Basic technical terms and applications

Thursday, 26th November 2009 10:06 - by Riddler

I have been trading for 2 years now and have learnt from many early mistakes when I just picked stocks on fundamentals alone, without any reference to the Chartist and technical picture. I still do research, phone Directors, read investor magazines and listen to the kind tips offered by other posters. However, I am beginning to develop a system and a way of interpreting the technical data which is, more often than not, leading to more thought-through trading decisions. I would like to share some basic Chartist skills to help you on your way. LESSON 1: Fibonacci retracement theory He was a 17th century Italian mathematician who studied ‘sequences in nature’ e.g. the relationship between the sizes of shells and the relationship between them. In the 1960s/70s, Traders started to apply his sequential understanding to why share prices seem to have certain patterns when they rise and fall, and help explain the wave-like structure - the ebbs and flows of share prices over various periods of time. Now whether these Fibonacci figures have intrinsic value or whether, due to their use and application, they have developed a ‘significance’ is not our issue. Our issue is that they DO HAVE SIGNIFICANCE. The 4 main retracement percentages are 23.2% , 38.2%, 50% and 61.8% ,and any rises or falls which re-trace these amounts can be said to have completed a Fibonacci retracement. LESSON 2: Bollinger Bands What are they? Basically, they are trend channels and are named after a guy called Bollinger who first identified these channels in the last few decades. When a share price is above the upper line OR is trading within the 2 bands, then the share can be concluded to be ‘trading within the direction of the bands’. They can be found by going to your chosen share on lse.co.uk, and click the ‘Share Chart’ option. On the right-hand side, click ‘Graph type’, scroll down the chart and choose ‘Bollinger lines’. You will see a lower (red) and upper (green) line. A break of the upper line is seen as bullish, whereas a drop beneath the lower line is seen as bearish. USES...(using the graph icon as mentioned above) - For short-term, choose the 3 month with 9 day moving base - For medium-term, choose the 6 month with 18 day moving base - For long-term choose, the 1 year with 50 day moving base LESSON 3: What are moving averages? (Referred to as MA’s) They are really just a graphical representation of where a stock has been in the short , medium and long-term, being ‘smoothed out’ lines to give a simple illustration. I use exactly the same settings as for Bollinger, i.e. 3 month chart with 9 day moving base, BUT this time choose the ‘3SMA’ option from the ‘Graph type’ drop-down box. Repeat this for the 6 month and 1 year (as per the Bollinger lesson). What you are looking for is that the share price will be ABOVE one of the 3 main short term MAs, especially if it has also crossed the 3 month Bollinger upper line. As long as the share price stays ABOVE or near to the upper Bollinger line, then there is no need to think about selling. If, however, you think that the share price rise was a little unexpected/unusual and you anticipate a re-trace’, then the moving averages will give you your 3 ‘supports’ that you are hoping your stock will settle and bounce from. A bullish sign is when the share price is above at least 2 of the 3SMAs; a bearish sign is when the share price is only supported by one of the three MAs, or even worse when it has dropped beneath all three SMAs on the 3 month time frame. In this case you are hoping the 6 month 3SMAs will come to the rescue to give historic support. From Admin: www.lse.co.uk cannot provide advice, so the information above is relied upon at your own risk, being the understanding/viewpoint of the Author alone.