The Nature of Risk
As applied to the stock market, the admonition to buy low and sell high is easy to understand but inordinately difficult to follow. In THE NATURE OF RISK, Justin Mamis, a prominent market technician, explores the psychology that makes successful investing difficult and offers guidance to serious long-term investors wishing to improve their odds.
Mamis explores various degrees and kinds of risk, from the outright foolhardy to the rational, calculated variety based on disciplined, logical method. Using analogies to sports and art, he suggests that investment risks are no greater than others, if the risk taker understands the activity. Although he recognizes that no method is foolproof, a carefully thought-out method can increase chances of winning.
The method he proposes requires analysis of charts of individual stocks and the market as a whole. Mamis believes that fluctuations of individual stocks and the market as a whole are explained by the behavior of market professionals who determine values. Through illustrative charts, he shows how the pattern of a stock’s price over a period of months gives a buy signal. In addition to a stock’s daily closing price, his method requires attention to intraday price range and sales volume. Although the process of compiling charts is demanding, the data are accessible; and Mamis would say that only disciplined individuals should attempt market investing.
Sell signals after profit are triggered not by the chart of individual stocks but by broad market moves, since in a general decline almost all stocks move down. For the individual investor, Mamis describes an oscillator that gives an indication of market momentum over a ten-day period. Its important components are the daily advance/decline ratios, the Dow Jones industrial Average, and the totals of new highs and lows. While it does not guarantee profits, his approach does offer a method that enables investors to remove emotion from investing.