Technical analysis part 2 (1)

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Introduction
In the first part of technical analysis we did
learn when and with how much capital should we
start trading? Core differences between investing
and trading? Why stock prices move. Heard
behavior in the stock market. And now in this
part we will learn what a beginner approach
toward trading should be. Once done we will learn
how to analyze charts as well as technical
analysis. So let's get going already.
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OPERATION OF TRADING ACCOUNT
How do we make a system? To make a system, there
are 2 things we need, you need a trading account
and a D-materialized account (it is the actual
version of the actual shares that you own)
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DISCRETIONARY TRADING VS SYSTEMATIC TRADING
Trading is of 2 types, one is systematic, which
we talked about in Technical analysis part 1 -
you have set rules and following day in day out -
just like business, which we will learn in depth
later on. On the other hand Discretionary is when
you trade on your feelings, something will go up
or down you then enter and exit to make a profit
and " YOUR GUT MAY NOT ALWAYS BE RIGHT". There is
also a key for this is money management, even if
you are wrong most of the time, you can use this
technique called money management and still make
money.
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SYSTEMATIC TRADING
DISCRETIONARY TRADING

• No need to monitor the market at all
• No emotions
• Quantified rules based on entry and exit
• Quantified rules based on entry and exit
• Can be automated

• Gut based entry and exit
• Involves human emotions
• Need to monitor the market all the time
• Need years of market experience to become
  profitable
• Cant be automated.

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WHAT IS SYSTEMATIC TRADING ?
To understand this lets use an example of a
casino. In this case I'm the owner of the casino,
and it is interesting because people are going to
gamble at casinos. But how do casinos survive if
so many people are getting payouts and making
money? It must be a business, right?. How are
they making money out of chance? There are
several machines, slot machines are running, and
the Roulette wheel is there. How are they making
money out of pure chance? What if someone wins a
million dollars and they go bankrupt? There must
be some logic to it? So, this is a roulette wheel.
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Now guess we have 2 colors, let's say I bet on
black. But what is the probability of winning?
It's 50-50, right. I bet on black but
unfortunately I lost. Now the interesting thing
is there is another color here and now just one
green color green changes the probability
completely. Its not 50-50 now, its now 48.6.
The margin of that 1.4 is the edge of the casino
to make money. So, normally when you have a
trading system , generally the win ratio of
profit is 50 to 55 , which is fine, the extra 5
is what actually makes you the money. And there
is a second dimension to this, one is like the
win- loss ratio is slightly higher. The second
dimension is when you are making money, forget
about this example, you as a reader making money
as a profit, that profit should be 100 dollars
when you are losing it shouldnt be less than 50
dollars. If youve taken lets say 10 trades, you
have a 55 win-loss ratio, you know, 55 of the
time you get at least 1 profitable trade. But
this time, you lost all 10 out of 10 trades,
okay. What do you think it means statistically? I
would say now its my time to win the next time.
If the system says I'll winn 55 out of 100 and I
lost 10 trades, I still have another 45 trades to
win. So you are not measuring trading on a per
trade level, you are messing it on a system level.
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IS TRADING A BUSINESS OR A GAMBLING?
In India there was a time when cafè coffee day
was on a rampage, each day they opened their new
shop. How did they know they could do that?
Because through 3-4 cafè they realized that using
certain variables, they can sell certain items.
So, they have a standard procedure to find a
location, There should be gemography, and they do
that analyzes, How to serve, How much is the bill
and many things more, and at the end there will
be someone saying the revenue received 1 lakh
rupees, expense was 5 lakh, profit is 5 lakh. So
this is similar to a trading system which is, you
find something that works, then you see, can this
work on a long term scale at macro level. Start
with a small capital, prove it works with the
system, then scale it very slowly just like a
business.
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We will take a bunch of rules, when this happens
Ill buy this ,based on math, we will learn this
in technical analysis, so that we can define
scenarios based on price, and we can say this
happens, then I will buy or sell this and you
apply this rule to say 10 years in past. This is
called backtesting, and it is a repeatable
process, because you can do it in the future. I
will make some changes in my system and I can
backtest again and again, there are experiments.
You keep running backtest you will have a
backtest stats, which will find how many of your
trades were profitable non-profitable out of
100. So you have an expectation from the
backtest, what can I expect when I trade this
system. Here is this one example of Backtesting
over 10 years.
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In the coming parts we will learn how to make our
own backstats strategies and technical analysis.
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