We are very busy, you know !!! We do not have time to learn "Technical Analysis" and your Software.... afterall, What is the need of your software when there are so many websites and people (read Technical Analysts) giving tips, forecasts and readymade Technical Analysis ?
Yes... you are right. Time is Money and you do not have 'extra time' to spend on learning technical jargons and new softwares. You are looking for an instant solution, just like a copying machine where you put blank paper from one end and receive printer paper from another, right ? So it is obvious that you can accept above options as solutions to your needs. Alright.... done. So you can go ahead with these options and make your life easy. But before you do that, please answer one, just one simple question.
- Money flows in stock market from one hand to another. Stock Market is your personal Money Minting Machine if you know when any particular stock is going to rise and fall. So far so good. But.... if people / websites sellings tips, forecasts, etc. 'already know' when market or particular stock is going to rise or fall, it means that they already own this Money Minting Machine. Is it not ? Then why would they be interested in your few hundred / thousand rupees subscription ? When an easy way of earning money right from their office / home is known to them, why are they sweating and spending more money to attract your attention through their websites, seminars, webinars ? Would you go out several miles to fetch water when the same is available to you through tap ?
Think again... :-)
But then... how come few people continue to earn from stock market, regardless of whether it is Bull or Bear Phase ? They must be having some magic secret formula which if I am able to get, it will make my life, for sure..
There you speak one truth, my friend. Only 'few' people are able to consistently win in the stock market regardless of the market condition. What do you think, why they win ? Is it because of just 'a formula' ? Nope... Winning consistently is a matter of bringing many things together, not just 'a formula'. A formula is actually just a part of The Trading Plan. And trading plan includes lots of things like, identifying potentially profitable trades, selecting a handful of them, identifying and making correct entry, putting pre-defined stoploss at the time of placing order (to protect yourself from trade going against you), wait period (ignoring the noise), monitoring conditions continuously which keep on changing every now and then, detecting early warning signals, exiting strictly at stoploss if trade tries to go against you, moving stoploss in the direction of the trade if it goes as you expected (trailing stop loss) and exiting when trailing stoploss is hit.
Ask any successful person in stock market about his winning trades and he will tell you, he does not win ALWAYS. Percentage of winning trades is at the most 50 to 75% of the total no. of trades. But his winning edge lies in exiting the trades early if they do not work out as expected and re-enter again, once favourable condition is spotted again. They do not ask WHY when things go against them. They quickly accept and cut their position and analyse it later from sidelines. Reason why people employed at big trading houses, FIIs, etc. continue to win is bacause, no participant is allowed to defer from the rules laid down by their management, which are results of their vast experience in this 'trading business'. Yes.... you will succeed in Stock Market only if you do it seriously as a business.
As you can see from above, you need to have a kind of system which will help you to do following.
- identify profitable trades
- select those which have highest potential (read risk to reward ratio)
- identify correct entry points and enter accordingly
- identify stoploss levels (which is normally a function of your total trading capital and maximum loss you can allow per trade) and apply them(mentally or actually)
- monitor the trade
- move trailing stoploss in the direction of the trade
- detect early warning signals
- and exit when stoploss is hit
Ohhh... now I am beginning to understand. Lets say I have a trading plan, I have also decided on the time frame, but how can one person do all these things simultaneously ? There are thousands of scrips continuously moving up and down... From where do I start ? And how do I monitor the position continuously ? How to identify early warning signals so that I can take correct action ?
Hmmm.... now I see a wise trader emerging out of you. Why ? because now you are thinking in the manner a successful trader thinks. Here, Technical Analysis combined with a good analysis platform will make your life simpler, if not easier. We will cover what is Technical Analysis and how it can help you identify possible profitable trades, stoploss levels, entry points, warning signals in just a few minutes.
What is Technical Analysis ?
Everyone wants to profit from his/her stock market 'adventures'. In order to succeed, traders study the market from various angles. They study the 'present' and 'historical' data of the stocks they are interested in and based on their findings, they decide their action. Broadly, we can classify these methods of analysis as fundamental analysis and technical analysis. In fundamental analysis, the analysts analyse the intrinsic value of the share i.e. its current v/s past performance, orders in hand, current domestic and global scenario that can affect the company or the industry, earning per share and various other factors that can affect the price of the stock. Based on their findings, they make a conclusion about 'future movements' in the price of the stock and invest accordingly.
In technical analysis, the analysts try to forecast the future movements in the price of the stock by mainly studying the current as well as historical price data of the security (i.e. shares or stocks) and volume. Technical Analysis is based on the following principles.
