Decoding Technical Analysis for Traders & Investors.


6 min read
Decoding Technical Analysis for Traders & Investors.

If you are reading this article then it is a 90% chance that either you are a regular investor/trader or willing to become a regular investor/trader, the best part is, in both cases, you are going to be benefited reading this 5 mins article.

Most of the people who are new to the stock market assume that the stock market is the place where you put your money at ‘Highest Risk’, It’s wrong.

Let me explain why?

In an amusement park, you have a variety of rides available for you. One is thrilling and scary like roller-coaster or Condor, some of them are moderate thrilling but not that much scary and the third would be easy like Balloon Race or Caterpillar. But the risk factor is associated with all three rides. It’s YOU to decide which ride you would like to opt for, nobody forces you do choose one.

So, while standing outside the park if I say “Amusement park is always a risky place” then, in my opinion, I am right but in reality, it isn’t true.

Just like this, we have Stock Market where you find three categories of stocks:

  1. Low Risk (Bluechip Stocks/LargeCap Stocks)
  2. Moderate Risk (MidCap Stocks)
  3. High Risk (SmallCap Stocks)

So, either you are a regular investor/trader or newbie, the ultimate goal would be to make profits. If you just google it, “How to make profits in the stock market”, then probably you will get millions of websites explaining the gazillions of concepts. I am not saying those concepts aren’t effective or won’t work, I am simply trying to wrap-up some of the effective worldwide acceptable strategies that will definitely help you to make profitable trades used by millions of traders across the world.

Selecting stocks that can give you considerable returns in a tough task for solving these mysteries we need to perform two kinds of analysis. Fundamental and Technical.

Analysis of financial markets is either fundamental or technical. Fundamental analysis focuses on financial statements in assessing the condition of a company’s ratios, margins, growth potential, historical numbers, debt, etc and in predicting its future performance to find out the fair value of the stock.

Technical analysis focuses on a stock’s historical price pattern, as portrayed on charts, to predict future price movements. You must have seen people staring at charts on multiple screens at a time, They actually perform technical analysis.

There is a common misconception that Technical Analysis is only for short term traders, that’s not true. You can use Technical Analysis for intraday, Swing trades or long term investment. Fundamental Analysis simply tells you ‘What to Buy’ and Technical Analysis simply tells you ‘When to Buy’.

Today we will focus on Technical Analysis discuss some effective strategies:

Technical analysis is a method used by traders to forecast future price movements of stocks by analysing past trading activity. Chart patterns and statistical numbers are used extensively by technical analysts. Technical analysts believe that the fundamental elements of a stock’s value are already represented in the stock price. They also believe that stock prices move in identifiable trends over a period of time which is true in most of the cases.

Strategy 1: Commodity Channel Index (CCI)

In 1980 Donald Lambert featured Commodity Channel Index (CCI) in Commodities magazine. The Commodity Channel Index (CCI) is a versatile indicator that can be used to identify a new trend or warn of extreme conditions. The Interesting thing was, Lambert originally developed CCI to identify cyclical turns in commodities, but later people identified that CCI indicator can be successfully applied to indices, ETFs, stocks, and other securities.

The majority of CCI movement occurs between -100 and +100. A move that exceeds this range shows unusual strength or weakness that can foreshadow an extended move. Think of these levels as bullish or bearish filters. so we can say Technically,

  • CCI favors bulls when positive.
  • CCI favors bears when negative.

It is not simple Identifying overbought and oversold levels or BULLISH or BEARISH can be tricky with the Commodity Channel Index (CCI).

So, how can we use CCI in our trading activities?

The CCI typically oscillates above and below a zero line. Normal oscillations will occur within the range of +100 and -100. So as highlighted above, CCI can be used in two ways:

1) For determining Overbought/Oversold situations.
2) For determining Bullish Bearish Divergences

Overbought/Oversold

A move above +100 is for a bullish signal A move below -100 is for a bearish signal

Divergence

i) A bullish divergence can be confirmed with a break above zero in CCI. ii) A bearish divergence can be confirmed with a break below zero in CCI.

stockcharts

Strategy 2: MACD (Moving Average Convergence/Divergence)

The Moving Average Convergence/Divergence indicator is a momentum oscillator primarily used to trade trends. Although it is an oscillator, it is not typically used to identify overbought or oversold conditions. It appears on the chart as two lines that oscillate without boundaries. The crossover of the two lines gives trading signals similar to a two moving average system.

https://upstox.com/open-demat-account/?f=HANP

The signal line is a 9-day EMA of the MACD line. As a moving average of the indicator, it trails the MACD and makes it easier to spot MACD turns. A bullish crossover occurs when the MACD turns up and crosses above the signal line. A bearish crossover occurs when the MACD turns down and crosses below the signal line.

3) Death and Golden Cross:

Death Cross: This is the combination of two moving averages. It is used when a shorter-time frame moving average crosses over a higher-time-frame moving average, indicating a trend reversal in favor of the bears. This pattern as a bearish indicator.

Golden Cross: This is the opposite of the death cross. When the short-term moving average of a stock or index moves above the long-term moving average. This pattern as a bullish indicator.

Here I am using 25 Day moving average and 100 days moving average.

you can exit the strategy anytime putting a stop loss of 5%.
Whenever stock goes down 5% you can exit.

Possible upside: no limit
Possible downside: 10–15% (5% with stop loss).

If you are a long term investor then use 50 Day moving average and 200 days moving average.

The best part of Death cross is, It will make you EXIT the stock before stock actually crashes.

Ex- Death cross warned investors when NCC was trading at 100 Rs.

Learn complete Technical Analysis in 15 days here



Important: Not just these three but you can also use Relative Strength Index (14), Stochastic %K (14, 3, 3), Awesome Oscillator, Stochastic RSI Fast (3, 3, 14, 14) , Williams Percent Range (14), Bull Bear Power, Ultimate Oscillator (7, 14, 28), Exponential Moving Average (5) etc.

  • Use Demat account which provides these indicators. Ex- Upstox
  • Use strict ‘Stock Loss’ to exit the trade on time.
  • Make definite targets and exit once you have achieved it.

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A few days back I had conducted a Webinar on 'Technical Analysis'.
Here is the recording:

Akshay Seth
Linkedin
akshay.equity@gmail.com

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