This is a guest post on trading from Tusk Trader (check out the newly launched site: www.TuskFund.com), an experienced Bay Street trader who will be writing here until Tusk’s own blog is set up. Tusk had a front row seat to the twists, turns, and almost collapse of our capital market systems a few years ago and provides a unique perspective you won’t find anywhere else. For most people, financial literacy is the elephant in the room. Let Tusk Trader help change that. If you are on twitter, make sure to follow Tusk at @TuskTrader
I have heard that question asked between friends numerous times this week and I have been asked that question personally about 10 times in the last 3 days. I cannot share my opinion on that topic in this blog but I can tell you the first thing that a trader will do to formulate an opinion on a particular stock. The first thing a trader will do is look at the stock chart. Charts do not tell you everything that is going on with a firm but it does tell you a lot. Charts tell you historical action, volume, price ranges, support levels, resistance levels and trend lines to name a few.
When you have a stock like RIM, which has been trending down for a while, people start to look for a reason to buy. The opposite is also true. If a stock has been trending up, people start to look for a reason to short. What sometimes can happen when looking at a chart is that people start to see things that are not really there. They see small signals and confuse them with legitimate chart patterns and reversal signs.
Traders use charts to gain market information every day. Some traders solely use charts to trade from and no other information, but most use charts as part of a larger toolkit. One thing the at home trader does not do often enough, that the professional trader does, is change their chart settings. Change your chart settings to get a different perspective on the same chart. An under used chart viewpoint is the candlestick chart. That is the chart where the lines are thick bars and usually shown in red and green. The aspect of the candlestick chart that makes it useful for a stock reversal is the tail, or what looks like the wick of an actual candle. Tails can be on the top, the bottom or both. The tail indicates that although the stock did trade at those prices, the bulk of the volume was not there. If a stock traded in a large trading range through out the day, glancing at the candle stick will give you a snap shot of where it actually had most of the activity and where the biggest volume was.
Candlestick charts and the tails they display are great for giving an indication of a possible change in direction. When a stock has been trending in one direction for a while, start to look for a candle with a long tail pointing in the direction of the trend. When there is a long tail on one end of the candle, it can point to a reversal of the trend. No chart signal is equal to a crystal ball but it can help to formulate an educated trading decision.
If you find yourself only using one type of chart, switch it up for a fresh perspective. It is like looking at the same chart with new eyes. You might see things more clearly even if you don’t see what you want to see.