The Hindu Business Line : P&F: Profits and fun

In the world of technical analysis, line chart connects a series of closing prices to display the price history of a share; bar chart shows the trading range — open, high and low — in addition to the closing price; and the candlestick chart highlights patterns by colouring the rectangle formed by the high and the low. The best of all technical analysis methods, though, is point-and-figure, write Heinrich Weber and Kermit Zieg in The Complete Guide to Point and Figure Charting, from Vision Books (www.visionbooksindia.com).

Reasons for the superiority of `P&F' are many, one learns. Foremost advantage is that point-and-figure is easy to understand, say the authors. "No maths skills, prior market knowledge or special tools are required." Second, it focuses on price movements, rather than err due to `timeline-induced distortions'.

To draw P&F charts you'd need `a pencil and eraser, graph paper, daily high-low prices for each stock or contract to be plotted, and an understanding of a few simple rules.'

The basic premise of this technique is that the laws of supply and demand govern the price of a security or commodity, explain the authors. In sum, the laws are: when supply exceeds demand, price falls, denoted by `long column of Os'; when demand exceeds supply, price rises, and this is shown by a long column of Xs; `when supply and demand are contesting for supremacy, the price moves sideways', and this is evident from `short alternating columns of Xs and Os'. P&F chart `extracts the essence of the battle for equilibrium between supply and demand'.

The book has chapters on chart interpretation, trading applications, optimisation techniques, and profitability analysis. To those who wonder if `p&f charting really works' the authors answer in the affirmative. "We really pay for the fun as much as for the money," they reason. Profitability does matter; but, `we need to be involved in the decision-making process if we are truly to enjoy the excitement of the game,' as P&F allows you to!

"We must feel that we are personally analysing the data, making a decision, and then entering the order. If the trade is a success, we take the credit for superior judgment and this makes the game worthwhile. If the trade turns sour, the whippy market is our scapegoat... " Instead, if you use a sophisticated trading system, as `programmed by another person', you can take no part of the credit, say Weber and Zieg.

An invitation to profitable fun.

OATS `pretty darn quick'!

The markets are a bundle of products and processes. Gain a grasp of both these in After the Trade is Made, by David M. Weiss (www.landmarkonthenet.com). The book, a revised third edition, is aimed at securities industry professionals and also individual investors. "It takes you step by step through the entire process of buying or selling a security, from the front office where the account executive receives the order, the middle office where the order is routed to be executed and operations functions begin, the back office where customer and street-side settlement occurs, to the books and records of the firm."

Operation process begins after the trade is made. A chapter titled `Te trade-processing system' begins by describing a sophisticated order management system, thus: "When orders enter the system, either from stockbrokers or from clients themselves, they pass through a series of validations before the order is permitted to go to the point of execution." Using security master database, which has information such as the security's symbol and last price, orders are verified for `symbol accuracy and then, in the case of a limit order, the price is verified against the last sale of the security to ensure that an order for the wrong security is not being entered.' There can be country variations to the processes, owing to `idiosyncrasies of the products and the marketplace'. While some processes may be state of the art, others have a long way to go, concedes the book.

A comprehensive glossary at the end of the book will educate you on many words and phrases. Such as: `all or none' is `an instruction to fill all of the order or none of the order over a preset time period'; BSE is Boston Stock Exchange; OATS is order audit trail system; and PDQ is `pretty darn quick' - `the night-time settlement process employed by DTCC (the Depository Trust and Clearing Corporation) on the evening of T+2'. T+, as you know, refers to the settlement cycle. TBA, which may look like yet another TLA (three-letter acronym), is explained as `to be announced'. A must-read for those who play the trading game.

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