|
| Wednesday, October 17, 2007 |
| Drawbacks of Technical Analysis |
While I pride upon myself for being a 100% pure technical trader with disregard to fundamentals, I do face a few problems during my trading experience. To begin talking about the drawbacks of TA, I would like to first critique on my own unpolished Trading System.
Critique on my system
Problem 1: One of the issues is the fact that I might enter and exit a counter too late. Although this was my intention as all I want is to capture the meat of the trend, but sometimes, when price shocks occur, it will hit my indicators, as a result, selling at a low. So right now, what I did was not against my system. However, if you look at how EMAs work, once the counter increases in value for some time, the EMAs will diverge so much that it will take a big drop to cut the EMA. That is the main problem in my opinion.
Potential Remedy:
When to buy: I will now purchase my counters in 3 batches. First is the recognition of the trend. Second will be when the price goes below the first support line. Third will be when the price reaches the third support line. One advantage is that I will have bargain buys in times of price shocks.
When to cutloss: This is a bit tricky as most of the time, it will coincide with the buying signal. In the recent past, I said that I shouldn't use cost averaging as it is "unfair" for the good positions but if I adopt this remedy, I will have use cost averaging. The cut loss should then be at the level if it is under the lowest EMA for x number of days.
When to profit take: This will be a new idea because once I accumulated enough, I should profit take on the excessive positions. To profit take maybe once it shows signs of consolidation. Profit taking could also be done on 3 stages, with the last stage signifying the closing of the position.
What to buy: The positions are larger, thus it is impossible to adopt my current strategy. Maybe a glance at fundamental data would be desired.
Verdict: The idea here is to capitalize on the trend till it actually breaks. Profit taking will reduce profits if it runs, but it will definitely allows one to stay in the trend longer as capital is present to cost average it. Furthermore, this might offset huge divergence of EMAs. The general idea is to sell 2/3 (assuming that accumulation is complete) once the shortest EMA is showing tiredness, buy 1/3 at the 2nd EMA line, and the last 1/3 at the 3rd EMA line or if the 1st line shows recovery. Yup, the system will be something like that.
In reality, I guess there will be situation whereby I will have 1/3 remaining after which I will top up another 1/3 at a higher price. This leaves the final third as free flowing cash flow. That is why the 1/3 will always be there till it actually breaks.
Drawback of TA
One of the main drawbacks is that while knowing technical analysis will set you up in the right direction, it doesn't really have much mechanisms that will determine the maximum upside of the counter. With this, it is kinda difficult to ride the trend as it will come to a point in time whereby you have lots of trends showing good signs. Like I mentioned, I am confident my system will have profits but my aim shouldn't be just profits, it should at least beat the local index. Right now, while I am able to keep downside at a minimum, I have no idea how to predict the upside.
Seems like I have no choice but to check out the fundamentals of the company. Luckily my brother will be able to help me out. It is interesting to note that while he is predominantly FA, I am predominantly TA. And at the moment, he has much better returns than I am, so I guess he must be doing the right things. I think if both of us learn faster and be good at what we are doing at the moment, then the million dollar dream will not be so far off!Labels: NenixDreams Fund |
posted by Nenix @ 10:11 PM   |
|
|
|
|
| NenixDreams Fund |
| Fund launchprice on 1st August 2006= $1
Target for 2007 = Beat STI index
Current price of NDF as of 1st Oct 2007 = $1.58
Current price of STI as of 1st Oct 2007 = $1.54
Difference with STI index is 0.04
|
| Links |
|
|
| Tools that Generate Passive Income |
|
| Previous Post |
|
| Archives |
|
|
