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THE TIME
ELEMENT
The Time Element
Much
of technical analysis focuses on changes in
prices over time. Consider the effect of time
in the following charts, each of which show
a security's price increase from $25 to around
$45.
Figure
43 shows that Merck's price increased consistently
over a 12-month time period. This chart shows
that investors continually reaffirmed the security's
upward movement.
Figure 43
As
shown in Figure 44, Disney's price also moved
from around $25 to $45, but it did so in two
significant moves. This shows that on two occasions
investors believed the security's price would
move higher. But following the first bidding
war, a period of time had to pass before investors
accepted the new prices and were ready to move
them higher.
Figure 44
The
pause after the rapid increase in Disney's price
is a typical phenomena. People have a difficult
time accepting new prices suddenly, but will
accept them over time. What once looked expensive
may one day look cheap as expectations evolve.
This
is an interesting aspect of point and figure
charts, because point and figure charts totally
disregard the passage of time and only display
changes in price.
A Sample Approach
There
are many technical analysis tools in this book.
The most difficult part of technical analysis
may be deciding which tools to use! Here is
an approach you might try.
- Determine
the overall market condition.
If you are trading equity-based securities
(e.g., stocks), determine the trend in interest
rates, the trend of the New York Stock Exchange,
and of investor sentiment (e.g., read the
newspaper). The object is to determine the
overall trend of the market.
- Pick
the securities.
I suggest that you pick the securities using
either a company or industry you are familiar
with, or the recommendation of a trusted
analyst (either fundamental or technical).
- Determine
the overall trend of the security.
Plot a 200-day (or 39-week) moving average
of the security's closing price. The best
buying opportunities occur when the security
has just risen above this long-term moving
average.
- Pick
your entry points.
Buy and sell using your favorite indicator.
However, only take positions that agree
with overall market conditions.
Much
of your success in technical analysis will come
from experience. The goal isn't to find the
holy grail of technical analysis, it is to reduce
your risks (e.g., by trading with the overall
trend) while capitalizing on opportunities (e.g.,
using your favorite indicator to time your trades).
As you gain experience, you will make better,
more informed, and more profitable investments.
"A fool
sees not the same tree that a wise man sees."
- William Blake, 1790
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