Inroduction to the Technical Analysis
In my last two write-ups I had written about how to identify a good business and tried to show that trading could be a very good ‘business’ and also that most of us fail in it because we do not stick to the basics of the game. Now I will give a brief on some practical steps to help you all understand the initial basic rules. Please note that even though they are real life learnings to me, for you they still will be ‘theories’ and you need to try them in your actual trading before they become your second nature. The sooner you start following them in letter and spirit, the sooner you would stop losing money and as a result will start making it.
Please also note that trading is different from investing in so much as the time you hold any financial instrument is much lesser when you trade compared to investing and in my view investment can have more dependence on the ‘fundamental analysis’ whereas trading is done mostly with the help of the ‘technical analysis. You cannot afford to avoid either of them in either of the activities and a good mix produces the maximum results.
As a successful trader we cannot avoid the fundamental analysis altogether which many people advise to do and to put it simply, it gives you the overall direction of an underlying share/currency pair etc. but you can capture the movements well only through the help of the charts which gives you the entry and exit levels. A successful trader only does two good things- 1. Enters a trade at a ‘good’ level and 2. Exits a trade at another ‘good’ level. These good levels will be different for different people entirely depending upon the ‘time frame’ with which one enters into a trade. This time frame is not an arbitrary number but will emerge from a well thought off ‘trading policy’ (to be made even before the start of the trading business). The ‘Trading Policy’ is a written (and NOT only in the respective minds) game plan prepared by an expert with the ‘goal’ to be achieved considering the overall risk appetite of a particular person/ company. Measuring or assessing the ‘risk appetite’ is another tough task and there are various factors that help decide it. I would not go into the details now but would advise all those who want to trade, to decide on a number (in INR if in India) that you are willing to lose in order to make much more money. This number should be small enough to help you survive to trade the next day/ week/month/year but also large enough to keep you dedicated to the task of making money from the ‘thin air’(?). This ‘number’ will be your overall ‘stop loss’ and if you hit this number for the time frame you have chosen for yourself, you would quit trading till the time the ‘time frame’ continues. For example If you had kept Rs 10 lakh as your YEARLY stop loss and you lose this amount in say 7 months only, you would not trade for the next 5 months. The potential to make money is limited by this stop loss amount and my experience in the area says that with Rs. 10 lakh as your stop you can make between Rs. 20 to Rs. 40 lakh in a year. With profits in one’s kitty, one can start taking higher risks to make even more money but again, the new ‘game rules’ must be defined beforehand and should be well documented.
What you do in trading is to identify a ‘trend’ and go with it and buy or sell a financial instrument and reverse the same when you see the trend changing. You identify the trend with the various indicators on your chart along with the price change and the volumes. The indicators could be either the ‘leading’ ones or the ‘lagging’ ones (please google). Trading happens to be a mind game (remember greed, fear and hope?) and it is for you or your coach to decide what indicators suit you more depending upon your emotional built up. In the beginning it is for you to try all of them one by one and find out what works for you. It is not as difficult as it sounds but you really need to be mindful and keep checking and time testing your findings.
There is a lot of material available on the subject on the net and before I post my next write up would request you all to get yourself acquainted with the various types of charts, viz, line, bar and candlesticks and also with the simple indicators like Moving Averages, Fibonacci levels, RSI, MACD, etc. Please avoid the complex ones as of now. In my view the simple ones work the most. Also get yourself familiar with the terms like, support and resistance levels, trend lines,etc.
Like all other areas, learning the technical analysis and trading is a continuous exercise and there is no full-proof method to trade. We make money by remaining with the majority (not in terms of the number of people but the volumes) and make money. Two quotes to end today:
1. It’s better to be wrong and be with people than to be right and be alone.
2. What does not destroy me, makes me stronger.