Technical analysis
• Technical analysis
• Introduction
• Types of charts
• Candlesticks
• Candle sticks patterns
• Multiple candlestick Patterns
• Trading – get started
• Trading view
• Support & resistance
• Volume trading
• News and Events
• Moving averages
• Indicators
• Fibonacci Retracements
• Notes
The Charting Software
We’ve learned a lot about Technical Analysis during the last chapters. If you’ve read through all of the chapters and understand what’s discussed, you’re almost ready to start trading with Technical Analysis. This chapter’s goal is to get you started by finding technical trading opportunities.
Please keep in mind that the recommendations in this chapter found in my trading expertise.
To begin, you will require chart visualisation software, also known as ‘Charting Software.’ The charting programme allows you to examine and evaluate various stock charts. Needless to say, charting software is a must-have for every technical analyst.
There is various charting software program available. ‘Metastock’ and ‘Amibroker’ are the two most popular. The majority of technical analysts employ one of the two charting software packages. Needless to mention, these paid applications, and you must obtain a software license before utilizing them.
You may utilize a few free charting tools online, which are available on Yahoo Finance, Google Finance, and pretty much all business media websites. However, if you want to be a technical analyst, you should invest in good charting software.
Consider the charting software to be a DVD player; once installed, you will still need to rent DVDs to view movies. Similarly, once you’ve installed charting software, you’ll still need to give it data in order to see the charts. The required data feed provides by the data vendors.
There are numerous data suppliers in India who provide data feeds. I would recommend that you search the internet for reputable vendors. You must notify the data vendor of your charting software, and he will provide you with data feeds in a format compatible with your charting software. Of course, the data feeds are not free.
When you sign up with a data vendor, he will first provide you with all of the historical data, after which you will need to update the data from his server on a regular basis in order to stay current.
According to my experience, purchasing the current version of a reputable charting software (Metastock or Amibroker) can cost you somewhere between Rs.25,000/- and Rs.30,000/-. Add an additional Rs.15,000/- to Rs.25,000/- for data feeds. Of course, while the software costs only once, the expense of data feeds is recurring every year. Please keep in mind that previous versions of the charting software may be substantially less expensive.
If you don’t want to spend so much money on charting software and data feeds, there is another option. And that would be Zerodha’s Pi.
As you may be aware, Zerodha has its own trading terminal known as ‘Pi.’ Pi can help you in a variety of ways; I’d like to highlight a few of them in the context of Technical Analysis:
It is bundles:- Pi is a charts programme and a data feed package rolled into one.
Great Visualization:-Pi helps you visualize charts across multiple time frames, including intraday charts.
Advanced Feature:-Pi offers advanced charting capabilities, as well as 80 built-in technical indicators and more than 30 sketching tools.
Scripting your strategy:-Pi features a scripting language that can practice to code technological strategies and backtest them on historical data. Please keep in mind that we will soon be adding a module on developing trading strategies and scripts to Varsity.
Easy opportunity recognition:-The Raspberry Pi contains a pattern recognition feature that allows you to draw a screen pattern. After you’ve drawn, tell Pi to scout for that pattern across the market, and it’ll do it for you.
Trade form PI:- Pi also allows you to trade directly from the chart (a huge plus point for a technical trader)
Data dump:– Because Pi has a large historical data dump (over 50,000 candles), backtesting your technique will be more efficient.
Your personal trading assistant:-Pi’s ‘Expert Advisor’ brings you up to date on the trends emerging in live markets.
Super Advanced feature:- Pi equip with Artificial Intelligence and Genetic Algorithms. These are optimization tools that assist you in optimizing your trading algorithms.
It is free:– Zerodha is providing it at no cost to all of its active traders.
The list is lengthy, ranging from basic to advanced functions. I strongly advise you to try Pi before investing on a charting package and data feed bundle.
Which timeframe to choose
We talked about ‘Timeframes.’ I’d like you to go over it again to refresh your memory.
One of the most perplexing issues for a beginner technical analyst is deciding on a timeframe to scan for trading possibilities. There are other timeframes to choose from, including 1 minute, 5 minutes, 10 minutes, 15 minutes, EOD, Weekly, Monthly, and Yearly. It is very easy to become perplexed about this.
