Day 2: Sometimes you gotta look back into the past.

Yeah, so according to my Day 1 blog, I was supposed to be learning Technical Analysis, which I did. Hurray to me for not being as lazy as I had expected myself to be.

So I did go through my study material, and it basically gave me an introduction to what exactly Technical Analysis is. Lemme put that here before I forget it.

Technical analysis basically means predicting future prices by seeing how past prices moved.

In simple terms, it’s like how the prices of fruits change according to the change in seasons. If you notice, mangos are fairly priced during the summer, but by the time summer almost ends, the prices go up. So now you know that this would be the same case next year too. You know you have to buy mangos mid-summer, stock them up at the lower prices and if you’re quite ambitious enough, sell them post-summer at a higher price and buy yourself a good reservation at those overpriced cafes.

Speaking of a trading example similar to the mango example :

When a company announces the commencement of a project and states the date of completion, investors or traders keep a constant watch. If things look good and progressive, they become keen on buying stocks on the completion of that project.

Now moving forward to what else I learnt.

Technical analysis only focuses on the prices. It does not usually consider the fundamentals of the company.

Analysts only look at the price, any past situation where the same price has occurred, what happened after that price and apply the same philosophy for the current price.

It’s used to analyse a group of stocks of various companies, eliminate those with less profit, round down to 3–4 companies and start trading.

Trading only happens according to the trend. Once a trend is established, technicians assume that the same trend will repeat itself. One can analyse trends using candlestick charts.

Support and resistance are used to understand how high and low a stock might go at a time. Let’s see an example using the picture below :

That green line shows that a stock only goes down until that particular limit and bounces back. It’s the vice versa for the Resistance line.

You can actually draw support and resistance lines to an ongoing stock to predict how low it could drop or how high it could rise.

Disclaimer

These work in most cases; you might have to keep yourself updated with the financial news of that company to ensure there’s no sudden spike or dip. Don’t blame me later.

Checking if the volume chart has risen or dropped is also to be considered.

It’s basically 80% emotions of the traders and 20% of logic. Like the way a trader reacts to a particular news and buys/sells his stocks is how the stock market works 80% of the time. Sometimes the news might not have y made a significant change in the price, but it was the way people reacted that ultimately matters.

Yupp, that’s what I learnt today. Honestly, reading all that felt like someone giving me advice on what technical analysis is and not exactly on how I could use it. That’s why I needed external help. And yesss, I did come up with a checklist of how one can use the Technical Analysis. Let’s dive into it :

1. Pick a stock (Obviously).

But like, you gotta analyse the entire stock market in general, see what all companies are doing well, round off 8–9 of them and finally choose 3–4 companies.

2. Select the TimeFrame you wish to trade in.

As a beginner its always best to go with a daily timeframe.

3. Draw your trendline.

Like the image I provided earlier, draw the lines, identify the price floor and ceiling, and check if it’s moving upward or downward.

Add your moving averages, like the 50-day MA OR 200-day MA.

4. Check the Volume of buying/selling.

If the stock has high volume = strong move.

If the stock has low volumes = weak move.

5. Add 1–2 Indicators

For a fresher, the RSI and Moving average are sufficient

• RSI ( Relative Strength Index) — It shows if a particular stock is overbought or oversold. Being overbought could indicate that the stock prices might continue going up or maybe go down due to the buying pressure being exhausted, and vice versa for stocks being oversold.
• Moving Averages — Using the moving averages helps see if the current stock price is above the MA line or below. One can apply the 50-day MA and 200-day MA together to understand if the market is bullish or bearish.

If the 50-day MA crosses ABOVE the 200-day MA, it’s a strong bullish signal.

If the 200-day MA crosses BELOW the 50-day MA, it’s a strong bearish signal.

Now, as your homework, identify if this market is bullish or bearish :

6. Plan your trade.

Before you decide to trade, you have to :

• Set an entry price
• Target price
• Stop loss

Example: You decide to enter at $100 and target to earn $200, but just in case your horoscope for the day wasn’t good, you might want to exit the trade if the price hits $90 ( stop loss ).

7. Manage Risk

Never risk more than 1–2% of your capital. You gotta protect your capital and worry about profits later.

Maintain a good risk-to-reward ratio (1:2 ratio)

8. Review after the trade.

• Was your strategy successful?
• Did something go wrong?
• If something went wrong, what should I change or implement?
• Keep a trading journal of your everyday trades.

Yeah, so that pretty sums up the practical usage of today’s lesson. Now, a few tips for me and all beginner traders :

• Don’t get too emotional while trading, just cause your trade went higher than your target price doesn’t mean you get greedy and wait for it to rise higher.
• You’re not going to be making big bucks instantly. In fact, you might lose a lot more than you put in. But consistency never fails a man; be patient, and you’ll gradually rise from cents to thousands.

Done with learning and blogging for the day. Honestly, I learnt wayy more by blogging this than reading that textbook. It’s like I’m your teacher and obviously I gotta know it all.

I hope y’all were able to grasp the concepts easily, understand the graphs and found everything interesting. If at all a trading scholar is reading this, please do let me know where I’m wrong and how I could improve.

Thank you so much for today.

Signing off,

Fibs and CandleSticks