SAMPLE OF A BAR CHART
KEY TO SUCCESS FOR BEGINNERS WHEN TRADING THE STOCK AND COMMODITY EXCHANGES
Beginners intending to trade the stock or commodity exchanges should avoid underestimating the challenge involved by taking a casual haphazard approach, i.e. assuming the redundance of economic design or purpose. Surrendering themselves to blind fate would put them in a vulnerable position because increasingly greater risks would be encountered.
A pure haphazard attitude would be the involvement in a lottery or a gambling club or casino by wagering money or wealth intended to be multiplied without the presence of any economic values for the entire party on a collective basis. Such absence of economic benefits is shown in the fact that no added value can be found for the entire group of participants because their collective wealth remains the same before and after the game. Indeed the croupier and a few winners will increase their wealth, but it is in fact at the expense and loss of the other participants.
On the other hand economic benefits can be found at the stock exchange in the form of investments which can appreciate in value because of stocks rising in price as the result of a higher liquidity level, in turn fueled by increased factory production rates and or a better financial performance of public companies. What is meant with liquidity is merely the number of people trading an exchange and another alternative to reach the same result is by increasing the number of stocks. Corporate bodies which have been registered at a stock exchange are called public companies because their shares are open for ownership by the people in general (or the public) and such shares or stocks are traded transparently through the computer network of the exchange. Anyone ought to be able to follow the stream of price fluctuations for all stocks through a broker or data provider by means of electronic media.
The same would apply to a commodity exchange, because the economic value is inherent in the hedging arrangement especially for the benefit of farming, breeding or mining establishments, creating some measure of liquidity as the result of initial offers for commodities not yet available for delivery. Such initial offers would draw bids leading to a price discovery involving fluctuations, which are likely to follow a rising trend approaching the delivery date (after harvest time for farmers) based on a predetermined contract. The producing party has therefore made itself certain of a market even before delivery time, which hedging is all about, while the buyer would be sure of delivery dates and quality standards. A competitive atmosphere draws more bidders in the process, creating more liquidity and even traders who merely like to take advantage of the price fluctuations and nothing more, hence adding to the liquidity level.
Consequently the stock as well as commodity exchanges usually attract also traders who are not interested in long term investments nor delivery of goods. They are called speculators, who by creating more liquidity, are most welcome to turn the exchanges to become more attractive economic centers.
It is evident that the processes involving investing and hedging leaves no room for a haphazard approach, because meticulous calculations or forecasting techniques are required in order to be able to take sensible and correct buy or sell decisions.
Speculator meaning and role
As mentioned before, liquidity means nothing more but the number of exchange participants consisting of stock investors and commodity traders enhanced by the presence of speculators also. Therefore the term does not imply speculating in the sense of a haphazard approach as associated to a lottery or casino, because speculators are merely a group of exchange participants not included in the investor or trader category.
The liquidity phenomena is in fact a manifestation of the interaction between bids and offers, appearing at an exchange in the tangible form of price and volume fluctuations, created from time to time. The relevant units of time could be could be set in periods lasting a specific number of minutes, days, weeks, months or even years.
Prices and volumes reported during the stream of time can be transferred on graph paper to produce charts, which when read correctly can give an indication of the direction of their subsequent movement, enabling exchange participants to make correct decisions about when to take sell or buy action. The capability to read and understand price and volume charts correctly will produce some measure of forecasting skill and it is recognized as technical analysis. Clearly the technique involved must be learned and put to practice to obtain the necessary experience and skill, hence this certainly would be far away from a haphazard attitude. This type of analysis is called technical because what is being observed is the result of actual events or real action having occurred or taken place in the field of activity being the exchange itself.
Another type of analysis can also be applied and requires more information in the form of calculations and details concerning the performance of public companies as the shares issueing parties. Usually the main part of such analysis concerns financial reports, while additionally material developments or incidents must be reported through mass media in a timely manner. When trading commodity exchanges, the analysis may include production costs, observation of events and developments related to the weather, and economic as well as social-political aspects. All the pieces of information are considered to be the foundation or fundamentals of what the price should be for a certain stock or commodity; this theoretical approach is designated as fundamental analysis. Obviously what has been calculated on paper usually does not match exactly with what would be found in the market, because the bunch of periodically changing information cannot be digested by all exchange participants at the same level and speed, leading to differing assumptions and perceptions. The result would be a constant change in price and volume, leading to fluctuations which would make it necessary to turn to charts or perhaps technical analysis for up-to-the-last-moment buy-sell decisions.
