Silly me! In my excitement yesterday over providing the book review I forgot to add something very important for technical analysis for Malaysian stocks. A lot of people get disappointed with technical analysis because they make a trade based on a signals and most of them don’t seem to work. There are many reasons for that - the most important one being that they failed to take into account the totality of the situation. The classic failures are reversal signals or overbought conditions which either 1) does not result in an actual reversal or 2) where there is a reversal but which is not supported by volume. For 1) where a person sees a reversal signal or overbought condition it is important to wait until the price actually turns before putting on the trade. A signal alone is not enough. In relation to 2), if volumes do not support the reversal despite the fact that the price may have dipped, the conclusion to draw from that is that the sellers are not dumping their shares yet. There is a momentary lapse in buying interest, but that doesn’t mean that the sellers are out in force yet.

Okay now these factors make trading difficult enough, but there are other factors to consider when you are trading in the Malaysian market. Firstly, there is no liquidity in the Malaysian market. That means that prices are susceptible to ramping and can even stay manipulated for extended periods of time. Secondly, normal market forces do not always work well due to non market intervention and poor corporate governance. A weak company may not necessarily go bust or get bought out by a competitor, and the price levels of a company may not always reflect whether the true value which buyers and sellers in the markets give it. In these situations, technical analysis does not help because it is designed to help explain what buyers and sellers are doing in a freely traded market where price action alone would be be sufficient to tell you what is really going on.

That is why it is important to only apply TA to counters that you know are heavily traded and preferably has a high public spread, and identify the counters which are truly susceptible to market forces. Blue chips are your obvious example and best candidates. After those, I would go for any counters which have an average daily traded volume of 50,000 and above, and most importantly I would avoid counters which display a history of odd behaviour (e.g. ones which frequently breakout falsely. )

Now that does not mean that you should not trade those counters, only that TA will be of limited help.