Continuous uptrending stock market is phenomenon of history. Now stock markets are highly volatile as its movement depends on so many complex factors. Globalization is adding new dimension to the volatility. One can not rely on buy and hold policy anymore. If you stick to the same old philosophy of buy and hold, volatility and inflation will eat away your returns. A cursory look on your buy and hold portfolio since 2008 will validate above statement. It should not surprise you at all if your portfolio is in red colour.
Keeping volatility and inflation in view let’s tweak our investment strategy and add a pinch of technical analysis to it so as to generate superior returns. Let’s figure out how following basic steps of technical analysis can help you in maximizing your returns.
What is Technical Analysis?
It’s a methodology 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. This method is not fool proof but it adds reliable dimension to your analysis. Mastering the art of Technical Analysis will definitely enhance your returns and stop you from committing silly investment mistakes.
Basic Steps of Technical Analysis
Spotting the trend
Using technical analysis you can easily find the general trend of the market (Up Trend/Down Trend/Range Bound). You can use the Nifty Yearly/Monthly/Weekly chart to find out the same. It’s necessary to know if the market is in uptrend or downtrend so as to take informed decision. Buy and hold policy will play for you if you are in up trending market. At the start of the downtrend it’s the right time you book profit and be cash rich. I know it’s difficult to find the exact top but even if you did not exit at right moment, market will give you another chance as you are in cash. Once the downtrend is over you can again enter the market and ride it till the top. Because of persistent volatility, you will get n number of chances of entry and exit.
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. It’s advisable to stick to large cap stocks if you are new to stock market. 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. Applying the basics of TA you can very easily find out the support/Resistance 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 till the range is broken. You should keep stop loss below one percent of the support price.
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 – Use Stock yearly/monthly/weekly charts
- Volume – Present & Historical – Use Stock yearly/monthly/weekly charts
- Market Breadth – Present & Historical – Use Nifty/Sensex yearly/monthly/weekly Price Volume charts
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 as it can prove to be a money spinner for you.
What you get from Technical Analysis
Using technical analysis one can find out the following
- When to enter the market (Support of Nifty/ Sensex)
- Which stock to buy and at what price (Support Price of Stock)
- When to book profit (Resistance of Nifty and stock)
- Which stock to get out from so as to minimize loss (Stop loss)
Answers to above questions are sure shot way of being successful in stock market. I can guarantee you one thing that TA will definitely help you in committing fewer mistakes.