Source: Nataraj Malavade
Long ago, Japanese rice traders began technical analysis in the 1600s, and they marked rice prices on charts. By repeatedly using these charts, some traders realized that the chart’s price pattern indicates the direction of the possible price movement of rice.
The price pattern is crucial in technical analysis. In the 1920s, Jesse Livermore talked about how the study of price patterns made him millions in the stock market:”There is nothing new in Wall Street. There can’t be because speculation is as old as the hills. Whatever happens in the stock market today has happened before and will happen again. – Jesse Livermore”
No technical trader would claim that technical analysis is useful in every trade. Some traders look for a strategy that has high accuracy. Making small profits on 60 to 70 percent of trades is possible. When these small profits are added up, they can be significant, provided losses from losing trades are tiny.
There is another category of technical traders who don’t worry so much about obtaining a high win rate. Even if just a mere 40% of trades are positive, they will still be profitable. It’s easy to see why this should be the case. In ten trades, a trader loses money in six and makes a profit in four. He makes an average loss of 5000Rs per trade in the losing trades and an average profit of 10000Rs in the winning trades.
Total loss = 6 x 5000 = 30,000 Rs
Total profit = 4 x 10000 = 40,000 Rs
Overall profit = 10,000 Rs
Let me recall a famous trading quote from a most successful trader,”It doesn’t matter how often you are right or wrong; it only matters how much you make when you are right versus how much you lose when you are wrong. – George Soros”
If your strategy has a positive expectancy, it can be profitable in all market dynamics, provided you’re disciplined about following the trade plan.
If you trade in the direction of the trend or the momentum, you can profit from it by aligning to the trend’s direction.
Well, known profitable technical traders include:
- Bill Dunn, whose funds have produced a compound return of almost 19% a year between 1975 & 2010, and
- Paul Tudor Jones, whose career has been developed on technical trading. He has amassed personal wealth over $6 billion
Final thoughts,
When we learn to read the trader’s interaction from the charts, we will be able to read and handle any price chart, any market, and going forward.
Since millions of people follow technical analysis, it verifies that technical concepts work clearly because they are comprehensive. Even the economic media often refer to technical concepts such as past highs and lows, all-time highs and lows, psychologically essential price levels and moving averages.