We will discuss if Technical Analysis – trades based on indicators in stock markets does make money or not.
My view on Technical Analysis / Disclaimer:
I do not have much knowledge in Technical Analysis (TA) neither there is a need to learn because I am very happy with my conservative trading strategies. TA is for people who want to be very aggressive 🙂 – those who want astronomical returns from stock markets. Very few people are able to do it. People like us who are retail traders with a job or business should look for small consistent profits.
Technical Analysis traders take short-term naked directional trades. This is big risk. If you have a job, this gets very difficult as you need to keep an eye on your trades every second. You must be able to quickly take profits or losses as per the indicators. These trades needs 100% of your attention. If your trading account is large and/or you are trading hundreds of lots, you cannot leave your trading table without stop-loss in your system for even 10 minutes.
Traders using Technical Analysis either go for buy or sell mostly using Futures as per the signals of their program. Some of them use options too. Since they love to trade direction, Futures are mostly preferred. Most of these people use some kind of tools/software to help them know the indicators to buy/sell. Some buy it from third parties, some develop their own trading ideas using Technical Analysis software available in the market. But frankly what a human brain can do, software cannot do because they do not have the ability to think.
Technical guys rarely trade next month derivatives. Some quickly get in or get out in few minutes or hours. Some in 2 or 3 days max. Some even develop systems to do automated trading / algorithmic trading.
In automated trading the system takes care of trading. The trader just needs to give information. The rest is taken care of by the system. This has its pros and cons. Human emotions of fear/greed are totally out of the trading system – this is a positive. The negative is that if the system is not fed properly or if there is a bug (server/internet) while trade is on – a lot of problems may occur. Read this $440m mistake of automated high-frequency trading. One mistake in a software can take you down ages never to recover.
Automated or not – the decision the trader takes is the final one that decides profits or loss.
Technical Analysis is meant for small swings in a stock/index and it mostly comes in 2-3 trading sessions. In fact if target is not hit, as far as I know they close the trade as they hate taking long positional trades. 3-5 trading sessions is the most they can wait. Most of them then start looking for new indicators. Why? Because for them time is money and any movement is what they want to capitalize on. Of course this is not possible always.
For example their software my not generate any signal for a day – they will still trade because they think they control the system – and not the other way round. Basically they get bored if they are not trading. My apologies if I am wrong but the new entrants to TA think they are better than normal retail traders. Of course they realize their mistake when they lose a lot of money (and time) trading. 🙂
Only a few go for positional trades. They either make a lot of money from one trade or lose a lot due to un-hedged directional trades. So technical analysis is for people who can take big risks. I am not one of them. This does not mean I am against Technical Analysis – I am only saying you should have a huge appetite for risk if Technical Analysis is what you are looking for to implement in your trades. And yes if you have a job or are into a business you will have a lot of difficulty doing trades based on technical analysis. They need your time.
A few traders may even hedge – but technically its not technical analysis. In my view they are better traders.
Some of the things they learn are: Line Chart, Candlesticks Chart (very popular), Bollinger Bands, Dow Theory, Support & Resistance, Fibonacci Retracements, Japanese Candlesticks, Trend Reversals, RSI, Stochastics, MACD, ADX etc. (Does it not sound like an Engineering Course? 🙂 )
I also think that if Technical Analysis really made huge money (reasonable for a living every month from an average trading account of say 5 lakhs) why would people struggle, pay and work hard for 4 years to study Engineering/Software/Medical/CA/Law etc? They would rather invest a year or two studying Technical Analysis and make money from home. Logical?
Making money from home is always better than taking a job, right? Why not every intelligent person is a TA?
I don’t know but maybe some guys are really good at it and are making a killing using TA. But they must have great methods. The real picture is, for most, Technical Analysis does not make money. And this I am saying after talking to at least 25 traders who are doing Technical Analysis in stock markets. 100% of them lost money using TA.
Social Science Research Network – a research company based in US, did a research on individual traders doing Technical Analysis and found that most traders doing TA lost money. Here is the link:
If you want to download the research report you can download it here.
Here is the abstract:
We find that individual investors who use technical analysis and trade options frequently make poor portfolio decisions, resulting in dramatically lower returns than other investors. The data on which this claim is based consists of transaction records and matched survey responses of a sample of Dutch discount brokerage clients for the period 2000-2006. Overall, our results indicate that individual investors who report using technical analysis are disproportionately prone to have speculation on short-term stock-market developments as their primary investment objective, hold more concentrated portfolios which they turn over at a higher rate, are less inclined to bet on reversals, choose risk exposures featuring a higher ratio of unsystematic risk to total risk, engage in more options trading, and earn lower returns.
