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Chart Patterns Study

 

One should keep learning to succeed in life. If you want to be successful in short-term and medium-term trading then it is important to know and understand the chart patterns before trading. In geometry, we studied triangle, in geography we learned about the Bermuda Triangle. Similarly, in the share market with chart patterns, they are various triangles. So if you wish to learn more about the triangles present in the chart patterns then stay tuned to this blog. 

 

American billionaire, investor, and philanthropist George Soros quotes, “Itʹs not whether youʹre right or wrong, but how much money you make when youʹre right and how much you lose when youʹre wrong.” Let us understand this with an example. In the blog updated in August 2020, we had discussed the Techno-Fundamental Analysis. In that video, we had talked about the share of Berger Paints. Now, do take a look at the current chart of Berger Paints. 

 

When on 10th August 2020, the share of Berger Paints had given a signal of moving out of the box after moving in a limited range for a while. So when the share was moving in a limited range, it has formed the shape of a triangle. In technical analysis, this triangle is also known as ascending triangle chart pattern. In this manner, if the share of any company has formed such a triangular chart pattern while moving in a limited range and indicating towards moving out of that range as per technical analysis then it is said to have formed an ascending chart pattern while indicating an uptrend. 

 

Let us now check the fundamentals of Berger Paints on 10th August 2020 when as per technical analysis it indicated moving out of the box while giving a signal of an uptrend. So as per our analysis, we had said that the company earns a good return on invested capital as well as there were indications of growth in the top-line (sales) and bottom-line (profit) growth of the company. So according to techno-fundamental analysis, we could make a buying in that share. Also, we had mentioned that we should buy-in that share by investing a limited capital and trade with a stoploss in place. 

 

So you needed to place the stoploss within the box. Had we kept the stoploss of Rs. 523/- then on 10th August 2020, its rate was Rs. 555/-, in case after buying the share at Rs. 555/-, there had been a quick fall in the share then how much would one lose? The share was bought at Rs.555 - Stoploss at Rs. 523 = Loss of Rs. 32 /-. So 32 * 100 / 555 = 5.76%. So the loss would’ve been close to 6%. 

 

In another case, had we held on to that stock then the price of the stock by January 2021 reached Rs. 760 /- approximately. So Rs. (760 – 555) = Rs. 205 /-. And, 205*100 / 555 = 36.93%. So the earning here would’ve been close to 37%. So had we gone wrong in that trade, we would’ve lost 6%, and had we held onto that trade, we would’ve made around 30% profit. That means, here the risk/reward ratio was reward > risk. So if we trade in this way then the returns we make would be greater whereas the loss would be reduced. This is what George Soros meant. 

 

Now, the next important question is where to keep the stoploss for the share of Berger Paints currently? We have discussed this topic in our previous blog on Nicolas Darvas – Part II. In that blog, we have discussed the fact that where did Nicolas Darvas place the stoploss, when the share kept increasing. So you can check that out as well. Let me mention it here once again. Nicolas Darvas used to place the stoploss inside the box when the share used to indicate moving out of the box after moving in a limited range for some time. Later, the share used to continue moving upwards and then might go into consolidation at times and enter into another box. So Nicolas Darvas used to trail the new stoploss below the base of this new box. 

 

In this same manner, if you have bought the share of Berger Paints earlier then you too can trail the stoploss and place it at Rs. 680. Like Berger Paints formed an ascending triangle on 10th August 2020 signaling an uptrend, so now in January 2021 which is that company or share which is forming a similar ascending triangle? The name of that share is Dr. Lal Path Labs. If we analyze its chart, we’ll find that after moving in a limited range for a while, the share indicated moving out of the box in January 2021. So while the share was moving in a limited range, it had made a triangle-shaped chart pattern. Now, the share has indicated moving out of the box giving a signal of an uptrend. So we can place the stoploss at Rs. 2107 /- and trade here. As per the chart, the share has signaled to move towards an uptrend.

 

Now, let’s track it fundamentally. So the company earns excellent returns on invested capital, also it is a low-debt company. There is good growth in the top-line as well as bottom-line and also it is expected to grow further. So here according to the techno-fundamental analysis and as per the ascending chart pattern, we can opt to trade here by placing at stoploss at Rs. 2107 /-. But while trading, you should remember that you can go wrong as well. Otherwise, you would blame us. 

 

We have mentioned this quite several times before, before trading, you need to check the market valuation and market direction first. As the market valuation is expensive, hence invest less along with placing a stoploss.

 

If you wish to learn this technique along with examples and case-studies then download our application Aryaamoney and if you wish, you can subscribe to our Smart Investor Training Program. After you subscribe to the program, you will be able to find out for the next two months about which are the shares that are coming out of the box, where are you supposed to place the stoploss, etc. with complete hand-holding support. You can subscribe to it if you wish to. If you wish to open your Demat account with India’s leading brokers, then you can check out the link given below.

 

We would like to give a disclaimer here that all the advice given in this blog is for educational purposes. This is not any kind of buy/sell recommendation. Mr. Bhuushan Godbole, his company as well as the director board of the company has crores of investment in the share market as well as in gold and silver. This is our disclaimer/disclosure. So we’d like to mention this again that invest in the market after thorough analysis and also after discussing it with your financial advisor. 

 

 

Until next time…

 

Happy Trading, Happy Investing!!!

 

 

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https://www.youtube.com/watch?v=_FF1kbdSpx8&t=93s

 

 

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