The Complete Beginner’s Guide to Technical Analysis

The Complete Beginner’s Guide to Technical Analysis

Technical analysis is a term that we hear a lot in the stock market. But what does it actually mean and how can it help you with options Intraday trading? Today, we’ll cover the basics and tell you everything you need to know.

 

What is Technical Analysis?

Technical analysis (TA) is the use of past market data to analyze INDEX and make better trading decisions. It’s based on the idea that supply and demand will determine a options premium more accurately than the INDEX intrinsic or “true” value.

Technical analysts look at the price movement over time, trading volume, and other historical market data. Then, they find trends and patterns which can be used to predict future price movements.

It can seem complicated at first, but many traders actually find it easier than its counterpart, fundamental analysis. It’s less subjective, involves less research, and can be used even if you don’t know a lot about the industry or company.

**To learn more about technical analysis, click here

The 3 Assumptions of Technical Analysis:

Technical analysis is very popular, especially for traders who like Intraday trading in options. But it’s important for you to understand it well before risking your hard-earned money. Before you go all-in, here are the 3 main assumptions in TA that you should know:

  1. The market discounts everything.

This is one of the strongest assumptions in TA. Here, we assume that all publicly available information is already “priced-in” or reflected in the options premium.

Our assumption is that when market players get information, they react to it by either buying or selling shares. Because of this, supply and demand will immediately adjust along with the options premium.

Any news, disclosures, or announcements won’t matter anymore because the market is always a step ahead. You can never have any “new” information that the market didn’t already account for,

  1. Prices move in trends.

Technical analysts believe that price movements are not random. They will always move in some general direction, whether upward, downward, or sideways.

For example, if a certain stock’s price is increasing, then it is more likely that the price will continue to increase. If the price is going down, then it is more likely that the price will continue to go down.

The trend can be short-, medium-, or long-term, but prices always tend to move in one direction and are more likely to continue that trend rather than move randomly.

  1. History repeats itself.

People behave in a predictable way. Because of this, similar events and information are usually met with similar reactions. Bad earnings will make people want to sell, expansion plans will make people want to buy, and so on.

For the year Fy17-18 we have traded Bank Nifty options Intraday options based on historical patterns which repeat over and over again which helped us to grow our account to over 110.64% in 12 months,

 

(Learn how we managed to generate consist income by trading Bank Nifty options, Click here)

 

This allows us to use past market data and chart patterns to predict future price movements and market behavior.

Basic Concepts in Technical Analysis

Now that you know a bit more about technical analysis and the assumptions behind it, let’s cover some of the basic concepts in TA. Each of these concepts can be a full article on its own, but for now we’ll just run through the most important facts to get you started.

 

1. Support and Resistance

Support and resistance are two of the most basic concepts in technical analysis. You can already use them to make trading decisions, but they also form the foundation of more complex strategies and trading systems.

Support is the price that, historically, a Index has had difficulty falling below. This is the point where the market considers the price to be “cheap”. Demand becomes so strong that it stops the price from going any lower.

 

(Here the current resistance is @25500 levels & support is @24750)

Resistance is simply the opposite of support. This is the point where the INDEX price usually starts going down because there is too much supply and not enough demand. 

Support and resistance levels are not always precise and they can be broken, but it’s a simple and proven concept that many find useful. The basic rule when trading using support and resistance is to buy on support and sell on resistance.

2. Trend Analysis

There are always going to be ups and downs in the stock market and in every stock, but these ups and downs will eventually form a trend that moves in some general direction—this is actually one of the key assumptions of TA that we discussed above.

There are 3 basic types of trends:

Uptrend:

(Currently Bank Nifty is in Uptrend in hourly chart)

Identified by a series of higher highs and higher lows. The general movement over time is going upward.

Downtrend:

(Red lines indicate down trend in hourly chart)

Identified by a series of lower highs and lower lows. The general movement over time is going downward.

