Friday, February 27, 2009

Taking Profits

The Nifty continues to move inside a trading range between 2700 and 2800. A breakout on either side may not provide a sustained trend. Just after 2800, w ehave resistance at 2850. On the lower side, below 2700, there is support at 2635. Thus, we can expct choppy market conditions to prevail while the Nifty makes up its mind on where to go.

Meanwhile, let us discuss on the ways to take profits.

When do I get out of a trade? Our exits are controlled by Fear and Greed. Fear gets us out too early and Greed keeps up in too long.
The answer lies in having your rules to take profits. While the rules should be matching the market flow, here are some examples:
1. For a day trader:
If a position is not profitable, I will exit after 60 minutes.
If a position sees a sudden move in my favor (range expansion), I will quickly close half of my position.
I will not allow a profitable position to become a loss. Thus, once a trade is profitable for 30 minutes, I will move mys top to break even.
2. For Swing Traders:
I will carry a position only if it is not closing at a loss.
When I am buying a dip in equities, I will exit on a 2% move in my favor.
I will enter when price touches a Support/Resistance level. If price does not quickly move in my favor then I will watch for an opportunity to close out as close to breakeven as possible.

I hope you get some ideas.

Thursday, February 26, 2009

Dont look now, but the Nifty is not falling!

The benchmark index has been inside a narrow trading range for seven trading days. This range is between 2700 and 2800. If the Index were to go above 2800, this will be an indication of a breakout. Traders should NOT short a breakout. If this breakout is going to fail (we do not know, but suppose if..) then there will be signs of exhaustion / distribution which will be a signal to go short. But an initial thrust above 2800 should not be used to sell.

It is possible that a move above 2800 could actually be a genuine breakout. Therefore, the trade is either go long, or wait for a dip / failure.

SURAT
I will be in Surat on Saturday Feb 28, for a CNBC Investor Camp. If you are closeby, do come and attend the camp and remember to meet me.
These camps are great fun, for speakers as well as participants. I am of the firm belief that traders succeed by acquiring knowledge. The camps provide knowledge. So attend them.

Wednesday, February 25, 2009

A relief rally ?

Why should a rally be called a 'relief' rally ? After all, when prices move up, the buyers should make money. With better global cues, the Indian markets may be expected to move higher. there is strong resistance in the 2800 to 2850 zone which should act as a profit taking level for intra day longs, as well as an aggressive short area. Always keep stop losses.

Punj Lloyd has been falling day after day. But, for the past three days it has been making narrower ranges. Yesterday, the stock saw a DOJI. Now, the DOJI may simply be a sign that the decline is giving way to a consolidation. It could also lead to a decent swing move. The stock was trading at 85. WIth a tight 2 point stop, there is a day trade, as well as a swing trade (carry forward) which could see the stock move near 90. Of course, a sudden market collapse may see it go down again. But calculated risk is trading.

Have Fun!

Tuesday, February 24, 2009

Good Morning, Tuesday

As world markets sink on Monday, I will look to sell rallies for intra day trading.

CLSA strategist Christopher Wood had correctly forecast the subprime crisis. He says that Gold is likely to triple in value to $3,500/oz in 2010. You can read all his predictions, Here. Wood sees bad news for Asia in the ongoing collapse in US consumer spending: “Asia needs to realise the US consumer is not going to go back to spending like they have in recent years." Wood’s final prognosis: that he still believes “Asia is the best long-term growth story… If i was putting money into stocks, I would go for China and India”.

Well, what this means is whenever the bear market ends, at whatever level, the next bull market should be interesting.

Saturday, February 21, 2009

Saturday musings

I have some thoughts on "Trend or Counter Trend". You can read it here
The Nifty is now pushing against support which comes in at 2740. Below 2740, there may well be a decline down to 2600.
The Index fell on last Tuesday, creating a gap. This gap is filled if and when the Nifty moves above 2850. Therefore, a long position is jsutified only after a gap is filled. Later, if the Nifty does decline, new patterns will form and these patterns are likely to give different buy signals. Now, if the Nifty crosses 2850, then it has to travel from current 2740 to 2850. I will not like to trade this up move, since at this time, we have no way of saying that the gap will be filled.
All of this creates some confusion. That's what the market is doing now, so we have to accept what the market is giving us.

