I was invited to do a guest blog on Hip Egg’s Technical Analysis site. Today I took him up on the offer and posted some thoughts about Technical Analysis.
He’s got some interesting ideas about stocks (basically using the graph of a company to predict its future). I threw my two cents in about how/why his approach has some merit. Basically I had an insight a while ago that in addition to the slope of a stock graph, the area under the curve can reveal some interesting information about the direction of the stock.
I have no idea if there is any real basis for my idea, but in the sampling of stock graphs I’ve looked at, it seems there is a correlation. If nothing else, it does stir up a lot of conversation about the behavior of systems (and how they can be influenced by outside forces). Which reminds me, I need to finish up that news analysis program I was going on and on about a while back….
2 comments ↓
i have a small bias against technical analysis aka charting. it’s tempting to think, since everyone is eyeballing the chart, people’s reactions to the chart’s past trajectory will influence their decisions in the present.
however, there is some merit to the volume you speak of. if you can track the flunctuations of volume and stock price and translate that into “how many ppl currently own this stock”, and specifically “at what price did they buy it”, you can safely assume they will sell it when the stock dips below the buy line by some extent. THAT, is a significant chart pattern.
then again, i think stocks are mostly insider trading and emotional responses to breaking news. it’s relatively difficult to detect insider trading, but if you can build a model that simulates the collective sensibilities of a room of gamblers, there’s a start.
I agree with you about the bias against charting, I feel that looking at just one type of data like that really doesn’t tell you a lot about what is going on with the company. I’ve tried to tell Hip Egg that several times and while he agrees that you should always do well-rounded research, he never really explicitly says that on his blog. I hope that my entry does that for him.
As to your second point: Logically, I agree with you 100%. But after watching the message boards for various stocks, it looks like that rarely happens. Most people seem to have the mentality that “My stock must always be going up, if it ever dips, I must sell”. While that strategy will work (i.e. make money), it is far from optimal. Plus that mentality isn’t really good for long term investing, its more of a day-trader mindset (which is risky).
By the way, I totally agree about values being tied to the breaking news and emotional response, but not necessarily the insider trading. I do think there is a lot of manipulations that go on with stocks, but I’m not sure its always insider based. (I could be way off on that one, but its just a gut feeling I’ve got.)
-Nick
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