The Genesis of my conversion to Technical Analysis

Around July August 2014, after the steep “Modi Rally”, I rapidly started running out of ideas on fresh stock picking possibilities. The stocks and the kinds of businesses I liked had become very expensive, and I was finding it difficult to justify to myself the price to acquire positions in stocks.

I also felt at this time, that some of the stocks had run up far ahead of economic fundamentals, and that the government did not have a magic wand to address all the economic difficulties faced by the country.

I also felt like shorting some stocks!!

I never believed in Technical Analysis. I used to try and read Vivek Patil’s technical analysis every week, and it seemed like a huge set of mumbo jumbo to me. I felt that in hindsight, anybody could fit anything to data. It also did not make sense to me that if a stock was going to be bought at multiple times during its rise, it was just better to buy and hold.

Coupled with this was the nonsense dished out on CNBC every day. I never could figure out, for the life of me, how some guy could come every morning, and name a few stocks to buy. What is more, these choices did not seem very appropriate. Having been bred on the virtues of a “buy and sit tight” philosophy, these technical analysts seemed very silly.

Yet, as my interest in stocks built, I could not but help recognize that “strong stocks” often tended to keep becoming stronger, sometimes to the point of irrationality from a normal valuation framework. Similarly, I could not help noticing that prices often fell in advance of news or a change in a commodity cycle. Similarly, a trending market move, like the Modi Rally, often moved all stocks, regardless of financial performance of the company in question.

This is where my interest in technical analysis started. Initially, I was just studying simple charts, and seeing how a stock would neatly rise above its long term moving average for example. Then I got to reading some books. Finally, I mustered the courage to go attend a meeting, Traders Carnival, in August 2014. I frankly did not learn much there, but I did get introduced to the field. I also ponied up some money to invest in software called trader’s cockpit, which allowed some rudimentary back testing and some simple strategy creation.

When I started playing around with Trader’s Cockpit, I clearly got some results on back testing. Trader’s cockpit has the facility of sending SMS’s of trade alerts, and allows you to paper test a strategy. So I started with that too.

I also started reading books. I read a book on Trading Systems on Kindle, which gave me a great introduction to risk, portfolio sizing, portfolio management, limiting risk through stop losses, the limitations of stop losses (no system I have developed so far has a stop loss), parameter optimization, over fitting and the dangers of over fitting.I am so glad I read this book well. It has really prepared me for the future.

Finally, by February-March 2015, I had started realizing the limitations of Trader’s Cockpit as a strategy development and testing tool. So, after some hesitation, I bought Amibroker, and shortly, a data feed. I then downloaded some code from Marketcalls, and decided that using that code, with parameter optimization, ¬†optimal position sizing and low brokerage, I could trade the bank nifty profitably. More on my journey in the next post.

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