0One of the principle reasons of investing in the financial markets is to ensure that the invested capital is not blown away; profits and their quantum come in later.
This article is presented to the large numbers of freshers in the financial markets who are in the process of learning technical analysis and intend to use them eventually and those chartists analysing markets without much success. To begin with the basics, one must have a clear understanding that technical analysis does not guarantee profits although the exits or stops can be pre- defined if entries do not go as planned.
Technical analysts will agree that the edge in winning trades solely based on chart formations is steadily declining. There are many instances when a particular chart formation is in its advanced stage of being formed, but at the nth minute, it bombs. In other cases, there are chart formations like a flag or a double top clearly visible, but the market heads in the reverse direction from its projected target.
Does this indicate that trading decisions based on technical analysis are outdated and should be discarded? Not at all..... With hundreds of chartists looking at similar chart patterns, all one needs to do is to spend a little more time on analysis before taking that crucial trading call. Don’t get excited and go all guns blazing just because prices have broken out of a trading range or a couple of indicators are moving in the overbought/ oversold region.
To get the best out of charts, follow the simple steps highlighted below and avoid taking that hasty trading decision which in all likelihood will lead to potential losses.
- Charts should represent one’s trading style. An intra- day chart is normally not used to perform positional trades and vice- versa.
- Volumes play a major role in technical analysis. Therefore, any trading decision should be complemented by volumes.
- Ensure all parameters are perceived while drawing trendlines.
- Identifying supports and resistances are the key and they can be done in several ways.
- Entries should be timed ONLY after a support/ resistance is taken out.
- Beware of whipsaws or false signals; follow price and time filters.
- The trend is your friend; have faith in the proverb.
- Placing bets during an ongoing trend can be potentially risky. Identify the phase of the primary trend before every entry.
- Take a look at a few leading indicators in addition to chart patterns to confirm short- term price reversals.
Trading is serious business and it’s always sensible to remain cautious than tactless. No strategy is perfect or foolproof. Get the best from your analysis, keep emotions in check, hold your fire and anticipate a favourable outcome...more often than not.
