Ask Colin

I am interested in learning about Technical Analysis with the view to using it to trade shares. If you were starting out to learn technical analysis, which method would you adopt?

In trying to answer you, I have one difficulty in that I am in the business of teaching investing, so I need to be careful to give you a disinterested answer if I can. However, you need to read whatever I say in that context.

The very first question is should you tackle share trading at all. You seem to have decided it is worth doing. However, let me tell you that it is not an easy game. There are lots of people out there offering seminars and so forth who are telling people what they want to hear rather than the reality. The reality is that it is a tough game and that 9 out of 10 people lose badly and give up. It takes those who succeed 5 to 10 years to learn to be successful. There is mounting research evidence to back up the empirical observation that the more frequently one trades the more difficult it becomes to succeed because the transaction costs and slippage destroy your results. So, please keep in mind that you might be better employed "investing actively" than trading and using the time to make money in your own business or whatever.

The next question is how to learn technical analysis and in this respect you have to appreciate that technical analysis is only a part of trading. Later, you will need to learn money management and psychology too. Over 200 ATAA members and over 1000 SIA students did the subject E114 in 2000. Those numbers were up on the year before and they keep growing as the quality of the subject and its value for money spreads by word of mouth. I think this is the way to go. However, bear in mind that I was the Principal Lecturer and that I designed and wrote the subject. I was also paid to oversee keeping it up to date and develop the assessments as well as lecturing in Sydney. So, you need to ask ATAA members who have done the subject for their opinion, rather than rely on me when I am clearly not disinterested.

Next you need some charting software and a data supplier. I use Insight Trader software (www.insighttrader.com.au) and get my data from Vestdata (www.vestdata.com.au). I recommend them because they do a good job for me. I have no financial interest in either of these businesses. The proprietor of Insight Trading, Bernard Chapman has become a very good friend over many years. I recommend him as a very sensible person to also give you advice in the general area you are asking me about. Best is to phone him in working hours on 02 4751 2932.

Finally, you need to develop a trading plan. It needs to suit you and to a large extent you need to make the journey of developing it. However, you can learn from those of us who have gone before. Dr Alexander Elder is in my opinion the best teacher of short term trading in the world. I have known him for a long time, he is afriend and I have taught at this trading camps over the years. His book The New Trading for a Living is a suberb place to start.

I would comment on one other thing - your stated intention to start with shares and move to options and futures. Unless you are trading shares with a lot of borrowed money, there is a big difference in the risk in trading shares compared to options and futures. The leverage in options and futures is enormous and the scope for huge losses comes with the scope for huge gains. Options is a mug's game. Generally the only game worth playing in options is writing options against a long-term portfolio to tweak up the return from the fact that 90% of options expire worthless. Other than that, it is the market makers who coin the profits. Futures are different, but it is highly stressful, difficult, full-time work. Be sure that you really want such an occupation - it is usually done by young people who burn out young too.

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