One day I got this email from Mr. Shantanu – an expert in Technical Analysis who is a regular visitor to this website.
Big fan of your website. I am someone who lost a fortune and made a fortune in last 7 years of my trading. I used to bet just like others in the market, got whooped. But today, I can actually claim to be one of the finest technical analysts the world ever saw :). Alright…just a rookie with 4 years exp in chart readings. I love the way you present trading psychology. But the learning we gain from your website on the finer parts of option trading is awesome. Will surely go for your course, not for making money, but to be rich with knowledge 🙂
I was very happy to receive this letter as it came from someone actually making money using TA.
So to know the answer I asked Shantanu if he could write about pros and cons of technical analysis and let my readers know if they should invest in Technical Analysis knowledge. I asked him if he could throw some light on this issue and let us know if someone can actually make a decent living out of Technical Analysis. Please read my notes in between too.
Here is Shantanu’s reply:
Yes, we can make a decent amount of money with knowledge of technical as it is also a tool that helps to get out at the right time when the tide turns against you (hence gives Capital Protection). I have always believed that in trading, making money is easy, but not loosing money is an art. Coming to option trading, I never hedge, I know surprising, but true (that’s the confidence and trust TA gives me).
(Note: I told you these guys NEVER hedge 🙂 )
I believe its the language of the markets, it shows the true picture of greed and fear, everyday, every moment. You will be amazed, market is like a woman, and using TA, one can clearly understand when she wants to dance with you, when she wants you to stay away, when it lies…and when it is joking around :)…best part…I have charts to show all her moods 🙂
(Note: Yes charts are what has happened, NOT what is going to happen. Charts are history NOT future. I think more than the Charts these guys are very disciplined. They always take more profits than losses. For example if Charts are showing Nifty will move up and its at 8200; they will take their profits at 8300 – or let the profits run till it lasts, but stop loss at 8150. That way if they are 50% of the times correct they still make money 🙂 . Anyone with TA knowledge please throw some more light on this. If I am wrong please correct me.)
TA or not if you are taking directional trades you should take double the profits than your losses. You will see that you are making money over time – but you have to be right 50% of the time. 🙂
Alright, so some positives and negatives of TA:
1- Gives a trader eyes and ears on the behavior of the market.
2 – Helps you understand the most important of trading, Price Action.
3 – Answers you Why, What, and When. Basically tells a trader, What it will do, Why it do, and When it will do it.
4 – Helps cuts down on losses.
5 – Helps people to stay on right side of the trend and allows a trader to let the profits run.
6 – Cuts out emotions and egos from trades.
(Note: 5th and 6th points are most important. They go with the trend until it lasts / or till their indicator’s target price. On the other hand they get wiped out by whipsaws (markets opening gap down/up in opposite direction the next day). Discipline is where they cut out emotions. )
1 – Not a perfect world so at times one can get deceived and take wrong positions (for example, today, most of the folks including me took a bullet).
(Note: Nifty opened gap down more than 1.2%)
2 – Half knowledge or poor knowledge can prove costly. Some people say TA is a smart way to loose money, those monkeys belong to this category.
3 – Can be overwhelming at times, people can get stuck with analysis paralysis and miss opportunities for entries and exit.
1 – on that day Nifty gaped down more than 100 points. Gone – 100 points gone in 1 trading session. Now climb the ladder again. This is the major issue with TA.
2 – is a very valid point. If you just read a book on TA and think you are ready to take large bets – I bet you will lose ALL your money. Practice and perfect yourself if you really want to do well in Technical Analysis.
3 – is also very important. These guys like action. They get bored if they are proved wrong or Markets are not behaving the way they want it to behave or just not moving. Like I said they will wait for 3-5 days and start getting jittery if nothing is happening. Then they start looking for new opportunities.)
I have a simple system that I have developed (took me 3 years to make it) that generates signals which are good enough to make a living and take couple of vacations around the globe. My daughter had cancer when she was 6 months old. Treatment drained me of my bank balance, sold everything I had. Trading made me pay the bills, recover my money, and saved my kid.
(Note: If this is true Shantanu you have done a great job. Congrats. Not many people can develop a system that can give true indicator of market movement in short-term. May your kid have a long & healthy life.)
My system is very simple, however, there is a even simpler system that beats them all. Its called “Trendline Break Trading“. If you know how to draw a line, you can make money.
Setup in brief: Draw trendline of current trend (join minimum two points). Wait for prices to break the trendline (up or down) and wait for ADX (Average Directional Index) to confirm the same. That’s it.