Consequently fundamental analysis is more suitable for long term decisions, meaning for investing purposes and technical analysis is more practical for short (up to two months) and medium term (up to six months) buying or selling action. Long term (over one year) decision making with technical analysis can also be contemplated to reinforce fundamental considerations.
Finally it can be said about speculators, as understood with the stock and commodity environment in view, that they in fact should be analysts too, who may be inclined to follow the fundamental approach, or are fanatically technically minded, but wisely both techniques should be adopted for optimal results. We should therefore differentiate between the general meaning of this term, bearing the haphazard connotation associated to gambling clubs or lotteries or casinos, compared to the terminology for exchanges as economic centers.
The road towards professionalism
It could happen that a newcomer at the exchange would like to take it easy, not with a pure haphazard approach, but by depending on rumours or hearsay, including comments made by friends. This would be the same perilous course of action, because the guidance followed contains a good measure of uncertainty with regard to competence.
If one would like to take a more convenient course of action, the services of professionals in fund management would be appropriate, recognized as mutual fund experts. But by being exposed to less risk by utilizing the skills of other people, additional expenditures would be incurred which would reduce the gain one could enjoy by making trading decisions independently.
Yet it would be sensible if at an initial stage some part of such gains is sacrificed as tutelage fee, to obtain an opportunity to study the skills of risk calculation and technical analysis while making personal decisions at theoretical level (paper trading) and comparing the results with the actual performance by mutual fund research staff. After having reached the same level of expertise for say, at least six months, the newcomer may have become qualified to make his own decisions.
Experts in the research staff of mutual fund firms usually perform technical and/or fundamental analysis to ensure that their buy-sell decisions produce gains consistently. Fundamental analysis may be performed with the aid of tables containing a list of financial ratios as published by or calculated for public companies, which may be compared to one another for the most profitable selection, or the relevant charts could be drawn up by computer software and naturally text should be available containing material reports or news on a continuous basis. On the other hand technical analysis can only be performed with the aid of price and/or volume charts which could be made manually (in the distant past), but ideally involves computer software for speed and accuracy. The term coined for this process is 'charting' and the ability to read the results correctly requires experience which finally will produce some kind of instinct, referred to by fundamental analysts as a subjective approach or capability. Yet because it has never happened that all fundamental experts have unanimously arrived at the same conclusion for the same stock or commodity, the matter of subjectivity turns out to be part of their behavior as well.
Because PT Bumianyar Futuria specializes in technical analysis, it provides a database for the price and volume movement of all public companies at the Jakarta Stock Exchange and the relevant charts are produced with computer software named MetaStock as an extremely populer investment analysis tool the world over. The author is Equis International, Inc. in the United States who have appointed our company as the sole distributor for Indonesia.
Basics of risk analysis
The first step generally overlooked by beginners is the consideration that not any available fund can be used safely for trading the stock or commodity exchange. To ascertain if it would be discrete to use it, depends on the genuine purpose of its application, whether it would be for basic needs like food, apparel, housing, health and education. In such a situation the risk involved would be 100% or the fund could disappear completely without any chance for recovery, because there would be no reserve available for any effort in this direction. Under such conditions, such fund should not be utilized for speculating purposes. Even if such funds are on hand incidentally or are being obtained from a bisnis not producing consistent returns, its utilization at an exchange would be a haphazard approach. The basic premise is the consideration that to hold on sufficiently long in terms of time, to be able to do some meaningful activity at an exchange, reserve funds are needed to recover from bad decision making, for at least a year. It can be ascertained already beforehand that bad decisions will inevitably outnumber the instances of good judgement., even for the experts and wizards. Risk can indeed be minimized by what is known as "cut-loss" action, meaning an instant liquidation of a loosing position, on the other hand winning positions should be kept as long as possible and the end result would be positive after a sufficient number of time periods.
What can be considered a sufficiently safe risk,
is a maximal utilization of merely some 10% of the available fund
for buy-selling positions during one month. It should be realized
that a loss of 5% must be made up for with a return of 5.26% to
go back to the initial position. Furthermore a gain of 42.86% is
needed to cover a loss of 30%, while to make a return of 25%
would be considered as an extraordinary performance even for the
seasoned trader. For a more in depth risk analysis the exchange
trader should study the theory of money management or even at a
more advanced level, portfolio management..
Basics of technical analysis
In technical analysis or the analysis of charts the prerequirement to have an understanding of the components making up a bar of a bar chart, expressing a unit or period of time, would be imperative. For stocks and commodities such a time period would be one day of trading, comprising the lowest and highest prices as the lowest and highest points of a vertical line or bar expressing the time unit for the day. Additionally the opening price would be a point attached to the front side of the bar and the closing price would be found at the back side. For a foreign currency exchange the time unit could be determined as brief as five minutes because trading action occurs much faster involving millions of participants the world over switching from one economic center to another for almost 24 hours every day.
