The Hindu Business Line : Trader's Corner

There are many who desire to enter the world of technical analysis and are wondering where they should begin. The first step is to accept that the market is supreme. It is futile to outsmart or outguess it. We just have to flow with the market and try to amass a fortune in the process. The novice technical analyst should have a two-point program.

Identify the trend.

Ride the trend till it reverses.

Trend identification can be done with the help of simple technical tools called trend lines and trend channels. We have discussed the construction and usage of trend lines and channels in previous columns.

Once an investor is fairly comfortable with trend lines, he can move on to identifying patterns in the charts. Patterns can be reversal patterns (head and shoulder, double or triple tops and bottoms, rounding tops and bottoms, etc.) or continuation patterns (triangles, wedges, flags, pennants, etc.). Right identification comes with constant practice. But once this skill is mastered, it will be easy to judge if the trend will continue or reverse.

The next set of tools that a beginner can look at is the oscillators. There are hundreds of oscillators currently in use. The most common ones are the ROC, RSI, MACD, Stochastic and Bollinger Band. As the name indicates, these are statistical tools that oscillate between overbought and oversold zones. They help to forewarn an investor when a trend is losing momentum and is likely to reverse. The trend, like a motorcar, cannot reverse while moving at top speed. It needs to slow down, stop, and then reverse. If we can identify that slowing down phase in advance, we can be one step ahead of the actual reversal.

Construction of these oscillators is fairly simple with the help of computer software available in the market. Buying a stock when the oscillator gives a buy signal and exiting when they signal a sell is a fairly simple and easy way to start using technical analysis in trading.

Lokeshwarri S.K.

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