April 9, 2015

Confusion regarding indicators and charts


Sir, I am very confused. Pls guide me which indicators or charts should I refer to as I'm having trouble. 
I have brought dlf@ 167.5, I've brought it because it broke it's 200day moving average and your page showed buy signal. But it is down since the past two days. What are your thoughts on this stock. 

How do I accurately read a script in 30 secs. 

I'm very confused at this point. 

Sanjay Nagpal 


It is wrong to assume that after a buy signal gets generated, a stock will immediately start moving up. It is entirely possible that the stock may trade rangebound for few days and then rally. On the other hand, it may even hit your SL.

It is important to note that all buy/ sell signals are in your mind only. You may use 5 day swing or 20 day swing or 50 DMA or 100EMA etc... the crossover has no meaning and the market cares a damn about this.

In reality, all the indicator does is indicate the trend in the context of the parameters you have defined. Whether the trend will persist or not you will not know. Which is why the probability of making money on any trade is on an average 50% (or same as tossing a coin). This holds true even if you ask so called "experts". From this perspective, additional analysis or asking other people is not going to help at all because it does not change the probability / outcome.

In DLF chart, we can see stock is rangebound - we have support around 150 levels, resistance at 180.

Consider this chart of SPARC... here breakout gave good profits. But you will not know this before taking a trade.

It is obvious that stocks making a breakout of 6 months or one year have a higher chance of generating profitable trades. In other words, a buy signal at 52 week high is better than one which emerges at 52 week lows.

Coming to the last question, how to read a chart in 30 seconds. I have a simple post here but I will repeat the contents. 

Always look for visually obvious levels of support and resistance. If you have a breakout above the resistance, then trade long.... your SL will be the recent supports and you can trail this as stock moves up.

If levels of support and resistance are too close or muddled up, then stock is rangebound. Zooming out or switching to a higher timeframe may give a better idea.

The reason I say is that one minute is enough to analyse a chart is that if you need to spend more time, then there is something wrong with your method (too many indicators? wave counts? etc etc).

At the end of the day, be mentally prepared for half the signals to fail. Money is never made because of accuracy - it is made only because of exiting loss making positions and holding to profitable positions as long as possible.

Hope this helps.

No comments:

Post a Comment