When analysing the movement of a share which has been bought for a short term trade, and the value of that share is at least three digits, e.g. 100p, 200p, 300p and so on, any examination of the progress of the trade, from the numbers alone, is a lot less difficult than for a much lower priced share, e.g. 5p, 10p, 20p and so on.
This is because of the narrowness of unit value. Clearly, a 10p share which has risen by just 5p has already risen 50%, yet just a 10% rise in a share of 300p yields 30p, which is six times the actual amount of money than the cheaper share, even though the percentage is less. This is just one example of how the use of percentages as indicators, if unskillfully employed, can be misleading enough to contribute to bad decisions.
I WAS 100% CERTAIN THAT I WAS NOT ALWAYS RIGHT BUT WAS NEVER WRONG.
This issue reminds me of a time in the distant past when I was writing for a publication whose Editor was half my age and repeatedly telling me off for using too many Capital Letters in my drafts, ("we don't use them anymore", she said)!. I struggled to convince her that it was dishonest to use illustrations of share performances of 90%, 200% and even 1000% returns on selections, like the other Writers, to teach the individual how to make a living from trading. If the share price to begin with was, for example, only 1p, then a trade producing a 100% return would only yield a 1p return. A share in such a low price band was unlikely to have a large market, and therefore profit quantity could not be made up by a high volume purchase. Furthermore, such shares would often take so long to move that they were clearly investments, not trades. But the corridors of wealth and the honest individual rarely make willing bedfellows, and the text book world and the real world are often worlds apart.
MONITORING THE TRADE
Of more relevance to the point of this Article is how to decide whether to sell or to hold a particular share trade open, in the hope of further gains, or to close it and bag any profit, or limit any loss, which is available at the time and date of its examination. There may be many different methods of achieving this goal, but for the purpose of this article, we will only be looking at mine.
INTUITIVE TRADER
The City Trader, Mr. Alan Soprano (surname changed for confidentiality), had opened a trade in GTL, at 14p, and the price had moved to 19p. He is what I call an "Intuitive Trader". What I mean by this term is that unlike myself and many others, he does not at any stage ever look at a chart to aid his analysis or trading decisions. His 30 years experience has bred into him some sort of one-ness with the pure numerics of a share, or a futures contract, or a currency. I doubt if this is a skill which any of us could learn without also acquiring the same decades of practical experience in the same way, for he began as a "runner", before becoming a Floor Trader, before progressing further in his career. Like all Floor Traders in certain markets, their conversion to electronic exchanges forced them to to operate from behind a computer screen. However, unlike so many who were successful on the floor but dismal failures from behind a pc, this guy seems to be able to juggle the numbers off the screen around his head, as though he still stands among the rough and tumble of the waving hands and screeching voices which defined the trading pits of yesteryear.
BUT NO MAN IS AN ISLAND
Nonetheless, even hardened and natural traders such as he will sometimes struggle to evaluate his own trading position, particularly in a low priced share, which is why and when a professional Analyst like myself can be of some use now and then.
Thus, my task was to undertake a chart analysis and supply Mr. Soprano with any guiding conclusions I could reach.
To do this my way, I first needed to construct a Chart of the share's most recent price history only (because he was in a short term trade). From this I would see if I could tell (a) why he bought it at that particular time? (b) why he bought the share at all? (c) evaluate whether there was skill or just good fortune behind trading the share price rise, and finally (d) what the current position at that time seemed to be, in order to provide an overall analysis.
CHARTING SOFTWARE TO THE RESCUE
In days not so long ago (or maybe it was and I am just reminiscing) I would have needed a box full of old financial times papers, plus a large size piece of graph paper, ruler, pen, protractor etc., and then expend hours plotting and scaling, and eventually ending up with a chart to work from.
Not any more, for the ANALYST charting program invited me to simply click on the icon to create a new chart, tap in the exchange symbol, and allow the program to go off into cyberspace, all on its own, and find a price history for 3 years or more, as soon as I clicked the button marked "fetch", as though talking to a pet dog. In little more than the time it took for one noisy external modem to connect to the Internet, hey presto a full sized chart with all the historical data faithfully plotted was before me. This rapid result however caused me to question my policy of billing for my efforts by the hour!
