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[sharechat] Anatomy of a Trade.

From: Phaedrus <>
Date: Thu, 26 Apr 2001 18:19:27 -0700 (PDT)

     Technical analysis is best utilised as a tool to analyse, and quantify 
what is happening in the market right now. I do not believe that any system or 
any person can predict the future. (even value analysts) The "many exogenous 
variables" you rightly mention, affect you too!  I have earned a good living 
from the sharemarket for many years, relying solely on technical analysis for 
my trading decisions. I do not need a proper job. I was not caught by the bubble, and I do not knock fundamental analysis. This is because it is 
mathematically easy to prove the worth of it, particularly over longer periods. 
Technical analysis, too, is based on logic and facts, and it is equally easy to 
mathematically prove its worth. Since there seems to be such confusion over 
what technical analysis is, and how it works, let me walk you through my latest 
trade. You will see it is simply a process of observing facts, recognising 
their significance, and acting accordingly. The stock was Smorgon Steel (SSX, 
 The first thing that attracted my attention was a sudden increase in the 
volume of shares traded daily - it was up more than fourfold. This continued, 
and indeed increased. Volume climaxes such as this are usually associated with 
a trend reversal, so I was watching for price movement that would confirm this. 
On 29/3 there was a much lower low, when some poor sod sold at 55 cents, and 
someone else got a lucky bargain. I was watching for a price breakout if this 
was the pivot point, or a new lower low if it wasn't. I was fairly certain that 
this was in fact the reversal point because of the long lower shadow formed on 
the price candlestick. (the Close was a lot higher than the Low) This is where 
the last of the weak holders were shaken out, and Buyers started to control the 
price action. The next 3 days went nowhere, but on 4/4 the Williams' %R 
oscillator gave a buy signal, it was an "Up" day (Close higher than Open) after 
16 consecutive down days, and it looked as though the Close would be higher 
than that of the Pivot point. Go. A "Buy at Market" order placed just before 
the days close got me in at 63 cents. The next day vindicated the purchase 
decision, with rising prices, an MACD crossover and an RSI oscillator buy 
There was a wobble in the steady rise of prices on 11/4. I did not even 
consider selling because of the absence of any sell signals, and the fact that 
there were many buyers stacked up offering 72 cents - they would provide good 
support at this level. By 23/4 a lot of people had made a lot of money on this 
stock, and some would be looking to sell and lock in their gains. I wanted to 
be ahead of any rush, so I was watching the price action very closely. The day 
opened at 85 and rose fairly steadily to 91, at which point the rise appeared 
to stall. There were fewer buyers now, and smaller orders going through. Could 
this be the top? Uncertain whether to sell or hold, I sold half of my position 
at 90. I continued to watch closely, and, as prices began to sag, I could see 
the  Long Shadow typical of Reversal candlestick formations begin to appear. A 
"Sell at Market" order placed just before the close saw my exit at 88 cents. 
The next day brought falling prices, a classical pivot point reversal, sell 
signals on both W%R and RSI, and a big black candlestick (Close below Open) 
with the day ending on its low (another negative sign) Taking out Stamp duty of 
0.15% and brokerage of 0.08% (both ways) I was left with a profit of over 40% 
in 19 days.
 This trade was better than most, but it illustrates clearly some of the 
simpler aspects of technical analysis.  
  I await howls of enraged disbelief.

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