My actual system gives more accurate trades as it removes market noise. But the above setup is used by me over any other system (sometimes I use this system even without the ADX, less oscillators the better, trust your eye). Backtest it yourself, over any period, any instrument.
This is the image he sent:
Then I mailed him: Saw your image Shantanu. But it was made AFTER the event was over. How can you predict the future with that?
Naah, we are not predicting but following the trend (only on this setup). Entry is on second candle, price should be near to closing of previous candle that broke the trend. So for example if Nifty broke the uptrend and closing price is 8500, our entry for short would be around this price the following day. I will try and send a more clear picture.
Still awaiting Shantanu’s reply. If you are reading this Shantanu please do write more about this in the comments section.
- Technical Analysis is trades done for short period of times.
- TA are directional trades. Mostly done with futures with no hedged trades.
- Strict profit and loss laws are followed.
- Trades based on indicators/system/software.
- Human emotions are not involved.
- Not everyone can be a good Technical Analyst.
- TA or normal speculative trades – the story is same everywhere. Most traders lose money. 🙁
- The real reason is trading more than the risk they can take, not hedging positions and speculating too much. And every-time they think that this time markets will behave the way they want. This happens once in ten times. This makes them confident and they trade again and lose more than they made.
- Not taking a stop-loss. Maybe ego or hope being a reason.
- You may or may not learn technical analysis but you should learn being conservative. Always hedge your positions, know your max loss, take a stop-loss or profits when a target is hit. Learn from your past experiences.
- If you do the same trade over and over again and expect a different result every time – you will lose money every time. 🙂
- Trading, as a profession, gets little respect. No one would try to become a doctor or lawyer without any training, but some traders just don’t think any knowledge is important. They speculate and lose a life time of earnings. I hope you are not one of them.
Are you a Technical Analysts? If yes please post over view on TA in the comments. We all will be thankful to you.
You Can Read More On My Site
What you should do now1. If you have still not subscribed for my free 5 days course you can do by filling the form above. You will learn a lot about option trading.
2. If you are a new option trader, not much experienced and are making losses you can do my paid course. I recommend Nifty Conservative Option Course for beginners because it is easy to understand and easy to trade. Even a 18 year old young trader or a housewife can learn it and start trading from next day. It will help you to earn consistent monthly income without any software or speculation or stress or big risk. You will learn proper hedging strategies that works in any market condition.
3. If you are banknifty weekly options trader you can do my Bank Nifty Weekly Options & Futures Strategy Course. You will learn future and option hedging strategies that works in volatile market condition.
NOTE: Here is one more help. You can open a trading account in UPSTOX and send me a WhatsApp message on 9051143004. I will send you a FREE Equity Intraday Strategy that you can start trading and make approx 200 a day. You need 5000 to start trading this strategy.
CLICK HERE AND REGISTER IMMEDIATELY TO OPEN AN ACCOUNT IN UPSTOX. If you do not register immediately you will not be mapped under me which is very important to get the free strategy.
UPSTOX is a low cost broker where buying and selling of stocks is FREE.
TestimonialsWhat Traders Say About My Course
Course fees: Click here to know the course fees.
Here is complete process of my course1. Once you pay I will send you the course materials for studying to your email.
2. You read and ask me questions via phone/whatsapp/email to clear doubts.
3. Then you start paper trading and still can ask me questions.
4. After about one month you can start trading.
5. Since doubts can come anytime the support will be there for one year.
Within one month you can start trading on your own. No need to depend on anyone once you are on your own.
If you have any question you can contact me.
You can read about me here and my trading mistakes here.
Dilip Shaw, Founder
INCOME DISCLAIMER: Any references in this site of income made by the traders are given to me by them either through Email or WhatsApp as a Thank You message. However every trade depends on the trader and his level of risk taking capability, knowledge and experience. Moreover stock market investments and trading are subject to market risks. Therefore there is no guarantee that everyone will achieve the same or similar results. My aim is to make you a better & disciplined trader with the stock trading and investing education and strategies you get from this website. Please note that I DO NOT give tips or advisory services by SMS, Email, or WhatsApp or any other form of social media. I strictly adhere to laws of my country. I only offer education on finance, investments on stock markets in the best possible way as much as I can through this website. Still, you must consult an authorized advisor or do thorough research before investing in any stock or derivative before trading any strategy given in this website. I am not responsible for any investment decision you take after reading any article given in this website. Knowledge is the only way to get success in stock markets. I try my best to give stock market investing and trading knowledge through the articles posted in this website. Thanks for visiting my website.