 

Sideways:

There is no clear pattern going upward or downward. The general movement over time is horizontal or flat.

Similar to support and resistance, trends are not guaranteed to continue to hold. That’s why they can be further classified into short-, medium-, and long-term trends. Trends can and do change. But unless something happens to change the market behavior, then the trend is likely to continue.

 

The general rule of thumb? Buy Call on Uptrend & put options in Down trend

3. Volume

A lot of technical analysis involves looking at the option premium, but that’s not the only important statistic in TA. Another equally important, if not more important, number to look at is the trading volume.

The trading volume tells you the number of shares that were bought and sold in a particular time frame (usually a day). You can see the volume shown as a bar graph at the bottom of the options chart.

Volume is important because it gives context to price movements. It tells you how strong or weak a trend or chart pattern is.

For example: If the price of a down trending stock starts going up, does it mean the trend changed to an uptrend? Take a look at the volume and you’ll find out. If the volume is low, then the trend will probably continue going down. If the trading volume is high, it means that there is a strong demand for the stock and the trend will likely change to an uptrend.

4. CHART PATTERNS

There are many kinds of charts that traders can use to monitor the stock market, but the most popular is probably the candlestick chart.

A candlestick chart shows four key prices for the day—the opening price, closing price, highest price, and lowest price. These are based on that day’s completed transactions.

 

If the candle is green, it means that the closing price was higher than the opening price. If it is red, it means the opening price was higher than the closing price.

 

The colors might change depending on the chart you’re using, but one color will always show an increase in price over the day and another color will show a decrease in price.

Once you understand how to read charts, then you can also start seeing patterns forming. Because TA assumes that history repeats itself, we can use past patterns to predict future movements in the market.

Here are some basic chart patterns:

Helpful Information:

  1. Learn the basics of technical analysis : Click here
  2. Learn technical case studies : Click here
  3. Learn daily chart analysis: Click here

 

Conclusion

We talked about a lot in this article, but we barely scratched the surface of technical analysis! As you practice trading, you will learn how to combine these concepts and turn them into practical and useful trading strategies.

Stay tuned as we dive deeper into each of the concepts in our next articles and subscribe to Trade_psychology for more tips in options trading strategies!

In the meantime, try applying the concepts above in your trading! Leave your comments below and update us on how you’re doing.

7 Crucial Tips for New Options Traders:

I am a self-taught trader doing it all by myself, I was forced to learn tips a lot the hard way and through trial and error along the way and this is, in part, what inspired me to create the blog tradepsychology.com  to be the mentor to people that I never had.

 I wish I knew the crucial steps to success like I’ll provide for you below.

 

  1. Seek an education.

 

The idea of just jumping in and starting to day trade NIFTY might be tempting. You’ll figure it out as you go, right? Not so fast.

 

I’m all for going for it, but take a step back before you do anything hasty. Remember, this is your money, and you don’t want to lose it. Before you trade, it’s smart to learn a bit about the process and theory behind trading so that you don’t lose your money in ways that could easily be avoided.

 

Tradepsychology.com was created for this exact reason. It is designed to educate the new traders on trading, real-life way. We progress into case studies and methods that you can put to work. I don’t want you to wait years and years to make your first trade, but I do want you to have an idea of what you’re doing before you dive in.

 

  1. Willingness to learn. 

 

Its best that you learn this early on in your career: as a trader, the need to keep learning will never end. Seeking out an education, as discussed in the previous point, is partially so that you can make educated trades. But it’s only the tip of the iceberg.

 

But if you really want to be a longtime, successful trader, you’ll need to have a will and a desire to learn. This is something that you basically want to turn on and never turn off. Keep reading, learning about the philosophies and methods behind successful traders, and stay interested in the world, both in terms of business and at large.

 

  1. Know what you’re working toward.

 

If you’re not working toward something as a trader, then your career will have little direction. So what are you working toward with your trading? What are your goals?

