Charting An analysis for the intelligent investor

257 Pages·2008·3.99 MB·English

INVESTOR’S GUIDE TO
Charting
SECOND EDITION
In an increasingly competitive world, we believe it’s quality of
thinking that will give you the edge – an idea that opens new
doors, a technique that solves a problem, or an insight that
simply makes sense of it all. The more you know, the smarter
and faster you can go.
That’s why we work with the best minds in business and finance
to bring cutting-edge thinking and best learning practice to a
global market.
Under a range of leading imprints, including Financial Times
Prentice Hall, we create world-class print publications and
electronic products bringing our readers knowledge, skills and
understanding which can be applied whether studying or at work.
To find out more about our business publications, or tell us about
the books you’d like to find, you can visit us at
www.business-minds.com
For other Pearson Education publications, visit
www.pearsoned-ema.com
INVESTOR’S GUIDE TO
Charting
An analysis for the
intelligent investor
SECOND EDITION
ALISTAIR BLAIR
An imprint ofPearson Education
London · New York · Toronto · Sydney · Tokyo
Singapore · Hong Kong · Cape Town · New Delhi
Madrid · Paris · Amsterdam · Munich · Milan · Stockholm
PEARSON EDUCATION LIMITED
Head Office:
Edinburgh Gate
Harlow CM20 2JE
Tel: [phone]
Fax: [phone]
London Office:
128 Long Acre
London WC2E 9AN
Tel: [phone]
Fax: [phone]
Website: www.financialminds.com
www.business-minds.com
First published in Great Britain in 2003
© Pearson Education Limited 2003
The right of Alistair Blair to be identified as Author
of this Work has been asserted by him in accordance
with the Copyright, Designs and Patents Act 1988.
ISBN 0 273 66203 1
British Library Cataloguing in Publication Data
ACIPcatalogue record for this book can be obtained from the British Library.
All rights reserved; no part of this publication may be reproduced, stored
in a retrieval system, or transmitted in any form or by any means, electronic,
mechanical, photocopying, recording, or otherwise without either the prior
written permission of the Publishers or a licence permitting restricted copying
in the United Kingdom issued by the Copyright Licensing Agency Ltd,
90 Tottenham Court Road, London W1P0LP. This book may not be lent,
resold, hired out or otherwise disposed of by way of trade in any form
of binding or cover other than that in which it is published, without the
prior consent of the Publishers.
10 9 8 7 6 5 4 3 2 1
Typeset by Northern Phototypesetting Co. Ltd, Bolton
Printed and bound in Great Britain by Bell & Bain Ltd, Glasgow
The Publishers’policy is to use paper manufactured from sustainable forests.
This publication is designed to provide accurate and authoritative information in regard to the
subject matter covered. It is sold with the understanding that neither the author nor the publisher
is engaged in rendering legal, investing, or any other professional service. If legal advice or other
expert assistance is required, the service of a competent professional person should be sought.
The publisher and contributors make no representation, express or implied, with regard to the
accuracy of the information contained in this book and cannot accept any responsibility or
liability for any errors or omissions that it may contain.
C
ontents
Preface ix
Introduction xi
1 The art of the chart 1
Fundamental analysis 3
Technical analysis 5
Not so divided after all? 6
Surely, if these patterns are so obvious, you can’t profit
from them? 9
The stock market is not where you’ll find most chartists 11
Options, futures and indexes 11
Where fundamentalists wring their hands 13
Chartists do it up anddown 15
Buyers, sellers, fear, greed and psychology 17
2 The trend is your friend: basic components of any
price chart 21
Trends 23
Trend lines 28
Moving averages 34
Scales 41
3 The head and shoulders and friends 45
Words of warning on the classic patterns 48
Reversal patterns – tops 53
Reversal patterns – bottoms 65
Continuation patterns 65
4 The supporting cast: secondary signals to support the main
conclusion 75
Volume 77
Relative strength or share price relative 78
Breadth and the advance/decline line 80
Momentum 80
v
Contents
Welles Wilder’s RSI 83
Stochastic 89
Moving average convergence-divergence (MACD) 92
There are many more … 94
5 The technique from Japan: an
introduction to candlestick charting 97
Bodies and shadows 99
Candlestick patterns 101
Windows 103
Jack Schwager’s tests 103
6 Is the price moving? Reallymoving? – Point and
figure charts 105
How to compile a point and figure chart 108
Trend lines and trading signals 113
The count 114
7 A quick guide to the chartist gospels 117
Fibonacci 119
Elliott Wave Theory 120
Gann 124
Coppock 126
Other cyclists 132
8 Whoever made money from charting? 133
Jesse Livermore 135
Victor Sperandeo 137
Monroe Trout 138
Stanley Kroll 139
Anthony Bolton 140
Crispin Odey 142
Conclusion 145
9 A modest grapple with real life: a look at some real charts 147
Not a scientific test 149
Asprinkling of expert views 150
Asympathetic hearing 151
vi
Contents
How to use this chapter 152
Randomness is restricted 152
Get a system and look twice 153
10 Will it work for you? 197
Two charts 199
What works for the professionals? 203
Just the gold-plated signals? 205
Or dime-a-dozen? 206
Not needing to understand 208
But needing to change 208
Should professional chartists be rich? 209
And fundamentalists? 209
And you? 210
11 Net gains for charting: what the internet can
do for chartists 211
Obliging online brokers 214
Community offerings 215
Gold standard 219
Breathless in the US – platinum standard 220
Net advice 224
Glossary 227
Further reading 234
Index 237
vii

P
reface
Without question, some people have made astonishing amounts of money
from studying share price charts (and virtually nothing else) and
foretelling whether the shares would rise or fall. It is equally certain that
further astonishing amounts of money have been lost in the same endeavour.
Sometimes the same people have clocked up both achievements, or just
the second. But a few have restricted themselves to the first. And many
more strive to do so.
This book is intended to help non-chartist investors understand what
chartists do.
Few claims in the world of investment attract more divided views than
whether a head and shoulders formation denotes anything more than
nothing. Many investors have heard of this and other oddly named tools
of the chartists’ trade, without understanding them. Even if you see no
financial benefit in gaining this understanding, you may well be interested
to discover how the other half lives (and if you take in the currency,
commodities and derivatives markets, it is probably more than half).
There may well be more books about charting (or technical analysis as
it is also known) than there are books about the more conventional
approach – fundamental analysis. This book’s modest claim to
differentiation is that it is not written by a chartist. It tackles the subject
from your side of the fence.
Although I have both feet in the fundamentalist’s camp, I do not scorn
every chartist utterance. Asignificant fraction, but not all. I do believe that
some chartists – a comparative few, indeed – have been remarkably
successful over very long periods of time. In the 12 years to 1991, Mr Gil
Blake, a small private US money manager, averaged a 45 per cent annual
return. This was not the outcome of a few lucky years combined with
many poor ones: his lowest annual return was 20 per cent. All of Mr
Blake’s investment decisions are derived from technical analysis. In the
1980s, Mint, another US investment management company (but 50 per
cent owned by the UK firm Man Group) achieved annual returns of
ix