Sunday, August 07, 2005

Different Types Of Analysis


Ho Bee

STI chart

Sembawang Marine

Keppel T T

Over the weekend, I had read a book titled, "Trade Like Jesse Livermore" by Richard Smitten. For those who don't know, he is one of the greatest legend of all time in the business of speculation. I can't help but realised after reading so many books, some of the most basic concepts are mentioned in each one of them. Stop Loss, Psychology, Money Management and follow the major trend are the most obvious repeating topics in all the books i come across. My question is, am I (or you) following it? For me, I did not. It is stupid of me to read and yet not follow over the past year. I went through all my past trades and realised my trading strategy is doomed to fail. Just as what Innocent Bystander pointed out. I have picked up a new strategy from this legend, that is, only buy the market leaders. As over the long period, they are the most profitable. Think about Cosco, Semb Marine, NOL....they are the leaders of the Marine sector when it was hot last year. The next sector in my opinion will be property. But does market think the same as me? "Never buy on anticipation", said Livermore. I will buy when market show me confirmation of my opinion. How many times have we seen a penny stock rallies and only to see it back to where you bought it after a few months. Or how many times have you seen a penny stock rise all the way to close above $2? I have never seen that. But I do see expensive stocks becoming more expensive in a shorter time. Hyflux, NOL, Cosco....some of the stocks i ignored to persue penny stocks which did not show so much growth.

I noticed a danger signal as depicted by Mr Livermore very similar to the candlesticks analysis's shooting star. A sign both the western and eastern world pay alot of attention to.
It was also mentioned that there are 3 stages of the market. Uptrend, Sideways, Downtrend. To Livermore, this is the cycle. While many savvy trader trades the trading range during sideways, to him, it was not where his most profitable trades were made. I can envision what his trading strategy was. A leader in the industry group breakout, he will use his probing method to enter the trade. If the leader turns ard, he will cut his position rightaway, suffering the minimum loss. He did this because he was wrong in his timing. A trade was made after lots of studies in identifying the trend and the market cycle in what he called the top down analysis. So the probablity of being wrong is low. When a leader industry group leads the market, it won't be a short time. Thus if he got it right, the ride up is very lucrative. But he warns of complacency where a trader got it right, sit on rich paper profit and ignore a danger sign. There are more to the book then i can possibly share here. I will try my best to share a bit every other day. Meanwhile, I will be scouting for leaders!

Have you ever stepped out of the box and look from the outside? Well, a trader friend of mine did months ago and came out with the lists of different type of analysis.

Fundamental Analysis: Humans who believed that the good financial results of the companywill be rewarded by the incline of it's share price.

Technical Analysis: Humans who believed that the chart patterns are re-occuring because it represent human emotions in trading. Greed, hope, despair, ignorance.....these have appeared way back in 19th century and it will always be the same.

Luck Analysis: Humans who believe that their luck is high at the moment and goes into market for the big kill. They mistook bull rally as their own personal luck. Usually this group of people will be killed by bear markets.

Hope Anaylsis: Humans who buy their shares and then hope that it will go up. Without cut loss, this group of people will see their investing capital up in smoke.

Astrology Analysis: Humans who believed that the planet movement will affect the force of market. This is made popular by the legends in Romance of 3 Kingdoms.

If you don't believe and laugh it off, take a look at the forums and observe. It is hard facts that human psychologies never changes. Even legends will be greedy once in a while. The above is shared to allow you to view urself as a trader. If you fall under hope & luck analysis, please reassess your psychology approach to the market.