BASIC TOOLS OF TECHNICAL ANALYSIS
 
We have discussed so far, different aspects of Technical Analysis as a subject. It is now presumed by the writer that the reader has sufficient grasp of the basics reasons of why one should be looking a lot more closely to the prices of the stocks in addition to the other factors related to the stocks (ultimately, price is the only reality).
 
The waters having now been tested, it is time for us to dive right into it.
 
The basic tool of all technical analysts is the Price Chart. Remember the definition of technical analysis we had carried sometime ago? It is the study of market action, principally through the medium of price charts.
 
So, what are these price charts and how do we go about constructing them. In the olden days we used a pencil and paper. Nowadays, we keep up with the times and do it on the PC. The first of the requirements is of course Price Data. After all, that is the basic masala which you are going to use to unravel the riches which are there in the market but still seem so mystifyingly out of reach! Next is to arm yourself with a software which will convert the data into those series of seemingly illegible lines but which, at the end of this tutorials (hopefully), would become completely clear as information.
 
There are several software packages available in the marketplace these days and more are on their way. Also, there are an abundant number of software available from abroad if one has the moolah ready for it. Most of the domestically available software cost around 15-25K. Most of the software vendors also make available historic data (usually going back to 1990) along with a contracted yearly service for updates of daily data. This usually ranges from around 5-7K. So, this is the basic cost (not counting the cost of computers of course) if one wants to start of doing serious technical analysis. Of course, there is the much simpler route of using the pencil and paper and taking the data out of the newspapers - the cost of this would be negligible of course. But then, it would be an equivalent of a handcart pitched against a supersonic jet! Most software vendors also throw in a bit of training on the package as well as some technical analysis stuff but then, it is quite meager.
 
The data structure of one vendor will not work with the software of another vendor. Hence one has to compulsorily buy the data and the software from the same vendor. One way of maintaining flexibility is to go in for Metastock compatible data, which is a kind of a world standard for price data. This will enable the user to buy any software from abroad as all the foreign software support Metastock format data (along with several other formats).
 
Most of the software are in Windows platform. There are many using the Dos platform too. The differences are obvious but there are advantages as well as disadvantages on both sides. Windows is a bit slower but a lot more flexible. Dos is considerably faster but has limitations in terms of memory – most Dos based technical analysis packages hog memory. So it becomes difficult to run other things. Windows packages are convenient for newbies – everything is mouse driven. In Dos packages, one has to learn a lot of commands. But it remains a fact that a long time Windows user adapts keyboard rather than the mouse! Talk about irony!
 
Software packages also differ in the time frame. While Intra day packages are quite normal abroad, here it is the end of day packages which are the norm. That is because we did not have, at least until recently, facilities for intra day data. Even today, this is still frightfully expensive. Hence, this area is dominated by the large foreign companies, like Reuters and Bridge. Some inroads have been made by a couple of domestic companies but currently they vend only one exchange data. Would you believe that we are still constrained by an archaic Telegraphic Act of the 1800s? Yes, you better believe it! Without forking out tremendous amounts, one cannot broadcast two exchange data. The technical packages which come with Reuters and Bridge are quite basic and one has to pay through the nose to get the better packages (as much as several hundred dollars a month). Hence, for the little guy, these are out!.
 
For someone approaching technical analysis afresh, it is better to start with the end of day version rather than the intra day version. No doubt, the intra day analysis is seductive but then it is also quite dangerous unless one knows how exactly to use the tools. For, a chart is a chart is a chart. If the time frame is not labeled on a chart, it is difficult to tell apart a daily from a weekly from a monthly from an hourly chart. The readings may be the same but the effect will be significantly different. A buy signal on the hourly chart will lead to a move of a few points and last maybe an hour or two while the same signal on a monthly chart will lead to a substantial move lasting several weeks and months.
 
What does the software do? It eliminates the chore of maintaining the charts by hand. Now that may not seem like too much for forking out 25K, would it? But try it, brother, and then you will know the difference. Back in the early to mid eighties, this writer used to maintain over 400 charts (daily weekly and monthly) by hand and it used to take the first Sunday of the month the entire day just to update these charts. At the end of it, one was so exhausted, that there was no time or energy left to analyse! Thus the very purpose was being defeated!! So, spend your time in analysis and not in the mundane chore of updating. Also, there are a dozen other reasons for buying software. For example, a simple thing like price levels going beyond the scale drawn would necessitate a fresh chart paper which would then have to be stuck together. At one point of time back around 1988-89, this writer had almost an entire wall in his room at home pasted with different sizes of chart paper of the Index and major stocks!! As another example, hand plotting allows you to only maintain as many stock charts as are physically possible by you. The software maintains all the traded stocks and adds new ones as and when they appear. It also accounts for bonus, rights and splits and readjusts the scale backward. Can you imagine doing that manually? The only recourse is to replot the chart entirely, using the new scale. So, move with the times. Spend that money for the software. Not only does it make updating easier but also helps to run queries.
 
Now this is the most powerful aspect of technical software. One can, at the click of a mouse or the press of the button, get a complete list of say, stocks which moved by more than 5% up or down today. Or which met some technical parameter or the other. Or which met a variety of technical parameters taken together. Or select stocks where there has been large volumes or trades or where there is a consistent rise in price and volumes etc etc. This kind of facility helps one to concentrate on only those stocks where some kind of action is taking place. This means a direct insight into the market, delivered to your desktop! What could be better than that? Better the querying facility, better the software.
 
So, there you have it. The two basic tools of the technical analyst. Either be miserly and stick to the pencil and paper but work up a lot of sweat and have lots of time on your hands for doing analysis subsequently. Or spend some money and get your self some speed. As they say, you can’t make an omlette without breaking the egg!