Ramshaw Trading

Trading Stocks Trilogy-2: The Analysis

Traders trade using fundamental analysis, in simple terms what the company does, its earnings, its product line, the debt on its books, its working capital, cash flow statements et cetera, with a view akin to a student sitting on the front bench, and consistently getting A grades, versus the student playing truant with his grades.

Good consistent performance is rewarded, so is the case with the fundamentalists, who crunch numbers, to see if the company will deliver good results, in future.Here you are guessing what is going to happen next. If the analyst gets it wrong, he/she ducks for cover; you end up losing money.

Traders also trade on technical analysis, that is the study of price from charts, where you can see what a stock has been doing, then look at the volumes, supports and resistances, and patterns, and then take a call-that is what direction to go-long or short.

Remember in the previous article, we said that trading deals in probabilities, and we can only hazard an educated guess which way a stock will move, to make you money. If it does not, you immediately need to take a small loss. The caveat here is that anything can go wrong. This knowledge helps in getting out when the market environment turns volatile. Each trade has to be viewed independent of the previous trade, otherwise you would not trade at all. Clear your head after a trade.

The analysis just forms 10% of your trading trilogy, the major component being managing the self or your psychology. The third leg of the tripod- that is good management of your capital, we will come to later in another article.

The significance of the above is that, if you work on the psychology aspect of trading, and your money management aspect, even an average trading system will return average to above average returns.

Another point to remember here, is that what gets measured gets done. In other words, keeping good records regarding your trading performance, is the sine qua non of becoming a successful trader. If you do not know where you are going wrong from your records, how would you improve? By keeping records and making every mistake available in the book, and not repeating them, you would run out of mistakes,and gradually you would reach the level of the elite traders.

Do not get drawn into another mistake made by traders; the hunt for the holy grail-the next nth indicator which would assure success. Select a few you are comfortable with, avoid paralysis by analysis, and keep things simple. The best traders follow few simple methodologies.

To conclude the article, the analysis part involves analysis of the self, analysis of the market through charts, analysis of the stock you would like to trade, and finally the analysis of whether it is, or not the right time to trade. Staying out-that is doing nothing, when conditions are adverse, is a virtue in the capital markets.

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