Technical Analysis

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 Technical Analysis




1.1 – Overview

we now know that developing a well researched point of view is critical for stock market success. A good point of view should have a directional view and should also include information such as:

1. Price at which one should buy and sell stocks

2. Risk involved

3. Expected reward

4. Expected holding period


1.2 – Technical Analysis, what is it?

Technical Analysis is a research technique to identify trading opportunities in market based on the actions of market participants. The actions of markets participants can be visualized by means of a stock chart. Over time, patterns are formed within these charts and each pattern conveys a certain message. The job of a technical analyst is to identify these patterns and develop a point of view.


1.3 – Setting expectations

Often market participants approach technical analysis as a quick and easy way to make a windfall gain in the markets.If you approach TA as a quick and easy way to make money in markets, trading catastrophe is bound to happen. When a trading debacle happens, more often than not the blame is on technical analysis and not on the trader’s inability to efficiently apply Technical Analysis to markets. Hence before you start delving deeper into technical analysis it is important to set expectations on what can and cannot be achieved with technical analysis.

1. Trades – TA is best used to identify short term trades. Do not use TA to identify long term investment opportunities. Long term investment opportunities are best identified using fundamental analysis. Also, If you are a fundamental analyst, use TA to calibrate the entry and exit points

2. Return per trade – TA based trades are usually short term in nature. Do not expect huge returns within a short duration of time. The trick with being successful with TA is to identify frequent short term trading opportunities which can give you small but consistent profits.

3. Holding Period – Trades based on technical analysis can last anywhere between few minutes and few weeks, and usually not beyond that. We will explore this aspect when we discuss the topic on timeframes.

4. Risk – Often traders initiate a trade for a certain reason, however in case of an adverse movement in the stock, the trade starts making a loss. Usually in such situations, traders hold on to their loss making trade with a hope they can recover the loss. Remember, TA based trades are short term, in case the trade goes sour, do remember to cut the losses and move on to identify another opportunity.


Key takeaways from this chapter


1. Technical Analysis is a popular method to develop a point of view on markets. Besides, TA also helps in identifying entry and exit points

2. Technical Analysis visualizes the actions of market participants in the form of stock charts

3. Patterns are formed within the charts and these patterns help a trader identify trading opportunities

4. TA works best when we keep a few core assumptions in perspective

5. TA is used best to identify short terms trades

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