Generally the closing prices are considered to have a more important impact and they are usually connected to another to form a line chart, much following a saw tooth pattern and known as the closing price chart. Examples of both types of charts are found on this page and have been drawn up with the aid of technical analysis software known as MetaStock created by Equis International, Inc. located in the United States, who have appointed PT Bumianyar Futuria as the distributor for the territory of Indonesia.
SAMPLE OF A BAR CHART
SAMPLE OF A LINE CHART FOR THE SAME TIME PERIOD OF ABOVE STOCK
The position of the closing price in a bar chart can give an indication of succeeding price movement, specifically in patterns which have been standardized as technical analysts jargon depicted hereunder.
Included in such standard patterns are:
All such standard patterns can be recognized as depicted hereunder, to become an indication what buy-sell action should be taken at subsequent periods or time frame.
Reversals
The hereunder depicted reversal top is usually completed within one period, or one day. In this example a top key reversal happened on January 11, 1992, showing a drop of the closing price, deeper than the previous one, involving a high volume.
The opposite would happen with a reversal bottom and it would not be difficult to imagine the details. A closing price appearing to approach the lowest price during a number of periods before the occurrence of a reversal, will produce a sharp price increase accompanied with a high volume.
In a saucer/round top or bottom formation, bids and offers move slowly and the accompanying volumes are also at a minimum, all pointing to a sluggish market. It would be difficult to set price objectives and the sole course of action would be to wait until some meaningful change occurs as a sign that more interest in the market is offering a better hope for the future.
The diamond pattern depicted hereunder, is usually part of a reversal, but can also be included in a continuous price move and actually consists of two symmetrical triangles, much resembling a head and shoulders formation but of a more complex type with a V shape neck.
It should be noted that the price objective, starting from the break-out point should be set minimally at the same distance as between the top and bottom of this pattern.
Hereunder is a head and shoulders pattern, which could be found at a top or either a bottom, but it can also be part of a continuous price move.
What should be paid attention to in a head and shoulders reversal pattern, is that the neck line does not need to be purely horizontal, furthermore please note the breakout point and the reversal toward the neck line. Additionally is it important to set the price objective at the a distance from the neck line, which should be the same as between the top and breakout points.
Different from the top or bottom saucer involving a sluggish market, the double top or bottom involves a more active situation. The benefit of this pattern is the signal given by the breakout taking the reversal move to completion, indicating that it is time to sell or buy.
We can also come across triple tops or bottoms, but such patterns occur quite rarely.
Congestion and continuation patterns
In the course of up or down price moves taking place almost vertically, a formation called congestion or continuation could occur, moving sideways in the form of rectangles or flags, triangles, diamonds, bullish/bearish wedges/pennants/symmetrical triangles, and also the bullish/bearish head and shoulders continuation pattern as shown hereunder.
In an ascending or descending triangle, a horizontal leg should serve as a resistance or support line and the other leg would become support or resistance at a negative or positive angle, both touched at least three times by the price move in between before an upwards or downwards breakout. Yet it should be ascertained beforehand whether the breakout becomes a reality for a perfect formation of this pattern, before some buy or sell action be taken.
A bullish rectangle would be formed if both the resistance and support lines run parallel to each other horizontally and this continuous pattern is found in an upward price move, moving sideways temporarily. The price waves should touch both trend lines at least three times before the pattern can be verified as such. Naturally a bearish rectangle behaves in the opposite direction.
In a descending flag, this continuation pattern is preceded by an upward price trend, moves somewhat downward to start this formation and completes it with a breakout to continue with the bullish direction. The formation of this pattern should include at least three waves touching the support and resistance lines running quite parallel to one another; preferably a confirmation should be made after two or three more periods after the breakout for a justified buying decision.
At an ascending wedge, this continuation pattern is preceded by a downward trend, moves upwards to finally make a breakout and follows through with the downward direction. To form such a pattern, at least three price waves should touch the resistance and support lines making the wedge configuration; it would be preferable to confirm after two or three periods more whether the breakout has been true.
Differing from the ascending or descending triangle, a symmetrial triangle does not include one horizontal leg, but the same interpretation applies although the strength of the market to produce a breakout is not as powerful as with the other triangle types.