Friday, February 20, 2009

More weakness ?

On Friday morning, the short term scenario is not optimistic. Overnight, American markets have fallen, with the Dow at a six year low. if the Nifty were to touch a six year low, then we would be at 920. Since we are currently trading at 2790, let us be thankful for small mercies.

A narrow, tight trading range for the Nifty is between 2760 and 2850. A dip to 2760 does not justify selling since there is some possibility of support re-emerging. While market may eventually fall, short selling is likely to become difficult, with support coming in at lower levels, every time the Nifty declines. This is what I meant on CNBC yesterday (thursday).

A dip in the Nifty to 2760, is not automatically a sell. If the market consolidates, then the there is a possible long trade with stops below the consolidation. Now, will the market oblige us by not falling further ? This is unknown.

Have Fun!

Wednesday, February 18, 2009

The Analyst as a Trading System

In comments, shabsaif said

Quote:

Make your own trading system, when every analyst saying now up now up than go SHORT and if they saying down down than go LONG in the market

When Sudarshan jee was saying many times that nifty will touch 2450 from that time NIfty was up and up.

After up move once again target 3050 fails and Now down down down

UnQuote

My Notes:
Quite possible. But, sometimes we get it right. When the bull market started, I had felt that we are in unchartered areas and the market can go much further than we imagine. It did. When the bear market started, I suggested that if the Nifty breaks below 5500, then we have a straight decline to 4500. At 4000, my suggestion was that 2000 was possible.

It is about momentum. Traders should follow the momentum. The tracking of momentum can be done in a hundred different ways. Just as the worship of God can be done through many religions but the road will eventually lead to Him. So also, traders will follow momentum in their own styles, but the end result is to be close to the Market.

If momentum is on the downside, I say sell. If the Market goes up, my trades will suffer losses. BUT, sometimes the market continues to go down and the trades will make money. The net result should be: gains should be more than losses.

Have Fun!

Confused !

What is this move : a dip or a new down move ?

The Nifty finally saw trading without losses. While world markets fell overnight, the Indian Markets showed resilence. At 2950, the Index faced resistance. This resistance has resulted in almost 200 points of losses.

What is the trend ?

A difficult question to answer. The short term trend is Down, the intermediate trend is sideways while the long term trend is almost certainly a bear market.

The intermediate trend is what should concern traders. The Nifty made a pattern of higher highs and higher lows, suggesting that this trend was up. Now, this pattern has changed to lower lows. We have not seen a lower high yet. Therefore, we classify the current move as sideways.

What is required for a new trend ?

To confirm an intermediate downtrend, the Nifty should make a lower high. This means we should see a rally for a minimum of one day and then a decline. The rally should not go above 2950.

To confirm an intermediate uptrend, we should see a a reversal of the lower lows pattern. This requires a rally, then a low which is higher than 2738 - today's low. This process is not easy but in the Market, anything can happen.

How do you trade ?

Use Oscillators to buy and sell. This means that in a sideways market, the trader should be open to taking trades on both sides - buy and sell.

What are the Oscillators saying ?

We are reaching extreme levels on the lower end of the Oscillator range. Perhaps buying opportunites are likely to emerge soon enough. These will be swing trades, looking at small gains, but these should come.

Swing Trading Ideas

Sesa Goa has seen a correction from 100 to 89. The stock could give a bounce. Buy using intraday charts, or above the previous day's high.

Suzlon has seen a pattern of lower highs and lower lows. It is NOT a buying opportunity, t least not yet. Avoid it.

IT stocks, specially the big ones (Infosys, TCS) has DOJI patterns today. These patterns have come in at support levels, suggesting a buying opportunity.

What happens if the Market falls ?

