Technical analysis useful tool for planning stock trades: Strategist

NextView chief market strategist expects the FTSE Bursa Malaysia Kuala Lumpur Composite Index to see a correction to between 950 and 1000 points in the next three to six months.

STOCK market retail traders can learn to use technical analysis to formulate their own trading entry and exit plan for general market trades or even for specific stocks, said NextView Sdn Bhd chief market strategist Benny Lee.

Lee said that retail traders can use either 30-, 60- or 90-day moving average indicators to chart when to buy, sell or to minimise their risk of capital loss.

In technical analysis, taking note of a stock price's support and resistance levels are key. The support level is typically where the price does not go below a level due to sustained buying interests while a resistance level is when traders/investors are selling the stock, thus preventing the stock's price from rising higher.

"In a bearish market or downtrend, the best time to buy is when there is real fear in the market and when the price moves very far from the average indicator, as there will be a rebound," Lee said at a public talk titled "Crouching Tiger, Hidden Dragon! Grow and Secure Your Wealth in 2010" held in Klang yesterday.

However, the best time to buy in a bullish market is when the price is close to the average indicator as it will probably not fall below its support level.

In structuring an entry and exit plan, Lee said the first step is to set a stop loss target.

"Stop loss is a must to protect your capital when the trade does not go in your favour. Stop loss, which can be determined by using the average true range indicator, is also used to calculate your risk," he said.

Next, a retail trader must determine the potential profit from his trade by setting a price target. To do so, traders can use either technical analysis or a company's fundamentals like net tangible assets or net asset value.

Once that is done, the final step is to calculate the potential profit to risk ratio.

"A good trading decision is made when the potential profit is higher than your risk, with the ratio at least 2:1 or preferably 3:1," he added.

The potential profit is the price difference between the target price and entry price while the potential risk is the price difference between the entry price and stop loss price.

Meanwhile, Lee, who practises technical analysis, said he expects the benchmark FTSE Bursa Malaysia Kuala Lumpur Composite Index (FBMKLCI) to see a correction to between 950 and 1000 points in the next three to six months.

The FBMKLCI rose 3.39 points to close at 1,267.15 yesterday.

Business Time