Could you trade on graph trends and nothing else?

While there is no doubt that share price graphs have their place in the decision-making process, is it possible or sensible to trade purely and simply on graph trends? Could you make money by detaching yourself from the underlying fundamentals and listening to what the markets have to say and nothing else? This is an interesting tactic which many people use for short-term gains and one we will look at below.

Trends change

Very often it will depend upon your risk profile but the emergence of say for example a “double top” pattern may look like a totally different trend in its early days. Before you know where you are, the share price has moved and looking back at the graph it was “obvious” it was a double top formation. There is no risk-free way to invest money, the markets will not deliver returns without effort but learning to read what the markets are saying is a vital skill.

Could you trade on graph trends and nothing else?
Could you trade on graph trends and nothing else?

In hindsight…

Have you ever looked back at a share price graph and thought to yourself, “that was a no-brainer, I should have invested”, with the benefit of hindsight? That is the problem with share price graphs, without taking some degree of risk everything looks clearer with hindsight. You will also notice that when it trend is changing many people wait until the “certainty” of the change in trend has been confirmed. This could see you missing out on a large chunk of the potential return even if at the time it was not certain the trend had change.

Fundamentals can spoil the party

If a share price is racing ahead and you expect a consolidation at some point it is very tempting to sit back and wait. The company may have excellent prospects but we all know that nothing goes up in a straight line. There are very few investors who have not thought this way and then kicked themselves because the share price just kept on going up and up. It may be a takeover, new contract or some other positive development where the fundamentals take over and can ruin the merging graph trends.

How many times have you invested in a company which is a potential takeover target only to see the share price fall back when the company announces the trend killing quote “we know of no reason for the share price rise”. Remember, whatever the share price is telling you, fundamentals and official announcements can get in the way. Rumours have a habit of growing arms and legs in the investment markets – often ignoring reality.

Graphs are just one part of the jigsaw

You need to take the fundamentals, rumours, counter rumours, news, research and speculation into account and then match this against the share price graph. Are the majority of these elements suggesting a rise or fall in a share price? Does the share price trend reflect what the news and speculation might be indicating?

By all means, use share price trends as one of the pieces of the jigsaw but using fundamentals alone, and ignoring the share price graph, or dealing purely on the share price graph, and ignoring the fundamentals, is high risk. At some point you will get caught out!

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