Chart Patterns - Trading Strategies

When there are fluctuations taking place in the shares in the share market then various patterns are formed, so how to trade such patterns and what strategies should we follow is something that we’ll be covering in this blog. 

American Entrepreneur, William O’Neil mentions a secret to winning big in the market, so what is that secret? Similarly, successful trader Bruce Kovner adopts what strategy while trading in the market? Nicolas Darvas despite being a famous dancer earned crores of rupees from the stock market. Once during an interview when he was asked, “As you have been such a good trader, also you have earned very good returns from the market, so how much time do you allot for market analysis?” To this Nicolas Darvas, answered, “It just spend 15-20 minutes on market analysis.” Is it possible to become a good trader in the market by allotting such less time? If you wish to find this out with the help of a case-study then stay tuned to this blog. 

Nicolas Darvas believes that the shares in the share market move in a specific pattern. Now talking about shares, there are three types of shares in the market. Shares that are in Uptrend, Downtrend, and in Consolidation. The shares that move in a limited range that neither move upwards nor downwards are known as shares in consolidation. So Nicolas Darvas used to trade in the shares when these shares start moving out of the box i.e. out of the limited range and he earned good returns here. 

Now the shares present in the share market are currently in which state exactly whether they are in the box or are they out of the box, how to find out? Consider there is this Orthopaedic Surgeon and he is performing surgery without referring to the x-ray then this might lead to a big blunder. Similarly, if you wish to carry out successful trading, or to find out the share is in which state then what should you do? Simply check-out the graph of the share. If you are trading for short-term (1-3 months), then you should refer to the graph of 3 months while if you are trading for medium-term (6-18 months), then you should refer to the graph of 6 to 18 months. 

Now, here if the share is in consolidation i.e. it is moving in a limited range then it may form various chart patterns like Cup & Handle Pattern, W Pattern, and Ascending Triangle Pattern. Looks complicated, isn’t it? Let us understand with the help of an example. If we analyse the current data then we come across a share of Page Industries. Quite a lot of people may start thinking that this might be a paper-making company. But the company makes apparels by the brand name of Jockey. So if we observe the chart of Page Industries, we’ll find that after the outbreak of negative news, its share started moving in a limited range and the chart formed a W-shaped pattern. In technical terms, it is known as Double Bottom. So the share has formed a box there and is now indicating of moving out of the box. So here along with a breaking chart, there’s a piece of breaking news as well. Now, because of a piece of positive news, the share has indicated moving out of the box. So if we trade here by placing a stoploss at the level of Rs. 19, 449 and by following proper money management technique then we can make a good profit here. 

If we analyse the business model of Page Industries then itʹ simple to understand i.e. if the company manages to manufacture and sell more garments than it did last year then the company will earn a good profit. Also, if we analyse the company’s Return on Invested Capital figures till date then we find that the company is generating excellent Return on Invested Capital. So here if we trade by following the techno-fundamental approach we can earn good returns, techno-fundamental means a company that is both, fundamentally strong and technically in an uptrend. In this way, by quoting the example of Page Industries, we understood the W-shaped chart pattern of shares.  

American Entrepreneur, William O’Neil mentions a secret to winning big in the market, so what is that secret? “The whole secret to winning big in the stock market is not to be right all the time, but to lose the least amount possible when you’re wrong.” And how is that possible? By following a stoploss. If you don’t follow the stoploss, your loss will never stop. So where should we place the stoploss? We have previously discussed this in our blog on Stoploss. See, Nicolas Darvas who made millions by trading in the share market has mentioned that you should trade in the share which indicates moving out of the box and while doing so, you should place the stoploss inside the box. 

