The personality of a stock

Just like humans, stocks sometimes seem to develop their own personalities.  By studying a stock’s behavior, you can often find repeating patterns.  These patterns put together over different points in time can be considered the personality of the stock.  Some stocks are trending, others volatile.  And just as you cannot capture everything about a person with a few of their personality traits, it is also impossible to completely predict a stock’s behavior from a chart.  There are outside factors that will still affect it; however, you can look for ways to generally predict its behavior.  

In general, we expect people to hold true to their personalities.  We expect that the way they reacted in the past will give us an idea of how they will respond in the future, unless there has been a huge outside influence.  By the same token, investors expect that the past market patterns will be similar in the future.  Without patterns, the study of charts would yield no useable information.

Using both discretionary and mechanical strategies

When you compare discretionary and mechanical trading, many people think they are completely opposite strategies.  Discretionary trading is based on the judgment of the investor in real time, while mechanical trading is based on a set system of money management, entries, and exits.  However, both strategies are trying to capture market patterns.  If you are able to do both – have a feel for the market and be able to identify patterns – then you have a much higher likelihood of making good investment choices.  Having historical information makes it much easier for investors to make on-the-spot trading decisions.

To understand the market’s personality, people have watched the patterns and systems for years, testing them and refining them.  While patterns will not explain every aspect of the market’s personality, when used consistently, they can be helpful in assisting you in choosing winners.  For instance, in a bull market, the investors that bought market weakness nearly always did better than the investor that bought market strength. There a ton of newsletters and advisories, providing you with additional insight and research. 

A quantitative evaluation can help you make your own decisions.  Knowing patterns will help you invest smarter.  You will be able to recognize how a stock will likely act in its predicted personality – such as breaking through or dropping below certain resistance points – and thus, you can make informed judgment calls that are more likely to be profitable.