3 ways to use price charts to make money in

Philippine Daily Inquirer

03:27 AM September 7th, 2016

Question: I often hear the terms resistance and support from my broker
whenever I ask for advice on when to buy or sell a stock. Sometimes, I also
hear funny names like hammer and morning star. Is this some kind of a Holy
Grail in trading stocks? How reliable is this?Jennifer Rodriguez by e-mail
A: Stock prices are reflection of market emotions determined by demand and
supply. When there is more demand than supply for a particular stock, share
price tends to increase while when there are more sellers than buyers, share
price tends to fall.
The factors influencing the demand and supply can be rational and irrational.
The market may be buying or selling a particular stock based on a rational
belief that it is fundamentally undervalued or overvalued, but it can also be
irrational sometimes when it is motivated by extreme greed or fear.
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When irrationality happens, this is where the market presents a trading

opportunity. As soon as market players recognize this, share prices will
correct by itself and may signal a new direction based on the prevailing
market sentiment.
Analyzing price patterns in stock charts assume that what happened in the
past can happen again in the future. The price patterns reflect how the
market feels about the future of a stock.
Whether it is positive or negative, regardless of the fundamental position of a
stock, the majority view of the market determines the general trend of the
share price. Here are five ways you can use price charts to trade profitably in
the stock market:
1.

Identifying shifts in price trends

In charting, trend lines are essential in identifying whether a stock is on

upward or downward trend. Trend lines are drawn by connecting two or more
historical price points and extending that into the future. For as long as the
stock moves along the line, the trend remains intact.
These trend lines also serve as support and resistance. If a stock is on
uptrend, the line holding the price points is called support while if the stock
is on downtrend, the trend line above it is called resistance.
When a stock breaks resistance or support, a shift in trend can be expected.
The change in trend signals change in demand and supply for a stock. Such
change can be a minor or major correction.
The PSE Index has broken an upward trend line support recently. The shift in
trend can be a minor correction that can bring the index down to its historical
support at 7,500.
2. Identifying changes in trading volumes to confirm price trends

Trading volume can reveal significant information about a price movement. A

rising stock that is not supported by rising volume may mean that the
uptrend may not last. In the same way, when a declining stock is not
supported by rising volume, it may mean that the decline is weak and the
stock should be able to recover soon.
The stock price of Calata (CAL) recently spiked by 28 percent from P2.77 to
P3.55 on news that the company is partnering with a foreign company to set
up REIT in the country. The surge in stock price was equally supported by
spike in volume trading. Share price continued to go up the following day
supported by higher trading volume. When the stock corrected, volume also
followed.
Whether this project will push through or not, the bullish share price
movement of CAL is valid because the trading volume confirms that there is
conviction behind such move.
3. Identifying market overreactions through price gaps

Market psychology suggests that investors tend to overreact to unexpected

news or announcements that affect movement of the stock. One sign of
market overreaction is when a stock creates a sharp move at market opening
resulting to a price gap. Gaps happen where there is a newsworthy event
overnight affecting the stock that has not yet been discounted by the
market.
Philweb (WEB) shares made a price gap recently to open at P13.20 from its
previous close of P14.25 after news have circulated overnight that the
gaming regulator would not be renewing the companys expired franchised
license anymore.
The gap represented strong selling pressure which sent the stock price to as
low as P3.02 in few days. Traders started picking up the stock in the days
that followed and made quick profits when the stock rallied by over 100
percent from the bottom. The temporary recovery was pure market emotions
and has nothing to do with fundamentals.
No Holy Grail
Success in using price charting needs discipline and commitment. You need
to monitor price action daily to spot potential price patterns for trading
opportunities. Timely trading that captures early buying or selling signals is
key to succeed in price charting.
You dont need to trade at all time. Trade only when there is a good
opportunity. Always consider your time horizon when you invest. If you
intend to trade for short-term gain and your strategy failed, try to have the
discipline to cut your losses unless you really intend to make it your longterm investment.
Trading can be source of excitement to some people. But be aware that
frequent trading in general always lead to losses. This is because of the
trading costs that can accumulate over time.
There are hundreds of patterns and charting techniques that are available in
the market but you only need to master a handful of them that can fit your
investing style. If you feel that you find your techniques no longer effective

or need to improve your skills, you can always research and learn from
experienced traders.
Henry Ong is registered financial planner of RFP Philippines. Stock data and
tools are provided by First Metro Securities. To learn more about stock
valuation and analysis, attend the 9th Accredited Financial Analyst (AFA)
program on Sept. 10-Oct 15. To register, e-mail info@rfp.ph or text
<name><e-mail> <AFA> at 0917-9689774.