Barry F, a reader, sent me an email with
a number of queries and comments. As I split each comment up to answer,
they accidentally appeared to me as though being a natural question and
answer session, and they have easily provided the format for this Article:
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BF: "I recently bought into Cranswick (CWK) at 370p and this was partly due to your previous articles. I noticed the volume and looked at the chart and saw the volume as an indication of the bottom being reached and a reversal being forthcoming."
TWW: Good show for spotting the extra heavy volume and becoming alert to the probable onset of a tradable opportunity. Full marks also for finding the confidence to actually take the plunge by opening a trade. Those two elements alone suggest you have the potential to develop into a positional Share Trader, with continued study.
BF: " Thankfully the share did indeed move upwards (around 418p today) and I've made a bit of money, which is always nice. However, I do wonder if I was lucky."
TWW. The only kind of luck
you can get consistently in Trading is bad luck, and the only kind of
good luck you can get is the luck you make yourself, i.e. the effort you
put in, and the results you get from expending the right effort in the
right way.
Everyone who learns to read
the music of the charts goes through a “shock” phase at some stage. This
describes that process by which, at the start of things, the student does
not have any really deep inner belief that it works, but goes into the
shock phase when he finds out that it does, and money starts coming in,
not once, but over and over. They ask themselves that age-old question,
“if this was true then surely everyone else would be doing it”? This however
is not so, for it is only the smallest minority of any population who
are willing to leave the herd of common belief and walk through the dark
tunnel towards the light at the end of it. Fear of the truth permeates
all areas of life itself, and standing in their own space is not something
that society encourages them to do. Does anybody say of the endeavours
of Donald Trump, well, he can’t really be making all that money from buildings;
otherwise everyone else would be doing it?
BF: "Your examples are wonderful and fascinate me.
TWW:
Thank you, they fascinate me too, which is why I write about the subject.
Sometimes I feel not so much a Trader as a Priest, preaching the teachings
of the Church of the Welsh Wizard!
BF: "They are simple but, at the same time, strike me
as easily misunderstood."
TWW: Most musicians know
that, in popular music at least, all the most memorable songs are based on
the most simple chord structures. It is though one thing to recognise that
as the listener, but quite another to be the composer. This analogy is extendable
to many other areas. For example if you ever watch professional sports on
TV, say snooker or tennis, the champions make it all look very easy, but you
try getting even a 50 break on a snooker table let alone a clearance, and
you soon see that what seems simple is not necessarily easy.
BF: The old adage of "a little knowledge in the wrong hands is dangerous".
TWW: I guess if you apply
this thought to something serious like terrorism it must hold true. but if
you are applying it to trading I would say that it only applies insofar that
a little knowledge equates to insufficient knowledge, which can lead to unsuccessful
trading. Hence it is never enough to look at any singular aspect without studying
also the other aspects which go with it. To return to my musical parables,
anyone can learn how to tap out baa baa black sheep on the piano or guitar,
but you need to study much more about musical composition to knock off a really
a good song.
BF: "I know you will not give specific advice and am not
expecting any. But, if you get a minute, could you have a quick
look and tell me if I am on the right track?"
TWW: You recognise that
it would be an offence, (in the UK), with potentially dire consequences for
me, to provide you with specific advice, for which I thank you. However, you
then ask me to tell you if you are on the right track, which, if I answer,
will be the same thing as giving that advice! If I say nothing, I am to be
damned, and if I answer as needed, I am also damned, so I am damned if I do
and damned if I don’t. How am I to get around this? The best I can do is to
examine and illustrate the chart of the instrument of your query, at the end
of this, and answer your final question with some thought provoking comments,
which I hope will stimulate you to find your own answers to your own questions.
BF: “The uptrend has now gone in favour of a more sideward direction but I haven't sold as there has been no significant volume to suggest those that moved in for a good run are getting out yet."
TWW: It is a rare scenario
indeed, in which you could just buy a share and watch it go to the sky in
a completely straight line without pauses, sideways phases, and interim retracements,
if not complete reversal. What you are experiencing here is the difference
between watching a share chart as a hobby and feeling the emotions which come
with having your actual money on the line. This is a normal phase of development
that every Trader in the making must go through.
BF: "Sometimes abnormal volume on stocks that have been falling do indeed prove to be a good indication of an upcoming reversal but as many times as not the hope proves false. I guess the skill is being right more times than wrong (or at least being wrong at less cost than the profit being right provides!)."
TWW: No, you are not correct
here, for your comment is limited by the limited observations you are making,
and by assuming that the bible of the gambler comes into play. We cannot afford,
as Traders, to have a hit and miss approach. You are mistakenly looking at
the volume as a "singular indicator".
