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I am a current undergrad student studying Finance and Economics. I belong to an investment group through my college and currently hold a vice presidency in the group and previously have been the president. Our portfolio is used for educational purposes by undergraduates and for added data into... More
  • Entry And Exit Strategies: Avoiding The Pitfall Of Poor Timing

    When entering or exiting a holding timing can either give the investor a gracious boost or put the investment in the red right out of the gate. It can happen to beginning investors as well as seasoned professionals. No one can predict the future, and as such we all make timing mistakes that can cost us an investment. The goal is to buy low and sell high, but hitting this nail on the head can be more difficult than it seems.

    It happens all the time, you find what you think is a great pick, you check and double check all the fundamentals, and compare your stock against its competitors, by the time you buy in the price is not where you thought it might be, and soon it falls. You cut your losses and exit the holding, thinking somewhere you missed a number and should have invested earlier or held on longer. This can happen to anyone, and we just move past one unfortunate investment and go on to the next one.

    While no one can predict exactly how, in what time frame, and to what degree a stock will move, you can use strategies to improve your probability of entering and exiting a security in more favorable time frame. Many of these strategies involve the use of technical analysis.

    Technicals are nothing to shy away from. While the past data of a stock cannot perfectly predict how it will behave in the future, technical analysis can provide key support and resistance trends and lines that can improve your ability as an investor to understand when to buy and sell a stock. One technical chart that can improve your chances of timing correctly is the Point and Figure Chart.

    Point and Figure Charting has been around for a long time, but it is very useful in determining the location of areas of support and resistance in the movements of a security. This is only one method of determining areas of support and resistance, but once you learn to read it (you can also subscribe to services that analyze these charts for you) the charts can reveal probable areas of resistance. Point and Figure very basically maps the movement of a stock over time by switching between the drivers of supply and demand.

    Below I have constructed a mock section of a Point and Figure Chart (this does not represent performance of any stock, and similarity is purely coincidental and not intentional). The X columns represent when demand is in control, meaning that more investors or traders are buying the shares than selling them. Whereas the O columns represent the opposite. Within the first and second columns of O at a price of $46 per share the bottom. This, at a very basic level, represents an area of support. Point and Figure charts by their construction do not represent a standard flow of time, but progress from left to right when demand switches to supply upon a reversal. (Reversals are when the price moves generally 3 basis points in the opposite direction than it has been moving generally).

    52

          

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    51

      

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    50

      

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    49

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    48

    X

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    47

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    46

     

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    45

              

    44

              

    A support trend, line, or area is seen on the chart above where the price of the stock will hit a price multiple times after multiple reversals, yet is unable to remain below that price before another reversal takes place. Resistance areas are the opposite, when a column of X remains at one price, unable to surpass to the next.

    In order to use these charts for entry and exit strategies, you can look at the past to determine where major resistance and support lines and areas have been previously, as well as looking at the current year or less to date to determine the current health and movements of the demand and supply. If it appears to be headed for a support line or is in an area of support, your chances of buying at a low are improved. While looking to sell, you should look for areas of resistance to determine the maximum price that you would sell at, this also can be used to improve the probability that you will sell high.

    This is just a very, very basic look into charting in Point and Figure, and if you want to learn more there are extensive strategies and guides written on this charting all over the place. Point and Figure is not perfect by any means and cannot guarantee that you will buy low and sell high, but it can increase the probability that you might.

    While an investor can get caught up in these types of charts and forget to use healthy fundamental analysis as well, it is always important to try and use both when determining when to exit and enter a particular holding. Both technical and fundamental analysis are important on their own, the best use would come from a combination of both. Find the pulse on the company and the industry through the fundamentals and get the entire medical history through technicals such as point and figure.

    Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

    Jun 13 9:37 AM | Link | Comment!
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