Starting Technical Analysis

Today’s post is the first in a series about Technical Analysis (TA).

Me and TA

This post is called “Starting Technical Analysis”. It should really be called “Re-Starting Technical Analysis”. Me and Technical Analysis go way back.

Which is true, but only half the story. I first learned TA back in the 1980s, when it was still called charting.

In those days, chartists waited hours for their printouts, and then drew all over them with pens and rulers.

There wasn’t much in the way of generally available software – everybody developed their own system.

I used TA off and on for a while. In my limited experience it was quite useful in the short-term – for entry points and momentum trading.

But I gradually developed more of a long-term, vaguely value perspective, and stopped using it so much.

It came back with a vengeance during the dot-com boom of 1999-2000. This was all about momentum and swing trading. TA worked very well for me then. ((Mind you, this was the boom to end all booms, and throwing darts at a board would have worked pretty well ))

I can’t claim to have called the top, but I did get out very quickly with most of my gains. So I was pretty happy with my use of TA, though I found it time-consuming.

And then I went-back to work, and to a long-term investing style. The 2008 crash forced me to re-evaluate my entire approach and I forgot about TA.

Why now?

So why have decided to take another look at TA after fifteen years?

There are three reasons:

1. starting this website has brought me into contact with people like WheelieDealer, who combine TA with fundamental analysis of small- and medium-cap stocks ((Most TA types trade FX, commodities and indices ))
2. from the reaction to WD’s posts and tweets, there seems to be a fair amount of interest in the topic
3. a friend of my girlfriend – who I used to know about 10 years ago – found out that I was writing this blog, and wanted to meet up

Tom (not his real name) would like to be financially secure. Unfortunately he’s almost as old as me, so my usual “get rich slow” spiel doesn’t apply.

I discovered that Tom had been on several of those “training courses” that people advertise in the money magazines and at the shows.

He’s invested quite a chunk of time and money and come away with some TA skills, and some practical trading experience – including some one-on-one mentoring.

Only now he’s too busy at work to day-trade, and needs to fall back to swing trading (daily analysis, trading over weeks and months).

So we did a deal – he’s going to learn a bit about my longer-term approach (asset allocation, costs and taxes, value-orientation) and I’m going to do a bit of TA-based swing trading with him.

So these articles will kill two birds: I need a refresher course and I think that some people who read this blog will be interested in TA.

What is Technical Analysis?

Everyone will have their own definition, but the key distinction is with fundamental analysis.

• Fundamental analysis is looking at the overall characteristics of a company to work out its (future) value.
• Technical analysis ignores the “value” of a company (or commodity, currency pair or index) and looks only at the price action

Actually, TA looks at the trade action, so we’ll include volume as well.

TA studies supply and demand, to try to work out the direction of the market – its trend. It’s an attempt to understand the emotions in the market by studying the market itself.

Lots of people think that TA is mumbo-jumbo, but the proof of the pudding will be in the trading.

What will we trade?

In order to give TA a fair test, we’ll play it at home – commodities / FX / indices – and away (stocks).

Here’s a list of trades I plan to look at:

• FX (£/$, £/€, $/€ – maybe some Yen)
• Commodities (Oil, Gold, basket)
• Indices (FTSE, S&P-500, Euro-Stoxx, Nikkei)
• UK Stocks – FTSE 100, liquid and high beta (one problem here is that the high betas are commodities and financials – more thought needed)
• Possibly some US stocks, probably tech like GOOG, AAPL, TSLA, NFLX, AMZN
• Pairs trades of “matched” FTSE-100 stocks

How will we do it?

Spread Bets look like the obvious approach – we need to be able to go short easily – so I plan to open a demo account with one of the big providers. If the demo trades work out, we’ll move to real money.

IG seems to be the market leader, so I’ll dig into what their demo account offers. We may need more than one account to cover all of the trades I’ve mentioned above.

How will we learn?

Like most things in life, I plan to learn from a combination of reading things in a book and then trying out the ideas in real-life.

This approach has worked for me across a wide variety of knowledge domains.

Which books will we use?

For Stage 1 of this process, I plan to use three books:

1. Technical Analysis for Dummies (2nd ed) – Barbara Rockefeller
   [amazon text=Amazon&asin=B008GO1984&template=thumbnail]
2. Technical Analysis of the Financial Markets – John Murphy
   [amazon text=Amazon&asin=0735200653&template=thumbnail]
3. Evidence-based Technical Analysis – David Aronson
   [amazon text=Amazon&asin=0470008741&template=thumbnail]

I also have the TA tutorial from Investopedia, which I intend to use more as a map of the territory.

What is the syllabus?

We’ll find out more as we go, but at the moment I expect to cover:

• trend lines
• support and resistance
• volume
• moving averages
• relative strength
• Bollinger bands
• indicators and oscillators – RSI, MACD / stochastic

We’ll also have to cover other some other aspects of swing trading / spread betting, such as money and risk management.

What is stage 2?

If we get that far, Stage 2 will be a look at Japanese candlestick charts. I have three more books lined up for that section, but I’ll save those for another day.

There may even be a Stage 3.

Feedback needed

If ever one of my posts needed feedback, it’s this one. Your help now will stop me heading off in the wrong direction.

1. What do you think of my plan?
2. Are there other instruments you would use TA to trade?
3. Have I ignored a key textbook?
4. Have I left your favourite TA technique off the syllabus?
5. Which is your favourite spread-betting company, and why?
6. What is their demo account like?
7. Is there a better way than spread-betting to practice TA?

Let me know what you think.

Until next time.