How important is technical analysis for F&O trading?

Technical analysis is to F&O trading what breathing is to survival. Simply put, it’s a study of demand and supply in which you identify the dominant force (bulls or bears) in the market and align yourself with it. Rather, without Technical Analysis or TA, trading is just a stroke of luck!

In the trading profession, one needs to define exits for capital preservation and protection when things don’t work as desired; and that’s possible only by using TA. Futures and Options are derivative contracts that are time bound and their price usually factors in the fundamentals of the company, market psychology and likely future events. The price moves in trends and many times follow patterns that tend to repeat having regard to time and historical levels. TA essentially interprets such price movements and aids in taking more appropriate entry and exit using simple and time-tested techniques. Therefore, learning TA becomes imperative for your F&O trading journey.

To begin with, broadly five different market trends govern how professionals trade. Strong Bullish, Mild Bullish, Neutral /Range Bound, Mild Bearish and Strong Bearish. TA provides tools and techniques to identify these trends. For every type of trend, professionals apply Option Strategies which minimise the risk, maximise gains and increase the probability of winning. That makes TA and Option Strategies a formidable combination for success.

Whilst TA helps you identify levels up to which a price can go, options data help you corroborate it by ascertaining whether it’s in the best interest of the Smart Money with deep pockets to let it happen.

Wouldn’t it be interesting to know how TA can be used to identify potential moves in the market? Perceived as a Zero-Sum game, in F&O the money flows from losers’ pockets to the winners’. Only 5% earn what the remaining 95% lose. Wouldn’t it be worthwhile to ascertain exactly why you are losing money or earning it?

You can separate the falling knives from the real opportunities using TA. Your wisdom will guide you to “be fearful when others are greedy, and be ready for the opportunities when others are fearful,” and steer clear of herd mentality. That said, TA helps you spot opportunities others miss.

Speaking of Trends – here is an example of how we made the trend our friend. The TA increased our probability to win, against all odds. Let’s check how our pick Ambuja Cement performed.

Ambuja Cement Stock

Ambuja Cements Stock on August 12, 2022, was at the price of Rs. 384.80. We’d been observing the trend (upward in this case) and predicted it would touch 420 using TA. We betted on Call Options of 400 Strike Price at Rs. 2.

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Ambuja Cement Stock (Stock Exchanges)
Ambuja Cements Stock

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Ambuja Cements Stock
Ambuja Cements Stock

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Ambuja Cements Stock

The stock went from 384 to 425, making Rs. 2 option reach Rs. 25 i.e. whopping 12 times returns in just 4 days! Discovering such multi-baggers in financial markets is possible only with the help of Technical Analysis.

Another example:

Punjab National Bank F&O Put Options:

One of the ASTA students, a 12-year-old kid observed the beginning of a downward trend and opted for Put Options earning 4.5 times profit in a month. Not surprisingly, he had applied TA for this trade.

Punjab National Bank F&O Put Options

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Punjab National Bank F&O Put Options (Stock Exchanges)
Punjab National Bank F&O Put Options

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Punjab National Bank F&O Put Options

How long does it take to learn Technical Analysis? Up to 6 months, with 1-2 hours of practice every day. Trading can be easily managed even while working, however, you will need to devote 1,000 days to become a Pro, just as you would for your enterprise to take off and flourish. F&O trading is a serious profession. As every profession needs a specific skill for success, Technical Analysis is the one for F&O trading.

Author: Avadhut Sathe (Financial Trader, Trainer & Mentor, Founder of Avadhut Sathe Trading Academy)


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