Combining Techniques – Part III

We could continue the same further into
Infosys path but then the write-up would get repetitive. What is more
relevant is to see the lessons that can be gleaned from the effort we
have made. Of course, the same kind of analysis will have to be
attempted once again after we have learnt more details in the subject.
Possibly, we shall take up Infosys again at that time to see whether we
could have improved on the performance that we obtained.

It
has been seen during the last two articles that the big money is made
during trended markets. Until then what we can extract out of the
market is only a small percentage of what the market is willing to give
us when it is in a trending mode. Hence the thrust of the analysis
should always be to find out if the market is likely to be trended or
range bound. The difference in the end result of the trade is
dramatically different for these two market situations.

Moving
averages, we have seen, are good systems for tracking trends. In part 2
of this series we saw how well the moving average system manage to
track the trend once it gets into a higher gear. Many people knock the
moving average system as being something very simplistic and therefore
not worthy of use. A look at the previous article should dispel such
false notions. As mentioned at the end of the article Part2, what are
really required are the patience and the conviction to hold the trades
into the future. It is very difficult for most people to stay in a
winning trade. The tendency is always to lock the profits in but when
the trade gets into losses, people always hope that the prices will
come back and allow them to exit even.

In the case of
candlesticks, we found that they can be used as confirming indicators
also along with other systems. We also used them by themselves, finding
major patterns to initiate trades. But many times, candlesticks can be
doubled up as confirmation of breakouts. Take a look at the chart
below. It is the same Infosys example chart, taken forward from the
last article. We had covered the area up to the left ¼ th portion of
the chart last time.

Note that the stock got into a long
congestion that is marked as a rectangle pattern. Note that this
pattern was resolved to the upside with a big range white candle. (This
candle is marked with an arrow). It is the biggest body after a long
series of small body candles.

It
is also to be noted that around the time of the long body candle, the
moving averages too managed to get into positive phase thereby
signaling the onset of another up trend. Notice the moving apart of the
two averages. This shows that the trend strength has increased rapidly.

We saw during our two coverages that patterns are not something
that we see very often. It might then be construed by some that
spending time learning about patterns may not really be worthwhile. But
when they do appear they give us very good signals of the nature and
position of the trend. Patterns have double advantage. One may recall
our discussion on patterns wherein it had been stated that the failure
of a pattern is also a signal by itself. Hence patterns study is an
important issue in technical analysis.

In the case given
above, it might well have appeared that Infosys, after such a long
rise, might slip into a correction. This would be the logical thinking.
But it so happened that the stock had entirely another idea. If one had
identified the pattern of a rectangle developing after a mild
correction and that this pattern was succeeded by an upward resolution,
one would have had enough indications from the market that it was not
going to follow the linear thinking habits of most people but instead
do something dramatically different.

Look how quickly the
moving average set up got in line with the changing trend and then how
swiftly the short term average began moving away from the long term
average. There was rapid confirmation that the stock, instead of the
expected decline, was actually into a tear-away rise! If one were
trading instinctively, it would be very difficult to get out of the
mindset of the expectation of a reaction. At every rise, the stock
would be expected to begin that reaction. Not only would this have kept
the trader from participating in a super rise but also had he traded
the stock short expecting the fall, the losses would have been heavy.
Hence, proper attention to the chart rules will help one not only trade
the proper way but also to contain the damage if one is positioned
wrongly in the market.

Thus, the entire exercise comes to
remembering a lot of things from what we learnt. We need to know the
patterns and their outcomes; we need to know how to draw the trendlines
and glean meanings from the interplay of the stock prices with the
trendlines; we need to know the logic behind the moving averages and
what they are saying about the market status. We then put everything
together and then arrive at a conclusion.

That should not be
so difficult. It isn’t. That is, if one has a lot of time to arrive at
the conclusion. But what if we are looking at the intraday chart of
Infosys? And our time frame of trading is only one day?? Then there is
no luxury of time. We need to do rapid analysis and arrive at rapid
conclusions else the move runs away. So, only repeated practice with
end-of-day charts can help cement the knowledge of these techniques in
our minds so that we can readily recall them when needed.