| Developing a Systematic Approach |
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Developing a Systematic Approach Please note that we have used historical data. These examples are for educational purposes only. In this issue of the ChartFilter Newsletter we'll look at the benefits of using a systematic approach to making investment decisions. I believe our biggest challenge as investors is to make intelligent decisions based on sound research rather than hot tips, rumours and runaway emotions. Developing a systematic approach means taking giant step in the right direction.
Stock analysis tools are available like never before; powerful charting and analysis programs like ChartFilter StockTools are now available to the average investor for a modest monthly fee. Now it's up to us to learn how to utilize the tools to our best advantage. And what an opportunity!! These tools give investors easy access to charts, technical indicators, and screening tools that most professional investors could have only dreamed of using a decade ago! Let's see how we can apply these sophisticated tools to developing a systematic approach to investing in stocks... CURRENT TRENDS - Learning to Use a Systematic Approach The art of investing in stocks boils down to answering two important questions: Answer these two questions successfully and you'll have a winning trade. But... where do we begin? How do we objectively analyze a prospective investment? Sufficient volume is important First of all, I suggest screening out any stock that isn't trading above a minimum of at least 50,000 shares per day. This liquidity is important if you want to have buy and sell orders filled quickly and at the right price. Next, I would suggest using a series of questions to analyze the direction of the market and the potential for profit. In the follow section, I've listed these questions and the technical indicators that would best provide the answers. Read on... Develop a Systematic Checklist I suggest using the checklist below to systematically analyze each stock before making the decision to invest. Of course, you may want to customize my suggested list with your own questions and favourite indicators. The system that follows reflects my personal style -- I'm interested in catching markets that are in an established up trend. I seek to buy into the trend and sell when the trend begins to reverse. I'm usually not interested in short-selling stocks, because that requires a margin account. Of the 17,000 tickers in North America, there are always plenty of stocks that are in an uptrend and worth buying. You could use these same indicators, however, to develop a system that would take advantage of down-trending stocks. Keep in mind, however, that you would use a slightly different set of indicators for a market that's in a congestive phase, and not trending. You would need to incorporate a set of oscillators, such as Stochastics and CCI. Questions and Indicators for a Trending Market 1. Is the market trending or in a period of congestion? Is it above or below its 50 & 100 day Moving Averages? Above or below 50 week MA? - if the price is above all of these it is likely breaking new ground in an uptrend. If it is breaking down through one of these, or bouncing off of one of them, that too is significant. If the 50 day crosses up through the 100 day, that too is considered bullish. MACD - positive or negative? ADX/DMI - ADX above 25? Trending up or down? 2. Which way is it trending -- up or down? Trendlines - long-term, mid-term, short-term - up or down? Moving Averages - 20 & 50 day - trending up or down? Which one is above or below? 3. Which way are the volume indicators trending? PVT, OBV Volume 4. What about the pattern? Bullish? Bearish? Any significant patterns emerging: new breakouts? Trendlines, Dow Theory, Support -- Resistance, Triangles Price Channel Parabolic SAR Here are the questions and indicators for a Trending Market, arranged in a handy checklist:
Let's take a look at an example, using this checklist. Here's a one-year, weekly chart for HLEX, showing the 50-week MA.
Here are some six month, daily charts for HLEX, with MAs, volume, MACD, ADX/DMI, PVT, OBV, Price Channel and Parabolic SAR.
There's a lot of information in these charts to try and digest! This is were the checklist comes in handy. Once you begin using the checklist, there's much less to try and remember... and an objective comparison of stocks becomes routine. Here's the Analysis Checklist with the relevant information filled-in:
Based on this analysis, we can see that HLEX is showing many indications of a good potential buy (from a technical analysis perspective - remember to check the fundamentals, as well). In terms of timing (when to buy or sell), many people would consider the following as positive buy signals recently offered by HLEX:
As long as this stock stays above its mid-term trendline, and 20-day MA, it should continue to be positive. Please feel free to make a copy of this checklist in developing your own systematic approach. You may have favourite indicators that you'd like to add or incorporate. |
