Purposive Technical Analysis: More than the Lines and Boxes

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We have nearly halfway completed the 8-week Recruitment Course and Module 3 has been one of the most interesting topics we had had so far – not because we have some idea on technical analysis already prior to entering Caylum Trading Institute, but because we realized how much we lacked foresight on WHY we are doing the trades we have had using these tools and indicators based on technical analysis.

This is my biggest takeaway from Sir Lawrence Lee – Make sure that you take PURPOSEFUL TRADES.

Interestingly, this may sound really very easy. Sure, you have picked your charts well. Sure, you have drawn trend lines and boxes in your chart. Sure, you have found support and resistances of your issues and has planned well to do your entry and exits. However, are you truly sure that you should be trading the issue you are looking at?

Let’s say you see a stock and it is below the 200 Moving Average. People have been losing money over the past one year? Based on technicals alone, do you really want to be trading an issue (stock) whose investors have been generally losing money over the past year if your intention is to go long (uptrend)? Do you think you are trading the issue well or are you “catching falling knives”? By performing this trade, are you doing an informed decision accounting for the risks that are favorable to you or are against your favor?

(Side note: 200 Exponential Moving Average represent the average closing price of a stock over a ONE YEAR, except greater weight is given to the most recent dates)

At the end of the day, we learn not only how to use technical analysis tools but also WHY we are using it and the stories that the charts have to tell us. 

Each of the candlesticks represent people’s emotions and their reaction towards markets that creates the distortion of the company’s fair value, creating over- and undervaluation of a company’s price. Interestingly, this perspective has been greatly missed out by a lot of the traders, as they have been greatly affected by their biases towards the issues. This event results to most traders entering trades that they have the vaguest clue why they are even there. Betting on every stock without managing your expectations through the use of technical analysis (and some level of fundamental analysis) is no different from betting in a baccarat table in a casino. You are performing a stake that is synonymous to gambling – in both scenarios you do not know why you are betting on your choice. Let’s say you are entering a trade below the 200 EMA with a formation without any good fundamental foundation. What makes you believe that the stock price will go up (to the moon) if people are losing money over the last year? What makes you think that it will not go into neglect continuously over a long period of time? Will you invest in a company that you have no idea what they are doing?

Indeed, I find my journey in understanding the FTSR Framework and applying it to my trading experience truly interesting.