Registered: Nov 2004
06-17-12 05:57 AM
Quote from icarus618:
The basic way the technical analyst makes profits is by identifying a trend in prices and riding
that trend. At times, daily fluctuations in prices make it difficult for the analyst to view the basic
underlying trend in prices. Moving averages are tools used to smooth this erratic data, making it
easier to discern the genuine underlying trend.
Although there are various methods of calculating a moving average, the basic idea is to
give a summary of the average or normal price history of a particular period. Because the moving
averages are based on historical prices, by nature, they will be a lagging indicator of trends. The
shorter the period covered by the moving average, the less of a lag there will be. However, using a
shorter period also leads to more false signals. As usual, when choosing a moving average system,
there is a tradeoff between early trend reversal recognition and certainty of trend reversal. The use
of envelopes, bands, and channels around the moving average can minimize the number of false
signals by providing a larger range of price movement before a signal is triggered.
Box 14.1 gives a list of basic principles that the technical analyst should keep in mind. This
list provides a summary of some of the key points we have addressed in the past three chapters.
BOX 1 4 . 1 Trading Rules
In the past few chapters, we have covered a good deal of material regarding trends.
Here are some of the key points to remember when investing:
ï¿½ Riding the trend is the most profitable use of technical analysis.
ï¿½ Trends can be identified with trend lines, moving averages, and relative highs
ï¿½ Always pick a security that trends up and down. Flat or random trends are usually
ï¿½ Be aware of the next higher and lower trend from the one being traded.
ï¿½ Always trade with the trend:
ï¿½ 'Trend is your friend."
ï¿½ "Don't buck the trend."
ï¿½ Breakouts from support or resistance levels, patterns, or bands usually signal a
change in trend.
ï¿½ A trend line breakout is at least a warning.
ï¿½ The longer the trend, the more important the breakout.
ï¿½Confirm any breakout with other evidence, especially when entering a position.
In exiting, confirmation is not as important.
ï¿½ Always use stops, protective and trailing.
ï¿½ Do not sell profitable positions too soon; just keep trailing with stops.
After reading this, it's evident that someone from academia with a $2000 Etrade account has read about 100 books on technical analysis, and has combined them into nothing more than complicated mumbo jumbo for the "student" of TA.
There are much better books out there. Mark Fisher's The Logical Trader is one. Simple and powerful. Yes he trades.