The advantage of technical analysis is in this form of analysis investors can decide a predefined price level where if price moves one can square off his position booking small loss this mechanism is not possible to apply in fundamental analysis and one may have to accept a larger loss.
Transparency issues in financial reporting is a challenge faced by the corporate world today. If a trader bases his decision on fundamental analysis, like the P/E ratio, price-to-book value ratio he will have to use figures from financial statements, which might not show a true and fair view. In case of technical analysis one does not have to depend on the financial statements.
Another advantage of technical analysis is in this form of analysis investors can decide a predefined price level where if price moves one can square off his position booking small loss this mechanism is not possible to apply in fundamental analysis and one may have to accept a larger loss.
Also, there is the advantage that one can either buy or sell in different stocks through technical analysis and gain profits in both, but in fundamental analysis, one can only decide to trade in one direction most of the time.
Here are 10 tips for the technical trader:
1. Trade based on Rule, when in doubt, stay out: First of all trader need to make a list of trading criteria, setup, or events that need to happen before you consider an order.
2. Use stop-loss, never trade based on hope: Create exit strategy, exit if the trade goes against you and rely completely on technical analysis level. If stop-loss level is hit, you should exit.
3.Act on your own judgment or else on an expert: If you do your analysis well and good. Else create a list of sources which you consult before making a trade and follow strictly every advice.
4. Constantly analyse your mistakes: First of all, correct mistakes which are outside your trading system such as bad execution and bad trade management. Make sure you don’t place the trades which are not the part of your trading system. If good execution and proper trade management still leads to unacceptable drawdown, it is time to get back to analysing the trading strategy to correct mistakes. Be patient with winning trades and be enormously impatient with losing trades. Remember it is quite possible to make profit as long as our losses are small and our profits are large.
5. Don’t jump the gun: Be as technical as you can, Firmly stick to your trading plan. Make a checklist of signals and indicators which might be helpful in making the trading process as mechanical as possible.
6. Don’t try to call every market turn: You might want to set up for counter-trend trades near some major market tops and bottoms. But trying to get in at all the twist and turns will make you overtrade and be chopped up by the market.
7. Never enter into a position without first establishing a reward-risk analysis: Establish a stop loss as soon as trade executes and put a target order according to risk reward. Before your entry you may set the thing up, after that, you are at the mercy of the market.
8. Place numerous bets on low risk ideas: It is suggested that one should not take losses more than 1-2 per cent of the capital in a single trade.
9. Don’t fight the trend: Trade in the direction of the trend, and after noise is created, against the trend. In order to do all these, you have to define what is a trend and what is noise. Do it yourself, else take expert views. In a bull market we can only be long or neutral, and in a bear market we can only be short or neutral
10. Never, under any circumstance, add to a losing position: Adding to losing position will eventually and absolutely lead to ruin.
The author is founder & CEO, CapitalVia Global Research. Views expressed here are personal