Every volume of the sort you
are observing does, and always does, signify meaningful activity in the direction
and behaviour of a share. However, in order to be able to decide which volume
is that which will precede a turning point, as opposed to that which is the
onset of fresh supply to drive the price down further, you have to look not
just at the volume in isolation, but also at the price bars, for every
bar is like a musical note, but there are many types of musical note. Hence,
it is only learning to understand the combination of the volumes plus
the immediately surrounding price bar action that can give you the skill to
decide which is which.
I have not given all my knowledge away in this regard in my articles, nor do I intend to. My articles are not in themselves a complete course, they are a message from me to the world, with examples, which illustrate that the music of the charts is true, and that anyone who is willing to learn to read it can change their own destiny forever. So you need to read all the music of a share chart, not just the first bit, in order to become an efficient Trader. If this were not so, then everyone who learned the first bit could become a professional in a week.
BF: "Any light you can shed will be much appreciated. I shall continue to study hard."
TWW: (1) You state that you entered at 370p and that you have made "some" money (suggesting a disappointing tone) as the share price currently stands at 418p. You must examine your own statement in more detail for your answer. By my reckoning, 418 minus 370 = 48 which = almost 13% in barely a month, which annualises to a flat rate equivalent return on capital employed of 156%, which is over 50 times the return you could get at most of the local building societies, and that is only on one share!
TWW: (2) When you trade, understand that the purpose of trading is to acquire a profit in the shortest period of time using the least possible amount of money and carrying the smallest possible risk, defined in terms of the amount of money at risk as a proportion of the total amount of money you have available. So, given that I am not allowed to tell you when to buy or sell, why don’t you (instead) ask yourself a different question such as "why are you not satisfied to close the trade and help yourself to your 13% return in a month with little effort?"
TWW: (3) If you do not
take profits, and then move onto the next trade, then you are not trading,
you are investing, and may find yourself in the same boat as other investors
who were too greedy to take profits, held onto their positions for never
ending growth, and now sit on holdings which are not worth what they would
like them to be. The two most important things to remember about trading
shares is (a)
First we look at the above daily chart of CWK shares, the last bar on the right showing the full day of Friday June 27th 2003.
At point A, BF has noticed the extra heavy volume and is alerted to a possible bottoming process.
Observe at Point A that the day is a gap down day, i.e. the high of the day is lower than the low of the previous day. This tells you that there would have been some fundamental information on that day, used by the Spin Doctors of the Stockmarket to explain away the day's dramatic fall in price. Sure enough, during the day, increasing volume illustrated that dumping was occurring. However, the following day, the price range has narrowed, and it is an up day, closing at the high of the range. This proves that as the price approached its low on the prior dump day, professional traders stepped to accumulate the share, at bargain prices, as they could see that the price falls were overdone, an over-reaction if you like to whatever fundamental news there was. Therefore, at this point, we can tell that the downtrend in price has ended. However, this is NOT necessarily a buy signal, for just because the price is to fall no more, does not mean that the price is immediately due to rise.
It is in fact over three trading weeks later on, at Point C, that the buy signal occurred. Notice the high volume under the price bar which shows the price being first driven down during the day, to wrongfoot you into thinking the share price decline was getting underway again.
Once the MarketMakers knew there was no significant supply from novice traders, their clients, the professionals, were given the green light to execute their buy orders, which is why the volume finished high, and the price gallops away, upwards, for the rest of the chart.
The line marked T1 shows you the bottom, the support level if you like, and T2 shows the projected price resistance level, to which the upward price move will aim for, and will likely struggle to move through, at least for a while.
However, the final bar of the period, i.e. Friday 27th June shows the first sign of weakness, and is the end bar in that series of bars which, visually, shows a "rounding over", normally signifying a drying out of demand. This is can be a temporary situation, but price may first drift downwards before attempting a further thrust up towards the line. Any surge up through that line would be described as a "breakout", and indicates a new bull trend, at least for the medium term, for the share.
Any period of hesitation\sideways move\rounding over here, is a signal to short term traders to "bag the booty", and release their funds for moving into another trading opportunity, as this trade has successfully captured the "momentum" of the turn in the share price. This is to say, that any future resumption of the upmove is likely to "slow". To hang on for this, or to jump on later, is to convert from short term trader either into medium term trader or longer term investor, not the business that we are in!
We can now change time frames and look at the weekly chart, again ending at the close of business Fri 27th June 2003.
At point A, you observe the volume bringing the price back up off the low of the disastrous week for the Bulls and novice traders of the share, who were standing in quicksand. Here you cannot see the gap down day, which is why a daily chart is necessary to highlight such activities.
At point B you see the consolidation of the daily buy signal, and the upward strength.
It is clear from T1 where the low of the trading channel lies, and T2 shows you, on a move along basis, where the price is attempting to aim for.
THUS, this article again explains something of the whys and wherefores of how important it is to learn to read different musical notes in conjunction, for just taking one note on its own, does not make a tune.
