How Trading Stocks Is More Than Just Knowing Technical Analysis

It is a common misconception that if a person is proficient in technical analysis, they will automatically become profitable. While technical analysis is important, it is not the only skill required. To be profitable in trading, a trader should possess multiple skills, including risk management, psychology, execution, market understanding, and chart analysis.

What Is Technical Analysis

In a nutshell, traders use historical market data consisting of price, volume and sometimes open interest to predict the future price movement. Technical analysis can help traders increase their probability of predicting price movements and the time duration during which they will move. So, technical analysis allows traders:

• In identifying the overall market trend. This can be further broken down into long-, medium-, and short-term trends.
• Finding the most profitable entry zones
• It can also help identify reversal zones, which are likely support and resistance levels.
• It also gives exits that the traders can use. This includes both stoploss and target levels.

However, it is important to note that technical analysis only increases the chances of profitability. There is no guarantee that profits will come. So, technical analysis will not help a trader to

• Control their losses -The traders should focus on sound risk management 
• Manage emotion - The traders should have clear discipline while trading
• Protect capital - Traders should trade with defined risk-reward structures and use a stoploss or hedge on all trades.

So, as the saying goes, technical analysis shows where to trade, not how to trade safely.

Trading - A Risk Management Business

Many traders look for the holy grail of trading. Risk management is the most critical aspect of trading. To give an example. Two traders may be taking the same trade based on similar technical analysis and setups. Both traders got the entry on the same symbol at the same price. Both traders took entry at ₹1,000. The stock drops by 60 points, then rises by 120 points. Let's take an example of 2 traders, how they would have performed:

Trader A: 

Total Capital = ₹10,000

Entry Price = ₹1,000

Highly Leveraged trader looking for high returns. So he takes a leverage of 1:20, and hence the quantity is 200

When the stock fell by 60 points, the total loss was 200 × 60 = ₹12,000. This exceeds the total capital, and hence the account is wiped out. 

Trader B:

Total Capital = ₹10,000

Entry Price = ₹1,000

He has a strong risk management and only takes a leverage of 1:2. So the quantity is 20. 

When the stock went down by 60 points, the total loss was 20 × 60 = ₹1,200. This is well within the capital. And then, when the stock rallied by 120 points, the total profit was 20 × 120 = ₹2,400. 

As we can see, the same trade, but with entirely different results. So to be profitable, risk management is of utmost importance, which consists of:

• Position sizing
• Maximum loss per trade
• Risk-reward ratio
• Drawdown limits

A trader with average accuracy but strong risk control can remain profitable.
A trader with high accuracy but poor risk management will eventually fail.

Market Psychology

A trader tries to learn all the hard skills, such as reading the charts, understanding risk management, and focusing on execution to get the best prices. But sometimes the most important aspects are the soft emotions every trader goes through: fear, greed, panic, and overconfidence. To be profitable in the long run, the trader must learn to control these common psychological mistakes:

• Overtrading after losses
• Booking profits too early
• Holding losing trades emotionally
• Chasing missed moves

Importance of Market Context

Technical analysis only works well when the prerequisite conditions are met. For example, a bullish engulfing candle has a high chance of giving a bullish entry when:

• The market has been in a prolonged downtrend for some time
• The bullish engulfing is seen at a critical support zone

The same technical analysis pattern can work very differently and lead to opposite trades if market conditions are not checked correctly. So a trader should check the following market context before applying any of the technical analysis tools:

• Trending vs sideways markets
• Volatility levels
• News or events
• Liquidity conditions
• Timeframe alignment

Trading Requires a System, Not Random Signals

Contrary to popular belief, a trading system does not mean algorithmic trading. This is not true. A trading system can be traded without algorithmic trading or sophisticated software. A trader should follow a consistent, rules-based system to increase their chances of profitability. A trading system consists of:

• Entry conditions
• Exit rules
• Risk per trade
• Trade frequency

While this process might be tedious due to its repeatability, having a trading system reduces random trades and instils strong market psychology in traders. 

Conclusion

Often, traders become disheartened when they incur losses even after understanding technical analysis. The problem is not that the technical analysis or their signals are not working. The primary reasons why traders fail are:

• Ignore risk management
• Overtrade
• Trade emotionally
• Lack discipline
• Expect certainty from patterns

It is important to understand that technical analysis is one of the tools in a trader's arsenal. And trading is not about being right; it is about managing the risk well.