Technical Analysis and Market Predictions

By A Rajendran. V.
CMD, Capstocks

In 1995, when I first stumbled upon the art and science of technical analysis, I felt that I had stuck a goldmine. I shared my ideas with fellow traders and investors but there were few takers. Few people had heard of technical charts and indicators in those days and fewer still used them.

Now more than 15 years later, you hear only about technical analysis and charts on business channels and newspapers. Whenever any analyst, whether fundamental or technical, speak on any scrip, any sector or the markets, there always will be a corresponding chart on the TV screen - intraday or end of the day. Gone are the days when I used to get umpteen calls on a daily basis for technical studies of individual scrips. All the clients I meet today seem to be expert technical analyst and every other person I meet gives me his views about the market movements.

Well this may be the reason why people say that technical charts are less effective nowadays. Investors complain that exact stop losses get hit and then the markets moves in opposite direction. Technical analysis is nothing but a collective response of traders and investors, their greed and fear, this collective human psychology reflected in price movements.

Technical analysis still works, more so when more and more people follow it, unlike popular perception. Stop losses get hit because more and more people know where to put the stop losses and the smart operators, being aware where the stop losses are, make it a point to see them triggered, making the markets hollow, before the markets move in opposite direction.

Well whether people seemingly follow technical analysis or not, they still don’t seem to make money. The markets moved up from Nifty levels of 2500 in April 2009 to 6300 levels in November 2010, a rise of 3800 points, ie., 150% in a matter of 18 months, and investors and traders should  have made a small fortunes, though the reality is far from the truth. But in the subsequent correction and volatility of exactly 12 months, when  the markets fell just 20%, most of the investors lost a majority of what they had made and the good percentage of the traders have stopped trading, having their capital completely wiped off.

Why is this happening? Well time and again the investors are committing the same old mistakes.  Whether you are a trader or a seasoned investor, technical analysis will really help you. But as I mentioned earlier every other person is seemingly studying charts now a days. What percentage of them really follow technical analysis will be clear, if we consider how many of them make money or at least manage not to lose their capital.[PAGE BREAK]