There are many methods of analysing the chart of a share, and of course we will all have our particular preferences, whether they be based on a technical or fundamental stance, pehaps even through astrology which, though not for me, has helped someone I know of to be successful enough to retire to the most expensive part of Monte Carlo, and played a major part in the price time projections of W.D. Gann!

WHAT TO LOOK AT AND WHY

But before we can examine the prospects for any individual share we must first have a way of identifying which ones to look at, bearing in mind, if we are traders, that we are seeking only those shares which may have moved into an opportunistic position.

We may be drawn to examine and analyse a particular share because we read or hear something about it, or we may have an advisor who points one out. We could live in the City and belong to a grapevine, or a share club, or we may recall the views of others on a discussion board. For the computer orientated we may even use the sophisticated charting software available today which can not only scan thousands of shares but also search for a particular degree of price movement, and then present us with a filtered down list for further study.

THE HARD WAY

For me though, I’m afraid, it’s the old fashioned way - manually going through a database of about 500 share charts each night until something catches my eye. I can just about manage this by utilising a sort of quick flick slide show routine, and then as a second stage whittle these down to just two or three shares to concentrate on at any one time. After all, I must make myself suffer for my art!

CONSISTENCY

Whatever type of financial instrument we trade, whatever particular method suits our style, perhaps the most important thing we can strive to achieve in our trading is the very secret of all successful traders - consistency.

Indeed it is in our pursuit of consistency that a study of many different aspects of trading, including for example the psychology at work, or the use of trend channelling to identify where a price may be headed, may sharpen our skills to help the future become more profitable than the past.

EXAMPLE

The following example is an end of day share chart for the SFI group, every bar reflects one day of trading.

Point AA is the highest high achieved within the timescale being studied, following which there was more than a 30% decline in price to the area marked as point BB.

The single support line drawn under the lows around this point, at that time, illustrated the possible formation of a base, or bottom. This was my signal to put the share on "the watch list".

At point 1, the marketmakers were "testing" - this is typically signified by a price bar of thin to normal price range, where the price was first marked down during the day back into the most recent lows, in order to test for any supply present, (all professional traders are familiar with the concept of testing).

The price was then marked back up to close on or near the high of the day, but volume remained low to normal, suggesting that supply was relatively absent. This was significant because the marketmakers could be holding orders from customers who would not be prepared to execute those orders if their buying was going to be suffocated by the onslaught of sellers into any rise.

The next five days showed continued thin price ranges ending with a down day, possibly so as to avoid attracting attention to the share (because, psychologically, the public typically pays attention only to shares on the rise, and usually too far into a rise just prior to a price retracement which wipes them out).

At point 2, you will see quite clearly the huge volume spike, accompanied by a very broad price range up and way past all the recent highs, and closing on the high of the day. This I took to be the smart money filling its boots with the share at its bottom, and knowing, for the reasons explained above, that it would meet no resistance.

At point 3 there was some supply present as the price was pushed back down from its highs to close in the middle of its range, activity in tick terms was ample, for otherwise the price range could not have been so broad. Some degree of price retracement was then observed, to allow for any supply or profit taking to be done with, in preparation for the next stage of the advance, confirmed by a subtle increase in volume at point 4, pushing the price up to the high of the day, and with no supply action on the following day, confirmed by a thin price range down closing in the middle, and on to the next stage of the advance.

At point 5, you will see the bar of fairly broad price range sticking up like a totem pole, but slammed down to close on the low of the day, there would have been some fundamental news around that time, reflecting some profit taking by that part of the advance caused by speculative punter volume, as distinct from the professional volume which is driving the share.

At that point the share was then in compulsory mark up mode, not because there was buying, but because it had already been bought, causing a scarcity of floating supply, which increased the perceived value of the share. Remember that the price of a three pence cabbage would jump to become a thirty pound cabbage if you have bought up all the cabbages.

At point 6 you will observe that the price closed almost on the low of the day and it broke down below the upward trend line, a line which was drawn to compute a geometrically dictated dynamic stop loss level, below which the trade could be closed and profit taken. Note, NO short trade would be opened there because there was no sign of volume. For the Trader, who is not an Investor, at point 6 his or her job is done, with the best of the profit within the short term trading timescale achieved.

At point 7 you will see the price ramped up into a new high, which hid the short term decline which was destined to come to pass, until at point 8, when the price resumed its upward path - this often constitutes a "reverse secondary reaction" where the price could have been deliberately marked back up to its recent high to mask the fact that a severe mark down might be in the offing - however in this case, you will observe at point 9 that the price was then gapped up - this was deliberate in order to raise the price up and over a known upper price resistance point, to discourage selling.

In conclusion then, there was (a) an opportunity to close any long position at point AA and (b) stop and reverse into a short position to be closed at point BB, at which point a neutral position could be taken until (c) the signal at Point 1 to open long, at this point a ruthless stop loss is placed at the top of the AA to BB trend line, if the price had broken here, then it would have meant that the chart was being read wrongly, and that opening a position was precipitous, but all would be saved by minimising the loss and living to trade another day, and finally (d) to close the long for profit at point 6, and move the money into another share which presented a new trading opportunity.