Why do we use monthly charts?

The reason why monthly price chart is use is because we want to filter out all unnecessary noises. Within the month, the stock market index will move north and south depending on the prevailing rumors or emotional bias at that time.

It is reasonable to expect that the haphazard movements due to whatever rumors will work itself out within the month to reflect a closing price aligned to the fundamental of the company or market.

Remember, rumours can be verified within a few days (with today’s speed of communication) but the fundamental prevails. With the monthly price chart, you can compare the price movement to the fundamental and make better investment judgments.

Let's take a look at one example, below are two charts of S&P 500 from May 97 to April2003. Can you see the difference, if we are going to draw trend lines, which of the charts below will give us more false signals.

You can also see how many times the weekly chart cuts across the middle dashed green line, which is the twenty period moving average and compared that with the monthly chart.

The way the S&P 500 moves in the weekly chart is a nightmare for any long term investors trying to figure when to start asset his allocation or protective strategies.

Now compare what I have said above to the monthly chart. Sure, you can see that if you really want to know when to really start switching your funds to money markets funds or to bond funds, using the monthly chart will give you better signals.

So, why is so many technical analyst using daily or weekly chart? Well, if you are trading instead of investing, then you will be correct to use a shorter term chart.

But we can say that the main reason is greed. They want to squeeze every penny from the stock market and as quick and as many times as possible. In other words, they want to get rich fast. Well, whoever  has this mentality and play the stock market in this manner will have reality landed on him like a ton of bricks.

How many people can trade on the short term successfully and consistently. How many of you can put in the same disciplined execution every time the daily or weekly signal occurs which will be very often if monthly charts are not used.

Lets face it, you are not here to do short term trading but to do investment trading where you are putting in more money and you want a greater chance of success in any one trade so that you can grow your investment year in year out at a above average rate of return of more than 10%. So choose a friendlier chart configuration that filters out as many false signals as possible leaving only the important ones that are more aligned with the fundamentals.

If you are dealing with your nest egg, it is better to take action to protect your investments when it matters, so how many times is it going to matters when you use daily or weekly charts, I guess many times and this is not what we want.

Therefore, we use monthly charts because there will be significantly less false signals and that major turning points are also easily identified by our system and also by the simple "trendline" method. You can appreciate this from the monthly chart of the S&P 500 above.

Don't just follow the general norm, do it differently.

When you go through the signals in this site you will find that in many cases they do work very well and although we cannot profess the strong effectiveness of the buy/sell signals, lets just say we are very happy with them.

Off course, we do not guarantee the that all signals will be correct, no one can do this. However, because monthly charts weeds out many short term false movements and the signals from monthly charts are less prone to being "whip-sawed", we therefore use them for investment trading purpose.

a

StocksWise.com welcomes your comments and proposals . All materials received are held in the strictest confidence. If you have additional questions, please e-mail us at ryys@stockswise.com