Well, any move below the previous day's low is a red flag, suggesting weakness. Go short with proper money management (stop loss, control on volumes)

So, what is the summary ?

The Nifty remains in a trading range, although the break down below previous lows suggests weakness. The Trend is sideways.

Monday, February 16, 2009

Market sees a break down

After a four day consolidaion the Market finally moved out of the consolidaion, taking the interim budget as a trigger. A trigger is just a reason for the market to do what it intended to do anyway.

Always go with the trend.

So far, the short term trend was up. Now, with the Nifty moving below 2835, this trend has changed to sideways. Long positions should be closed since the Index has violated a significant support level.

Has the downtrend resumed ?

Not realy. The Nifty was inside a trading range 2700 to 2875 and this trading range probably continues wih different boundaries - 2950 to 2760.

Looking at a Scenario

The Market is moving inside a range, although the range is probably wider than the one we are tracking. The real range may well be 2500 to 3200. Maybe, the Index will move inside this larger range for months altogether, before deciding on a trending move. The next move could be down to 1800 or up to 3800. All of this is just to build possible moves for the Index.

If this is a trading range, how should I trade ?

The nice thing about a range is the fact that there are opportunities on both, the long side as well as the short side. In a few days time, most stocks will reach support areas. This will be a time to buy for small up moves. Traders may consider going short on rallies. Going short will no longer be easy enough. I suspect that the best part of the bear market is behind us. Every rally now will raise the question: is this the real 'bull' move ? Thus, short selling may remain rather difficult, from now on.

The Nifty

While the Nifty remains inside a trading range (2760 - 2950), the range is difficult to trade since we have alrady seen two failed moves out of it. First, the Nifty fell below 2700 to 2635 but rallied back inside the range without reaching its downside target. Now, the Index broke out above 2875, went to 2950 and has retreated back ino the range. Therefore, it seems that using oscilators to identify extreme conditions may be the more profitable. This means using tm Stoch, or RSI, CCI, Stochastics or some such method.

Have Fun!

Still up but uncertain

As the markets open on Monday (written at 6:54 PM), the technical position of the market can be defined as this:
1. The short term trend is UP. This happened when the Nifty found repeated support around 2760, then broke out of a trading range. We have seen four days of consolidation, which we have to assume is a continuation of the up move.

If nothing external disturbs the trend, the Nifty could be seeing 3075. To reach this target, the index wil have to break out of the current 4 day consolidation, giving it more steam.
The trend changes to down, if and when the Nifty trades below 2835.

So, how do I trade ? I continue to search for intra day dips to buy for day trades.

Have Fun!

Thursday, February 12, 2009

Down moves ?

The Nifty as well as the Bank Nifty has narrow range days today, suggesting a breakout in either direction (up or down).
Art of Trade is comments which you can read here suggests that NTPC may be ready for bearish hed and shoulder breakdown.
My analysis seems to confirm these views. In NTPC a possible breakdown below 175 will have a target of 155 (CMP:180). But, the stock has lot of support at 165, has been showing strong relative strength, therefore, we may see lot of support before touching the target.

Infosys seems to be in a trading range between 1320 and 1260. A breakdown below 1260 gives 1200 as a target. There is chart support at 1200 anyway, so this may be a good level for support to come in.
I have a new post in the blog Practical Technical Analysis. The topic is: Bob Farrell's ten rules of investing. I think you will enjoy reading it. Read it here

The wise are still worried

Microsoft Chief Executive Steve Ballmer sketched a dire portrait of the world economy on Friday, likening it to market conditions in 1837, 1873, and 1929, each of which involved bank failures, high unemployment, and a depression. You can read the full article here.
His warning of a protracted downturn that could become a depression comes amid a stock market that is down by more than 40 percent from its October 2007 peak, and housing prices in many metro areas that have been falling consistently since July 2006--a feat not equalled since the Great Depression.
"In my view, what we now have will be a fundamental economic reset," he said. "The economy is going to have to re-establish itself at a level of spending that reflects the real value of underlying assets before we can all start growing again at a healthy rate."

