MAGGIE LAKE: In the last part of this course, we looked at time horizons and, more specifically, the sort of drivers that influence broader markets across secular, cyclical, and shorter term tactical time frames. Investing is about using all the tools at your disposal to make the most informed decision possible. But remember, we, as investors, never have complete certainty in our decisions. It's all a matter of stacking the probabilities in our favor and managing risk well enough that we get to play the game many times.
In this part of our journey, we'll focus on the value of charts as a tool in everyone's framework. Using only charts to make an investment decision can be dangerous. But sometimes it's difficult to stop ourselves. Because the best and worst thing about a chart is that it tells us a lot in a short amount of time. Let me explain.
Price charts are, to all intents and purposes, a visual representation of the ideas, emotions, and positioning of millions of market participants across multiple time horizons. In a short period of time, they tell us a lot about the dominating view of market participants in a given time frame. This last point is very important and worth repeating.
Two people might be trading the same security in opposite directions, and both make money. Because of having different time horizons. Remember this, as we'll revisit it multiple times.
Charts are your best friend and worst enemy all at once. They take you a long way down the road of visualizing history, but they don't give you the whole picture, and often mislead you to think you can see into the future. Despite popular belief, charts do not predict where any security will go in the future.
Now, this is not to say that can't make money just from looking at charts. You absolutely can. And some people do. And we've interviewed some of them on Real Vision. But that takes a certain discipline and framework.
Broadly speaking, charts are an excellent starting point. But let's be clear, there is no shortcut. If you're looking to make medium to long term investments spanning months to years, then charts should only be a part of your investment case.
By all means, use charts to help you filter ideas and get up to speed on history. But don't rely on them alone, unless you are an actual chartist who only looks to find technical patterns and trade on them. If you're interested in that approach, we are building a dedicated area in the Academy portal, based on the methods of some of the best in the business, like Peter Brandt, Dave Floyd, Tom Demarc, and others.
So here's our first point. Charts are a great way to explore a thesis you're formulating or generate a brand new one altogether. Charts show how the price of an asset has evolved on different time frames and raise interesting questions you wouldn't have thought of asking without looking at the pictorial illustration of the market. They often follow patterns or ranges, all to do with how the asset has traded historically.
For example, a currency might trade in a range versus the US dollar specifically, because the host nation targets a range. It may also be that a company trades on fundamental valuations. And its share price moves between a certain high and certain low price, depending on the economy. To understand why it trades a certain way, you'll need to do more research. But the chart can kick you off by showing you the trend or range.
Let's make one thing abundantly clear, though. Unless the chart confirms your thesis, you will lose money. No matter how good your idea appears to be, ultimately, what you want is for the price to move in your direction and confirm your thesis.
Remember, a price chart is the average of the ideas and emotions of millions of investors across many time horizons. If the price is not supporting your view, that likely means that another set of investors know or see something you don't, which is currently dominating the price.
Instead of fighting the market, consider reassessing. There are tens of thousands of tradable assets out there. Why does it have to be this one?
In the previous part on market drivers, we said that often good ideas don't make money because of a wrong time horizon. Well, this is a big way that charts can help. Just remember to look at a time frame of a chart that represents the time frame of your thesis. Otherwise, you'll end up building the wrong trade. But we'll come to trade construction in a later part.
So getting to know-how your asset trades is important. But also, you must take a moment to understand the market you are in. As we said, and will continue saying, markets are not static and the game changes all the time. And so does an asset's behavior.
If we're in a recession, your asset might trade out of its historical range. If the economy shifts into an inflationary regime, which hasn't been the dominant in the past decade, you'll need to approach price action from recent years carefully. Market drivers have changed and that will likely effect the behavior of the security you're looking at.
As with every part of this journey, there'll be plenty of opportunities to learn about the value of charts and to see how these concepts are applied in practice. In the discussion, you'll hear about the role charts can play in an investor's toolbox and begin to formulate your own ideas on how you might want to use them. Then we'll hear from the professionals to gain some insight into the many different ways they use charts within their investing framework. Finally, in the workshop Roger will walk you through actionable ideas on how to begin assessing and using charts on your own. Let's dive in.