Monday, December 6, 2010

My Attempt At Technical Analysis

I've been waiting for over a month or so to see how this stock turned out, before I wrote a blog post about it. A while ago, I decided to try my hand at trading on some basic technical analysis. I had read about support and resistance and printed off a few stock charts. After drawing support and resistance lines on the charts, I decided to try and trade IMG.TO (IAMGOLD Corporation) to see if I could make some capital gains based on my chart. The following is a screenshot of IMG.TO over the past six months from the time of this writing, as well as my support and resistance lines drawn in. I've also marked where I bought (blue arrow) and sold (red arrow) the stock.

My figuring at the time point where the blue arrow is, was that this stock price had been bouncing off its resistance for a while now (the middle green line), and was coming up again for another try. I read that if a price breaks its resistance, that level will often become the new support level for the price, and the price will shoot upwards. I figured that if I were lucky and hopped on board right when it broke resistance, it might shoot up. If I were even luckier, it might shoot up past its longer-term resistance (top green line) and who knows how much higher. Obviously I had some unhealthy expectations for this stock.

So I bought the stock at the blue arrow on the chart. I bought twice as much as I meant to, because first I placed a limit order. Since I wasn't patient enough for the price to hit my limit order, I canceled the order and placed a market order. Then the price reached my limit order (which I thought I had canceled), and I mistakenly bought twice the number of shares that I had meant to. I suppose that counts as another one of my mistakes to post about on this blog. In any case, I held on to see what would happen.

Unrelated to stock trading, it turned out that I needed the money I was trading with. For reasons why, see my post about investing while unemployed. The price dipped a little, and when it went back to where I had bought it, I figured I would stop while I was at break-even (including commission fees), and sell the shares, since I needed the money. I've made some mistakes in investing so far, but I know not to trade with money I can't afford to lose. So I sold the shares at the red arrow.

I still paid attention to the stock, to see if it turned out that I was right with my basic technical analysis predication based on support and resistance. As of December 6th, the stock has gone down quite a bit (as you can see from the chart) compared to where I bought shares. Through pure luck of pulling out when I did, I missed out on the big plunge. Had I held on, I probably would have fallen for the same mistake I had suffered once already.

I've decided not to trade on the basis of technical analysis from now on for two reasons: it's not an exact science, and it does not fit with my dividend growth investing strategy. I've heard statistics saying that a significant percentage of day traders lose money overall, and their trading is largely based on technical analysis. I haven't labeled this post as a mistake or a success, as it was neither. It was simply another step in my journey of learning about investing in the stock market, and I've shared the results in this blog post.

No comments:

Post a Comment