THE LAW OF INERTIA AS IT APPLIES TO TRADING
Fundamentally, fundamentals are fundamentally for the birds
crunching is like trying to nail jello to the wall. For years, we've been
treated to fudged books and forward-thinking financial statements. Corporate
CEOs admit to "zero visibility" for their own company's business prospects. Accurate valuation is now considered mission impossible even for Wall Street
analysts. Traders are always the last to know, and, by the time the truth gets
out, it's always far too late. Sadly, traders always seem to be left holding
"To suppose that the value of a common stock is determined solely by a
corporation's earnings discounted by the relevant interest rate is to forget
that people have burned witches, gone to war on a whim, risen to the defense of
Joseph Stalin, and believed Orson Welles when he told them over the radio that
the Martians had landed." (Doug Kass, hedge fund manager)
only two things that don’t lie – price and volume …
While it flies in the face of conventional wisdom to make decisions without the
almighty "fundamentals", given where today’s market is at, we are often better
off to act before any of the numbers hit the press. We can always read
the paper later to get the "whys and wherefores". Price and volume don’t lie.
They are simply the facts - numbers that tally up the transactions at the
exchange, where everyone who knows anything is forced to show their hands in the
form of trades for the record. There is no place to run and hide. We may never
know why people are buying or selling, but if they are doing it, their actions
are surely reflected in price. We can never be certain about a company's
affairs, and we don't have to be, since everyone who is in the know is
already acting in the market, and price is a real-time measurement of worth.
Straight Skinny on Trading …
view is that technical analysis is not a tool to be used to "forecast"
the future. I use it to gather information, and diagnose what the market is
doing in the here and now. This allows me to prepare a road map and
contingency plans so that I am ready for just about anything. I believe that it
is important to look at the behaviour of price itself, rather than rely solely
on indicators to provide buy/sell signals, as traders tend to make decisions
triggered by price change. Essentially, all we need to know is if there is
movement or sideways action. In the case of trending, we want to know how
strong. If we are into a sideways pattern, we want to identify areas of
potential trend change or breakout. The goal is to buy every dip in an uptrend,
and sell every rally in a downtrend. In a consolidation phase, we want to wait
patiently for some sort of movement. Remember the adage, "The trend is your
friend!" The Law of Inertia states that an object at rest or in motion tends to
stay that way unless acted upon by some external force. The same could be said
of commodities, currencies, futures, markets, options, and stocks.
the charts …
charts to help me assess what’s likely to happen next – to examine past price
movements to forecast future price movements. This approach to trading is
called technical analysis. Technical analysts are trend followers who interpret
price movement and volume via charts to determine tradable up or down trends.
extent that technical analysis works, it is because human psychology plays a big
role in traders’ decisions to buy or sell, and that hasn’t changed much over the
years. Convinced devotees don’t really want to know anything about a company’s
business fortunes or outlook. They believe that everything that is known about
the business fundamentals is already reflected in the price and could care less
about valuation or business fundamentals.
traders believe that price will move in the path of least resistance, and that
path is defined by the trend in the price.
“To predict the course of the market,
Wall Streeters have tried everything from the height of tides to the frequency
of sunspots. The most practical tool is CHARTS that show the price changes as
well as the action of the market as a whole. Chartists are powers in the
Street; on what their charts show, institutions, mutual funds, and thousands of
individual investors buy and sell.” Time Magazine, 1962
There is a third and final thing that
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