My Notes: Pimco's Bill Gross says that a second wave of crisis may be coming. Well, as traders we can only try to go with the market. The current minor trend is UP so traders should be better off staying with the idea of buy on dips.

Wednesday, February 11, 2009

Back to Square One ?

The American Markets fell on Tuesday evening, almost 4.5% or more. This suggests an impact on Asian markets today, including India.
We have seen a slow and steady rally from the lows at 2625 finally reaching 2950 yesterday. After any rally, a dip or correction is possible. A decline today should be assumed to be a correction of the ongoing up move. Support comes in at 2835 (Near month futures) where the Nify had made a minor resistance line earlier. So far this line holds, I assume that any decline is a correction. A break below 2835 will be a sign to exit long positions, but will still not be a short selling signal.
What can go wrong ? Well, the Market can continue to slide, breaking these levels, one by one.
Have Fun!

Tuesday, February 10, 2009

After a big move, a narrow range day ?

Two days of back to back gains in the Nifty should probably give way to a narrow range day today. This is possible because global markets are not exactly cheering.

How wll you recognize a range ? If the market repeatedly comes inside the area defined by the highs and lows set in the first 15 minutes of trading, you start getting the idea that big traders are not having a view on the market today, so they are probably out of the market. In such days, your momentum oscillators are of use. Sell when the RSI / Stochastics / CCI is 'overbought', buy when they are in the 'oversold' area.

Swing Traders can take profits on any intra day rally, or simply hold on to existing long positions.
Should you go short ? Not in my trading rules. A trading range breakout is a reason to buy. Market may or may not reward us, that is a different issue.
Have Fun!

Sunday, February 8, 2009

Is a bull hiding somewhere ?

The American markets rallied for the second day on Friday. This should set thet one for a higher open on Monday in Asia (including India). If we open higher and maintain the gains, then we are looking at a possible breakout from the trading range. The minimum targets for the range may be 3050 approximately. Will this come about ? No one can say this for sure. Traders should go with market flow. The flow seems to be on the bullish side.
How do you trade ?
If you are a swing trader, planning to take positions for a few days, then buy calls / futures / nifty ETF using the 15 minute rule .Your stops should be the mid point of the range, about 2790. If the trade moves in your favor, you can move the stop loss to break even. The management of exits is a very personal decision. I am only giving indicative ideas.
If you are a day trader, then buy after the five minutes from the open, above the five minute high. You can plan for an exit on any range expansion (big sudden move) in your favor. You can also plan for a reentry after a dip. In any case, going short will not be a good idea.
What can go wrong ? Everything. There is no guarantee that the markets will move up. But traders work on probability. That favors buying.
Please understand that day trading / swing trading is meant only for professional traders who are adequately capitalized.
Have Fun!

