All the Buffetts & Grahams and ‘random walks’ please immediately exit the page.
A brief – I learnt about investing from the books of Morningstar (trust me those fair values can change at blink of eyes). I was all psyched up on ‘Fundamentals’. I had penned down all the rules from Benjamin Graham and by hearted all the advice from Warren Buffett. But for some reason, my trades more often than not would sink. The buys would go no where and the missed boats were galore. I was demoralized to the core and was almost about to call it quits. Some gentleman on some random forum suggested me to club my fundamental scans with technical scans. So did it do the magic – yes and no.
First ‘NO’ – Every market is different, every bull is different and every (I ‘ say bear) correction is different. The leaders of bull market may be different and as the bull ages via corrections the leaders rotate. So there is no magic bullet and hence, the trading systems need optimizations every few months.
‘YES’ – well, the ability to understand the stock patterns does help maximize profit and minimize losses. So suit up guys as we dive deep into the world of technicals.
The logic behind pattern/technical trading is simple – greed and fear are two psychologies that have been same for years and will repeat as long as we live. So this lays the foundation of technical trades.
FYI – I will be updating this page frequently to cover all the points.
1. Breakouts –
In a bull market (key phrase), this is the most successful form of trade. A good breakout 4%+ on 150%+ volume ,compared to previous close, has ability to trigger bull in individual stock from months if not years. One key aspect of the breakout is the formation of tight pattern, generally a flag/rectangle/parallelogram, prior to the breakout. The I have traded this since I learnt about it. This is a flag bearer for both a rally or a correction. Leave me a message to learn how?
2. 50 DMA support –
In a bull market and sometimes during interim minor corrections, the leading stocks will have pullbacks. They will, on low to average volume, decline and in most of the cases a leader will find support at 50 DMA. Now, this will repeat few times during a bull life cycle of the stock. Catch the train at the earliest station to gain the best returns.
3. Previous high becomes the support for the decline –
This is almost as above, but in this case the stock after a pullback on low volume, might find support at previous high. This works beautifully if the previous high and new high are both above 50 DMA. Again it’s not mandatory a stock will always find support else no stock would go lower than previous high.
I use the last two to see the big picture. They identify the new trend and show the strength of the current trend in case of minor fluctuations on the daily charts.
4. Weekly ADX in uptrend
5. Weekly MACD changing direction.
First two are the most successful technicals I have used so far. The best part is these two keep things very simple. I avoid using gazillion indicators because they are all lagging indicator.