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Resident trader
Book review: Charting for Dummies
Will Kraa, February 18, 2007
I have so far reviewed books that I have bought because in my opinion they were good books to have and I bought them for my library. This time I will review some new books that were sent to me for review. That does not mean that I have run out of books to recommend that were already in my library, and I will get back to them later.
The first of the books sent to me is 'Charting for Dummies' and so those of you who do not fit this description can skip this part of the review. When I first saw the title I sort of groaned inwardly and thought, "Not another one of those books that tell you just a few basic things". Anyway, I decided I should have a look at it seeing someone was kind enough to send it to me. I was pleasantly surprised and impressed.
The four authors who wrote this book know what they are talking about. I was even more impressed when I discovered in the book a very healthy dose of skepticism about Fibbonacci and similar stuff (where people think they have stumbled across some law of the universe which governs human behaviour and that this gives an edge to the devotees to this sort of magic). Now I know I have immediately offended some of my readers and I am sorry but simply can't help it so maybe you will forgive me.
As I looked at the Appendices I was even more delighted to see that the authors recommend AmiBroker as "by far the best value for your dollar". Obviously these are very sensible people! They also share my view that learning to trade well does not require attendance at expensive seminars or purchase of costly software.
However, that is not the main reason for recommending this book. I had planned to recommend some books on charting but this book has saved me the trouble. In one book there is material that puts together lots of information to give a good understanding to the beginner but also has enough to interest those who have been trading for some time. Anyone studying this book will get a very good grounding in using charts to trade. It is filled with very practical and down to earth information and even if you think you are a bit of an expert I think you will still find some good ideas here.
It is not just a compendium of indicators but shows what they are based on and how to use them. Charting that is not based on indicators is also discussed including basic candlestick analysis, support and resistance, and patterns. This book is not just theory but deals with the practical application. In the process experienced people share lots of what they know with the reader.
There is a section of the book that deals briefly with risk management but there are much better treatments of this subject, such as the book by Van Tharp that I reviewed earlier. Risk management is a subject that is of the greatest importance and needs more than just a small section of a book to cover it adequately. For instance the way the famous 2% rule is explained in this book leaves much to be desired.
This is not an encyclopaedia of charting but a very practical and useful book for anyone who wants a better understanding of the uses and limitations of Technical Analysis. It is geared to the Australian market and I think you will find it very useful. So long as you don’t mind admitting to being a dummy.
Last week I mentioned that I would deal with some of the ways fundamental analysis can be used and this brings me to another book that landed on my desk for review. It is the latest in the well-known Top Stocks series by Martin Roth, 'Top Stocks 2008'. From the outset I must say that it really should be labelled as being about the top stocks for 2007 since it is based on the company reports for the year finishing in June 2007. This is one of the problems with fundamental data: it is usually well and truly out of date by the time you get it and also it relies on the honesty and lack of accounting window dressing of the companies.
That is one of the reasons I would not want to invest in companies by relying simply on finding 'undervalued companies'. There are many times when there is a good reason for the fact that they are undervalued. This is something I did not really understand when I first started in the stock market and as a consequence lost more than most people save in a lifetime. Fortunately I have been able to get it all back and a lot more since then but I hope I might be able to help others avoid this kind of thing.
Now back to the book. It gives a lot of good fundamental information about companies that have been selected as being in the author's opinion the best companies of the top 500. The book gives a detailed list of criteria used to make the selection and it is a conservative process. But there are some excellent companies that are not selected simply because they have not been listed for five years.
By typing the list of the 107 stocks in this book into a watchlist in AmiBroker and opening a sheet with nothing more than a 30-week weighted moving average over the price chart it is very easy to select the companies that are worth buying at any particular time. The criterion might simply be that they must be trading above the rising indicator. Applying this criterion to the list showed very few companies that complied at the moment. That must tell you something about the present market.
So one way of selecting stocks as candidates for trading is to buy this book and then just use it to make a watchlist and applying a trading strategy. Other than just simply looking for a rising 30W WMA, The Berg method is also one that could be used.
Another way of selecting such a list is to use research facilities provided by an online broker. I have one small account, which I keep open for just this one reason (and to trade the microcap stocks); they give me access to an Advanced Stock Filter provided by AspectHuntley. This takes getting used to but is excellent. For instance, this morning I put in the following criteria: Market Cap>50,000,000; Debt/equity ratio<0.6; Return on Equity>0.1 and display only the EPS 5 year average growth and Dividend yield. (Note that in these filters percentages are expressed as decimal fractions, so 10% becomes 0.1 and 0.6 is 60%. When I first started using it I put it in as say 10 for 10% and wondered why there were no results. I guess there was no companies getting 1000% return on equity.)
