chart your own graph - charting #1

Sometimes charting helps, sometimes it doesn't. Most of the time, i think we wish we could see the charts rather than just numbers. But where can we get free charting software with technical analysis besides expensive (but very useful) machines like bloomberg and reuters? here's it is. http://www.tradesignum.com/ (mainly for malaysian equity though...)

attached herewith a chart showing KLCI index as at 29 June 2007. gosh, what are those red and green bar? this is what we called the "Candle stick chart". Well, basically, the green bar depict an "up" day (i.e. closing price is higher than opening price) and red is the opposite. Go to google, type in candlestick chart and read up more interesting features of candlestick charting. Trust me, it's worth it.

From the chart above, it shows that KLCI was having 4 consecutive "down" (Red) days. Painful it is. But does the chart tell you any other stories?

The art of reading financial charts is called "Technical Analysis". There are millions of books out there teaching investors how to read the chart, so they can predict the future movement of the prices. Sounds strange, isn't it? i mean, isn't that sounds like "fortune telling"?

well, as a matter of fact, it is kinda similar. Put it this way, once my "Sifu" told me that reading the chart or charting is some form of natural born talent. The same chart can be presented to two different people, and they might see different things altogether. But of course, if you read more about technical charting, you will see that in general, the future movement of prices do follow certain trends...

but why so? well, that's because market is made up of People. You and Me. and where there are people, there's EMOTION. like it or not, when it comes to investing, investors tend to be a little bit....okok, very at times, emotional. Thus alot of tools have been developed for chartist or us to discover the general trend.

For instance, one of the common tool used is Bollinger Band. Bollinger band is represented by the shaded blue area surrounding the green & red candle sticks on the upper chart. Basically, the higher the volatility in the market, the bands get wider, and vice versa. If the band has contracted, it might signify a massive jump in volatility to follow suit. From the chart above, it seems like KLCI's band is contracting, but not quite there yet...

One of my favourite tool is called RSI. Relative strength index, or more commonly known as RSI, is shown at the chart right at the bottom. Basically, what it tells is that if the line is above 70, it means that it's "overbought", i.e., time to sell. If the line falls below 30, it's "oversold", what does that mean? Time to Buy it is! simple isn't it?

From the chart, it shows that the KLCI is currently at the neutral level, which is at 50. Pretty much, it does not telling much story. But once you see it moves, it might give you some indication of "to buy or to sell"

But these are not magical tools, they merely provide you with some direction, but not absolute definite-will-happen direction or prediction. Most investors claimed that they are chartists, but few got them right. Also, one thing we should bear in mind is that technical analysis will only works well if the underlying market is very liquid. I.e. the trading of the cross currencies such as USD-EUR and USD-JPY.

Nonetheless, it's fun to learn and put this techniques into application. will share more of my thoughts for days to come.

Let's play a game now, just drop me some comments and say where will the KLCI be on 6th July based on the chart shown? i say 1370. ;)