If you’re getting started with day trading one of the first things you’ll hear when you ask the classic question “How do I get started with Stock Market?” is that you’ll have to learn Technical Analysis and Fundamental Analysis. These two are two different world with their own set of rules.
First thing you’ll have to know about these two methods in a nutshell is that
- Technical Analysis includes Analyzing Charts and using Technical Indicators to find the ideal trade.
- Fundamental Analysis includes analyzing financial statements (Balance sheet, Income Statement, Cash flow statement)
A good practice often includes utilizing both the theories and implementing them side by side. Especially in Day Trading.
In this article I’ll be sharing what I have learned in Technical Analysis and try to explain couple of methods I have used till now in my trades.
Here’s the nitty-gritty of the whole thing:
- Head & Shoulders and Wedge Pattern breakout confirming with RSI Indicator
- Fibonacci Retracements over 61.8%
- Accumulation & Distribution breakout
Important point to be noted is that there are many traders with decades of experience say to focus on Price action & Volume and I totally agree with them. However for beginners like me Indicators are good tools to understand the underlying price action. What’s important is that you shouldn’t be dependent on them. A good piece of advice I got is that
“The best thing an indicator can do is to give the user a context about the past moment of a stock. Not a trading signal”
Here, the thing to keep in mind is a) the methods stated are just a helpful measure to understand the price action b) they are not the sole reasons to trade.
If you’re new to the topic I recommend you a book “Technical Analysis for the rest of us” by Clifford Pistolese. First 3 chapters and googling couple of terms on the go would suffice to understand this article.
Note that these methods works best on high volume stocks and Index.
Head & Shoulders and Wedge Pattern breakout with RSI Indicator
If you’re reading this or read the book mentioned above, chances are you know the classic head & shoulder pattern. Good number of traders on youtube justify their trades on this pattern. However, you can ever so slightly tweak some things to improve the accuracy of your trade. Here are the couple of things I do when I see an H&S pattern forming. The following points are in perspective of inverted H&S.
Concept
1.Draw a trend line touching the closing prices or candle body top.
- In Inverted H&S (as shown in the picture) try to connect highs and for H&S vice versa.
2.Use RSI indicator to confirm the Head’s bottom (or head’s top in in the pattern.
- As per the picture, you can see the RSI touching 30, indicating ‘oversold’. The closing or low price of that candle would be the Head’s low. Marking the price level helps.
3.Wait for the break out and enter at ‘last kiss’ and stoploss at heads low.
- Good entry would be anywhere between 31400–31440.
Fibonacci Retracements
It’s one of the classic tool used by any index trader’s arsenal. Different people have different opinion about using this tool, duh (or any tool lol). The following is the concept you should keep in mind while using it.
- In a Bull or Bear run, when the retracement of the price is above 61.8%, the chances of trend change are very high.
Usually, what I use to do is that, whenever the price retraces to the fibonacci level, I try to take an entry. And when the above condition occurs, I try to find other justification using other patterns and indicators for the price action happened. Instead it would be a good choice to go short instead of long(and vice versa). This is the reason why I think this is one of the underrated and fundamental point beginners miss-out.
The picture shows that after price reached at 0.618 levels, a sideways moment with no higher highs or lower lows formed. But once it broke that level, it acted a resistance and began giving lower highs and lows, indicating the trend change.
Accumulation & Distribution breakout
This is the most interesting method out of 3 and while using it I always had low confidence in execution. But it doesn’t mean it doesn’t work. It absolutely does. It just doesn’t work for me :D (wow thats a lot of does)
This article explains it way more extensively the underlying concepts of this method. https://tradingcoach.co.in/richard-wyckoff-accumulation-distribution-phase/
The main point here is that when ever a breakout/breakdown from the accumulation or distribution phase happens, entering in the direction would be affirmative action. However, where I struggle is the entry point. I’ve seen people say enter at ‘last kiss’ or at market price or wait for a retracement. Till now only 4–5 were a success out of 20 trades. So yes, I would definitely recommend you to back test it and do let me know if your accuracy is >50%. that would be a massive help.
Verdict
Trial and error is the way to succeed in Stock Market. Learning from a top class guru is good, but it doesn’t matter at all if you don’t have the guts to play the cards. For eg there’s a channel breakout in the chart, but if you choose not to act and just watch, it’s waste of energy and analysis. I’d recommend and encourage back testing extensively first before trading with real money. Once you’ve done this for a brief period test out with 1 lot and calculate the results based on percentage. One important point to remember is that, you should not enter into stock market with the mindset of ‘making 50k per month’. Instead, as James Clear say, “Focus on Systems, not Goals”. A good TA or price action setup with >60% accuracy will take you long way.
This whole article is only for educational purpose only. I encourage you to first back test the strategies and then proceed based on your trading style and the results you get.