This filter produced a list of 212 stocks that meet the criteria. The list can be typed into an AmiBroker watchlist and further refined by exploring it with a simple turnover filter that lists those stocks that meet your liquidity needs. You need a daily average turnover at least ten times the size of position you would trade to be able to get in and out comfortably. The AmiBroker formula for such a scan is at the end of this article.
Such a fundamental filter can also be had by paying a company that provides this sort of thing such as AspectHuntley. One reason I don't do that is that I get sidetracked reading the flood of fundamental information these companies produce. I find their Buy, Accumulate, Hold and Sell recommendations of little use.
I was amused yesterday reading a sample set of recommendations by one of these fundamental companies. For the last week of January 2007 their recommendation was to Buy AFG at $12.33, Buy BOL at $3.95 and Short QAN at $5.30. Now if you had done the exact opposite you would have done very well. Just have a look at the charts.
There is another online scanner that Jim Berg uses which is cheaper than some others that run on your computer after you download all company information. The latter charge well over $1,000 per year for the privilege so you need to get a good return to make it worth paying that much. One well known one is very sophisticated and you might have little use for much of what it can do. I would be happy to pay a smaller sum just to get their list of 'Star Stocks' and have it updated as necessary.
Another way to get access to the Star Stocks is to do what Shean Gannon does and subscribe to ActVest. (See the article featuring his story). Alan Hull’s ActVest method uses the Star Stock list as the fundamental filter.
Currently there are very few stocks that are trending well enough to be able to trade them with a trend following method such as the ActVest or Jim Berg ones.
One thing you might find interesting is to look at all the charts of All Ordinaries stocks to find the ones that were not affected by the panic selling in January. You will find some that hardly moved down at all and you will notice that these have mostly trended up at a fast clip since then. Obviously these were stocks where the fundamentals are so strong that they were not sold down in the panic and these are now going up faster than ever.
So one strategy to use after a big panic such as the recent one or the one in August is to look for these stocks and then as soon as the Jim Berg method gives a buy signal (candles turning blue) get into them. Just have a look at the chart of CEY for instance.
Currently the trend following methods are not producing too many opportunities for trading CFDs and short term trading is probably more appropriate but that is another story for another day and one that does not require fundamental analysis.
Suggested AmiBroker Formula for Turnover Exploration:
tradingVolMin = 2000000;
//the value of this can be adjusted to suit
tradingVolume =MA(Volume,10) * MA(Close,10);
// this averages the turnover for the last ten days
Filter = tradingVolume > tradingVolMin;
AddColumn( tradingVolume, "$tradingVolume " , 1.0);
To use the formula, open the Formula Editor, copy the above formula into it, click on File>Save as and from the drop down box select Formulas>Systems then name the formula and click Save and Close.
Now click on Auto-Analyser, click on Pick and from Systems select the formula by the name you gave it.
Click on Define (and Clear if something is selected) and from the Watchlist dropdown list select the Watchlist you want to scan.
Click OK and under Range select the latest date in 'from' and 'to' and then click Explore.
After a few seconds the list will be there displaying the stocks in the watchlist that meet the turnover value.
In the list right-click and, if you want to, select "Replace the watch list with the results…" and in the box that opens select the watchlist where you want the results to be. Remember that whatever was in the watchlist will be replaced.
The average daily turnover I have put in the formula is $2,000,000, which suits me, but you may not need such a large turnover. Just click Edit in the Automatic Analysis box and type in the figure you want.
Also in the Automatic Analysis window put a tick in the box beside 'Sync chart on select' and that will open the chart as soon as you select the entry in the list. Very handy to look at charts after an Exploration.
This scan is handy to scan any watchlist or even all equities to find stocks that have suitable volume of turnover. For short term trading I would suggest you pick a higher turnover value. You don't want to get caught in a short-term trade by lack of turnover.
More articles from this edition of CompareShares:
Online brokers: Will traders win from online broker showdown?
Investing: Things you need to know about a company
Stocks: Stock of the week - Metallica Minerals
Sectors: Healthcare stocks offer no cure for market jitters
Fundamentals: Steps to valuing a company - spotlight on mining services
Resident Trader: Book review - Charting for Dummies
Commodities: Bullish outlook for crude oil
CFDs: Top ten CFD stocks
Expert Panel: Advantages of investing in instalment warrants
Property: House repossessions on the rise
Companies: Centro wins refinancing extension
Stocks: Stock to watch - AMP Limited
Whatever your views, you can discuss this article - or any of Will's articles - on our message board Your 2 Cents.
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