In an ascending head and shoulders formation encountered in a bullish market, the head is found at a lower level than the shoulders. The interpretation of the price move is the same as for the head and shoulders reversal pattern and can be used as a guide for succeeding buy-sell actions.
Gaps
What is called as a gap is a jump between the highest price during a certain period to the lowest price during the next one, and a more accurate name is gap-up or the other way round, gap-down. When happening in a weak market at a congestion stage and with low volume, the impact would be insignificant and would be referred to as a common gap. If accompanied with high volume, we are speaking about a breakaway gap and price action with increased speed would be expected moving toward the breakaway.
When increased volume occurs during a price move in a certain direction, we are dealing with a run-away gap. Such a gap may produce a price objective starting from the gap which distance should be measured from the gap to the previous bottom or top.
We may also encounter an island reversal gap fenced between an exhaustion gap and a breakaway gap as shown above.
Trend lines
If the position of the closing price in a bar chart can be utilized to give an indication of a price move, and buy-sell decisions can also be performed with the aid of the recognition of basic price patterns, we may also make use of another type of another indicating tool, known as the trend line. This tool is a straight line drawn from the right to the left staring from some top or bottom and connecting other tops or bottoms. In a bearish market connecting the tops to one another will produce a down trendline which is also called a resistance line. On the other hand in a bullish market connecting the bottoms would produce an up trendline also called a support line.
The resistance line appears to prevent the price to cross it until the strength of the market cannot be blocked anymore to effect a bullish breakthrough and the other way round would happen in relationship to a support line with respect to a bearish breakthrough. In a bullish trend the bids have overrun the offers and the opposite would be true for a bearish market condition.
Please note that steeper a trendline and the more tops or bottoms have been connected to one another, the easier the trend will take a turn, changing a support to become a resistance line or otherwise.
In the chart shown above we see a down trendline drawn from top A to B until it penetrates the price on the date of 23 September 98 at a level of Rp375, this method of analysis involving a trend line has produced an indicator pointing to a buy signal, because the bids have overpowered the offers or a bullish has replaced a bearish situation and the resistance has turned into a support line. Yet it would certainly be sensible to wait one or two periods for confirmation of the change to act on it with a buy order to the broker.
By make use of the calculating speed of today's computers, we can use another method on the same principle to obtain a buy or sell signal.. The straight trendline can be made more accurate by incorporating the average of the price values during a certain number of periods, say for instance 10 days. The first average value will be obtained on the 11th day and could be represented in the chart as one point, and by producing the succeeding points we will obtain a curved line. By applying the principle of price penetration by the trendline we have arrived at an earlier date, being 18 September 98 and at the lower value of Rp275. This means that the buy signal can be executed at an even lower price leading to a higher gain. The curved line is called a moving average and in this case it is named a 10 days simple moving average, abbreviated as SMA-10. More complicated calculations may result in a weighted moving average (WMA) or either an exponential moving average (EMA).
More accurate analyses can be performed with more sophisticated indicators like a combination of moving averages (subtraction, division) for trending price formations, momentum oscillators for prices moving sideways and a host of other methods outside the scope of this presentation for beginners.
Indicators and line studies available with MetaStock 7.0 EOD consisting of 92 studies are grouped into six categories covering trends, volatility, momentum, time cycles, market strength, support and resistance.
The tools needed to trade and exchange
In addition to the hints and pointers explained above, the beginner trader or speculator should be equipped with the required tools, which would naturally be the price database and the technical analysis software as well as a telephone to place the various orders with a broker, who will be more competent to explain the relevant details. A more serious and sophisticated fulltime trader or speculator would also require a price datafeed directly from the exchange to follow the sequence of bids, offers and transactions on a realtime basis during trading hours and enable them to place orders instantly up to the minute for stocks, but they would still be in need of the means to perform some previous analysis to guide them on a correct course of action. This need would be in the form of the database providing end-of-day prices for all stocks and category of transactions, consisting of raw (unadjusted) prices as obtained from the stock exchange datafeed, adjusted prices as the result of splits, rights and bonus issues, bond conversions as calculated meticulously by suitable computer software, and the addition of initial public offers (IPOs) to the database.
Hence the end-of-day price database is a must for all stock traders and investors and the MetaStock Version 7 EOD (for end-of-day) technical analysis software is most suitable to provide you with the capabilities to select the most suitable industry and stock for profitable action and correct timing for buy or sell or other market orders based on signals generated by its hosts of indicators.
PT Bumianyar Futuria is at your fingertips to provide you with these tools and you can rely on the accuracy of its database as well as technical support for the MetaStock software it has provided as the author's sole distributor for the territory of Indonesia.