InvestorQ : I am trying to get a hang of trading based on technical charts but find it quite confusing. Can you throw some light on how I can focus on a handful of technical charts and help make profits?
rhea Babu made post

I am trying to get a hang of trading based on technical charts but find it quite confusing. Can you throw some light on how I can focus on a handful of technical charts and help make profits?

4 years ago

The subject of technicals is quite elaborate and it is hard to cover in one answer. But I will try and focus on a handful of very basic and very powerful indicators in technical charts that can help you get a good foothold of the stock markets. The first rule of trading is that you must always be your own chartist and do your own chart patterns to trade. That is the best way on your road to profitable trading.

What is the most enduring image that you have of a trader in the stock markets or in any other markets like commodities or forex? It is of a trader sitting in front of complex screens and trying to identify complex trends in the market to trade opportunities. Such traders work on a body of knowledge called technical analysis. It is not just a study of charts but a study of underlying trends in the market, the message of the market and the breakouts in the market. Technicals are not a perfect science but it is largely based on interpretation of trends. Different traders can interpret the same trend differently but there are some set rules on which such interpretation is based. That is what technical indicators are all about.

Technical analysis forms the basis for most traders and even for investors it does form the basis on which the entry and exit is timed. Most of the smart investors, even after spending hours delving into cash flows and balance sheets; do use technical indicators to time their entry and exit for that extra bit of alpha. The whole story becomes a lot simpler when we look at technical analysis as an adjunct to the investment decision process rather than an alternative decision process. Let us look at in detail at how to use technical analysis to trade stocks?

Technical charts capture the collective intelligence on stocks through simple and elegant graphs. Then these graphs can be sliced to identify critical trends and turnaround signals. While there are countless of indicators with different levels of complexity like Dow Theory, Gann trading etc here are 4 such technical indicators to apply on a regular basis…

How to use moving averages effectively to trade in the markets?

Moving averages, as the name suggests, are dynamic unlike static prices. These moving averages form one of the basic pillars technical charting for trading. Moving averages make it easy for a trader to identify trading opportunities within the overall direction of the market. There is an underlying trend and then there are sub-ideas called trading opportunities. The moving averaging is a typical average where the data point keeps skipping and calculating. Popular moving averages are the 50 DMA, 100 DMA and the 200 DMA. Normally, moving average charts are plotted along with actual price charts to get signals on trading. The moving averages are very useful in identifying the supports and resistance levels of the stock. Normally, supports and resistances are created when the stock chart keeps consistently hitting around the 200 DMA or when the price chart decisively breaks above or below such moving average lines.

How to use Relative Strength Index (RSI) as an Oscillator for trading in the market?

The Relative Strength Index (RSI) is also called an oscillator as it helps you identify range within with the stock price will oscillate. There will be an upper end to the normal range and a lower end to the normal range. Normally stocks that are overbought tend to become a classic case for either selling or shorting while stocks that are oversold become candidates for buying at lower levels. RSI answers the critical question of entry and exit. The RSI is plotted on a scale of 0-100. An RSI level of 100 indicates that the stock is extremely overbought while a level of 0 indicates that the stock is extremely oversold. Remember that 100 and 0 are theoretical levels and not exactly practical levels. The RSI for most stocks ranges between 30 and 70. Stocks are considered to be oversold around the RSI of 30 while stocks are considered to be overbought around the RSI level of 70. That is the benchmark that traders can use to trade the market.

Going one step further on oscillators through stochastic

Like the RSI, the stochastic are also an oscillator, in the sense that they also give indications of when a stock is overbought and when it is oversold. Relatively, the Stochastics is more reliable and affirmative of these zones compared to RSI and is used more often by professional traders. Stochastics interpretation is slightly more complex than RSI and hence it is used more by professional traders only. The RSI does not look for a double confirmation before identifying overbought and oversold zones. The Stochastics goes one step ahead and also identifies %K line and the %D line and uses a crossover to identify the oversold levels with much greater conviction and empirical success rate. When traders need to commit bigger money on a trend, they use stochastic charts rather than plain vanilla RSI.

Studying divergence for breakouts through Moving Average Convergence Divergence (MACD)

The MACD is referred to as the king of technical indicators since it encompasses moving average and also oscillators. MACD not only identifies the overbought and oversold zones in the chart but also identifies the right levels of entry and exit. MACD is flexible as it can be used in range-bound markets as well as in trending markets. This is the process flow. You first recognize the lines in relation to the zero line which identify an upward or downward bias in the stock price. Secondly, you try and identify the cross over or cross under of the red line and the blue line to get the appropriate trading signal.


Dinesh C Nagpal answered.
3 years ago

There are several technical studies, Focus on 1 max 2 and go into the complete depth and then use them. Follow the process and do exactly what the signals say and not your biased mindset.

Do not try to overdo several studies as each has it own timing and specifications. If you look for signals from all then you will never get a proper trade set up. In fact you will end up losing a lot of money totally confused.

I use Harmonics and Ichimoku for my trading. I have some decent knowledge on other studies but I do not let those interpretations impact my judgement. I do only what I am able to interpret from these 2 studies and respect the stop loss while trailing towards my target