Secret 12TRACKS IN THE CHARTS
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Even though the markets approach randomness, technical
charts of stocks or futures can provide some clues or tracks to
what will happen in the future. However, readings from the
charts are never a sure thing and should always be taken with a
grain of salt.
Many traders take factual data too seriously, and many get
lost in the trees. A chart of a stock’s price action including its
trading volume should be treated as signs in the sand of what the
future might hold. Charts are pictures of supply and demand.
They show you the trend and where the price will find support
and resistance.
I look closely at support and resistance when designing my
strategies, especially when setting stop-losses and profit goals. I
also watch for breakouts from tight trading ranges. This supports
a major change in volatility and improved odds of a major move.
Nevertheless, this again is not a sure thing. I put much
more importance on trends when there is a lot of volume and no
news to support the move.
Charts are not crystal balls but can provide signs to what
may happen in the future, especially when they are not supported
by news items and they are seen as a picture of supply and demand.
They tell you where the money is flowing. For example, a
stock price falling below long term support, or a place where it
has found a lot of support in the past, suggests that a lot of
money is flowing out of the stock and the stock price is likely to
continue falling.
When a stock or futures makes a new high, it is likely to
move higher for the resistance is rare at the level of a new high.
There is no one left who is desperate to sell at a new high; i.e. no
one still hanging on who was left holding the bag on the last
major run up in the stock or futures.
However, there are buyers in line waiting to jump on the
band wagon on any pull back. Likewise, when a stock or futures
is making a new low, it is likely to move lower, for on any rally,
sellers who were left holding the bag are waiting in line to get
out.
Action in the charts becomes more valuable when there is
no news to support the price action. Because the charts can tell
you something is happening behind the scenes that the public is
not aware of, they become crystal balls. This is where the slogan,
“Buy on the rumor and sell on the news, “ comes into play.
How good are charts at predicting the future? Well, they
sure beat fundamentals. The charts were giving “sell” signals on stocks such as Enron, WorldCom and Adelphia Communications
long before their demise. Fundamentals told you to sell when
these stocks were almost worthless. In fact, when large brokerage
firms give sell signals on stocks, most of the damage to the stock
price has already been done. The answers are in the charts, not in
the fundamentals.
Option prices can also foretell the future. When option premiums
on a stock are suddenly very expensive and overpriced
even though the stock price is not moving much, you should be
suspicious. It suggests a news event or development that has not
been exposed to the public.
In conclusion, the charts can foretell the future if you are a
good detective and don’t get lost in every tick of the tape. Despite
this, remember, there are no sure things in the charts, just hints
about what the future holds.
Even though the markets approach randomness, technical
charts of stocks or futures can provide some clues or tracks to
what will happen in the future. However, readings from the
charts are never a sure thing and should always be taken with a
grain of salt.
Many traders take factual data too seriously, and many get
lost in the trees. A chart of a stock’s price action including its
trading volume should be treated as signs in the sand of what the
future might hold. Charts are pictures of supply and demand.
They show you the trend and where the price will find support
and resistance.
I look closely at support and resistance when designing my
strategies, especially when setting stop-losses and profit goals. I
also watch for breakouts from tight trading ranges. This supports
a major change in volatility and improved odds of a major move.
Nevertheless, this again is not a sure thing. I put much
more importance on trends when there is a lot of volume and no
news to support the move.
Charts are not crystal balls but can provide signs to what
may happen in the future, especially when they are not supported
by news items and they are seen as a picture of supply and demand.
They tell you where the money is flowing. For example, a
stock price falling below long term support, or a place where it
has found a lot of support in the past, suggests that a lot of
money is flowing out of the stock and the stock price is likely to
continue falling.
When a stock or futures makes a new high, it is likely to
move higher for the resistance is rare at the level of a new high.
There is no one left who is desperate to sell at a new high; i.e. no
one still hanging on who was left holding the bag on the last
major run up in the stock or futures.
However, there are buyers in line waiting to jump on the
band wagon on any pull back. Likewise, when a stock or futures
is making a new low, it is likely to move lower, for on any rally,
sellers who were left holding the bag are waiting in line to get
out.
Action in the charts becomes more valuable when there is
no news to support the price action. Because the charts can tell
you something is happening behind the scenes that the public is
not aware of, they become crystal balls. This is where the slogan,
“Buy on the rumor and sell on the news, “ comes into play.
How good are charts at predicting the future? Well, they
sure beat fundamentals. The charts were giving “sell” signals on stocks such as Enron, WorldCom and Adelphia Communications
long before their demise. Fundamentals told you to sell when
these stocks were almost worthless. In fact, when large brokerage
firms give sell signals on stocks, most of the damage to the stock
price has already been done. The answers are in the charts, not in
the fundamentals.
Option prices can also foretell the future. When option premiums
on a stock are suddenly very expensive and overpriced
even though the stock price is not moving much, you should be
suspicious. It suggests a news event or development that has not
been exposed to the public.
In conclusion, the charts can foretell the future if you are a
good detective and don’t get lost in every tick of the tape. Despite
this, remember, there are no sure things in the charts, just hints
about what the future holds.