Science Of Trading -Part 1

Professional Trading is all about a platform, where everything culminates and comes together as a whole. The science of trading is the heart, soul and the fundamental secret behind trading. If you do not have sufficient knowledge about this area of the trading world, you can never become a successful trader. It comprises all the technical guidance and secrets you’ll ever need to know to be successful in trading. Try to get in-depth and firsthand knowledge into what makes a successful trader!

The constituents of Science of Trading:-

TECHNICAL ANALYSIS

“THE ILLUSION OF RANDOMNESS GRADUALLY DISAPPEARS AS THE SKILL IN CHART READING IMPROVES.”

-       -John Murphy 

     Technical analysis is a methodology for carrying out an analysis of the market and entails the study of a market’s past data in a bid to predict the direction of the prices. The data studied is the price as well as volume. Many analytical tools are used in this process, and they help in determining the strength and weakness of security. Technical analysis is carried out on any tradeable entity that is subject to supply and demand forces that propel the market in the direction it will take. There are tools used for technical analysis, and they include charts, oscillators, technical indicators, and a combination of these.

§  The price is a determining factor and discounts everything else: This assumption typically means that the price of a security in the market at a specific time reflects all the available information and thus, represents the security’s value that is fair.

§  The price of securities moves following specific trends: This is an assumption that many analysts believe. They believe that the price will follow a short-term, medium-term, and long-term trend and thus, it will follow a past trend.

§    History will always repeat itself: This typically implies that price movements are repetitive, and this is based on the psychological state of people and the emotions they show.

Technical Indicators

Technical Indicators derive their value and application from the movement or activity of the price of a stock or index. They are very dependable and reliable in forecasting future levels of prices, and all you have to do is study the previous patterns.

These technical indicators are mostly used by short term traders. This is because they are excellent in predicting short-term price movements in the market. For a long-term trader, it is only useful in helping to determine the best entry and exit points. Since they are used to analyze the price movements over a short period, they do little to help analyze profit margins & earnings. 

A technical indicator is supposed to tell you the trend, the strength and the direction of the market.  A technical indicator may be specific or non-specific and may be used in isolation or in combination with another indicator. All technical indicators are subjective and require expert interpretation.

Technical indicators get their signals from price, which means that the indicator might be giving a delayed signal. It is not unusual for technical indicators to give you a false signal in some cases, and traders should always use their wisdom before taking a trade.

No technical indicator can provide a 100% accurate signal and no trading strategy should be based purely on a technical indicator. It has to be a combination of indicators to increase the probability of winning and decrease the risk element. It is important to use trade management, risk management, and money management in conjunction with all other aspects of trading.

Tarun Goyal

(Trainer & Author)