Gone are the days when market used to be in continuous uptrend or downtrend. In those days Buy and Hold policy used to be the best one. Contrary to that now a day’s volatility is the most dreaded buzzword in stock market. If you stick to the same old policy of buy and hold, you will not even be in a position to beat inflation. If you are a diehard fundamentalist then please check the return of your portfolio since 2008. It should not surprise you if you are sitting on loss by following the buy and hold mantra. If you are little bit convinced now then it’s the right time to change the investment strategy and add a pinch of technical analysis to it so as to generate superior returns. In this article we will try to figure out how following basic steps of technical analysis can help you in taking prudent decisions.
What is Technical Analysis?
Technical analysis is a tool used by traders and investors to figure out the direction of prices of a security through the study of past market data, primarily price and volume. Although this method is not fool proof but it acts as one more weapon in your kitty. Mastering the art of using this weapon will definitely enhance your returns and forbid you from committing silly investment mistakes.
Basic Steps of Technical Analysis
Spotting the trend
Using technical analysis it’s easy to find what’s the general trend of the market? It’s always beneficial to know if the market is in uptrend or downtrend. Buy and hold policy will play for you if you are in up trending market. Keep on sniffing for the start of the downtrend as that’s the right time you book profit and be cash rich. Once the downtrend is over, you can again enter the market and ride it till the top. As the market is very volatile these days, you will get many chances of entry and exit. So, be patient and enjoy the capital appreciation.
Finding support and resistance
Once you are sure of the trend of market, the next step is to find out the right entry and exit point with respect to specific stocks. Let’s say, you like a particular stock A and you want to buy it. Technical analysis suggests that you should not blindly invest in the stock. You should first try to find out what’s the best price at which you can get it. If you are ready to make your hands dirty, you can very easily find out the support price of the stock. In a volatile market, it’s very common for stocks to test their support prices. Just wait for few sessions and you will get a chance to enter the stock round its support price. Similarly, you can find the best price at which you should get out of a position which is the resistance of a stock. You can buy at support and sell at resistance to keep things simple. Ride this sine wave of support and resistance to reap great rewards.
The First Step
Technical Analysis takes into account that the markets are driven not by fundamentals but the human minds perception of fundamentals. As a technical analyst you need to study the following data:
· Price – Present & Historical
· Volume – Present & Historical
· Market Breadth – Present & Historical
If you don’t know where to start from then take help of an advisor or friend who practices this art. A lot of material is available online and a lot of good books are available too. It’s worth investing few bucks and hours in learning this art.
Using technical analysis one can find answers to the following questions
1. When to enter the market.
2. Which stock to buy and at what price.
3. When to book profit .
4. Which stock to get out from so as to minimize loss.
Answers to above questions are a sure shot way of being successful in stock market. So, it’s better to roll our sleeves up and be ready to learn the art of Technical Analysis and mind you, it’s not as tough and confusing as it sounds.
The author Bimlesh Singh is a CFA Level 2 candidate currently working as a business analyst in financial domain. He holds a Bachelor’s degree from IT-BHU. He can be reached at email@example.com.
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