Ask Colin

If profit comes from price movement, should a technical analyst look for volatile shares?

If profit comesfrom price movement, should a technical analyst look for volatile shares?

I think that you will recognise that losses also come from volatility. Nevertheless, what you say is basically correct - we will make the most money from stocks that move in price rather than ones that are sluggish.

Different stocks have different characters. We should always look at a long-term chart to see whether a stock normally displays enough price movement to give us the profits we are hoping to make. Of course, sluggish stocks can always come to life with new management, or if they discover something, and this too should be watched out for.

In very broad terms, the larger a company, the slower its price movement in percentage terms. This only makes sense - large companies cannot grow their business consistently by large percentages - eg could BHP double its size in a year or so except by takeover?

However, smaller companies tend to be able to grow much more in a short time and frequently double or triple in price in a year or so. They can also fall back again just as fast. Also, it does not follow that the smaller the company the bigger the possible growth. There seems to be a sort of threshold level below which a really small company does not have enough size to make a meaningful move.

In finding the best companies, volatility and size are only very crude aspects of a much richer picture. We have to consider industry and management in particular. There is no simple answer.

However, I have found some of the most consistent results come from second rank industrial companies that have sound businesses and management. Situations where they have had temporary problems or where they work their way into growth opportunities bring the best results.