When you’re new as a trader, you should have strong clarity on what it is that drew you to trading. Money, obviously. But money for what? A better quality of life? Really dig deep and figure out exactly what it is that you want to buy with all that money you’ll make.

Tattoo that desire in your brain and think of it with every trade you make. It will help you stay motivated, which makes you a better trader. Having goals to stay committed to will keep you going when things get tough.

 

  1. Recognize your strengths and weaknesses.

 

It’s important to be able to identify your strengths and weaknesses early on as a trader. Basically, the sooner you identify them, the sooner you can streamline your trading.

By recognizing your strengths, you can play to them, and adjust your study and trading schedule to suit what works best for you, every trade and student is different as we all have different personalities so it’s important to recognize this and adapt to whatever works best FOR YOU!

By recognizing your weaknesses, you can either work around them, or make a decision to become stronger in those areas. This might involve studying harder in certain areas, or taking the steps to remove bad habits from your daily repertoire and replace them with good habits.

 

  1. Give time for improvement, Don’t Quit!

 

Patience is a virtue when it comes to trading. Don’t expect miracles (or millions) in your first week. It doesn’t have to take an incredible amount of time to start earning money, but don’t rush it.

Let yourself discover what works and what doesn’t, and get your footing as a trader, if you want to learn more about patience and perseverance.

Slow but steady wins the race when it comes to developing skills as a trader. Don’t try to jump ahead, because there’s so much that you can learn along the way that can help you later. Giving yourself the room to learn and improve over time will take a way a huge stress from your trading career, and it will also make the journey more enjoyable.

  1. Create good contacts, friends. 

Creating a network is important for any entrepreneur, and traders are no different.  Making friends with other new traders can create a positive support network and help you stay inspired.

Making friends with traders who are further along in their career than you can give you insight and allow you to emulate their success (without copying).

A mentor, too, should be part of your network; this is a trader who is further along in their career than you who takes it one level further and acts as your adviser. Meeting with a mentor on occasion can inform your career, give your ideas, and help you know what career pitfalls to avoid.

Moreover, creating a strong network is a great thing for new traders, as you never know what opportunities your connections might afford you in the future.

 

  1. Love intraday trading.

If you walk away with nothing else from this article, take this advice to heart. If you learn to love trading, then you’ll be doing yourself a great service as a trader…the process and the journey is actually even more enjoyable than the rewards…the rewards are nice, don’t get me wrong, but learning to be self-sufficient is priceless as even if I lost all my money tomorrow, I know EXACTLY what I must to do get it back so I’ll NEVER be down for very long, no matter what happens.

And remember, too many people suck at their jobs and don’t excel because they don’t truly enjoy it…doing things that you hate is no fun. It makes the time crawl by, and it does nothing to improve your quality of life so don’t make that your future.

However, doing things you love makes time fly by (in a good way) and makes you feel vital and excited about your day, and about life in general.

If trading can become one of those things that you love, then your career will seem effortless and success will come to you far more quickly and more naturally.

These seven pieces of advice are vital for new traders. I wish that I’d had them when I was a new trader! So go forth and don’t make the same mistakes I did.

Please leave a comment below with which of these points make the most sense to you, #1-7, you tell me! 

Best options trading strategies?

There is no option trading strategy which can be called best.

Quest for the best strategies or even a good strategy is an endless pursuit. Every trader whether trading Options, Futures or Equities is looking for a strategy to stay profitable.

Precious time is spent, huge data is back tested and the experts come out with some formula, method or strategy with fancy name. Do they guarantee that this fruit of their hard work will always deliver profit? No.

The success ration may improve to 60–65% with best of the strategies.

Will they ultimately be profitable?

No, if applied blindly.

Yes, if used judiciously.

So finally it is not the strategy which generates the profit but its application in a controlled manner.

Having stated that there is no holy grail, let us see what the next best thing is.

Is Option Trading Really Complicated ?

It is human nature to look for problems where none exist.

Life is simple, we complicate it ourselves and then spend our time clearing the mess.

