Stock Trading (Day Trading)-2

 ii. LIMITATION AND IMPORTANCE OF TECHNICAL ANALYSIS-

i.          A. LIMITATIONS-

ii.          I. Technical Analysis was invented in a time when we lacked computational know how to really validate its strategies at a massive scale. Moreover, people have no idea/ differing view about how to interpret them. Buy when RSI is 30, sell at RSI 70. What about 70. 01..? Or 29.99? 

iii.          ii. Inventors of technical indicators never gave mathematical proof, they just drew some lines on a chart, had wrong winners bias, and proclaimed that their idea equals profit. Look at a 5-year bull market. Think of all sorts of technical indicators which always come up with buy. I could have linked the sale of ice creams during a hot summer with the rise of the stock market in a strong bull market. It does not mean that my reasoning is right.

iv.           

v.          Iii. Stock Market may behave contrary to what technical indicator indicates. In other words, if technical indicator X is showing buy at 9 am for stock Y, and a portfolio manager for a complete random reason dumps Y massively, that indicator would never have been able to have forecast the Y to plummet yielding a negative for technical indicator X. Also, any important news, event, statement (pertain to a single stock, a group of companies or the whole market itself.) may change sentiment of the market suddenly about which technical analysis is not able to predict.

vi.           

vii.          Fact is, stock markets attract a lot of people. Most of them are underprepared, and want the money, without the hassle of understanding what is going on. There blind faith in technical words like RESISTANCE, SUPPORT, RANGE AND SO ON prevents them to board the bull rally if they cannot catch the same at entry point (support level).

viii.           

ix.          Traders misses the point that all analysis is nothing but an attempt to explain HUMAN (who are irrational) behaviour on screen. In short Human actions is cause and chart is result. Lay man tends to believe reverse and so fails in market. Thus, before a person develop a technical edge and scale up the trade one should give much importance to MINDSET (of self and group, details down line/next post) and understand भेड चाल.

B. Importance – Others believe technical analysis has its own importance and Two views come up –

i. Those believes that there is secret in trading strategy and why should they reveal their strategy? - Many authors (on trade) believe that sharing your strategy will destroy your advantage. A few successful traders, have a similar opinion and say one trader’s target is other trader’s stop loss. Thus, fear of losing advantage stops us to share knowledge. If you go to any successful businessman and request him to share his business secrets with you, no one will share his strategy with you and trading is also a business,

ii. Contrary view- Others say, fact is many trading strategies are available online free of cost (books, you-tube channels, blogs etc.), nothing is a hidden secret here in the share market. Successful traders also use these strategies (but with a précised fine tuning). No one can guarantee you that a strategy will work for you or not, it is up to you only, whether you can convert that strategy into a profitable one.

So, question is should we go begging for strategy (from successful traders) or go for what is available in public domain? Books are someone’s life story in paper form. Trading books are exceptionally helpful. Read a book a month if not a week. There is so much knowledge you can learn this way. Find a mentor or a coach but only if they help you work on you. Only copying someone’s else’s system is guaranteed failure long term. You will always be buying their new system or doubting their calls when they have a few losers.

Ultimately a (self-developed) simple and easy strategy will be profitable, but one will have to practice it for a considerable amount of time and will have to fine tune it according to different market scenarios. Developing a real system with an edge often takes years. It is mainly because of experience and screen time it takes to get there - those cannot be rushed/acquired overnight. 

 

In other words, if you are not in the game for long term, do not even start. Traders who put their own time limit on (learning trade) fail. It might take you 10 years to master this. If it does, would you still do it?  Money is the reason most start trading. Working from home, making more money, financial freedom, whatever it is. That can be a starting factor but it will not give you the motivation to stick with the grind. Find your why, and you will get through the throat punches rather easily.

 

When you master a system, then trust your edge once it is there, get it coded and automate as much as you can. The goal here is to build an edge and keep yourself out of the equation as much as possible. This way, whatever personal demons (explained in later post) you have and that show up in trading, you find a way to get past them.

 

Again, I emphasis, ultimately you will realise knowing and mastering strategy is not that important as everything depends on probability (not a mathematical formula), and what separates successful trader from unsuccessful trader is Mindset, Expectation, Timing, Discipline, and Money Management.