Mr. Murali Krishnan, a pro Technical Analyst holds a view that continuous reading, study and exploring new ways of analyzing the price movements are the only parameters that helps you to book profitable trades. He says, to become a successful trader, one should follow these 9 point theory to understand the price movements at ground level. I have tried to list down our communication briefly in following points
1. Downtrend in price: He says, analyse a stock that has a long history. At least listed for 10 years or more. Stock should have observed a continuous down trend for minimum of one year and maximum of one and half year.
2. Change of hands: He explains that there should be change of hands in stock usually at the end of downtrend. Is the change happening from weaker hands to stronger hands? If yes, stock passes the second test. For eg: If change of hands is from individual or HNI to mutual funds you can consider it as changing from weaker to stronger hands.
3. Higher Lows: Next point to check is if the stock is making higher Lows for at least 3 weeks or more.
4. Higher Highs: Similarly, the stock should also make higher Highs to get eligible for Buy according to this theory.
5. Two Parallel Lines: Stock should have experienced the up and down but is not able to break either low or high. This means there will be point from which stock takes a U turn for short period of time. When you try to join the high's and low's you will observe the two parallel lines are created.
6. On Balance Volume: Another indicator that traders should follow very closely is On Balance Volume. It takes volume as a base and based on the change in volume, the relative price change predictions can be made. Negative and Positive volumes helps chartist to predict the change in price movement. If the closing price is higher than previous period closing price the volume is termed as positive volume and vice versa. Let us understand the formula of OBV
If the closing price is above the prior close price then:
Current OBV = Previous OBV + Current Volume
If the closing price is below the prior close price then:
Current OBV = Previous OBV - Current Volume
If the closing prices equals the prior close price then:
Current OBV = Previous OBV (no change)
On balance volume with the positive number will push the prices higher in near future
7. Relative Strength Comparison: In this theory, chartist will monitor and compare the strength of the counter with another counter, sector and index and try to predict the movement of the price. If the counter is holding strong in weak markets or stressful sector scenario, then that stock is to be looked at in deeper sense and once receive confirmation on other parameters, aggressive buying should take place.
8. Money Management: Money Management is the important and must indicator to be checked upon. Stop loss should be decided before entering into the trade. If the price hit the stop loss, keeping aside the emotions, the loss should be booked. We should keep the stop loss at 12% of the lowest bottom and any price below that takes your counter to the danger zone.
9. Down Target: Though hitting the stop loss is the negative sign. However, we can take the said situation into our favor by shorting the trade. This is the reason, we should pre determine the down target as well, which can be utilized to take the decision in the stressed situations. It also ensure to minimize the loss by taking the trade as per the momentum.
Fundamental parameters like the ones mentioned below should also be checked upon to support your theory of profitability on the counter
1. Change in Earnings Quarter on Quarter and Year on Year is above 20%
2. Change in Annual Earnings is minimum 17% or more
3. Frequent use of word New by company: A company should use 'New' during the year - say for example New Management, New Product, New Strategy, New Technology, New Client, New Market, New Strategy etc.
You will find 14 points that every stock market trader and investor should keep in mind by Puneet Marwah an interesting read.
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