Opening Position
May 2006
After interviewing Chicago-based journalist Cari Lynn for this issue of Technical Analysis of STOCKS & COMMODITIES, I eyed charts for ways in which price bars can reveal information on crowd behavior (the interview starts on page 56). This resulted in many unanswered questions for me. When is there panic buying/selling? What about short-covering? When are traders just pushing prices down so they can purchase more at a lower price? Can something like observing crowd behavior, which is subjective, be translated into objective trading systems, indicators, or chart patterns?
Since crowds react to certain stimuli rapidly -- in the case of markets it is usually earnings releases, economic conditions, rumors, analyst up- or downgrades, takeovers, and so forth -- it is likely that their reaction to a specific event will be forgotten soon. If that's the case, it's that much more difficult to make decisions based on objective methods. So I gazed at my monitor and observed charts of securities with unusually strong movement, just watching and watching.
After three days of that, I started to recognize what was going on. Mind you, I put money on these trades, so I was forced to go through all the emotions that we usually do when we trade.
What I found from my observations was rather positive: There are definite areas where price reversals take place and areas where prices pull back and they all relate to some indicator or pattern. That was a relief, given that technical analysis is the focus of our publication - but. You knew there would be one, right?
The difficulty is in trying to find out what works best where, and this will vary from one security to another. As a result, it becomes necessary to constantly change whatever system you are using so it is unique to the security you are trading at any given time. And as an individual trader, you have the power to do that. Being a part of a crowd will not allow you to form your own decisions, but sitting in front of your monitor gives you the power to be flexible.
Perhaps this is where the individual trader's edge lies. And after my
short exercise in agony and ecstasy, I think I can safely say, "Take advantage
of it."
Jayanthi Gopalakrishnan,
Editor
Originally published in the May 2006 issue of Technical Analysis
of STOCKS & COMMODITIES magazine.
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