- Market action, which reflects into price of the stock, discounts everything : This means that all the relevant information regarding current market state, global and domestic scenario, perception of all market participants regarding possible future movements is reflected in the price of the stock. It thus tries to concentrate on the 'internals' of the particular stock than on 'externals' like news and events happening around.
- Price moves in trends : Broadly there are 3 types of trends that any stock follows viz. an uptrend which is marked by a series of 'higher highs' and 'higher lows', downtrend which is marked by 'lower highs' and 'lower lows' and sideways trend, in which, a stock neither moves upwards nor downwards but oscillates between an upper and lower value. Such stocks are also known as 'range bound' stocks.
- History tends to repeat itself : Technical analysts believe that investors collectively repeat the behavior of the investors that preceded them. Most of the humans think alike. You can expect a certain reaction from a majority of the participants in response to something that happens in the market. Such reactions are reflected in the prices.
Why Prices rise and fall ?
It is a universal phenomenon that all buyers want to buy at the lowest possible price and all sellers want to sell at the highest possible price, so as to maximise their profits. Buyers are buying the stock because they feel that the prices will go up so that they can profit from selling higher later. Sellers are selling the stock because they are of the opinion that the price of the share will go down so that they can cover the shares later i.e. buy at lower price and profit. These conflicting opinions of the market participants about the same market gives rise to buyers and sellers. In trading terminology, buyers are called as bulls and sellers are called as bears. Which is why when prices go up, we hear that the market has become 'bullish' and when prices go down, the same market is said to be in 'bearish' mood.
So, at any given time, there are willing buyers as well as willing sellers in the market... The price at which buyers are willing to buy a stock is called as Bid Price. The price at which sellers are willing to sell the stock is called as Ask Price. As you can guess, Bid Price is always lower than the Ask Price.
So when there are more sellers willing to sell the stock than the buyers, it creates a 'kind of' competition amongst sellers. In order to succeed, they ask lower and lower to stay ahead of the competition. This results in more and more transactions at lower prices. In contrast, when there are more willing buyers than sellers, it creates competition amongst buyers and in order to succeed in buying, they keep increasing their bid price thus resulting in increase in the price of the stock.
How does Technical Analysis Work ?
Technical analysis is nothing but the study of this demand and supply. Technical Analyst tries to study these price movements in the form of charts on which, current as well as historical prices are plotted generally with volumes. Increase in the price with increased volumes shows that majority of the market participants feel that the price of the stock should go up and vise versa.
A chart plots the price of the stock on Y-axis with time-scale on X-axis. It gives visual representation of the market movements to the analyst which is very easy to understand. Generally, line charts or candlestick charts are used by majority of the technical analysts. Candlestick charting is a method successfully used by rice traders in Japan centuries ago. We will be using this method for all demonstrations on this site.
In a candlestick chart, every candle represents a particular time-frame. In daily charts, each candle represents a day whereas in a weekly chart, each candle represents a week. Similarly in intraday charts, you can have candles representing 1 minute, 5 minutes, 30 minutes and so on.
A candle denotes Open, High, Low and Close of the stock for that particular time frame. Each candle has 3 distinct parts, main body, upper shadow and lower shadow. The part between Open and Close forms the main body. A candle which closes lower than its open is has its body shown in black colour. A candle which closes higher than its open has its body shown in white colour. Upper and lower wicks represent High and Low respectively. Some chartist also use blue-red combination instead of white-black. See some examples below.
As seen in the picture above, each candle shows Open, High, Low and Close (OHLC in short) of the particular stock. A series of such candles when plotted on the time scale gives us visual clue as to where the stock is moving.
A Case Study
Let us take a case study and try to analyse a scrip with the help of Technical Analysis. For the case study, we will consider daily chart of NSE-NIFTY as shown below.
As we can see, the Nifty Index is continuously making higher highs and higher lows since November 2005, which denotes a strong uptrend. The picture will be more clear after a trendline is drawn. A trendline is drawn by connecting at least 2 lows (higher lows connecting the trendline, the better) in an uptrending scrip. Similarly, in a downtrend, you draw a trendline by connecting at least 2 highs.
As we can see above, trendline acts as a kind of support. The falling prices tend to bounce back when they touch / close near the trendline. This gives a trader more confidence into the trendline and buying activity tends to increase when prices fall close to the trendline. As we can see from the picture above, the trendline has remained intact since November 2005 upto May 2006. Towards the right extreme right end of the chart however, we see that for the first time, prices have closed below the trendline. For more accurate analysis, we will incorporate volume too in the chart as shown below.
