“The thing that hath been, it is that which shall be;
and that which is done, is that which shall be done;
and there is no new thing under the sun.”
___________________________________ - The Bible

Technical Analysis is commonly termed as looking for patterns which have appeared in the past and hoping that these patterns will repeat in the future. So the quite natural second sentence will be “the historical patterns do not necessarily translate into an exact picture of future performance”. So it may or may not. This is exactly why the Technical Analysts make the Weather-Man look good.

Another commonly accepted definition is “A technical analyst is somebody who looks back in history, using the recognizable patterns of past trading data to try to predict what might happen to stocks in the future”. Both those usages, “Patterns of Past” and “Predict”, are not necessarily those which defines a technical analyst. In our opinion, “What happened till now”, “Most probable scenario” and “Worst case scenario” are the ones which defines a technical analyst. He doesn’t blindly look for some strange patterns in the chart. He chooses certain aspects of a market which are tradeable and also which satisfies your logic (rather than some bizarre formations of the stock transactions data). Fits it into a disciplined trading plan and executes it without fail. He doesn’t predict the future. It is not prediction. It is all about probability.

It is as simple as that you know a vehicle is going to run as far as it has fuel in it. You can’t possibly predict how many litres of fuel is there in the big tank because there are no clear fuel gauge meters. But you still know that now that the engine is running, even if the fuel is going to finish very soon, the momentum of the vehicle is going to take it atleast for a few yards.

Welcome to the world of new Technical Analysis!

Technical analysis is not all about those patterns, indicators and formations! If you are looking for patterns and formations, you can find better ones in Electro Cardio Gram graphs or poverty charts of namibia! If the Relative Strength Index crossing 30 from the downside will get the stock going, everyone who looks at the indicator will be richer than bill gates!
Now if you are downloading data from internet through a dial-up modem, you can see the download speed vary wildly. Carefully look at the speeds. You know your maximum download speed is 6 KB/S. Minimum is 0 KB/S. You know the average speed will be around 4.5 KB/S. Now imagine it is the stock ticker and you are a very short term trader with a very small stop loss. When the speed varies wildly, try to find the buying and selling points. Exit at the predetermined stop loss level. Just note down how many times you are right and wrong. Or better, when you can perfectly find the turning points, where you catch exactly the top or bottom. I bet if you try it for 30 minutes, your strike rate will be lower than 50%!
Here, you know your average, maximum and minimum levels. But in the markets, you only know the minimum level, ie., the stock gets delisted from the exchange. The average level, which is the fair value of the stock is not available or the maximum price it can achieve. So it is even worse.
If you have a chart for the download speeds, you will be better off. Then you can see it in a visual manner and you will have a feel of support and resistance around the minimum and maximum levels for the time being. Now imagine that the download speed is hitting zero and then going up, to cross 1 KB/S, you are buying. You will sell when it hits 6 and comes down to cross 5. You have a stop loss of 0.5 KB/S. This is called a system and you are trading with the help of a chart. Now what if you have no idea about the minimum and maximum levels? You create an indicator for finding the maximum and minimum levels for the time being. You can take the previous ten minutes high, low points and calculate the difference between these points and the current speed. When this difference from current speed becomes less than 20% of the total difference between maximum and minimum levels, you have a trade either way. Here the ten minutes high, low points become crucial. But how can you say if it is 10 minutes or five minutes? You do this for a long time and optimize for a better time period. This is how RSI is normally 14 period. It is optimized after testing in several markets.
So how valid is this? It is just as good as looking at the download speeds and trading without any further information. The indicator is only an approximate guideline with an optimized time period. It doesn't necessarily take into account what is controlling the downloading speeds. It just hopes that the speed will go up when it comes near the ten minutes low.
What about patterns? It is not the cuteness of the shape that gets us the money. If the chart displays a "head and shoulders" pattern, it doesn't necessarily mean that the market is going to sink immediately after. The "head and shoulders" pattern is generally a distribution pattern. It informs us that the big people are selling the stock. If it appears at the bottom of a chart, what does it mean? Is it that the big money is taking losses? It never happens, because they are the 5% taking money from the hands of the remaining 95%. So the patterns show a particular behaviour of the people involved in the market. But it has to be validated with other means. Otherwise it just has the shape of the poverty charts of Namibia!

In these articles, we have tried to pass on whatever we have gained all through these years. This is a humble effort to make things a little bit better for those who are new to this field.

Here we have tried to answer some questions which have been asked by a lot of people in the past. They have been answered too in several ways through books, articles, magazines and softwares. Here are some of those questions: -

How people always lose in the market in the long run?
Why you can't find a man who has made money in stock market?
Everything is manipulated, so how can any rational technique be useful?
Why do I lose even if I follow the advise of some renowned traders?


I hope you will get some kind of answers for these questions after reading through these articles. There is no such thing as easy money. You have to work hard to earn it.

You can access these articles from :-

Technical Analysis Course

Keep track of my recommendations at :-

Previous Trades

Keep reading and keep posting, good luck,
SAJITH KUMAR M.


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