Saturday, February 7, 2009

Whipsaws in Trend Following Systems

Aurobindo, in his comments asks about whipsaws & automated trading. You can read the comments Here .
These are my favorite subjects. So, here I start.
Whipsaws:
Aurobindo asks: How to avoid trades when market moves sideways.
Any system / method which is trend following will make money when the market is in a trend. In sideways, range bound markets, these systems lose money, sometimes giving up a lot of the accumulated gains. I have developed hundreds of systems over the past ten years, and traded many of them. Here are my experiences in a nutshell:
1. The best systems are trend following. This seems reasonable since trends will give money. If there is no trend, there is no gain.
2. Counter trend systems (trying to sell tops and buy bottoms) are a losers game. Larry Connors provides many ideas for counter trend systems in his books and website. My understanding is that he trades without stops. When you are trying to buy at a low, it is always possible that the market may dip one more time before the final low is made. You do not want to be stopped out at the worst possible time. I have never been able to develop mechanical systems based on this idea. I do not recommend any trading without protective stops.
3. Trend Following Systems give many whipsaws in range bound periods. This results in (a) large number of consecutive losses (b) large drawdowns. Together they create an environment in which you say to yourself "I will do anything except run a trend system". Chances are, at the point of maximum pain the system is abandoned. That's probably a sign that a strong trend is emerging!
4. Adding moving averages to the system will almost inevitably adversely affect the system performance. Do not filter with averages.
5. There is no formula which gives an answer to "how to avoid whipsaws". If you are a trend trader, you have to live with whipsaws. But, here are some suggestions to reduce the pain.
(a) Trade one side of the market. Use a long term average to determine the trend. Then, take only those trades which are in the trend direction. This has the unfortunate affect of eliminating reversal trades which are often profitable, but that's the way it is.
(b) Experiment with price filters. If long term trend is on your side then you will buy at x + 1. If your signal is against the long term trend then you will buy at x+2. You can develop simiar logic for exits.
(c) Develop systems which trade less but give a higher sharpe + profit factor, even when they have lower profits. Chances are they will have lower profits, but that's okay. Have a number of systems with different logic. You can trade a combination of two or more systems which together will give you the same performance with less whipsaws.
(d) Experiment with time exits. This sometimes enhances the performance of trend following systems. Even if it does not, if it reduces the whipsaw periods you may like to consider it. Example: If it is Tuesday, then I will exit my system. Often, this forces you out of bad trades (good ones also!).
(e) Experiment with the ADX using a low period. Instead of 14 use 5 or 8. ADX tells us when the market is not trending. But often it prevents us from entering at the beginning of a trending move.
(f) understand there is a tradeoff. You want to accept most of the whipsaws since the idea is to catch the big moves. Filtering will prevent you from the big ones. If you can reduce some of the whipsaws, I feel that the job is well done.

Finally, I have to thank you for asking these interesting questions. I look forward to more of this.

Friday, February 6, 2009

Take it Easy

The Nifty spends time in a trading range, 2875 to 2700 (or 2760 if you look at a smaller range). A move out of this range should give some rewards to traders.

Optimism in the air ?
An interview with Charles Nenner (a Dutch academic) should be good news for bulls. He predicts the S&P to rally to 1000 by mid Mrch. He alsos ays that the bear cycle is bottoming out. When asked by CNBC America on how accurate his forecasts are, he said 100%. The anchor asked him: "In that case why do not own the world ?" Mr Nenner answered: "Because I am not American, I am content to do research".
"Experts predict Monster Rally (Thanks to kirkreport.com)
Before you get carried away, do a google search on Charles Nenner (his website is charlesnenner.com):
Here are one comment: Not Happy

My Notes: You need to develop your own instincts and styles for trading. Following an Guru (any one, including yours truly) will not be rewarding.

Thursday, February 5, 2009

We have seen this before

In the month of July - September 2008, a trading range developed on the Nifty which lasted for seven weeks, between July 3 and September 12. The range was narrow. Boundaries were 4200 as support and 4550 as resistance. Eventually the Index fell down breaking support. This led the the eventual decline below 3000 (as we are now).

A similar range is now developing in the Nifty. Between Janaury 12 to feb 4, the Index has moved in a 175 point range, with support 2700 and resistance at 2875. For all we know, this process may continue on. Eventually, the Index will break out or breakdown. The move out of the trading range should provide a trend, whichever way it breaks.

Position Trading or Day Trading ?
Day trading is a difficult task, because of the rapid response required from traders to enter as well as exit positions. Day Trading also requires extrensive research and studies for the development of your trading systems.
Position Trading is less stressful since decisions are made less frequently (as compared to day trading). As a Position Trader, you probably rely on end of day charts for trades. Trades are analyzed and decisions made after trading hours (probably late evening or early morning).
Another category is that of a swing trader. You need access to intra day charts to swing trade. Trades last between a few hours to a few days.
Capital required.
Trading requires capital. Whatever style of trading you follow, you MUST be adequately funded. As a position trader, you will have less quantity (compared to a day trader) because your stops will be wider. In all trading styles, there are periods of opportunity, periods of drawdowns and stagnation. That's part of business.