Here is the much revered Option Pricing Formula:

I would leave it to the mathematicians and experts to deal with. We traders should look at the screen for the price action and get our two cents or two dollars from that. Whether the Option is priced perfectly or not is immaterial.

Who said markets were rational?

And which formula would work in irrational environment.

Some Strategies:

Some strategies are listed in the chart below with impact of Vega and Change in Implied Volatility indicated:

Does it mean anything to you and me?

I am not sure.

I have been trading options for quite a few years without caring for these definitions. Probably, the impact is understood automatically through price action.

Or I would have become a far better trader had I perfected my knowledge of these theories and formulas.

What Do You Want To Achieve? :

You want to be a good trader.

Work towards that goal.

You want to learn driving. Learn it. Do not aspire to be Michael Schumacher on the first day of driving.

And do not try to become automobile engineer when all you want is to learn driving.

That is where most people waste their time and energy.

For crossing a railway track, look left and right and cross. Do not try to memorize the train time table just for crossing the track safely.

What Strategies Should One Use ? :

We are back to where we started. A trader is an inquisitive person. Whether winning or losing, one would still like to know if there could be some better method for trading.

For that, a trader has to know himself ( herself ) first.

Option Buyer has the potential for Unlimited Profit and Limited Loss.

But the probability of the Limited Loss is very high.

Option Seller has the potential for Limited Profit and Unlimited Loss.

Probability of profit is higher than that of loss.

So most trader believe that selling Options is a surefire way to win the game.

Remember to be careful about the unlimited loss probability. It can wipe out your capital.

One can be a profitable both ways, by appropriate exit when losing in a trade.

Or use debit spreads, credit spreads to keep the loss manageable and wait for the profit.

Options are not as complex as they have been made by creation of strategies. Strategies are needed for large portfolios. 

 

To Conclude:

There is no strategy called the best strategy.

All strategies can fail.

Keeping it simple is the easy way to trade.

A trader’s personality and risk profile determines what strategy will be good for him.

Know yourself.

Create your own strategy.

Pivot point theory: NIFTY Options Trading

The pivot point itself is the primary support/resistance for Nifty. This means that the largest price movement is expected to occur at this price. The other support and resistance levels are less influential, but may still generate significant price movements

The first way is for determining the overall market trend: if the pivot point price is broken in an upward movement, then the market is bullish, and vice versa. Keep in mind, however, that pivot points are short-term trend indicators, useful for only one day until it needs to be recalculated

Using Pivot Points in NIFTY Options Trading

Pivot acting as Support

Pivot acting as Resistance

Pivot

The second method is to use pivot point price levels to enter and exit the markets. For example, a trader might put in a limit order to buy 100 shares if the price breaks a resistance level. Alternatively, a trader might set a stop-loss for his or her active trade if a support level is broken.

Pivot points theory is powerful tool for any trader. It enables anyone to quickly calculate levels that are likely to cause price movement. The success of a pivot-point system, however, lies on the psychological decisions of the trader, and on his or her ability to effectively use the pivot-point systems in conjunction with other forms of technical analysis.


A day trader can use daily data to calculate the pivot points each day, a swing trader can use weekly data to calculate the pivot points for each week and a position trader can use monthly data to calculate the pivot points at the beginning of each month.

Investors can even use yearly data to approximate significant levels for the coming year. The trading philosophy remains the same regardless of the time frame. That is, the calculated pivot points give the trader an idea of where support and resistance is for the coming period, but the trader – because nothing in trading is more important than preparedness – must always be prepared to act.

The Support & Resistance: Pivot points

‘’Support and resistance represent key junctions where the forces of supply and demand meet’’

In the financial markets, prices are driven by supply (down) and demand (up). Supply is synonymous with bearish, bears and selling. Demand is synonymous with bullish, bulls and buying.