Let us understand this using a simple example. If we analyse the current data, then there’s one more company where we can trade using the techno-fundamental approach. That company is Pidilite Industries. The share of this company after moving in a limited range has now indicated moving out of the box. So we can place a stoploss inside the box here. Now when we place a stoploss inside the box, some say why such a big stoploss? In this regard, Bruce Kovner says, “Whenever I enter a position, I have a predetermined stop. That is the only way I can sleep. I know where Iʹm getting out before I get in. The position size on a trade is determined by the stop, and the stop is determined on a technical basis.” That is to say when we place a stoploss inside the box, price-wise it may seem bigger but it is more important to place the stoploss at the right place. If we don’t place it inside the box just so that our loss is minimized then that wouldn’t be right because the share moves up and down before going into an uptrend. It is a share, not a rocket that would go straight upwards. Another thing, if we place a very small stoploss, it would get hit instantly.  

The share moves up and down before getting into an uptrend. It requires space to breathe. If we place the stoploss inside the box where it actually should be and if it looks big price wise then in that case what should be our strategy? So the strategy is that we should buy less quantity. Thus, if we buy less quantity and if our prediction goes wrong and the share price falls and stoploss gets hit then our loss would also be reduced due to less quantity purchased.

If you trade in such shares that are indicating moving out of the box with stoploss and proper money management then you can too become a successful trader. So if you want to learn this box strategy in detail with complete handholding support then download our application Aryaamoney and subscribe to our Smart Investor Training Program today. Along with the program, you get a Chart Premium tool as well. This tool tells you that which shares have such box formations and are about to move out of the box for two months. So you can learn this technique and apply it all by yourself later.

For carrying-out successful trading, 4-step analysis is very important as I have discussed in our previous blogs. The first step is to check the market valuation. The second step is to check the market direction. The third step is to analyze the share you are trading in. And the fourth step is stoploss.

As per the first step, if we analyze the market valuation then it seems to be expensive. And if we analyze the US market data i.e. if we check the US market valuation as per Market Cap to GDP ratio or Warren Buffet Indicator then it seems like the US market is equivalent to playing with fire as it has reached the mark of 180.  Why do we analyze the US market data? It is because the US market has its impact on most of the markets around the world. Hence, it is important to be cautious. Now, as per the second step, we need to check the market direction, so till the time Sensex and Nifty are above the level of their respective supports i.e. Sensex (45,685) and Nifty (13,399) the trend is said to be on an uptrend. And the next step is if the trend is uptrend then trade in the share that is coming out of the box. The thing to be noted here is that as the market valuation is expensive, trade with a techno-fundamental approach here.

So which shares are coming out of the box as per techno-fundamental analysis? We have already discussed those shares in this video i.e. Page Industries Limited & Pidilite. The fourth step is to trade using proper money management and stoploss. Our prediction can go wrong anytime, otherwise, you would blame us. Hence, one can still become a successful trader in the market by following this 4-step analysis and by allotting just 15-20 minutes for market analysis. Not all our trades are going to be successful. Some of them may go wrong, hence it is important to follow stoploss always. And remember, success is nothing but just the next chapter after failure.

If you are planning to invest for the long-term in the market then invest less as the market valuation is currently expensive. When the market valuation becomes inexpensive, you can increase your investments there. So where to invest? Invest in companies having a sustainable competitive advantage and earn excellent returns on invested capital. We have discussed this in detail in our previous blogs. Do check that out. History tells us that if we invest systematically in such companies, we can earn great returns in the long-run. If we apply this same approach, then be it trading or investing we can earn good returns there.

It is important to check the charts of gold and silver along with that of the share market. As the share market is at an expensive valuation, if the market crashes and gold and/or silver indicate moving out of the box then an opportunity to earn good returns might be created here as well. Also, if you are planning to invest for the long-term in the market then you can systematically start investing in gold and silver along with investing in the share market. You can always add a golden touch to your portfolio.

If you wish to open your Demat account with India’s leading brokers, then you can check out the link given below. We may or may not have our investment in the companies discussed here. We would like to give a disclaimer here that all the advice given in this blog is for educational purposes. This is not any kind of buy/sell recommendation. Mr. Bhuushan Godbole, his company as well as the director board of the company has crores of investment in the share market as well as in gold and silver. This is our disclaimer/disclosure. So we’d like to mention this again that invest in the market after thorough analysis and also after discussing it with your financial advisor.

Until next time…

Happy Trading, Happy Investing!!!

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