Many a mortal men have been fascinated by the world of stock markets and most of them have failed. A common notion is that “Technical Analysis” is a vast ocean of knowledge which holds a ‘Holy Grail’ to get rich. In the pursuit of finding the holy grail , traders study umpteen concepts, indicators , strategies etc and finally when it doesn’t work, they write off Technical Analysis as a hoax. Some failed traders say that Technical Analysis is to Trading as Astrology is to Science. To understand where most of us go wrong, we have to understand what exactly is Technical Analysis.
Technical Analysis is the methodology employed to evaluate securities and attempt to forecast their future movement by analyzing statistics gathered from trading activity, such as price movement and volume. This is as defined by www.investopedia.com
The basic definition involves the use of the following important words :
- Attempt to forecast
- Price Movement and Volume
When we say , it is an attempt to forecast the future movement of any security , we have to bear in mind that it is not a scientifically proven law like the Newton’s law of Universal Gravitation. It revolves around the use of statistical and graphical tools to find a high probability trade to earn profit. Here choosing a high probability trade is the key. If you trade compulsively on every other script that comes across on the screen then it is Gambling and not Trading. To explain it in easier words, consider two people : Mr. A and Mr. B.
- Mr.A is a wise, strong-headed person who knows when to say No and takes calculated risks.
- Mr.B is silly , gullible person who can’t says Yes for everything and lives life in a carefree manner. He commits mistakes and may or may not learn from them.
It is understood that Mr.A will make better life and business decisions because he assesses every situation from a Risk-Reward point of view. He only jumps into an opportunity when he knows that the chances of winning are higher than losing and in spite of that even if he loses , he can bear the loss or the defeat.
On the other hand, Mr.B makes careless decisions. Says yes to every opportunity because it sounds exciting to him and bets all his money on that one opportunity because he ‘feels‘ that it will hit a jackpot. He has no clue that this opportunity might bankrupt him.
Similarly , trading has to be performed with the mindset of Mr.A. We have to wait for the perfect opportunity. Our minds have to be trained to reject mediocre trading opportunities. A major tool that can ensure a long term , sustainable and a profitable trading career is a focused and controlled mind.
Moving on to the point of Price and Volume , unfortunately , most of the new traders make buying or selling decisions based on news , tips , indicators etc. and suffer badly. News and tips have never made anyone rich and indicators are derived from price and give late signals. They try to catch a running bus and hurt themselves.
Below is an example of State Bank of India with 50 and 200 EMA plotted on it. It shows how these moving average crossovers give a late buying and selling signal.
The above example can represent most of the indicators.
To catch the best possibility trades at the right time , we must only follow Price and support it with Volume.
Following are the concepts that we will cover in the upcoming posts:
- Trend Analysis
- Japanese Candlesticks
- Demand and Supply zones
- Support and Resistances
- Fibonacci Retracement
Along with these topics we will use Exponential Moving Averages to support our analysis using Price Action.