Putting technical analysis to work

Reading for India · about 4 min

What this cluster is for

Everything before this cluster taught you to read a chart. This cluster is about what you do with it, and it has 3 parts: what to own, how much of it to own, and why any of this works at all.

One thing needs saying at the top, plainly, because it is the single most useful sentence in the entire technical track.

Of everything in these 22 clusters, article 2 is the one that decides outcomes. Position size, not stock selection, is what ends accounts. Almost all retail effort goes into choosing what to buy, and almost none goes into deciding how much. That allocation of effort is exactly backwards, and the arithmetic is not a matter of opinion: a 50% loss requires a 100% gain to recover, and nothing about being right more often changes that.

A person with a mediocre method and 1% risk per position is still trading in 5 years. A person with an excellent method and 10% risk is not. The difference is not judgement, research or skill. It is a division they did before they entered.

If you read only 1 article from this cluster, read article 2. If you read only 1 article from the whole technical track, read article 2.

By the end of this cluster you will be able to:

Rank everything you own against the index in about 5 minutes, without an indicator
Work out how many shares your account actually permits, from the stop distance rather than from a feeling
Say what percentage of your account is at risk right now, across every position at once
Tell the difference between a chart claim that has a documented mechanism and one that is a pattern found in noise
Measure the disposition effect in your own trade history, and know which of your exit reasons are about the business and which are about the price

The reading order

Three articles, and they answer 3 different questions. Read them in order.

Relative strength, and choosing what to own — your stock's change minus the index's change over the same window. Nothing more complicated is needed. It shows you which holdings you are keeping out of hope.
Risk management and position sizing — the one that matters. Fix the stop from the chart, risk 1% of the account, cap the position value, cap the share count against daily volume, and take the smallest of the answers.
Behavioural finance, and why technical analysis works — there are documented mechanisms that would produce some persistent price patterns. They support far fewer techniques than they are used to defend.

The checklist

Three actions. The first takes 5 minutes, the second takes 5, the third takes 5. Together they are 15 minutes and they will tell you more about your account than a year of reading.

On your holdings, every 6 months

Compute each holding's percentage change over 6 months, and subtract the index's change over the same 6 months. Sort the list. (1)
For every holding more than 10 points below the index, write 1 sentence saying why you still own it. Write it down, do not think it. (1)
Add up the value of the holdings in the bottom group. That is how much of your money is losing to a fund you could buy in 1 click. (1)

On your largest position, today

Write the price at which you would sell if you were wrong. (2)
Multiply: shares × (current price − that price). That is your money at risk. (2)
Divide by your total account value, including cash. If it is above 2%, you do not have a position, you have a bet. (2)
Repeat for every holding and add the results. That total is what you lose if everything goes to its stop at once, and correlated positions do go together. (2)

On your trade history, every quarter

Compute the average holding period of your winners and of your losers. Divide the second by the first. (3)
For the losers you held longest, write why you did not sell. Sort the reasons into ones about the business and ones about the price. (3)
Count the second group. That count is what to fix, and it is in your exit rule, not your entry rule. (3)

Before any new position, in this order (2)

Stop from the chart, not from your wallet.
Shares = (account × 1%) ÷ (entry − stop).
Cap position value at 15% to 20% of the account.
Cap share count at 5% of average daily volume.
Take the smallest of the 3 numbers. If it is far fewer shares than you wanted, that is the answer, not a problem to solve.

India and the United States, equally

Every article covers both markets at the same depth, then says where they differ and what the difference tells you. In this cluster those sections are unusually practical.

The answer is not always purchasable. American fractional shares mean the sizing formula's output can always be bought. Indian derivatives lot sizes mean it usually cannot, so the Indian version of the method needs a step the American version never had to write down: if 1 lot risks more than your limit, do not take the position.

An Indian stop is a weaker promise. A stock at its lower price band may have no buyers at all, so the stop cannot execute because no trade occurs. American halts are designed to reopen with a wider band. That difference means position size is not merely the best protection in India. It is often the only one that works.

Behaviour is managed by structure in one market and by the individual in the other. American retirement plans default many savers into diversified funds with automatic contributions, so inertia produces diversification. India has no equivalent default, so the same inertia leaves the decision open. An Indian reader has to build the arrangement themselves: automatic monthly investment, a written size rule, and an exit condition fixed before entry.

And the evidence is not symmetric. SEBI has published population-scale studies of individual derivatives traders, covering crores of accounts. There is no American equivalent at that scale or recency. It is the most direct evidence anywhere that behaviour beats analysis, and it was produced about the readers least likely to have seen it.

A note on what this is not

These lessons are free and they will stay free. They are the text version of the ideas in our video course, written for anybody who cannot spend money on learning right now.

This cluster contains no method for being right more often. It contains a method for being wrong cheaply, which is the only thing that has ever kept an account alive long enough for being right to matter. The goal is the same one it has always been: fewer people in the 95%.