The higher the timeframe, as a rule of thumb, the more dependable the trading indication. A ‘Bullish Engulfing’ pattern on the 15-minute timeframe, for example, is significantly more trustworthy than one on the 5-minute timeframe. Keeping this in mind, one must select a timeframe dependent on the length of the deal.
So, how do you determine the length of your trade?
I recommend avoiding day trading if you are new to trading or are not a seasoned trader. Begin with trades that can hold for a few days. This refers to as ‘Positional Trading’ or ‘Swing Trading.’ An avid swing trader will often hold his trading position for a few days. A swing trader’s best lookback period is 6 months to a year.
A scalper, on the other hand, is an experienced day trader who often uses a 1 minute or 5 minute period.
When you’re comfortable holding deals for several days, go on to ‘Day Trading.’ My guess is that your shift from positional to day trading will take some time. Needless to say, the changeover period is far shorter for a determined and disciplined trader.
Lookback period
The number of candles you want to see before making a trading choice is simply the look back period. A lookback time of three months, for example, means you’re looking at today’s candle against the backdrop of at least the previous three months’ data. This will help you establish a perspective on today’s price action in relation to the previous three months’ price action.
What is the ideal look back period for swing trading opportunities? In my experience, a swing trader should search for at least 6 months to a year of data. Similarly, a scalper should look at the last 5 days of data.
When plotting the S&R levels, however, you need lengthen the look back period to at least 2 years.
The opportunity universe
The Bombay Stock Exchange (BSE) has over 6000 listed stocks and the National Stock Exchange (NSE) has approximately 2000 listed stocks (NSE). Does it make sense for you to scour these thousands of stocks every day for opportunities? Clearly not. You must choose a portfolio of equities that you are comfortable trading over time. This group of stocks would be your “Opportunity Universe.” You search your opportunity universe every day for trade chances.
Here are some tips for choosing equities to develop your opportunity universe:
- Ascertain if the stock has adequate liquidity. Examining the bid-ask spread is one technique to ensure enough liquidity. The wider the spread, the less liquid the stock.
- You might also have’minimum volume criteria.’ For example, you can only evaluate stocks with a daily volume of at least 500000.
- Check that the stock is in the ‘EQ’ category. This is mostly due to the fact that equities in the ‘EQ’ segment can be day traded. I agree, I discouraged day trading for a beginner, but if you started a positional trade and the target encounters the same day, there is no damage in closing the position intraday.
- This is a bit tough, however make sure the stock is not driven by the operator. Unfortunately, no measurable mechanism exists to detect operator-driven stocks. This comes from personal experience.
If you are having difficulty finding stocks that meet the criteria outlined above, I recommend sticking to the Nifty 50 or the Sensex 30. These are all known as index stocks. The exchanges carefully choose index stocks; this procedure guarantees that they meet several criteria, including those indicated above.
For both swing traders and scalpers, keeping the Nifty 50 as your opportunity universe is definitely a good idea.
The scout
Let us now look at how one should go about selecting equities for trading. In other words, we will strive to identify a procedure that will allow us to search for trading chances. The method is best suited for swing traders.
We have finally determined the four most important factors-
- I suggest using Zerodha’s Pi charting programme.
- Data at the end of the day
- Opportunity Nifty 50 stocks – Universe
- Positional transactions with the option to square off intraday if the target encounters on the same day.
- Look back period – 6 months to a year While charting the S&R level, increase to 2 years.
After I’ve addressed these critical practical issues, I’ll disclose my trade opportunity scanning process. I’ve separated the procedure into two parts:
Part 1 The shortlisting process
I examine the chart of all of the equities in my opportunity universe.
When I look at the chart, I simply pay attention to the last three or four candles.
When I check the last three candles, I search for any discernible candlestick pattern.
If I come across an intriguing pattern, I mark it down for further examination and continue the scouting process. I always double-check all 50 charts.
Part 2 The evolution process
At this point, I usually have 4-5 shortlisted companies (of of the 50 stocks in my opportunity universe) that have a discernible candlestick pattern. I then proceed to thoroughly evaluate these 4-5 charts. I usually spend 15 to 20 minutes on each chart. When I look at the shortlisted chart, I do the following:
- I generally consider how strong the pattern is; I’m particularly interested in determining whether I need to be more adaptable.For example, if a Bullish Marubuzo has a shadow, I consider the length of the shadow in relation to the range.
