Tuesday, February 22, 2011

Importance of charts and levels in trading

Shazia said;
If everyone played according to the charts and levels, wouldnt it now alter the change in the pattern of trading? Or would it make TA more efficient?

My notes;

Market consist of many type of traders. Some traders use technical analysis, not all. Out of those who use TA, many use indicators, patterns of different types, not related to levels. Finally, some traders use chart levels for trading. Each of these traders can use levels in different ways. Example: The daily pivot calculated with pivot numbers can be used as a dividing line by traders. If the stock remains above the line for the first fifteen minutes, then the trend for the day is up. Some other traders will say: if I get an MACD buy while price is above the daily pivot, I will take it, otherwise not. There can be any number of methods to use the same numbers, with each method a valid idea. The key is not the level or the chart. The key is your understanding of the market trend, momentum, management of risk and position sizing. Therefore, the same tools are used differently by different hands. There is virtually no danger of overuse.

Finally, sometimes, the same tool is used in the same way. That is definately a warning sign. In Summer 2009, a well watched head and shoulder pattern emerged in the S&P 500. Everyone was watching it. The pattern failed. The failure triggered a spectacular rally on the upside. Such events are so rare that they can be considered an exception.

2 comments:

Business Minds said...

Trading does not require any advanced mathematical complex theories or any deep knowledge of chart reading skills with complicated indicators.

Trading is just another form of business & need is to understand the importance of probabilities & associated money management.

Those who are trading to make a living out of it & finding it difficulty are suffering because they do not understand the money rotation cycle.

Any business requires ensuring availability of fresh money at times due to various reasons & thereafter a complete rotation cycle (consolidation phase) has to be cleared.

But please remember that probability & time cycle will play its decision making role & one needs to understand one’s business potential before starting investing into it.

To manage all above one just requires clear business vision & basic calculator & pen & note book.

Any business is not free from risks & so the trading in equities.

So concept of money rotation as per one's own ability to ensure sufficient business funds & associated expectations riding on probabilities must be clear.

Above is true for any business including equity.

Concept of any kind of hype of advanced & complex & hi-tech technical analysis in itself is WRONG as every thing is “so subjective” in any business including equity that nothing can ever land on a common platform.

Things will always remain subjective & people will never religiously follow any technical analyst ever.

I insist to understand the concept of running a business & associated “Business Analysis”.

Nothing can overcome the action of probabbility & time.

Regards

Shazia said...

hi sir,
Thanks you for answering my query!
and the example you gave (head and shoulders) was wowow!