Those who are very new to stock market, who is not even aware of terms like long, short, calls and puts leave alone technical analysis. Even a dummy/Newbie in stock market who could only choose one between two options of buy and sell would be right 50% of the time.
Now think about the probability factor is in front of you. When there are two outcomes possible, there is a 50% chance of something going your way, averaging out the continuous streak of good or bad fortune. Then how, almost 90% of the people in this industry end up on the wrong side and lose their shirts?
My understanding tells me that the reason behind this bewildering statistic is that it doesn’t matter either you are right or wrong, what matters is how much you lose when you are wrong and how much you gain when you are right.
If your success rate of winning trades is 80% (very rare) and your average win to lose ratio is unfavorable (as in negative), in the derivatives market which is full of leverage, you would go bankrupt over a period of time if the risk involved in your trading style is very huge.
If your success rate of winning trades is 40%. (dummies in the above example have 50), and your average win to lose units is 3:1 (that is to say every-time you win, you get 3 and every time you lose you give 1) over a period of an year, doing these set of trades again and again would/should make you a decent profits.
Come to think of it, stock trading has less to do with technical analyses and more with MONEY MANAGEMENT. This is where the concept of support and resistance comes in. Technical analyses basically help you in shortening your stop losses and defining the entries and exits, nothing else. It is good money management that seize the day for the trader.
Author – Mystic Funds