This month in STOCKS & COMMODITIES, we cover topics ranging from mutual funds to intraday trading. For the mutual fund crowd, we have an article from Jay Kaeppel, director of research at Essex Trading Co. Kaeppel has always been one of my favorite authors because of his professional commitment toward research. Before Kaeppel sits down to trade, he has a system in place. First, he takes an idea, sets it to rules, and then backtests on historical data. Only at that point does Kaeppel make a determination as to whether the system should be used with real money. Let this be a lesson to all new traders!
As the article title suggests, Kaeppel details a mutual fund trading method in "A System For Trading Fidelity Select Funds." The method times mutual funds on a weekly basis, and he has created a set of rules and performs a backtest on close to 10 years' worth of data.
Many of you are looking for a shorter-term time frame. To that end, we have an article by Ned Gandevani titled "Identifying Crucial Support And Resistance Levels." Here, Gandevani uses a classic chartist's approach to monitoring price levels -- once support is broken, it can become resistance, and vice versa. But he takes it a step further and shows how the concept can be applied in various time frames to identify important levels. While this article leans more toward the art of technical analysis, with no backtesting to support the procedures, it does give you insight into the value of working with trading methods based strictly on price and aren't so dependent on indicators.
Please don't brand me a heretic for mentioning the art of chart reading. Over the years, technological advances have put a great deal of power into the technical trader's hands for research. And it's understandable that someone looking at a chart could find the information unfathomable by simple observation and decide to move on in search of the perfect oscillator or filter. After all, indicators and filters can help automate the process of chart interpretation and can generate signals. But you shouldn't avoid learning the basics of technical analysis, such as Dow theory, Wyckoff techniques, or even what a top or bottom looks like on a chart. There's a reason that these methods have been around for such a long time.
Charts give us a true picture of the demand and supply forces at work, which are what truly determine price. As we study our charts, we can often observe trends, but the day-to-day movement can get us twisted around at times. We may think the latest price action is the beginning of a trend reversal when it's simply some countertrend movement. Moreover, it's difficult to quantify chart patterns. Consequently, many new traders quickly move onto learning about indicators and forsake basic chart analysis. I want to stress that it's time well spent to learn about chart reading. New technology provides terrific assistance, but beware of jumping over the foundations of technical analysis.
And speaking of technology, we've added a new resource, a section we call "Websites For Traders." Each month, we'll publish a listing of Websites that we feel would be useful to you. For starters, we'll cover technical analysis and charting sites or focus on the charting areas of larger financial sites. From there, we'll rotate through other areas of interest. This is just one more step we're taking toward becoming your best resource for trading and technical analysis. Good trading!