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| Technical analysis (Photo credit: Wikipedia) |
Financial IQ Philippines Quick Hit(s):
How do you buy stocks? Is it based on rumors? Or do you buy based on fundamentals, technical, or both? Or do you follow the herd?
This brings me to the technique used by one of the legendary market traders of all time, Richard Wyckoff.
Wyckoff, in his study of the market, took close notice of the difference and changing nature of the market. Out of his study, he found out that market changes are the result of actions led by speculative activity, price actions within the market, and the need for investment value.
He came out with what he called “10 vital traits” of these different market actions and used them as a step-by-step selection criteria and decision model to trade (or buy and sell) stocks.
“The 10 traits were split among three groups or categories.” These are the “corporate related (based on trends of the fundamentals), industry related (based on trends of business in general), and technical related (based on technical swings in the market.”
Thus, like in the foregoing example, his model will first address which of the market’s group category is ruling over its movement. He will test them with the “vital traits” that has to appear in some determined sequence before making a decision and course of action.
His method is as well the combination of fundamental and technical analysis. Thus, his stock selection and trading method is governed by the following five evaluation steps: The first is to “determine the present position and probable future trend of the market; second, select those stocks that are in harmony with the market—in a bull market stronger, in a bear market weaker, using the idea of relative strength; third, select those stocks that have built a cause for a potential move in keeping with one’s goals.”
“Fourth, use point and figure charts to determine how far the stock is likely to move. Determine the stock’s readiness to move and then analyze the standard price and Point and Figure charts with the help of the 10 buying and selling tests.”
Fifth, guide your decisions and course of actions with the generally applicable technical laws that govern all market behavior and direction.
With his methods, Wyckoff became wealthy “that he eventually owned nine and a half acres and a mansion next door to the General Motor’s Industrialist, Alfred Sloan Estate, in Great Neck, New York (Hamptons).”
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