A few days ago, I met with some eager students of technical analysis, who wanted my opinion on how they should go about their work. They were eager to show me their stuff and almost everyone had a whole lot of analysis thingies on their charts, making for a very crowded screen. It made me think back to the time when I had to draw all charts by hand, on a paper with pencil. It was arduous work, as we had to draw a chart for every tool that we added. One chart for daily, one for weekly, one for monthly, one for Log scaled chart, one for indicators, a separate one for candlestick charts (those had just got introduced at that time!) etc. etc. You get the idea- lots and lots of work. Maybe that is why we all got weaned on keeping matters quite simple. In contrast, today’s TAs can simply add things with a mouse click or two- almost next to no work.
But does more do the trick? Does faster do the trick? I don’t think so. I told those young chaps to first declutter their screens and have just a plain chart on. Price is everything, isn’t it? The rest emerge out of price- averages, lines, oscillators, etc. While those are all additives, the main ingredient is the price.
Simplification is the process of making something less complicated and therefore easier to do or understand, or the thing that results from this process. We are drawing charts to understand the expressions of people involved in that stock. We get this through understanding the way their actions are creating various patterns that then combine to produce a whole composite picture.
So, if you start with something already cluttered and complicated, with one item colliding or contradicting another, how can clarity ever emerge? If clarity is obfuscated, then confusion is bound to prevail. A mind that is over ridden with confusion can only lead to wrong conclusions. And, in the market, that can lead to only one thing- wrong trades, meaning losses. Lots of it.
People take to TA enthusiastically, expecting it to solve problems of entry and exit. But TA is a vast collection of tools. Considering that more is better, everyone dives into the more. Result is confusion, something referred to as a cliché – getting lost in the technical jungle!
The key lies in simplification. One chart. Your main time frame. That’s where it should start. And end. This is the main decision chart. Don’t get lost in the sea of time frames. Computer software will take you deep into that ocean. Utter confusion then. Go back to your main timeframe. That is called the Chart of Choice. All conclusions must be taken from there. Other charts (timeframe, indicators etc) are all there only to provide some further clarity on what you see on your chart of choice. Your decision to enter, gauge your risk, estimate your targets etc. should all be done on your chart of choice. Simplify. Clean up your screen. Have only the chart.
How does one choose the timeframe for the chart of choice? That depends on how often you play. You can do this only if you understand what multi timeframes are supposed to do! Lower time frames are only meant for execution while higher timeframes are only meant to provide you with a larger perspective. Day traders can keep some intraday timeframe like 30 minutes. This will offer the 10- or 5-min chart as a lower timeframe for using for entry signals. This will offer the 75 or day time frame as an indicator of the next higher timeframe that defines the trends better.
I find day traders operating purely out of a 5 min chart. If this is your all-in-one chart, then you are demanding too much from it- signals, execution points, risk control and reward settings, exit parameters etc. etc. This is when you will be forced to add more and more items to that chart, so as to define each of those components. Complication is the only result. Think of this- do you or are you able to act with the alacrity that is demanded of a 5-min chart player? Not many are. But they feel they cannot miss out the action, so go for lower and lower timeframes. I hear people using 1- and 3-min charts on the Bank Nifty. Have you even learnt how patterns form on such low time frame charts? And how swiftly they change or get resolved? Just the desire to spot all squiggles of the price doesn’t mean that you will be able to act on them. Many people’s brains don’t act that fast. Result is, progressively worsening loss streaks.
That is when many discover the benefit of making it less complicated. But why take this painful route? It is expensive.
Simplify right off the bat. Understand the concept of timeframe analysis. Oscillators work on the principle of cycles. If you cannot see the cycles in the price, how will you correlate them with the oscillators? Trendlines are price and time vectors. Only on a clear chart will you be able to spot the relationships of these two elements. Only a clear chart can you see the nuanced moves of oscillators.
Confusions lead to errors. Tolerating errors leads to incorrect conclusions. These lead to bad habits. Those end in unfavourable outcomes, creating stress. Poor behavioural habits form owing to stress.
See the pattern here? Total downhill.
Avoid all these. Start simplifying. It may seem hard to do at first, like you are missing out on too much information and hence worrying about losses. But slowly, you will find clarity emerging out of that fear. And a new virtuous cycle building from that. You start seeing the patterns better, correlating them to each other much more efficiently. The results begin to show. Profits start to dot your trades. This creates a positive habit formation- one that leads to consistency in action.
Simplicity lies at the root of success in the market. Adopt it.