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.
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.
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.
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.
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.
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.
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.
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
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:
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.
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 -
|Trade (1st leg)||Trade (2nd leg)|
|Time – 10:15 AM||Time – 10:25 AM|
|Stock – Infosys||Stock – Infosys|
|Price – 3980||Price – 3976|
|Action – Sell||Action – Buy|
|Quantity – 1000 shares||Quantity – 1000 shares|
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:
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.