 These terms are used interchangeably throughout this and other articles. As demand increases, prices advance and as supply increases, prices decline. When supply and demand are equal, prices move sideways as bulls and bears slug it out for control.

Support:

 

”Above screen shot indicates support level at 57.5

Support is the price level at which demand is thought to be strong enough to prevent the price from declining further. The logic dictates that as the price declines towards support and gets cheaper, buyers become more inclined to buy and sellers become less inclined to sell.

By the time the price reaches the support level, it is believed that demand will overcome supply and prevent the price from falling below support.

Support does not always hold and a break below support signals that the bears have won out over the bulls. A decline below support indicates a new willingness to sell and/or a lack of incentive to buy.

Support breaks and new lows signal that sellers have reduced their expectations and are willing sell at even lower prices. In addition, buyers could not be coerced into buying until prices declined below support or below the previous low. Once support is broken, another support level will have to be established at a lower level.

Resistance:

 

Resistance is the price level at which selling is thought to be strong enough to prevent the price from rising further. The logic dictates that as the price advances towards resistance, sellers become more inclined to sell and buyers become less inclined to buy.

By the time the price reaches the resistance level, it is believed that supply will overcome demand and prevent the price from rising above resistance.

Support and resistance levels can be identified by pivot point theory, will be discussed in Pivot point theory,

Technical indicators

Thinking ahead with Stochastic:

The stochastic oscillator is a momentum technical indicator, which uses the basic support and resistance levels and integrates them with the trend to give an accurate buy or sell signal.

Using stochastic, a trader can gauge the momentum and interpret over brought and oversold condition of a security, currency or an index. Momentum oscillators such as stochastic can give clues when the momentum is slowing down or picking up.

“Instead of using all indicators that are almost derived from closing prices, use of a novel tool like stochastic can add more value to decision-making, as it captures the momentum on the basis of an entire price range over a period,”

Stochastic is measured with the %K line and the %D line. Traders should follow the %D line closely because that indicates major signals on the chart.

A default period of 14 is used to calculate the stochastic oscillator, which is commonly referred to as %K. The K line is the fastest while the D line is the slower of the two.

In other words, a slow stochastic is nothing but a three-period average of a fast stochastic. “A close observation will reveal that the %D line of the fast stochastic is equal to the %K line of the slow stochastic,”

For decision-making, investors need to watch the D-line. If the price of the security moves above the 80 level, it signifies over brought condition. If the value moves towards 20, it will signify an oversold zone.

“The stochastic value, which is referred to as %K, is smoothed by applying three-day moving average to generate BUY/ SELLsignals and this value is called as % D,”

Traders can buy a stock when this indicator shows oversold condition and sell it when the when the indicator moves beyond 80.

Apart from generating buy and sell signals based on the trigger line (%D), a stochastic oscillator is also useful in identifying oversold and over brought conditions and bullish or bearish divergences.

How top investors & traders decisions on Stochastic indicator:
“In a stochastic, the fast indicator is highly sensitive as it is formed by taking a daily price readings. It can fool traders into thinking that trade is possible when it may not be so,”

“The slow stochastic indicator, on the other hand, takes the average of such sensitive readings and smoothness the fluctuations for a more visible trade able signal. Most charting software now can be optimized to the trader’s preference and can thus suit each trader’s need,”

“When the faster stochastic crosses over against the slower one, it indicates a change in the short-term momentum and can be interpreted as a signal to enter the security,”

When not to use stochastic:

Stochastic have been around for over 50 years and just like most indicators, they cannot be looked at in a vacuum. “This should be taken into consideration alongside a tested trading strategy and could act as a supplement to the inherent trading decision,”

Trading with stochastic is not that simple, but in tandem with other indicators and experience, good traders can make a lot of high-probability trades using stochastic

“In small cap or midcap stocks, where liquidity is often scarce, or during wild trends like daily upper or lower circuits, this indicator should not be used as the stock or commodity can remain in over brought or oversold zones for prolonged duration, giving false signals for a counter-trend,”.