Money
Issue No. 51 - February/March 2010
Chart a course to dodge bears
The global meltdown has devastated Australian share portfolios, but could its impact, and that of every major sharemarket correction in history, have been minimised? The answer is almost certainly yes, if investors were watching price charts for trend changes.
Many investors use technical analysis, analysing price charts for trend changes, to supplement and confirm fundamental research and investment decisions, particularly on longer-term price charts. But how do analysts identify a market trend, and how does this affect your decision to buy or sell a share investment?
The first step to knowing whether to invest or not is to identify the trend a share is in. Share prices don’t go straight up or down: they generally trace a zig-zag pattern up, down or sideways.
Prices form patterns from their extremes, which are used to define and identify where the trend is. Figure 1 explains how a trend develops and changes over time. When ‘higher highs’ transition to ‘lower highs’ and ‘higher lows’ become ‘lower lows’, this confirms the trend change. Until this transition is complete, an investor can assume the preceding trend is likely to continue. When to buy and when to sell? Have you ever sold a share and later watched it double or triple in value? Maybe you have held a loss position on a share, only to watch it fall further, perhaps buying more along the way to average down your cost price in the hope it would recover. This is a recipe for investment disaster, as the share may never recover.
Investment success comes from investing, and staying invested, while the market trends upwards and divesting as the trend changes to down. Most people do it the other way around, mistakenly believing that when a share price has lost significant value it makes sense to buy up big.
The problem is that no one knows where the bottom is, so it makes more sense to swim with the tide and let the market take you with it. To improve the odds of a ...