Wednesday, February 4, 2009

Trading as a Profession

What is the amount that you need for trading ?
As of date, the value of 100 Nifty is about Rs 2,80,000. Let me round this to Rs 3 lakhs.
You have a method for trading the Nifty that gives about 1500 points of profits in a year and risks about 500 points. (the risk is the maximum loss incurred during the year)
This is the capital requirement I get:
A. 30% Margin 90,000/-
B. Risk provision ( 3 times historical risk) 1,50,000/-
-------------------------------------------------------------
Total capital required Rs 2,40,000 / -
Expected Gain (1500 points) Rs 1,50,000/-
-------------------------------------------------------------
You will also earn some interest on the margin and the money you keep aside for funding losses and on the accumulated profits, but I have ignored this. The return is about 62.5% on capital invested. This is possible to achieve.
Why traders go wrong ? They overtrade. While my suggestion is to trade 100 Nifty with an investment of Rs 2.4 lakhs, it is possible to trade 1000 Nifty with the same amount (without any provision for losses and a willing broker). What happens to such traders ? The end of their trading careers is guaranteed.

Monday, February 2, 2009

It is still a trading range

The Nifty has spend 15 trading days moving inside this range - 2700 to 2875. Thanks to increase in volatility, there is a sense that the markets are moving a lot. but, the truth is : the markets are where they were. Since they move up and down, day after day, there is a sense of movement. This is a deception, as the market remains inside a narrow trading zone.
Sooner or later this range will break. A move outside the range should provide a trending move, so watch these range levels.
Banks charts are cause for worry. The Bank Nifty seems to have made a bearish flag and broken down from flag support, today. Flags are made half way in a trend. based on this principle, the bank Nifty (close at 4240) may be heading towards 3000. Of course, the pattern could fail and my analysis may be wrong. But, still...
Take care.

Good Morning, Monday

For the Nifty:
A trading range between 2700 and 2875 was on the verge of being taken out. The Nifty closed at 2874, just ready to breakout. An up move should see a pattern target of 3050, while the failure to go higher will mean that the Index remains in that trading range.
DayTraders: Possible trades (1) Gap trade: A gap down then a rally. or (2) Breakout / breakdown from intra day consolidation.
Swing Traders: It may be wise to close any long positions. If there is a breakout, a 'dip' can be used to reenter.
Position Trades in individual stocks: Not a good day to buy since most strong stocks were rallying in previous 2-3 days.
Disclaimer: These are suggestions, not trading advice. Short term trading requires large amounts of capital, ability to suffer losses and discipline. Only professional traders should be trading.

Sunday, February 1, 2009

The Wall Street culture in Dalal Street

(Information taken from a New York Times article which can be can be read Here )
Mr Obama was angered by the news of Wall Street Bonuses (18.5 billion dollars paid to people who had almost brought down the country by their actions!). He called TV news and said "That is the height of irresponsibility". “It is shameful.” Wall Street was given public funds and the government had a right to expect in return that Wall Street would “show some restraint and show some discipline and show some sense of responsibility.”
The New York Times says that it is not just a question of money. “It suggests the selfishness of people on Wall Street.” ...... the people who thought of themselves as the smartest guys in the room — and were paid accordingly — weren’t so smart after all. They brought down the financial system.
Why ? Because of the “eat what you kill” mentality that has dominated their (wall street) profession these past two decades. It means that if you made money, you were entitiled to keep all of it. Taken further, if you had a profitable idea, you were to entitled to make as much money as possible from that idea, no matter what the affects on the economy, society etc...Also, if you lost money, then the public has to come and bail you out.

So, what about Dalal Street
Our own mini versions of the American Investment Banker had assumed a divine right to advice and make money. If they said that a company is doing well, it became the duty of the public to buy that share, so that (a) they are proved right, and, (b) they make money. If subsequently, share prices fall (as happened) the blame is on the public.
I must also point out that investors do not have to listen. They can take sensible, common sense based decisions on their own hard earned money.