Now this chart gives us some hint. Towards extreme end, we see abnormally high volume on one day followed by more than average volume with black candles. It means that sellers are more aggressive than buyers and there is a chance that prices may fall further. To make sure that our analysis is perfect, we will take help of an indicator, called Relative Strength Index or RSI in short. We will plot RSI below the price chart as shown below.
Upon closely observing the RSI in conjunction with Price chart, we observe that although prices have gone up since April 2006, the RSI value has not increased, if fact, it has gone down.
Such a divergence gives us the best signal. It tells us that something is happening underground and mood of the majority of the market participants is becoming bearish. So it is time to close whatever open positions we have i.e. book profit or loss and exit the trade.
We will now extend the chart window into June 2006 to see what happened after we decided to exit the trade on 12th May 2006.
I am really amazed to know how Technical Analysis can make my job simpler. I have also started reading about Technical Analysis and how to identify possible winning trades. But my question still remains; how to screen thousands of stocks and monitor continuously once position is taken ?
As you must have realised by now, it is not possible to screen thousands of stocks manually. You need help of professional technical analysis and charting software to help you in this job.
But why professional software ? I find list of so many free charting and analysis softwares over Internet. Can I not use any one of them ?
Yes and No. Answer depends on many factors. You can use any free software provided it has all the features which will help you achieve all that you wish to achieve (remember check list above?) and help you concentrate on trading.
People spend a lot of time searching for a free TA software which performs all they have in mind. As they begin, any software looks fine. But as they move forward, they start facing problems.
The first hurdle they come across is in finding a compatible data source. Every TA software needs data to analyse it further. Some succeed in getting data source to only find that they want to do day-trading for which they need real-time data whereas the data received by them is either end-of-the-day or delayed (if intraday). Being a freeware, they have to make good with whatever is available and go ahead. Then there are limitations like total no. of scrips that can be displayed, no. of indicators that can be added (most of the times, you have to satisfy yourself with whatever is available, you cannot add your own indicator to the software), non-ability to include your own entry-exit logic to the system, limited ways of scanning the scrips for taking entry-exit positions (mostly they are non-existent for real time data), scanning the scrip continuously to track changes in the market sentiments not to include other issues like arranging and displaying GUI in the manner it suits your style, unexpected errors, infamous and deadly illegal operations, OS compatibility issues, non-availability or poor support to list a few.
Can you come to the point quickly ?
My dear friend, please understand that stock market is a serious business. You are putting in your hard-earned money in the stock market. People out there are smarter than you and are equipped with all necessary tools to quickly identify and act as per entry-exit signals. So your technical analysis platform has to be robust with all the features required by any serious trader so that you spend more time in taking the necessary action than on fixing issues presented by your TA Software. Anybody with 4-5 years of coding experience can make an entry-level TA Software but development of a professional Technical Analysis Software, which is the need of dynamic stock market, needs money, experience, seriousness towards business, manpower resources and vision. You need staff familier with needs of the stock market to write and test software accordingly. You need to invest in dedicated support staff to handle the issues that arise at the customers' end. After rolling out a version, you need to have a system to listen to the feedback received from the customers and fix bugs, if any. You need scalable development platform so that future versions with modifications, enhancements do not require you to rewrite the software from scratch. As said earlier this needs lot of money, experience and patience which rarely exist at the freeware developers' end.
Hmmm... so do you mean to say that your software has all these features ?
There you are :-). It has much more than you can expect. AmiBroker has stood the most brutal test for any business, the time test. AmiBroker, a product by amibroker.com (read Tomasz Janeczko), is in the market for more than a decade. At Amibroker, a team of dedicated developers led by Tomasz Janeczko, who is the owner of amibroker.com, is consistently listening to the changing and demanding stock market and have been rolling out the products which have won praise from every corner of the world. Current version 5.40 has all the necessary features required by a serious trader. Apart from those mentioned in the checklist, it has advanced features like :
Well, I have gone through the exhaustive feature list of AmiBroker... I have also googled Internet and visited many forums where I have read only encouraging remarks about AmiBroker... I am now really keen but want to try AmiBroker myself and make sure that it works perfect and has all features as claimed...
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The only limitation of AmiBroker trial version is, it does not allow you to save database i.e. all changes are lost once AmiBroker is closed, including the data downloaded. Apart from this, there is no other restriction and you may check all of its features including advanced ones, without any restrictions.
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Absolutely not. AmiBroker is available in 2 editions, Standard and Professional. Both editions have the ability to show real time data. (To know the difference between 2 editions of AmiBroker, click here). To know pricing of AmiBroker editions, please visit our Products Section.
AmiBroker price includes :
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Happy Investing and Trading !!