Technical Analysis and Chart Interpretations. Ponsi Ed

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      If fundamental analysts like those at Standard & Poor's had simply focused on the stock's price, they would have noticed a distressed chart that was breaking at all of its major support levels. One glance at that chart proved to be worth much more than countless hours of so-called expert analysis and number crunching.

      Think of all the misery that could have been avoided by simply paying attention to that chart. Just as with Enron, Lehman Brothers' employees were heavily invested in the company's stock, particularly in their retirement accounts. Perhaps fundamental analysts should obtain at least a cursory knowledge of technical analysis to use as a filter or warning system in the event of situations such as these.

      Years later, shares of Lehman Brothers Holdings are available on the over-the-counter market for less than three cents per share. Both the Lehman Brothers and Enron charts contained numerous clues as to what was about to transpire, thereby warning investors of the danger well before it happened. Fortunately for some investors, technical analysis allowed them to ignore the denials of management and focus on the truth of price.

      Similar issues can arise at any time, with any investment, in less dramatic ways. At any given moment, your fundamental analysis of a company may be missing an important piece of information, either positive or negative. How will you know? The sad fact is, you'll only know in hindsight what you didn't know when it mattered most.

      On the other hand, if you can read a chart, there's no need to understand the reason behind every move in the market. The price is already telling you everything you need to know.

      What is the best way to trade? Which technical analysis method should you use? How can you know which techniques will work best for you?

      Everyone wants to know if there is one particular technical analysis method that works better than the others. It's a great question, because a simple answer could save a lot of time and effort.

      Unfortunately, there is no simple answer. Nobody can tell you which technical analysis method will work best for you. Only you can make that determination. Here's why:

      In The Little Book of Market Wizards, author Jack Schwager wrote the following:

      How can that be? How is it possible that a trading strategy can work for one person and not another?

      In that same book, Schwager interviewed a hedge fund manager named Colm O'Shea, who elaborated on this concept:

      As a trader, you need to become you. How can you accomplish this? Study the various techniques in this book with an open mind. Consider that any of them may or may not work for you. Most likely, one or more of these concepts will resonate with you. Begin your search there.

      Once you have found something that makes sense to you, apply it to your personal trading style, which will continue to evolve over time. Gain as much experience as you can, while taking as little risk as possible. After the initial excitement wears off, traders normally become less frantic and more patient. Circumstances change, people mature, and you'll find that your trading style will evolve with experience. The initial thrill of trading is gradually replaced with a calm focus.

      This is important, because if you're highly excited while placing trades, you're much more likely to make a serious mistake. How would you feel about being the passenger in a vehicle whose driver is extremely emotional and excited? Or, would you want to glance up from an operating table and notice that the doctor who is about to perform surgery on you is very animated or agitated?

      My trading styles have been documented in the books Forex Patterns and Probabilities and The Ed Ponsi Forex Playbook. Those styles are geared toward currency trading, but many traders have adapted them to stocks and commodities as well. However, as Mr. Schwager and Mr. O'Shea point out, there is no promise that a technique that works for one person will also work for another.

      There's a good chance you will find something in this book that resonates with you. Just as important, you need to determine which techniques are incompatible with your personality. Read through the different methods, examine the charts, and sort through the various concepts presented in the following pages. At the very least you'll be able to eliminate some methods, and that's a start.

      CHAPTER 2

      The Language of Trading

      In trading, large sums of money can be lost due to confusion caused by the use of imprecise language. That's why it's important to use appropriate terminology. The proper use of the following expressions removes ambiguity because they describe trading activity in precise terms.

      This precise language may seem unnecessary to the untrained novice. However, to the experienced trader, who may have lost money on a trade or has witnessed a good trade get “busted” due to confusion caused by imprecise terminology, this is more than mere semantics.

      Trading terminology can be confusing at times and often seems unnecessarily complicated. However, there are a few expressions that are critical to your understanding of both technical analysis and trading in general. Certain terms allow traders to express a concise thought in one or two syllables.

      Trading errors can be expensive, and often there are tremendous sums of money on the line, so it's important that every party involved in the trade understands exactly what is taking place.

      First, we will briefly discuss three important terms – “long,” “short,” and “flat.” What do these terms mean?

      Long– When a trader expresses an intention to go long, he or she is placing a trade that will only become profitable if the price increases. The trader wants the price to rise; if it falls, the trader loses.

      Context: John is long ABC because he likes their new line of products.

      Short– When a trader expresses an intention to sell short, he or she is placing a trade that will only become profitable if the price declines. The trader wants the price to fall; if it rises, the trader loses.

      Context: Jane shorted XYZ just before earnings; she thinks the company might be in trouble.

      The obvious question is, why don't traders simply say, “I'm going to buy stock XYZ” instead of “I'm going to go long XYZ”? In this case, the word “buy” is an imprecise term. In the world of trading, the term “buy” could mean two different things.

      A trader might buy XYZ because he or she believes the price will rise. Or, a trader might buy XYZ because he or she is currently short shares of that stock. Those are two СКАЧАТЬ