How can examining past price history possibly provide insight into future price movements?

1
» Market participants, acting alone, react similarly to major news.
Technical analysis is partly based on the psychology of crowds. Even though
all investors may not be congregated in a single room, they’re all human —
even quantitative systems have humans behind them. Hence, they’re
susceptible to the same emotions all humans share: greed, fear, hope, and
the like. Security prices would be very difficult to analyze if everyone trading
were Spock-like — perfectly logical with no emotions getting in the way.
» Market participants have memory. Traders, investors, and other market
participants have reference points when they buy or sell securities. The price
they pay when they buy a security affects when they’re likely to sell that security
(even though it should have no bearing on that decision). They remember their
purchase price and, naturally, want to either make a profit or break even. If the
security price swoons after they purchase shares, they’re likely to feel pain. And
if the price recovers to their original purchase price, many will be happy to sell
to break even. What these traders and investors often don’t realize is that hundreds, if not thousands, of others are experiencing these same emotions.
This fact is why certain price levels are more significant than others. Securities
tend to find support (a level at which security prices stop falling and begin to
rise) and resistance (a level at which security prices stop rising and begin to fall)
at round numbers.
I’m amazed at how often traders place buy-limit or sell-limit orders at round
price figures. Don’t they realize that many other traders may be doing the
exact same thing, and that their actions may prevent the price from ever
reaching that level? Quite simply, a sell limit of $100 isn’t too bright, because
other traders or investors likely placed orders at that same round number.
And their orders may prevent yours from ever getting executed (the over-
whelming supply of shares at that level will force the stock to retreat before
reaching $100). On the other hand, a sell limit of $98.71 is smart, because it’s
unlikely that other traders placed an order at that specific price, and you have
a much better chance of your order getting executed.
» Smart investors’ actions show up on the chart. Smart money often refers
to investment money made by institutional investors who have greater
resources than individual investors (for instance, access to research, staff,
and so on). Institutional investors invest their money with specialized managers who can visit a company’s headquarters and pay for expensive research.
Smart money also constitutes insiders at a firm who have an information
advantage over other market participants and may trade on that information.
Dumb money, on the other hand, refers to investment money made by
amateurs who buy or sell securities for the thrill of investment or without
proper diligence. Dumb money doesn’t necessarily mean individual traders;
it can include retirement plans or corporate plans that divest securities that
no longer meet the plans’ criteria. This selling pressure pushes prices down
for no good reason. Dumb money can also include institutional investors
who buy or sell stocks because they fall in love with their investments.
Believe it or not, institutional investors are subject to the same whims
and emotional swings experienced by all traders.
» Folks with knowledge of a company’s prospects can only take advantage
of that knowledge by trading on the open market. Their trading shows up
on the ticker tape (it’s the law). So if you know that Amazon is going to have a
blowout quarter (by legal means, of course, and not through illegal insider
sources), you can’t profit from that knowledge except by buying shares. And
your buying is going to show up as volume on a price chart. Others who may
not know about the blowout quarter can, nonetheless, infer that something is
up when they see Amazon’s shares rising on heavy volume.
what we want: 1+1+1+1+1+1+1+1+1=9 <3
what market delivers: 1+2+8+7-4+0-5+8-4-5+1=9 :problem:


Who is online

Users browsing this forum: No registered users and 12 guests