- Following that, I examine the ‘previous trend.’ The preceding trend for all bullish formations should be a downtrend, while the prior trend for all bearish patterns should be an upswing. I do pay close attention to previous trends.
- If everything appears to be in order (i.e., I have recognised an identifiable pattern with a well-defined prior trend), I proceed to analyse the chart further.
- Following that, I examine the volumes. The volume must be equal to or greater than the 10-day average volume.
- If both the candlestick pattern and the volume confirm, I check the support (for a long trade) and resistance (for a short trade) levels.
- The S&R level should (as much as feasible) coincide with the trade’s stoploss (as defined by the candlestick pattern)
- If the S&R level is more than 4% away from the stoploss, I stop studying the chart and move on to the next one.
- I then search for Dow patterns, notably double and triple top and bottom formations, flag formations, and the probability of a range breakout.
- Needless to add, I also establish the trend in the primary and secondary markets.
- If steps 1 through 5 are satisfactory, I calculate the risk to benefit ratio (RRR)
- To compute RRR, I first define the target by graphing the support or resistance level.
- The RRR should be at least 1.5.
- Finally, I check the MACD and RSI indicators to see if they confirm, and if I have extra money, I raise my trade size.
Typically, only one or two of the 4-5 nominated equities will qualify for a trade. There are days when no trade possibilities exist. Making the decision not to trade is a significant trading decision in and of itself. Keep in mind that this is a highly strict checklist; if a stock confirms the checklist, my conviction to trade is very high.
I’ve said it many times in this module, and I’ll say it again: once you place a trade, do nothing until your objective encounters or your stoploss is trigger. Of course, you can trail your stop-loss, which is a good idea. Otherwise, do nothing if your trade meets the checklist, and keep in mind that the deal is very limited, so your chances of success are high. So staying put with conviction makes sense.
The Scalper
A scalper is a concentrated trader with a keen sense of price. To make trading judgments, he uses specific charts such as 1 minute and 5-minute timeframes. A successful scalper executes numerous such deals throughout the day. His goal is straightforward: a huge quantity deal that he intends to hold for a few minutes. He aims to profit on minor fluctuations in the stock. Remember the checklist we mentioned, but don’t anticipate all of the checklist requirements to fulfill because the transaction time is relatively short.
If you want to be a scalper, here are some guidelines:
- Remember the checklist we mentioned, but don’t anticipate all of the checklist requirements to fulfill because the transaction time is relatively short.
- If I had to choose just one or two items from the scalping checklist, it would be candlestick pattern and volume.
- While scalping, a risk-reward ratio of even 0.5 to 0.75 is acceptable.
- Scalping should only done with liquid equities.
- Have an effective risk management strategy in place, and be quick to book a loss if necessary.
- Keep an eye on the bid-ask spread to see how volumes are developing.
- Keep an eye on worldwide markets; for example, a decrease in the Hang Seng (Hong Kong stock exchange) generally leads to a drop in local markets.
- Choose a low-cost broker to keep your spending under control.
- Use margins wisely and avoid overleveraging.
- Use dependable intraday charting software.
- Stop trading and go away from your terminal if you suspect the day is going wrong.
Scalping is a day trading practise that needs mental fortitude and a machine-like mentality. A successful scalper enjoys volatility and is unconcern with market movements.
Conclusion
- If you wan to be a technical trader, you should invest in good charting software. Zerodha’s Pi is my favourite.
- Choose the EOD chart for both day and swing trading.
- If you enjoy scalping the markets, look at intraday charts.
- For swing trading, the lookback period should be at least 6 months to 1 year.
- To begin with, the Nifty 50 is a fantastic opportunity universe.
- The opportunity scanning process can divide into two stages.
- Part 1 entails scanning the charts of all the stocks in the opportunity universe and shortlisting those that show a recognizable candlestick pattern.
- Part 2 is investigating the shortlisted charts to see if they meet the checklist.
- Scalping recommend for experienced swing traders