Just a quick post to say thanks for the link love to my new buddy Julius. I’m so glad that you like my ‘chaotic charts and graphs’ and use of technical analysis. [/sarcasm] I don’t have the energy to go into the argument of technical analysis vs. fundamental analysis but I’ll just say that investors would do well to combine the two. The shorter term you get the less fundamentals matter. What you see on my blog is very short term oriented, thus the heavy technical analysis. There are a million and one ways to make money in the markets and people have to use what works for them and what they’re comfortable with.
As for Julius’ comments about exponential moving averages I’ll just say this: huh? I don’t know where he got all that mumbo jumbo about derivatives, calculus and future data, but I’m pretty sure that’s wrong. The things he does get right are that EMAs are just another type of MA (hence the name), and that all MAs are lagging indicators. The fact that simple MAs lag so much are the very reason that people came up with EMAs — they wanted less lag/faster lines. All EMAs do is weight the latest data heavier than the older data. Perhaps the EMA formula is calculus but it looks more like algebra to me:
EMA(current) = ( (Price(current) – EMA(prev) ) x Multiplier) + EMA(prev)
Anyway, all they’re used for is to better identify the trend by smoothing out the fluctuations of the actual stock price. (I actually prefer simple moving averages but since the Multiple Moving Average methodology uses EMAs I became somewhat of a convert.) What looks like a cluttered mess to Julius looks crystal clear to me. True, I wish I could control the colors of each EMA on those StockCharts graphs, but I can’t. If I could there would only be two colors shown — one for the short-term averages and one for the long-term averages. I think that cuts down a lot on the ‘clutter’. (Here’s an example of how my real charts look — the ones on my desktop software )
As for his last comment:
This is why, in my opinion, you’ll be a more informed investor by reading the Economist then you will be by going blind staring at these kind of graphs all day everyday. It’s the idea that stock prices aren’t determined by their stock history, but rather by the psychology of investors, the company itself, earning reports, the economy, the weather, the government, exchange rates, geography, employees, and six billion other factors known as world consumers. (Imagine what it might look like if you could find a way to gather and present all of that data clearly and in an informative way.
Technical analysts would argue that stock charts, even the uncluttered ones that just show the price of the chart do display all those six billion factors in a clear and informative way.
Seems to me you could go blind trying to read the Economist from cover-to-cover every week (or whenever). That is some SMALL print! lol…
And talk about clutter if you are simply trying to come up with daily buy/sell opinions…
Mike – Good on you !!! The Economist is probably one of the worst publications you could read to base investment decisions on. Add to that the UK Financial Times. I agree a combination of Technical and Fundamental is the only way forward. Combining a fundamental fair value with technical support, resistance lines will help you become a happy trader. The calculation for an EMA is nothing to do with calculus. If Calculus was applied you would then be looking at the slope of these moving average – which in itself can be a very powerful indicator. In a way the MACD is a derivative of this. – Happy trading – love your blog on gaps at opens and candles – that was new thing I learnt that day….