Trading Indian Stock Market Using Technical Analysis
Indian stock market is no doubt one of the most volatile stock market in the world; many people have made millions of profits, and sadly lost millions also. The problem is that 90% of traders in India rely on tips which are given by amateurs and some so called technical analysts who claim 90% or in some cases 100% accuracy, this is very immature and I really feel that some autonomous body in India should come who should track these analysts closely and give them ranking or ratings on which investors can rely and then subscribe to them on the basis of the ratings, of the autonomous body. Anyways this will take time to formulate, but if done then it will surely bring sanity to the minds of day-traders and investors who invest huge sums of money on the basis of these analysts’ tips. I am more interested in delivering profits to an average investor but on the same time I would like the investor or day-trader to understand the concept of technical analysis, which is a very widely used word among traders who do some reading on websites and watch TV channels. Technical analysis is an incomplete study of statistical indicators, not one indicator is perfect, you have to use many indicators together in order to come to a particular conclusion that a stock is going to correct or is it going to fall. There are many factors which effect a trader's mind while trading in stocks. There are three ways a trader can trade: 1) The trader can call his broker on phone and place the trade via phone. 2) The trader can trade from home via internet, and place order by himself. 3) The trader can go to the broker's office and do trading from there only. 1st and 3rd are old methods, and can bring huge losses to the trader, the 2nd method is also dangerous, but less, if the trader knows’s technical analysis. The 3rd method can be good again if the trader knows technical analysis, but then the broker's trading software should have graphs for stocks, with technical indicators. Technical analysis requires a focused mind, technical analysis is not just making a cup of tea and then drinking it and then you become a renowned analyst, NO!, it requires patience, a focused mind, and surely a four letter word "PLAN". Without planning you cannot succeed in technical analysis it is the fuel which runs technical analysis, once you plan that you want to short sell Reliance the next trading day, you watch out for a breakout of crucial support level and the short sell it, during the intra-day and while short selling you also make sure that Sensex and Nifty also show weakness or are in clear downtrend. This a very simple technique just explained to you, but obviously it includes a lot of graph analysis which is not being discussed right now as then this article will be of more than 100 pages and I have just started typing this article and will like to do so, in future . When you read the word "PLAN" then many thoughts come in the mind, what sort of planning should I do when I know market is going to fall tomorrow, or rally? There are many methods but the best method which I have followed is to follow the trend and big stocks like SBI, RELIANCE, TCS, INFOSYS, and SATYAM. Let me give you an example: To follow the trend I track BSE SENSEX chart everyday and in intra-day as well, the moment I find important turning points, where Sensex will correct or from where Sensex will bounce back at, and when that is confirmed I take a directional call on a stock for example short sell Reliance at 750 is that is broken and keep a target of Rs742, stop loss I keep as 757, which is roughly 1% of Reliance cash market price. When I keep a target of 742 and I see a bullish pattern forming at bottoms in Sensex and at that time reliance is at 744, then I buy it at that price or wait for it to touch 743, and make it a point to cover the short sell fast. 90% of people who loose money in short sell is that they either get over confident or they want higher profits, and wait for lower targets as they get confident that market is correcting then why should we cover it, let the market correct, this policy sometimes give good profits but sometimes take away money also, and loads of money. So when you are getting profit after short selling Reliance at 749.50 and Reliance is at now 743 you are getting Rs6.50 profit per share. Say you shorted 500 shares then 500 x 6.50 = Rs3250, say the brokerage is .0005 per transaction (5 paisa), then: Bought brokerage .0005 x 500 x 749.50 = 188 sold brokerage .0005 x 500 x 743 = 186 total brokerage = Rs374 Total profit = Rs3250 - 374 = Rs2876 5 paisa brokerage is equivalent to 5 / 100 = .05 then .05 / 100 = .0005 which is the % to be used in order to calculate the actual brokerage. Just exit at 743 if reliance touches that level, Rs2876 profit in a single day is enough. Even if Reliance touches 744 I will exit, because volatility sometimes is huge and I don’t trade for targets, I trade for profits. When I say I track sensex it is because Sensex is a broad based index as compared to NSE, when I say broad based index, it is because sensex has more stocks listed in its exchange and its base starts from 1975 onwards, than nifty and also sensex is the oldest index in Asia, NSE came in 1995 or 1996 if i am not wrong. Sensex gives sometimes very early signals of correction which Nifty does not. Another rule I follow is to trade only after 10:15am, this is because when market opens at 9:55am then market is at peaks of volatility and first 20minutes decide the trend of the market, and this phenomena is very important to follow the trend, what happens that if market opens in negative then in first 20min itself market might correct and start moving up which if you short sell in those 20min you will get stuck on lower levels and hence stop loss will trigger and you loose. To use technical analysis you have to set some rules, and the most important rule is to trade after 15-20min market has moved and some sort of stability has formed, in the market. After 10:15am one should read the charts of the indices and try to figure out the main trend of the index, and then try to find those stocks which are moving with the index and are near very crucial support and resistances, and then once those levels are broken then one can trade in that stock which obviously has broken out in the direction of the trend and also its crucial support or resistance. Technical analysis is not a magic wand which you can swing and get instant results in a few minutes, instead technical analysis is a tool which can be used to enter and exit from stocks profitably, or in any financial markets, technical analysis lays a lot of weightage on volume. Make sure the stocks you are analysing have enough volume so that your analysis is accurate on the basis of tools you are using. For example my thumb rule is based on atleast 1 million shares are traded on that stock to be listed in my analysis list, otherwise I don't do analysis on that stock. Right now I have not mentioned how to find that support and resistance levels, neither i have explained how to find the main trend of the index, these key points will be discussed in the later articles. I use Japanese candlesticks, in order to find the trend reversal points and also to find the main trend of the index or the stock in which i want to take my entry. Japanese candlesticks is vast study and requires at least 100 pages (can go to 300 pages) of articles with examples to be explained in order to make it clear to you. If you follow Japanese candlesticks and other technical indicators and are an amateur, then the method explained above will bring some method and refinement in your trading. I will end here my article which is a short one, but will post many other articles to bring clarity in your mind in order to catch the trend in stock market at right time, as that is the key to success in day trading, otherwise indian stock market is big jungle and you can get lost in it! DISCLAIMER
This article is written by Mohit Thapar, technical analyst and trader in stock market who is managing his website http://www.bookprofit.com, and are his views and any decisions taken by any reader of this article after reading it, in stock market then the reader is solely responsible for his/her actions. Stock market is a very volatile place to invest your hard earned money, and you might incur losses if you don’t follow some rules, or you should hire either a technical analyst or financial analyst to manage your money. If you are interested to post this article on your site, then please don’t delete this disclaimer and give a link back to http://www.bookprofit.com, Bookprofit is a registered trade mark. Bookprofit is registered. Thanks. Mohit Thapar is a technical analyst and webmaster for http://www.bookprofit.com He also conducts technical analysis training for 2 days on weekends, in New Delhi, India. He gives free technical analysis support to all his students, for 1 month after successful completion of a 2 day workshop which is 7 hrs each day. |
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