THE BARE CHART
As you can see, the bare chart was a "line chart", from which I could tell absolutely nothing!
The program was told to convert the bare chart, into a BAR chart, and now the musical notation begins to reveal itself on a part by part basis. above.
Next, if a bar chart reveals the treble clef of stockmarket musical notation, to produce the bass clef for a full musical score we need to add the volume. A quick couple of clicks and we get the above.
Now we put them together, above, to see the score:-
ADDING INDICATORS
We can add indicators with a few clicks, and choose from the following list:-
Bollinger Bands, Candles, Chaikin Volatility, Detrended Price Oscillator, Median Price, Momentum, Moving Averages, On Balance Volume, Parabolic SAR. Price Rate of Change, Rebasing, Relative Performance, Relative Performance with Base Line, Relative Strength, Simple Momentum, Spread, Stochastics, Welles Wilder R.S.I, Trend Lines.
Any or all of these can be great tools, but one only selects the tools needed for the specific job in hand. In this instance, my method requires only one of them i.e. Trend Lines, and we shall now add them to the chart.
We draw these trend lines by using a practised eye, to immediately observe that the general movement is up. Then we find the low point within that uptrend (again you learn this by practise), and draw the lower trend line between two successive lows, and then the upper trend line from an intervening high, parralel to the lower line.
We can now put everything together to arrive at an analysis:-
MY CONCLUSIONS
I reported to Mr. Soprano as follows:-
AT
V1, you can clearly see the professional volume (share accumulation) which
gave a buy signal at 13 pence, on Dec 13th 2001. Straight away, we can say
how making the trade on T20 would not have produced the gains available from
an outright purchase, or from a CFD, if opened at that date, but any interest
payable on the latter would need to be factored in against the gain.
At V2, we can see the trading volume which supports the price rise over the
last few days, during which you have made a short term trade, with the price
currently trading (Monday 27th Jan, lunchtime) to 19p. However, we cannot
know for sure (until tomorrow) if the latter leg of that volume may contain
hidden selling, and I suspect it does, especially as you will observe a narrowing
of price range at the high of the up move.
S indicates the support level of the uptrend-channel, to which we can expect
the price to fall back to IF it is going to retrace at this time (15pence).
R shows us that the price is currently bang on the upper resistance level
of the same channel (19p), and here is where a technical appraisal can help
in deciding whether or not it is time to close the trade and take the profit.
Any break up and through that upper line, will be a hold signal, as the price
attempts to reach into the areas of new current highs, within the highs previously
visited in better days gone by, as high as 70p some time ago. If time in T20
or shorter has decayed, then a switch into a CFD is the way to go, if a hold
is required, as opposed to a T.cash anew.
However, any retracement downwards from this resistance could be swift, as
distribution of the share takes place by those who accumulated it at V1. In
this case, the gains made in the last few days would likely be quickly eroded,
rendering a good trade a waste of time and money.
Greed may incite us to hold the position open. And frustration may arrive
if we close it and then watch the price shoot for the sky.
Conclusion?
There is not one, only a matter of judgement. Each Trader will have their
own view, and perhaps their own information. However, in the absence of fundamental
information to overide the technical picture, as a short term trader I would
be inclined to close the trade, bag the profit, and buy in again after the
price hits the support line, but only if it begins to bounce from there. If
however the price breaks out, well - that's the game we play, but someone
famous said that you never go broke by taking a profit.
THE OUTCOME
Pleased with myself for reaching what I believed was a conclusion which could do nothing less than inspire Mr. Soprano to bag his profit, avoid a loss from holding on, and shower me with credit, my effort to reach for the invoice pad was quickly scuppered by the following phone call and ensuing dialogue:-
"Hi Rich, thanks for that analysis, spot on!" ----------------------------------------- "Ok so are you going to close the trade and bag the booty?" - I asked.-------------- "Already did that an hour before I got your Analysis". -------------------------------- "So you didn't need me then."------------------------------------------------------ "No, I 'felt' that it was time to close the trade, and I did.
Intuitive Traders - I hate them all!!!!!!!
POSTSCRIPT - here is the chart for the close of that day and the 10 trading days after, which illustrates the price reversal which ensued although, in the end, the credit due for making the correct decision was not down to me, despite my best effort.
