Forum Archive Index - June 2001

[Phaedrus <Phaedrus@techemail.com>]

 Technical Analysis is often used for short-term trading. Because of this, many 
people assume that it is not suitable for the long-term investor. This is not 
correct. By using Trend Indicators, and selecting long time periods, useful 
long-term entry and exit signals can be generated. Trend Indicators work best 
with stocks that are trending up or down, and are not suitable for use in 
choppy trendless markets. The longer the time period chosen, the fewer the 
signals generated, the less sensitive the indicator and the slower it is to 
respond to any changes in price action. This means that there is a trade-off 
between signal frequency and timeliness. The object is to choose indicators and 
periods that generate signals compatible with your preferred frequency of 
trading, whether this is intra-day, holding selected stocks for years, or 
something between.
 The chart below is of Ebos Ltd. (EBO, NZ) This stock made good gains for 3 
years, but has done nothing in the 4.5 years since. If you bought in 1994 and 
held, you would have made a capital gain (excluding dividends) of 272% in 7.5 
years. The use of a few Trend Indicators would have signalled an exit after 3.8 
years, giving a 326% gain in that time. Another trade lasting 16 months was 
signalled, which would have given another 50% gain on top of that. That's all - 
just two trades in nearly eight years. Even if all you did was exit after the 
initial uptrend, your annual return would be well over double that of buying 
and holding this stock.
 The Qstick Indicator at the top of the chart was developed by Tushar Chande, 
and provides a method of quantifying Candlesticks. It is simply a smoothed 
moving average of the difference between open and close prices. Further 
information on the indices used in the chart can be found under "Technical 
Analysis from A to Z" at :-  http://www.echarts.com/Learning/Library/
     
                  Phaedrus.

This post was prepared at the invitation of Gerry Stolwyk, as part of the 
"Learning to Invest" series.

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