How to make money by Trade Charts
Charts are a vital resource for amateur spread betters.
Even if you have little understanding of what affects the fundamental value of a particular market, evangelical chartists say you can still predict its future course by finding patterns in historical price movements.
Bill Adlard, editor of Chartguide. com, says: “At any given time the market will either be trending up or down. You use various indicators that tell you when the market is in such a frenzy it has to turn around.”
Charts are arguably much easier to read than the fundamental data about financial indices, individual shares or commodities. Omer Bhatti, head sales trader at Worldspreads, says: “Fundamental analysis is still an area for the professionals. You need a certain level of skill and experience to use and understand things like earnings reports.”
Technical analysis, on the other hand, follows a straightforward set of rules, freely available on scores of websites. Happily, the simplest rules in charting tend to be the most reliable.
The most basic form of technical analysis is to look for support and resistance levels that markets have struggled to break through in the past. Traders say using charts in this way works best in moderately volatile markets. In trending or excessively choppy markets, these traditional methods falter.
James Hughes, market analyst at CMC Markets, says: “If a market is trending up it will always break through resistance levels. Too much volatility will mean that the market doesn’t have time to create these levels.”
The financial crisis has been an interesting time for the chartists. In some respects, the charts have become much more important as prices have become further removed from fundamental values.
Andrew Mackenzie, spokesman for Spreadex, says: “Over the past six months most people’s traditional charting methods have been blown out of the water. Most of the patterns have not really been ready for this type of volatility. Still, it’s better to have some kind of strategy than going in with your eyes closed.”
For example, chart 1 shows recent support and resistance levels on the FTSE 100. The resistance level of around 4,600 is the high so far this year. The chart suggests betters should start selling the index as it nears 4,600. Traders also recommend placing a stop loss just above the resistance level to protect you if the rally continues.
The support level at around 3,700 is a point that has underpinned the market before. Hughes, of CMC, says: “The cornerstone of technical analysis is, ‘Levels that were important in the past will become important again in the future.'”
When a market breaks through its support or resistance levels, there tends to be a renewed momentum for it to move further in the same direction. Therefore, if the FTSE 100 breaks through the 4,600 level, chartists would then predict a strong rally.
Another simple way of using charts is to look at moving averages, such as the average price over 10 days. The idea is that this gives you a better representation of what the price is doing over a longer period of time.
Chart 2 shows the 10-day and 50-day moving average for the FTSE 100. When the shorter moving average crosses the longer average on its way up that is a buying opportunity. When it crosses it moving downwards, that is a selling opportunity.
If you had followed this strategy, you would have made a small profit having bought in December, then a larger profit having sold in mid-January. Towards the end of March you would buy again and would now be sitting on a 400-point profit.
Another simple pattern is based on the so-called relative strength index (RSI). This highlights situations where a market is overbought or oversold and warns of a potential reversal in the trend. The RSI is the total points gained on up days, divided by the total points lost and gained, multiplied by 100.
A reading above 70pc indicates that the instrument is overbought; it has been rising too quickly and is due to turn around. A reading below 30pc indicates the market is oversold; it is due for a run higher and is therefore a buying signal.
Chart 3 shows the RSI for the S&P 500. Chartists following this method would have bought towards the end of February to make a significant profit. The chart suggests that now may be the time to sell the S&P 500.
Trade Charts Conclusion
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