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Chart Game
It's easy to think you will make great investing decisions.
You don't really know what you'll actually do until you get punched in the mouth.
Let's play a game. Look at the chart below, and comment what percentage drop you think is shown.
Do you think you'd be tempted to cut your loses after that dip? (just based on the visual, without knowing how deep it was).
No idea what the percentage drop is, but technical analysis can help set your expectations on what you can expect if a drop does happen from your buy point.
I've marked it up.
In this case, it would've been easy for us to hold because the likely support line was never breached. If we'd bought this stock at that buy point, we'd already be setting our expectation that the stock could drop to that level and we'd calculate our position size accordingly (so we don't risk more than 1.5% of our total investment capital on a single individual stock position).
Although TA identifies levels where potential buying support can kick in, it's obviously not a guarantee. The value that it adds is it helps set your expectation of how deep a stock could drop from current levels. One of the behavioural risks facing a long-term investor is abandoning a stock just because its price has dropped deeper than expectations. So the key is to calibrate those expectations accordingly. This is where TA can help (cue the outrage from the FA purists! ha ha ha).
@jazziyoung That was super helpful! Thanks for annotating the chart— that really helps visualize where support might be.
Did you pick that spot because it is the most recent low? Or / and because there are two spots on the chart where it dropped to that level and rebounded?
Now that I look at your markup, it makes a lot of sense. I'm still getting used to technical analysis myself. Like you said it's helpful to help calibrate expectations.
Thanks a lot for the thoughtful answer!
@nathanworden It's the point of rebound. The stock price fell to that level and it became the point where seller pressure exhausted and buyers stepped in to push the stock price higher. Buyers obviously found value at this level and these levels can become sticky.
@jazziyoung I intend to post a whole lot of material on this for those interested. I've just been distracted going through another important piece of published research I'll be posting a deep dive commentary on (it's epic).
Roughly 47%
I used a ruler
@nathanworden I can kinda tell now looking back at the chart it wouldn't be that much 😂 need to check up on my math.. was fun to try though!
i noticed this is a penny stock, my guess would be around ~20%
Interesting take because, on the one hand, we all have emotional and neurotic reactions (investment psychology). Depending on your personality type, a visual stimulus like a chart may affect you more than looking at numbers on a screen. I think journaling and becoming aware of how you react differently is essential.
If the story is intact and the fundamentals are still good, and there's a slight hiccup, perhaps a minor earnings miss, I revert to my valuation model and future expectations. It helps to avoid knee-jerk reactions to price action and reaffirm the long-term story and projections.
@buyingyourtime This is very sound advice! Love it— very good reminder that investing based on a price chart is speculation, so to let the ups and downs of a price chart throw you.... that's just speculation and emotion sneaking in. Great point.
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