Technical Chart Patterns - Do they work?

Technical analysis has been widely used and exploited in all its shapes and forms. It is about identifying price patterns to anticipate future moves. There are lots of books and courses being made on the subject. Still, there is always a debate about the validity of these concepts as opposed to fundamental analysis, which is more about understanding the company as a whole. CA Afzal Lokhandwala a short term active trader and a passive investor, argues, "I'm solely using technical analysis to trade in the markets. For me, the technical study is not about these classical patterns like double bottoms, triangles, etc. It is more of understanding the price behaviour of a stock along with the volume analysis."

There are many books on the various chart patterns and candlestick analysis. Most traders use these concepts to trade in the market. It is noteworthy that the majority of the active traders are at the losing end. Afzal shares his insights on this phenomenon, "First, most of these authors have no credibility as to whether they have really been able to make money for themselves. It is unfortunate to see beginners getting trapped in thinking that they will find success after learning a few charts or candlestick patterns. These things are useless. You have to understand how the prices really move and observe that using the charts. Even you if get the hang of it slowly, you have to have a strong money management system and rock-solid psychology to taste success."

He shares his views and trades very transparently on Twitter (@afzal_57). He openly communicates about his losses and how frequent losses are a part of a trading journey. He believes in keeping the losses minimal by exiting his trades quickly when he is proven wrong by the market. "Small losses, big wins and a good hit rate - if you can do this, you are sorted. Then, it is simply a question of how frequently you can repeat this. The math is simple, but traders are not getting this or maybe, they lack the discipline to stick to the process. This is why, apart from technical analysis, I place a great deal of emphasis on risk management and psychology when I train aspiring traders."

He adds, "My community has got so strong, and I get a lot of great trading ideas from them as well." Afzal has a passion for understanding the price behaviour and browses through hundreds of charts every day. It is this determination that has taken him to such heights.

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He believes that the actual understanding of the charts comes from looking at the charts repeatedly, and there is no substitute for that experience. A beginner should not get mesmerised into memorising the chart patterns and technical indicators as they do not serve any purpose unless one has learnt to look at price movements from a "supply and demand" perspective.