Share Market Toolbox
For a number of reasons the share market is like an elephant. Here is why...(and this is one of Brainy's Share Market GEMs)
The share market is like an elephant?
The share market (actually, perhaps the financial markets in general), and an elephant, have the following characteristics in common:
The behaviour of an elephant is very similar to that of the share market:
By thinking of the market in this way, it is easier to see why we should study multiple time frames in the market, and when the market is moving strongly in one direction it might be unwise to try to argue with the market. In comparative terms, we are like an ant compared to the elephant. Some people lovingly refer to the financial markets as "Mister Market".
There are three key points to remember, as follows.
1) Zoom out to see the "bigger picture"
It is very useful to understand what is happening in the "bigger picture". So when studying a price chart of a stock, or index (or even any financial instrument), always zoom the chart out to see a much bigger time period. It can be surprising what is actually happening in the bigger time period.
2) Multiple time frames
It doesn't matter whether we use a trend-following (trend trading) strategy, or one of many other strategies, it is useful to know what sort of trend might be applicable to our selected instrument or stock. And, it can be very useful to know what trend might be in place in a larger time frame as well as the relatively shorter time frame.
Many short-term (day) traders typically study price behaviour in two time frames - perhaps a 5-minute and a 30-minute time frame, or a 30-minute and 2-hour time frame. Longer-term traders and investors can do well to look at both daily price charts, and weekly charts, and to make sure their study includes a chart of many, many months to see where the price has come from.
If we don't study both large and small time frames,
3) Mister Market is always right
It is important to remember that even though ten brokers and analysts might give potentially different price valuations for any one stock, at the end of the day the only true and correct price valuation today is today's market price. That is the price at which the majority of actual market participants are prepared to buy or sell the stock. Any theoretical price valuation is simply not relevant.
If you hold BHP shares, for example, and you believe that BHP is worth $40, and you want to hold onto the stock until someone is prepared to buy it from you at $40, then you might be waiting a long time. If the market continues to trade it at $30 to $35, then you won't be able to convince the market that it is really worth $40. This is one person's opinion. The reason that share prices move is because there are so many participants in the market who all have different opinions about what a stock is worth. (Note: the share price figures used here for BHP were first written here in 2012. BHP's share price did trade above $40 in 2008, then crashed, then above $40 again in early 2011, then fell progressively to below $35 for many months, then below $30 in 2015. See the price chart below for the sad details.)
At the end of the day, the Mister Market is right. There is no point trying to argue with the market. It would be like standing in front of a stampeding herd of elephants.
Weekly price chart of
BHP over 10 years from 2007-2017
More informationFor more details on this topic, see the list of references above right...
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