Including Technical Analysis in Stock Investing

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I usually have issues on when to buy stocks with my little money and at what prices.

A friend of mine, LP, told me that he used Technical Analysis (TA) as an extra step to get better prices and filter bad entries, AK also uses some too.

I daytraded Index Futures previously, so it does kinda make sense.

However, as now I don't have so much time in front of a monitor (nor the principal sum to manage risk by position sizing).

So my added approach (value+dividend investing), on top of looking at a stock's fundamentals, is to get better prices using TA.

Some may call it heresy, but TA is not exactly buying or selling something while not knowing the value of it. TA is buying and selling something while knowing that there is a demand and supply for it (yes, even the Tulips Mania in 1637, except this time, 2015, we aren't chasing tulips, the tulips now is money).

Price is not so much about just the value of something, yes, in the long run, price do correct to what we deem how much it is worth, the value of it they say.

However, we also get scared or pressured by people to do things, joining the crowd they say, these fluctuates the markets in the short term, it is not rational behavior, but instead the herd mentality of the market.

And that is about the irrational people inside it, during periods when people think it is good and they keep buying it, demand exceeds supply and thus pushing prices up. When all is dark and gloomy, people get spooked out and let it go in horror, supply exceeds demand, and prices fall.

The stock market is not just an open market where everything is fairly priced nor a big place of numbers or funny charts.

It is a place of expectations, greed, fear, and many twisted emotions, the psychology of the herd that is "Mr Market", or just the many people behind those monitors or even reading papers, putting their money in hopes for a better future, be it a carefully portioned out money or throwing in their live savings. They are all human, experiencing joy, sadness, rage, regret, all trying to get wealth transferred to them in some way or another, or in bad instances, having much wealth transferred out from them.

TA is just a method of looking at irrational behavior, in belief that history will repeat itself.

Ok, enough ranting, back to my setup.

Sadly enough, TA in stock investing, is not as rigid as systematic trading, where you can backtest or live test data (3-24 months), instead as it is affected by how fast your warchest is refilled, what market condition resulting in stock to buy, so it is more an arbitrary gauge of a price, in hopes of getting a better price.

I purchased Datafolio End-Of-Day Datafeed (using my survey earnings :p) and continued use of my Ninjatrader free SIM account (I used the same platform for futures trading).

Why Datafolio?

• Metastock data feeds into trading platforms
• EOD data is good enough for investing, no need intraday live data as we are not trading
• One time subscription (instead of recurring monthly fees), best bang for buck
• Have to reload data everyday or week though

Similar to trading, we look for trends and countertrends, but in this instance, we might be more interested in looking at macro price trends and short term reversals at areas of psychological resistance/support, where we can add positions, buy in heavily, cash out, or most importantly, know when to sit on your hands (to let your profits run or not to buy in).

Here is a rough setup (I prefer tick charts over time based charts to better see price action) from my swing trading of YM Futures (DOW Index Futures), along with some explanations (I added links for further read up for those interested):

• Bollinger Bands to observe price volatility, as it helps to tell whether the people in the market are sitting on fences (low volatility with little movement), confused (large volatility but swinging between the bands), jumping into the bandwagon (large volatility with a strong upwards surge) or fearful (large volatility with a strong downwards plummet).
• Moving Average to see price directions using an aerospace analog filter using Digital Signal Processing, as it helps to see long term trends instead of price proxy as how MAs are usually used, without oversmoothing that it lags badly (Ehler explains here).
• Heiken Ashi candlesticks instead of the usual ones, to observe short term price trends and strength/weaknesses in volatile periods, helps to tell periods of people buying in or selling off heavily, when people are losing interest or staying out, or thinking it is time to buy in/let go for the particular day (Good explanation here).
• Fisher Transformation to observe divergence or momentum of price, measuring the increasing buyers against sellers or vice versa, whether each day before the next is stronger or not (Ehler explains here too). It is similar to a MACD in terms of use, but much better.
• Volume Profile to observe the number of long vs short trades executed by people in the market, as well as how much interest people have in the instrument, based on volume, it identifies strong buying/selling volume (which may be due to institutional activity or a psychological price point creating support/resistance) or psychological points where there's high buyers and sellers resulting in a temporal halt in price (the algo is here.)
• Multiple timeframes to zoom in to price yet having a look at a longer outlook to prevent tunnel vision. I used daily and weekly bars (~5x time scale differences), usually 3 is preferred but but don't really have other timeframes (not enough data for yearly) to use because my datafeed is EOD (so live data is impossible to plot, I'm not at the screen anyway nor am I trading).
• Of course, that being said, the most basic of TA which is support and resistance of price must be observe as well.

Here's a screenshot of how it looks like using Singtel to plot.

Yea, Ninjatrader on my Linux, teehee~

Is it the best setup? No, just what works for me. (Well, it take quite a bit of time to setup as mentioned from my prior post on 5th Dec 2015 ^^")

Do you use some technical analysis in your investing?