19.1 - The Charting Software

We have learned many aspects of Technical Analysis over the 18 chapters. After you've read all of the chapters, and have understood the contents, you will be able to trade based on technical analysis. This chapter aims to assist you in identifying technical trading opportunities.

Please note that the recommendations in this chapter are based upon my trading experience.

You will need chart visualization software called the "Charting Software" to get started. Charting software allows you to view and analyze stock charts. Charting software is essential for technical analysts.

There are many charting programs available. The most common are 'Metastock and 'Amibroker. The majority of technical analysts use one or both of these charting software's. These are paid software's and you must purchase the license before you can use them.

There are a few free online charting tools that you can access - they are available on Yahoo Finance and Google Finance as well as all business media websites. My advice is to get good charting software if you want to be a technical analyst.

The charting software can be compared to a DVD player. Once you have the DVD player installed, you'll still need to rent DVDs in order to view movies. You will need to continue feeding data to charting software once it is installed. Data vendors will require you to provide the required data feed.

Many data vendors are available in India that can provide data feeds. You can search the internet to find reliable vendors. The data vendor will need to know which charting software you use. He will then provide data feeds that are compatible with your charting program. Data feeds are not free. After signing up for a data vendor you will receive all historical data. Then you will need to keep the data current by updating his server daily.

My experience shows that buying the latest version (Metastock, Amibroker) of a charting software (Metastock, or Amibroker), can result in a one-time fee between Rs.25,000/– and Rs.30,000/–. You will need to pay an additional Rs.15,000-Rs.25,000 for data feeds. The software costs are one-time, but data feeds cost annually. You may find that older versions of charting software are more expensive.

If you don't want to spend that much on charting software and data feeds, there are other options

 I'd like to highlight some of its features within the context of Technical Analysis.

1. It comes bundledPi is both a charting and data feed software that can be used together in one software.
2. Great VisualizationsPi allows you to visualize charts in multiple time frames, including intraday charts.
3. Advanced Features :Pi features advanced charting capabilities and has over 80 technical indicators built in.
4. Scripting you strategy : Pi provides a scripting language that allows you to code technical strategies and backtest them using historical data. Varsity will soon have a module about scripting and building trading strategies.
5. Easy Opportunity RecognitionPi's pattern recognition feature allows you to draw a screen-based pattern. After you have drawn, you can command Pi to search for the pattern in the market.
6. Trade with Pi : Pi allows you to execute trades directly from your chart, which is a big plus for technical traders.
7. Data Dump : Pi has an enormous historical data dump (over 500.000 candles), which will make backtesting your strategy easier.
8. Your personal trading assistant:Pi's "Expert Advisor" keeps you up-to-date about patterns that are being created in live markets.
9. Features that are Super AdvancedPi is equipped with Artificial Intelligence (AI) and Genetic Algorithms. These are optimization tools that help you optimize your trading algorithm.
10.  

This list covers everything from the most basic to the most advanced features. Before you decide to purchase the data feed bundle and charting package, I strongly recommend that you test Pi.

19.2 - What time frame should I choose?

In chapter 3, we discussed "Timeframes". To refresh your memory, I ask that you read it again.

A technical analyst new to the field may have difficulty choosing the right timeframe when scanning for trading opportunities. There are many timeframes you can choose from: 1 minute, 5 min, 10 minutes or 15 minutes EOD, Weekly Monthly, Yearly, and Monthly. This is easy to get lost in.

The timeframe is the most reliable indicator of a trading signal. A 'Bullish Engulfing' pattern in a 15-minute timeframe will be more reliable than one in a 5-minute. This is why it is important to pick a timeframe that corresponds with the intended duration of the trade.

How do you determine the length of your trade?

Day trading is not recommended for beginners or seasoned traders. Trades should be held for at least a few days before you start trading. This is known as 'Positional Trading’ or 'Swing Trading'. A swing trader who is active usually keeps his trading position open for only a few days. A swing trader's best lookback period is between 6 and 1 year.

