Today I will talk about a very good and effective technical analysis technique for making informed decision in equity market about when you should off load your portfolio and when you should buy.
These days I have been doing lot of reading and some of the books that I went through were on Technical Analysis of stocks and I have learnt a very good and effective technique for making informed decision in equity market about when you should off load your portfolio and when you should buy.
So let’s begin with an example.
In this analysis we will be using 2 technical indicators
- 50 Day Simple Moving Average (Red Line)
- 200 Day Simple Moving Average (Green Line)
Yahoo Finance provides both and so here is a Nifty chart for last 5 years,
Now follow the table and see how you can predict the future.
| Pattern | Indicator | |
|---|---|---|
| 1 | Red Line is Above Green Line | Sign of Bullish pattern. If the trend is not long enough it’s better to do smart investment. |
| 2 | Green Line is Above Red Line | Sign of Bearish Pattern and if you are still heavy in stock market its time to re-look at your stocks. |
| 3 | Red Line is Above Green Line but crossing down | This is the best time to move out of stock market and go on for a vacation. |
| 4 | Red Line is Below Green Line but crossing over | Relax. Time has come to think equity as a way of investment and creating wealth. |
How this can help?
This time round I will not do the calculation for you but I will ask you to do it for your stock and see how close is your 50 DMA with 200 DMA is?
Choose your favourite stock or even a fund. Then get the historical value of that fund or stock using any such charts like Yahoo / Google.
Now just try to apply this to your situation. Assuming you did some investment in mid 2007. Now start following the above table which suggest you should sell your funds in April 2008 and then buy again back in April 2009 and see for yourself how much money you could have saved 🙁 if not make.
So now you are feeling sad that we have this after the losses and not before it and so now you think “I don’t believe in History. Show me something for today.”
Remember History teaches you a lot and so now it is all about applying.
See if you any of your stock has 50 DMA very close to 200 DMA today. If there is see if there is any decisive crossing of the DMA’s. If it is now you know its time for the application of your lesson learnt from history?
For me Dish TV DMA’s are very close. So if I sell Dish TV before doing a posting now you should know why? 🙁
Don’t you think just one example is not just good enough for any study to conclude.
I do think that way but believe me I have tested this theory on all my list of stocks, funds and even on all indexes I can think off.
Second Example
We have very less data for Nifty when it comes to charts in Yahoo and so I will demonstrate this on Dow Jones on some random time and see how you can predict more easily your golden time to buy and sell stocks.
You can see lots of arrows and let us call them Pivots.
When you buy at first pivot and sell at second you actually make a loss but that is actually not loss in true sense but it proves to be a stop loss and you are saved from a sharp downturn.
Third pivot again proves to be a point of handsome returns but when it comes to 4th and 5th pivots there is nothing much to choose from.
I can just go on and on showing you examples after examples but instead of me doing that why don’t you try finding something for your stock where the above theory has failed. Let’s try it.
If you are curious to know about the name of the books I have been following recently here they are.
- The Investor’s Guide to Technical Analysis
- Technical Analysis for Dummies
- Technical Analysis: The Complete Resource for Financial Market Technicians
Remember it’s never too late to have an extra book in your library.
I believe Technical Analysis can be a helpful tool, but only after you have Identified that undervalued stock your looking for. Then it usually will tell you the best times to get in.
Technical Analysis is not about finding undervalued stock. That is fundamentals
Hi
Anon has hit the nail on its head…All this technical analysis is garbage so people stay away from all this talks of guesses being educated guesses and likes..They are all their to suck your money
How exponential Simple Moving Average is helpful?
All those can be used. SMA, EMA or even Fibonacci levels as well as Bollinger Bands. SMA is just one of them.
Hi
In the given example, you taken SMA 50 and SMA 200. Any reason for it? Why not 10 or 20 days SMA instead of 50 days and 200 days SMA?
Over a period of time 50 and 200 has worked for more instances than others.
Hi,
This proves again that technical analysis is garbage packaged by smart mathematicians who have to apply their spreadsheet skills somewhere. Please look at the BLUE LINE for what you are BUYING and SELLING and the green and red lines as INDICATORS that are supposed to “trigger” that decision! Based on the chart above … did anyone notice the following.
First Buy Signal; DOW at 10.6k
Next Sell Signal; DOW at 9.6k
Next Buy Signal; DOW at 8.6k
Next Sell Signal; DOW at 10.3k
Next Buy Signal; DOW at 10.6k
Next Sell Signal; DOW at 10.5k
Over Five years total income = -1k+1.7k-0.1k = 0.6k
On a base of ~10k thats a whopping 6% return over 5 short years implying a great 1% return per year.
Counting brokerage, STT etc you will be at one BIG ZERO or most likely NEGATIVE. Simple FD would have got you 40% in the interim without ever looking at any screen or broker.
