“ It is difficult to forecast, especially the future.” This quote is attributed to Samuel Goldwyn, of Metro Goldwyn Meyer, the great film studio - in it’s heyday, the biggest studio in Hollywood.

And this is what technical analysis is all about; an attempt to forecast the future movement of shares in the stock market, based on the past movement of those shares. As Mr. Goldwyn reminds us, it is difficult, not easy, and the risk is there, but if one can improve the odds of being correct – then the rewards can be considerable.

So… how do you improve the odds? What is the best strategy you should use to highlight those stocks one should invest in?  Is it Wells Wilders’ RSI indicator; is it George Lane’s stochastic indicator or is it some obscure indicator still to be invented? I cannot say… I have used them all with varying degrees of success, and am still searching for the Holy Grail, the indicator that will consistently give me 100% returns.  

I have found, in all my years of working the market that one uses fundamental analysis to identify the share you would like to own, and technical analysis to decide when to buy it. But then of course, like me you could be lazy. Looking through hundreds of balance sheets to find a worthwhile stock can be time consuming, and yes, I have worked out a strategy that pulls the nitty gritty out of that balance sheet, to give me a rating, but even that takes time. It is far easier to develop a strategy for a program like, let’s say Technifilter Plus, that will analyse the entire market in 3 to 5 minutes and highlight those stocks that are shouting

‘Hey look at me, something is about to happen.’

With all the restrictions on insider trading today, and Martha Stewart’s conviction for following her brokers insider ‘tip’ is a perfect example of that, what causes a share to stand out as a possible buy? ( Note: Martha Stewart was convicted of telling a lie. She tried to cover up the tip she was given.) I have always believed, and a recent hike in Tuscany confirmed this belief that when the wife of a vice President in a well known company said after one glass of wine,

‘You should buy the shares of my husband’s company because...’

She didn’t have to complete her sentence. A wife is very sensitive to her partner’s Viagra quickstep and in any conversation … who knows what comes out?

So what then are we measuring? Technical analysis is measuring the consensus of those that are correct in their fundamental analysis; those who are buying the stock because they like what their research has told them. The research analysts of the brokerage houses will always let their largest clients know the result of their research before publication. It always depends on how large your account is, or where your surname lists in the alphabet, or even the distance from their Post Office to your letter box.  Although with today’s internet availability, you are limited by the extent you are watching your computer screen.  They advise, and the clients react and that is what we look for -  a move upwards/downwards on increasing volume. 

The first rule in Technical analysis is to look at volume, and Joe Granville of the On Balance Volume fame used his strategy very successfully in the markets of the 1980s, when computers first hit the shelves. Do I still look at OBV? Not as much as I used to. I have found that there are other strategies out there that are better but I never forget the following:-

 Price rise on rising volume = Bullish
 Price fall on rising volume = Bearish
 Price fall on falling volume = Bullish
 Price rise on falling volume = Bearish.

Now, if you want to trade the market, you must decide what type of trader you want to be? There are three types of basic trader, and here I do not include options, futures or currency traders. They are a different kettle of fish, and live in a very different world. I know this, because in a past life, I was a successful Futures and Options trader, and in another life, when I first emigrated to Vancouver, I was a currency trader.

  The trading I am talking about is trading stocks on the market.

a. End of Day Trading – that is where you download data at the end of each day, analyse that data, and make a decision and act on it the following day. The stock would be held until a sell signal has been given or a stop loss hit, which ever comes first.  This could be the next day, the next month or even the next year.

b. Intra-day trading – that is where your analysis identifies a stock that you should trade. You buy it at the opening of the following day, but sell it at the close of the day. You do not hold an overnight position. (There is a strategy that you can use where you do hold an overnight position, but that is for another article.)

c. Inter-day trading – this is where you identify the stock that has a high volatility that can be traded. Here you would buy and sell the stock/futures many times during the day, happy with a 3 point profit per trade.

In this article, I shall be writing about End of day Trading, but the strategies and formulas I suggest could be modified for both intra and inter day trading.     

One of the things I have learned over my 35 odd years of trading the market is that during the trading day, you should focus solely on the market, and conduct all your research after hours at home, and before you have had that scotch during happy hour. Research is essential, because a strategy that you developed in a Bull market will not work in a Bear market or a sideways market, so you are continually looking for and back testing a strategy to meet the times. You are also looking for indicators to improve your trading strategy, and put the odds even more on your side. So, you read and read and read, and then you write what you have read into an algorithm that you test over a number of stocks looking for the strategy that gives you the best return. You test your strategy over past history of a range of stocks – I usually test over about 2000 stocks, - and you look at the percentage of times the strategy has been a winner. The strategy with the best results then becomes the foundation for fine tuning to give even better results.

Do remember, that you are back testing, over historical data. This means that when I am developing a strategy to short the market, I would not test the strategy in a bull market. Be very careful as to the time scale you are testing over, also never forget that past performance does not necessarily equate to future performance, but you will be adjusting the odds in your favour.

At the moment I am playing with the following strategies for end of day trading. So far they have been pretty impressive.

This is an excerpt from Sept/Oct 2005 issue of Trader's Journal. To view the complete article, please click here.