Microscopes, Telescopes and Satellites (1)

WALL STREET SMARTS, THE BLOG, IS NOW WALL STREET SMARTS, THE BOOK.  FULLY EDITED AND REVISED WITH NEW MATERIAL ON AMAZON

All three of the tools listed in the title are used to look at things, but each is used for a specific purpose.  Microscopes enable us to focus on objects invisible to the naked eye.  Telescopes enable us to view view things several miles away in sharp detail.  Satellites orbiting hundreds of miles in the atmosphere provide us clear pictures of the earth's surface and weather patterns affecting it.  Each instrument is used to view objects at different distances.  Like most tools, if not used correctly, they are of little help.  I would like to analogize them to tools used in the market for making investments.  In my analogy, we are concerned with time, not distance.  Once again, if not used correctly, problems can occur with market tools.  

 Bradbury K. Thurlow discussed  investment time frames in his book, Rediscovering the Wheel: Contrary Thinking & Investment Strategy. 

Technical analysis, like its grandparent the Dow Theory, rests on the assumption that stock prices move in well-defined trends, up or down, and that these are of three kinds, short, intermediate and long, according to how long they last and how far they carry.  For historians, a fourth kind is labeled secular, running presumably back to the garden of Eden.*

(Author's emphasis in bold)

An individual relying on technical analysis looks at the detailed movement of a stock, much like a scientist might look through a microscope at a specimen slide.  Based on hourly, daily or weekly price movement, the technical speculator or day trader plots a stock's future direction and invests based on that probable price movement.  The day trader may not care what the stock did six months ago or what it might do six months from now.  This type of speculator is only concerned with making a quick profit in the next few hours or days.  But this can create a problem.  As Al Frank pointed out in his book, Al Frank's New Prudent Speculator, the shorter the time period being examined, the more likely the movement will be random.  Investing based on random movement is about as close to coin tossing as one can get.

Justin Mamis wrote about short term trading in his 1994 book, When to Sell -- Inside Strategies for Stock-Market Profits as follows:

Just as long-term investors pooh-pooh market swings as not affecting them, short term traders exaggerate the significance of every little twitch, convinced that looking at the market through a microscope will disclose its secrets.  This need has been intensified by what seems, to such traders, to be the almost magical solution -- that is, computers.  Nowadays, you can actually put those twitches up on the screen like a dentist scrutinizing an X-ray: this "molar" is healthy, but look, over here, three downticks in a row in your "lower left bicuspid."  These tick by tick, or moment-to-moment charts have all the appearance of reality, and can, indeed, be "read" the same way as a daily or weekly chart...so the trader believes in them far beyond their usefulness.  They cause over-trading, and all losses lead from that.  They create a belief that one knows what one is doing, when it is really the noise of the trading floor and trading rooms around the country that one is staring at. (This criticism/warning is of course not only valid for charts of options, futures and stocks themselves but also for indicators, especially those oscillator types that ring "signal" bells all day long and then again overnight.)**

 (Author's emphasis in bold)

We will continue looking at investing time frames in the next blog.
 
* Excerpt from Rediscovering the Wheel: Contrary Thinking & Investment Strategy, Bradbury K. Thurlow, copyright ©1981, published by Fraser Publishing Company, is used by permission of the current copyright holder.

**Excerpt from When To Sell - Inside Strategies for Stock-Market Profits, Justin Mamis, copyright ©1994, published by Fraser Publishing Company, is used by permission of the publisher and Mr. Mamis.

Comments are always welcome.