to put our biases aside and focus on the right ideas at the right times.
- Defense wins the game. Risk/money management are constantly emphasized in this book and the breakdown of different stages for stocks allows you to identify when to be long, when to be short and when it makes more sense to be on the sidelines in cash. Cash is sometimes the best position.
- Using a minimum of three timeframes to study price action allows the investor/trader to, 1) Identify a candidate based on the primary trend (longer term timeframe), 2) Establish a potential risk/reward scenario (intermediate term) based on potential support and resistance levels and 3) Determine entry and exit levels (short term) based on the trending behavior.
- How to recognize specific price behavior which indicates when buyers or sellers are gaining or losing control of the trend. One tip is that moving average crossovers (which are often used as the basis of technical timing systems) actually represent indecision and trend confusion which is a time to raise your defensive guard, not a time to aggressively commit new funds to the market.
- A healthy volume pattern will see volume expand in the direction of price movement and then diminish as the stock experiences a short term correction. Big volume without further upside volume equals distribution, while big volume without further downside is a sign of accumulation.
- Because the market is a discounting mechanism, fundamental news stories often follow price direction. Fundamental analysis cannot be ignored by anyone serious about making money in the markets, but it is the market reaction to the news that matters most, not your interpretation of the headline. Fundamental “news” is only as good as its source and as we well know news and truth are often confused on Wall Street. News stories can are reacted to by; establishing a new trend, accelerating and existing trend, reversing a trends or just fizzling out.
- The Volume Weighted Average Price (VWAP) is the average price a stock (or market) has traded at over a given time. The VWAP is the basis for many of the algorithmic trades that are executed each day. Brian gives a thorough description of how this price affects behavior on a daily basis.
- Short squeezes can create powerful trend trading opportunities. By combining short interest figures (which are released to the public every two weeks) with average price information, it is possible to determine the approximate level where short positions were initiated. As the average short position begins to lose money, the odds increase for capitulative purchases to cover the shorts which can lead to dramatic upward price moves.
- Success in the markets is attained by understanding your own personal psychology, the psychology of the “herd” (as represented by price behavior), and finding the trading vehicles and timeframe which suits your personality best.
You can pick up a copy of this book HERE
Related Reading:
Have Google Apple and Amazon finally hit bottom?
Stocks for the Holiday Stocking
MSN Investor Education Center
Learn how to use charts on MSN Money
Andrew Horowitz is a money manager and the founder of Horowitz & Company. He is also the author of the bestselling book, The Disciplined Investor . Check out his latest investment idea or listen in as he hosts, The Disciplined Investor Podcast.