Scalper is an experienced day trader who uses a time frame of either 1 minute or 5 minutes.

Once you feel comfortable holding trades for multiple days, then you can move on to 'Day Trading. I expect that your transition from being a positional trader into a day trader may take some time. The transition period for disciplined and dedicated traders is much shorter.

19.3 - Looking back period

The look back period is the number of candles that you want to see before making a trading decision. A lookback period of three months, for example, means that you view today's candle against the background of at least 3 months of data. This will give you a view of today's price action relative to the last 3 months.

What is the best look back period for swing trading? My experience has shown that swing traders should have at least six months to one year of data. A scalper should also look at the last 5 day data.

However, when plotting the S&R levels you should increase your look back period to at most 2 years.
 

19.4 -An idea to Opportunity universe

The Bombay Stock Exchange (BSE), which has approximately 6000 stocks, and the National Stock Exchange with close to 2000 stocks (NSE) have about 2000 stocks. Do you think it makes sense to search these thousands of stocks daily for potential opportunities? It is not. You will need to find a few stocks you feel comfortable trading over time. This would be your "Opportunity Universe". You scan your opportunity universe daily to find trading opportunities.

These are some tips to help you choose stocks that will build your opportunity universe.

1. Make sure the stock has sufficient liquidity. You can check the spread between bid and ask to make sure you have adequate liquidity. The spread is a measure of how liquid the stock is.
   1. You can also set a minimum volume threshold. You can, for example, only consider stocks whose daily volume is less than 500000
2. Check that the stock is within the EQ segment. Stocks in the EQ segment can be traded day trading. Although I disagree with you, day trading is not recommended for newbies. However, if you initiate a positional trade that is close to the target, it is possible to close the position intraday.
3. This can be tricky but ensure that the stock isn't operator driven. Operator driven stocks are difficult to identify quantitatively. This is only possible through experience.

If it is difficult to find stocks that meet the above criteria, I recommend the Nifty 50 and Sensex 30 stocks. These stocks are known as index stocks. These index stocks are carefully selected by the exchanges. This selection process ensures that they meet all requirements, including the ones mentioned above.

Both scalpers and swing traders will benefit from Nifty 50 being your opportunity universe.

19.5 - What are The Scout?

Let's now look at how to select stocks for trading. We will also try to identify a process that can be used to scan for trading opportunities. This process is best suited to swing traders.

Now we have identified the four most important aspects.

1. Charting software - We recommend Zerodha's pi
2. Timeframe - End Of Day Data
3. Opportunity Universe - Nifty50 stocks
4. Trade type: Positional trades that can be squared intraday if the target is reached on the same day.
5. The look back period is between 6 months and 1 year. Plan the S&R level for 2 years.

These important aspects have been fixed, and I'll now share my method of scanning trading opportunities.There are two divisions for the process:

Part 1 - The process of Shortlisting 

1. I see the chart of all stocks in my opportunity universe.
2. Observe that I am only focusing on the most recent 3-4 candles when looking at the chart
3. I look at the 3 recent candles and see if there is a pattern for a candlestick.
4. If I discover an interesting pattern, then I shortlist the stock and continue my scouting. I make sure I review all 50 charts.

Part 2 -The process of Estimation

I usually end up with 4-5 stocks from the 50 in my opportunity universe that exhibit a clear candlestick pattern. Then I go through each of these charts. I usually spend between 15 and 20 minutes per chart. Here's what I do when I look at the shortlisted charts:

1. I tend to look at the strength of the pattern - I am particularly interested in finding out if I need to be more flexible.
   1. If a Bullish Marubuzo is spotted by a shadow, I will evaluate its length relative to the range.
2. The 'prior trends' are then examined. The prior trend for bullish patterns should be a downtrend. For bearish patterns, it should be an upward trend. Prior trends are something I pay attention to.
3. If everything looks good, (i.e. Once I've identified a pattern that is easily identifiable and has a clear prior trend, I inspect the chart more.
4. The volumes are then examined. The volume should not be less than or equal to the 10-day average volume.
5. Once I have confirmed the volume and candlestick pattern, I will check the support level (in the case of long trades) and resistance level (in the case of short trades).
   1. S&R should be as close to the stoploss level of the trade (as determined by candlestick patterns) as possible
   2. If the S&R level exceeds 4% from the stoploss, then I will stop looking at the chart and move on to the next chart.
6. Then I look for Dow patterns, especially double and triple top and bottom formations, flags formations and range breakout possibilities.
   1. It is obvious that I also create the primary and secondary market trends.
7. If I am satisfied with the first five steps, I will calculate the risk-reward ratio (RRR).
   1. To calculate RRR, first I establish the target by plotting the support level or resistance level.
   2. Minimum RRR should not be less than 1.5
8. To get a better understanding of the MACD and RSI indicators, I review them. If they confirm, I increase my trade size.

Most often, a trade is possible with one or two stocks out of the 4-5 shortlisted stocks. There may be days when trading opportunities are not available. It is difficult to decide not to trade. This is a very strict checklist. If a stock confirms the checklist, then my conviction to trade is high.

This has been mentioned many times in this module. I will reiterate it once more: Once you have placed a trade, stop doing anything until your target is reached or stoploss is activated. You can also trail your stoploss which is a good practice. If your trade does not comply with the checklist, you can do nothing. Also, remember that the chances of success are high because the trade is highly-cureted. It makes sense to be firm in your convictions.
 

19.5 -Understand The Scalper

Scalping is an option for seasoned swing traders. Scalping is when a trader initiates large trades to keep the trade open for a few seconds. Here's an example of a scalper trading -

After applicable charges, the overall profit = Rs.2644/.

However, if you scalp with high brokerage rates, your overall profitability will shrink dramatically. Successful scalping requires you to pay transaction fees.

Scalper is a trader who is highly focused and has a keen sense of the price. To make his trading decisions, he uses exact charts like those with a 1 minute or 5-minute timeframe. Many of these trades are executed by a successful scalper within a single day. His goal is to trade large quantities and hold them for a few seconds. He wants to make a profit on the stock's small movements.

Here are some guidelines for scalpers:

1. Keep in mind the list we've given, but don't expect all of the items to be on the checklist. The trade duration is extremely short.
2. I would have been chosen candlestick pattern and volume if I had to handpick items may be 1 or 2,for scalping in checklist.
3. Scalping is okay if there's a risk-reward ratio between 0.5 and 0.75.
4. Only scale liquid stocks.
5. You should have a good risk management system. If you do lose, be quick to book it.
6. To see the volume increase, keep an eye on the bid-ask spread.
7. You should keep an eye on global markets. For example, if the Hang Seng (Hong Kong stock market) suddenly drops, it will invariably lead to a sudden fall in local markets.
8. To ensure that your costs are managed, choose a low-cost broker.
9. Margins should be used effectively, but not leverage.
10. Use reliable intraday charting software
11. Stop trading if you feel the day is not going according to plan.

Scalping is a day trading strategy that requires great mental presence and a machine-like approach. Scalping is a skill that embraces volatility and is not affected by market swings.

Keypoints:

1. A good charting program is essential if you want to be a technical trader. 
2. EOD charts are available for day trading as well as swing trading.
3. If you are interested in scalping the markets, look at intraday charts.
4. Swing trading should have a lookback period of at least 6 months to one year
5. To begin, Nifty 50 represents a fantastic opportunity universe.
6. You can do the opportunity scanning in two parts.
7. Part 1 is about skimming through all stocks in the opportunity universe and shortlisting the charts that have a clear candlestick pattern.
8. Part 2 will examine the shortlisted charts and determine if they are in accordance with the checklist.
9. For swing traders who are experienced, scaling is an option.