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Trade According to Numbers, Not Noise

By is an investor supposed to wade through all the noise in order to make decisions they can feel comfortable with?


It may be because of the Internet, or it may be because of discount brokerage firms. It may even be because of the mass media or a combination of them all, but regardless of the culprit one thing is for sure.

Investors are inundated today more than ever before with financial opinions, outlooks and ideas. While the access to information and low cost of trading has opened up the world of investing to millions, this same information can also easily cloud your judgment and have you running to and fro, always a step behind.

With so much information floating around and many educated and convincing opinions; how is an investor supposed to wade through all the noise in order to make decisions they can feel comfortable with?

I feel very strongly that one of the best ways to do this is to dig deep into the individual stock action taking place, which will always tell you exactly what is happening and what you should do. It doesn't mean you have to start becoming an expert in technical analysis or start understanding complex algorithms, but it does mean that understanding what a chart is saying in basic terms may help an individual to gain a better understanding and find some clarity.

Stock charts represent a picture of what traders are really doing and so often it is these footprints one can follow to gain a better understanding of where a stock is going.

Take, for example, a CEO that continues to relay just how good business is and the exciting things ahead, while the stock chart continues to notch a series of lower lows and lower highs, while volume picks up on the down days and dries up on the up days.

More than likely, regardless of what the CEO is saying, the major shareholders, be it institutions or others, are clearly thinking differently.

While the CEO may be optimistic, if the buyers are not, the stock may have a tough time gaining any traction because at the end of the day it remains a supply and demand equation.

On the flip side, consider an industry or sector that may be going through some very tough times with no clear end in sight; however the stock charts of the underlying companies start to turn higher after a long decline.

Regardless of how poor the business may look in the near future, someone with sizable capital is stepping in to scoop up shares. Do they know something we don't? Do we care? Not really, as the chart is talking, telling us what exactly the investors are doing, rather than some publication or financial pundit.

Take the normal noise and increase it by two or three times when we face extreme uncertainty. It isn't that there is actually more noise, it is that there are more ears and therefore those who have the opportunity to discuss their views do so with a bigger microphone.

Lately, you can read just about anything from complex arguments regarding the end of the U.S. financial system to opinions surrounding the global super economy and the incredible opportunities presenting themselves. On a day when the market drops 200 points, obviously those with the former view take center stage, while those with the later view arrive on scene when the market posts a gain. When trading is as volatile as it has been of late, it is enough to make a person's head spin.

I am also of the camp that it is no longer enough to simply glance only at the major averages as our guide however one must drill down and remain focused on the individual charts of interest. At present the S&P 500 continues to say be on guard as the financial markets may come crashing down, while Intel (INTC) continues to stair step higher from its 2006 bottom and Berkshire Hathaway (BRK-A) continues consolidating at all time highs. Sure there are always anomalies however if you aren't looking for them, how will you find them? A trader remaining focused only on the S&P may overlook these stocks completely.

I have found that my best trading comes when I shut out all outside noise and listen only to the charts. Currently, many individual names are saying good things, while others are struggling. It is this mix that is creating the volatility and choppiness as money moves from one area to another. I continue to watch each and every day for stocks that strike my eye. If and when I take a position in them, I continue to let the chart be my guide going forward until I am either stopped out, or a warning signal flashes, telling me it's time to book my gains.

Rather than adhere to the Wall Street noise or the opinions that are running rampant through the financial media, take a deep long look at the individual stocks to get a better sense of what they are saying. Are they echoing other's opinions or are they saying something different? Make this exercise a habit and you just might be surprised how well your trading improves.

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