Enjoy yourself at technical trading but please know that you will be poorer and your brokers richer over a 20 year period.
Now there will always be some bloke who will claim how he made a zillion bucks doing technicals. But lets put it in perspective. Lets look at every possible stock in every possible market in the world and plot billions of charts. Now see how many of these DMA theories work and how many don’t. That ratio will turn out to be ~50% over a hundred year span implying you win half the time and loose half the time. In short collectively this group of investors makes nothing. But there will be those lucky few who will write books and publish new theories every day.
Chew on this one again if you have’nt read it already.
Suppose there were 1,000,000 chimpazees in a room. And they were asked to call heads or tails on a coin flipping contest (the same 50% probability as above). After the first flip 500k would loose and 500k would win. After the second flip, 250k would be left and so on. After 20 flips there would be one chimp left. He would have called right 20 times in a row. By now he would have written books/theories/blogs and probably won a Nobel on how to call a toin coss. Many would follow him and write more books. The would examine room temperature, air velocity, flippers palm size, eyesight of participants and write more on all these factors that influence winning. The fact is he just happened to get lucky and is still a chimp! Chartists and Chimps in a coin flipping contest have a lot in common.
Anon, I am not sure if you have your right email to get the notification of this reply but yes I will definitely share it here. When it comes to trading all you are doing a guessing game for future. Yes I know being a trader I should not be saying this but the fact will not change no matter what I say or don’t say. I don’t buy into stocks because I know for sure it will move up or down but I buy because I assume it will. Now there are lots of analysis to make the guess an educated guess. Technical analysis is one of them. Fractal analysis is one more. Trading and investing in equity is all about guessing like you say in chimpanzees but then converting those guesses into an educated what makes you a better trader and investors which I am sure chimpanzees lacks.
It is very informative. But, it is not always necessary that the simple moving average graph will always move in zig zag style. In the given chart after touching its pivotol points it is going other direction ie moving up so it is benefited. What if comes down to the same direction then the investory suffer more losses.
How to predict the movement of SMA 50 after a pivotal point? it can go the same direction or if lucky, oposite direction. How does an investory decide on that?
Salm, One date cannot help to predict lot of things but it is one way of doing for a particular pattern.
Hi Shabbir,
Thanks for the reply say for eg. i want to invest (STP) in Canara Robeco Equity Tax Saver what should be my investing strategies…
Thanks
Ketan
STP should be in 2 funds and move out of one and move into other depending on the market condition or investment needs.
Hi Shabbir,
Recently i read about STP (systematic transfer plan) but was confused as it has very little information… it also says that its good investment in the current market scenario… will you pls. provide me with complete information about this product and how to invest in it.
Thanks
Ketan
Ketan, It is something where you transfer from one fund to other on a regular basis
Hi Shabbir,
Excellent post specially for a beginner to choose the stocks.
Can you please drop another post how to find a stock touching 52-week high or low?
TS, Any charts on Yahoo Finance will give you that.
it would help full in case you could give us sector wise good stocks.
Also, need to know about option premium calculation. how to calculate correct option premium price with right examples.
Vija, I do not discuss stocks often
Sorry for the confusion. i got it now.
i looked the same stok in http://in.finance.yahoo.com/q?s=IDEA.NS
(where there is no interactive chart)
later looked into
http://finance.yahoo.com/echarts?s=IDEA.NS#chart1:symbol=idea.ns;range=5y;indicator=volume;charttype=line;crosshair=on;ohlcvalues=0;logscale=off;source=undefined
where look and feel is same
Shabbir, As mentioned looked in yahoo finance and Google finance the chart looks different.
I mean the look and feel is different, not the same as shown above.
Where can I find the chart to do technial anaysis? Is technical anaysis for mutual fund possible in this chart?i want to do technical anaysis for UTI Infra advantage mutual fund
Would approciste if the address of the site is provided
Thanks Shabbir for your valuable explanation. Could you let me know from which website your using for charts as shown above.
Vijay, Its mentioned in the post and its Yahoo Finance.
thanks shabbir for correction.
Is there any way to find out support level for scrip?
Marshal, Have you seen http://shabbir.in/calculate-stop-loss-target-level/
Nice explanation about 50 DMA and 200 DMA. Thanks for sharing. Now I myself can predict about the movement of any particular stock by applying your four points.
typo is here
“Green Line is Below Green Line but crossing over”
@Marshal, Thanks for pointing that out and its now corrected.
@Khalid, Good to see that and see how I applied in on my stock – http://shabbir.in/practical-application-of-technical-analysis/
Hi,
I guess there is a typo with the last(4th) pattern
Sharath, Can you suggest where?
the result are good it is good to apply the observation during trading hrs to get good profits.