Some Notes On Charts

I've had some questions in the comments about certain technical analysis "things". So, I'm going to do a bulk answer. In addition, I wanted to mention why I use certain technical analysis methods and not others.

-- Technical analysis without fundamental analysis is crap. The old maxim goes something like this: "fundamental analysis tells you what to buy while technical analysis tells you when to buy." I don't care how good a chart reader someone is. If they can't tell me a fundamental reason why they like or don't like something I'm not listening.

-- I'm not a big fan of about 90% of the technical analysis (TA) indicators like stochastics, relative strength indicator and the like. There is a huge lie that goes around which basically assumes TA can somehow create a fool-proof system of trading. "If the chart says this, and the indicator says that then do this." Sorry, that doesn't work at all. The main problem I have with most indicators is they aren't foolproof and usually aren't the best indicator of what will happen.

-- That being said, there are about 5 indicators I do like.

-- Most indicates that use volume: On Balance Volume and the Chaiken Money Flow are good at telling you when money is flowing into and out of a security.

-- Simple Moving Average (SMA): This is a great way to see what certain trends are. I use the 10, 20, 50 and 200 day. Because there are 5 days in a trading week, this gives us the 2 week, 1 month, 2 and a half month and and 40 week trend line. This is essentially a range of trends from pretty short to fairly long.

-- The Exponential Moving Average: This simply gives more weight to more recent days trading. It assumes that what happened more recently is more important that what happened less recently.

-- The MACD: I fall in and out of love with this indicator. I like it because it uses SMAs. I don't like it because it's easy to fall into the trap of "this always works." So I use it sometimes and don't use it sometimes.

The main thing I always look for is the trend. That's about all I look for. Where are prices going, and will they continue in that direction? That's really about it; there's nothing incredibly fancy about it.

Now, onto trend lines.

How do I determine the trend line? I wish I had a great rule of thumb, or some great scientific way that I could pass on. What I do is look at the chart and see where the lows and highs connect, or if they connect. That's about it. Some charts give this information easily and some don't give any clue. That's the nature of the beast. It's always possible to disagree about charts because one person sees one thing and someone else sees something else. That's one of the reasons I love to read other TA blogs - to see what they see because I could miss something along the way.

Finally, a note about Bonddad' trading.

Most of my money is conservatively invested. Right now it's mostly in inflation-indexed bonds, utilities and consumer staples. I keep most of my money conservatively invested because I want to retire at some time. I set aside a small amount of "play" money to trade options. I never mention any of the securities I trade because I am not a licensed broker. And despite the disclaimer at the top right of this blog I want to protect myself legally (I am a lawyer, after all).