For newbies

Here is something I wrote for Scottrade in April 2010. I figure the statute of limitations on an article for which I was not paid anything has expired.

Give Yourself a Break!

By Michael Kahn

The debate continues on whether navigating the financial markets using charts is an art or a science. Those of the latter belief work with equations, trading systems and models. Those of the former belief, and I venture that most investors fall into this category, use basic charts, a trustworthy source of opinion, and their own experienced eyes.

Let's leave the rocket science to others. For most of us, simple charting tools work just fine whether you use them to complement the fundamentals or all by themselves.

Just as some writers use journalistic license to bend the rules of grammar and facts, some chart watchers selectively ignore various chart points to attempt to create a meaningful and, more importantly, useful analysis. They do not get hung up on pennies when they are trying to invest for dollars.

Strict interpretation of technical charting rules can yield academically correct analyses, but they may only loosely describe what is going on in the real world. What more do you need than your eyeballs to tell you that in a bull market, prices on the chart move higher over time?

Assessing whether the market is in a bull or bear trend is more than half the battle. If you know if there is a bull market in progress, then you can take your list of sound companies and buy their stocks on weakness. If you know it is a bear market, then you might limit yourself to special situations where the fundamentals are so compelling that the rest of the market is not an influence.

Many traders spend huge amounts of time pouring over their charts to determine idealized buy points. And to find them, traders draw horizontal lines connecting points on the chart that represented price lows in the past. The theory is that if demand surged at that price before then it is likely to do so again.

But then they make a mistake and connect those lows with a fine point pen. They might not buy a stock because it traded at 36.25 and the line connects previous price lows at 36.10. More times than not, 36.25 is close enough to create a good risk vs. reward purchase, and the picky trader will miss it.

Fine point pens have nothing over a fat crayon when looking for these price levels. "Close enough" may be good enough for many investors with multi-month or longer investment horizons.

Of course, there will be times when precision is needed. And there will be times when even a fat crayon line will be broken to the downside by falling prices.

Investing is far from a guaranteed endeavor, and losses can and do occur. But investing should not be brain surgery. We are allowed to make mistakes, and as long as we use proper risk controls, such as stop orders, then we're doing what we can to learn from those mistakes and mitigate their impact.