Saturday, May 30, 2009

The lighter side of trading

I returned from the CNBC Investor Camp at Agra, late evening. I sat down to write this blog, then paused as I felt I should first reply to some comments, and, maybe write my ideas in another post.
Men says :
"......... some guidance on how do we go about it has been left UNANSWERED from your end, while questions asked in lighter sense has got a prompt reply why? HOPE YOU WILL NOT DELETE THIS POST"

My Notes: I do not delete any comments. Perhaps one or two comments which contained unaccceptable language were deleted since I started blogging.
It is quite possible that questions asked 'in a lighter sense' have received a prompt reply from my side. I suppose these questions are easier and more fun to reply so the mind quickly focuses on them.

Men's question is:
What you are saying in other words is buy low and sell high, sounds so easy, but EQUALLY hard to implement.Say we touch 4600 and then a dip comes to 4300 would you say buy into that? Would that be better off or buying now and taking the risk of seeing it come to 4080 and then rebounding from there, that is what makes us look at people like you. Please give us levels to work with, on cnbc you said "3500 IS NOT IMPOSSIBLE and SO IS 4500 some days back the market can do what it wants to" So please give us levels for entry on dips and exit on rallies, rather than wait for a dip.

My Notes:
Here are segments of my blog posts strating from march when the rally started. I have tried to share my views on the market with readers.

Monday March 16, 2009
The Nifty has moved above its 20 period MA today. If the index were to rally towards the upper bollinger band, that gives a target of 2900 for the Nifty. A failure to touch the upper band will be a signal that the bear market is alive and kicking.
The next resistance for the Nifty is 2800. Traders may wish to step aside and let the market decide if it wants to move above this resistance area. if it does, then buying is suggested.

Thursday March 19, 2009
A significant resistance level continues to hold, pushing prices down whenever it is challenged. This may be happening in the Nifty where the 2800 resistance seems to be strong.
If the market feels there should be no dip, it will start another up move above 2825. Monday,

March 23 Morning
While the American markets fell on Friday. Monday morning is a different story. Asia is up, while the SGX Nifty suggests a strong rally is coming in the Nifty.
A decisive close above 2800 will suggest a breakout from a trading range, leading to 3000 or even 3100. Short term traders should not fight the trend.
Is the bear market over ? This knowledge comes much after the event. I assume this is a rally in a bear market.

Monday, March 23 evening
A 5 percent gain in the Nifty has set the markets on fire today. These gains have come together with up moves in world markets, all over.Is this a bear market rally or the beginning of a bull market ? The answer is not relevant to traders who should follow the trend. The trend remains up, so go with it.

Thursday March 26
The Market continues to go up. We go with the flow, which is UP.

Friday March 27
Investors must remember that this bull move started three weeks ago. The Nifty has gained 20%+ since then. Surely, the market can gain more, maybe 30% or even more. But, investors must understand that the risk reward ratio no longer favors them. If you invest now, you may earn money, and, then again, you may not.
For traders, the decision is easy. Buy on dips. When these buying positions begin to lose money, the bear rally may be coming to a pause.

Wednesday April 1, 2009
The Nifty is now in a trading range between 2980 and 3100. This range has lasted for five days. A breakout above 3100 could see 3220 or higher

Friday April 3. 2009
Bull Markets do NOT start with a big bang. Therefore, the curent rally may well be the beginning of a new bull market, but as of now, this is not confirmed.

Sunday April 5, 2009
It seems fair to expect the markets to maintain their strength. A breakout above 3150 tells us that the Nifty may be on the move to touch 3700 to 3800 in the next few months.

Wednesday April 8, 2009
The short term and intermediate trend is up. Today's likely dip may change the short term trend to down if Nifty futures close below 3227, Monday's low.
Should this be a buy on dips opportunity ? Yes. But, you need to wait till you get a setup on your charts that says - "the dip may be over".

Thursday April 9, 2009
The trend is UP, world markets are rallying as I write this. Traders should stay with the trend

Saturday April 11, 2009
The Market says, I am going up. This message is coming clearly in the charts.

Thursday April 23, 2009
A small trading range between 3350 and 3500 was broken yesterday when the Index closed below 3350. A decline is expected. The key question here is: Is this a correction in an ongoing up trend, or the beginning of a new leg of the bear market ? A 'normal' pullback can take the Nifty down to 3150 support without changing the intermediate up trend. Therefore, at some point, when charts begin to give 'buy on dips' signals, we will take them.

Friday, April 24, 2009

Markets at another inflection point

A close above 3500 will justify a long position (buying) for traders a well as investors. For traders, the task is simpler. Buy with stop losses.

Friday May 15. 2009

Today's trading view is positive.
Should you carry long positions into Saturday's big news events? My views has been: avoid trading during news events. I always stay away. You may wish to keep an options straddle by buying calls and puts of 3600 strike. That's to take advantage of any sharp post election.

Thursday, May 28, 2009

Day trading or Futues trading does not depend on consensus

Most analysts now believe that the Markets are going to remain steady, leading to higher levels. However, consensus is not always a sign of wisdom.

Quote from The Big Picture blog:

And for those of you who are fans of the wisdom of crowds, allow me to remind you how poorly the consensus of professionals did last year. As we discussed yesterday:
“Consensus? Why should investors — or homeowners, for that matter — care much about the opinion representing the consensus view? That consensus missed the credit bubble as it formed, wrongly believed the sub-prime issue were “contained,” and utterly missed the top in housing. If you followed the consensus, you lost 50% of your money last year, saw your home value drop 30%, and generally got mangled in most asset classes other than Bonds, Cash and Gold."

Most people feel left out from the rally. Any number of people now say "the market has shown that it will go up every day. So, we should now buy without waiting for a dip". This is dangerous thinking that emerges at the top of the rally. "The Market cannot go down now" -this theory has been proved wrong when we had the bear market immediately after the 2003 - 2007 bull market.

My point is: investors should always wait for dips to buy. These dips come, that is for sure, it is our patience that gets exhausted quickly, leading us to buy almost at the top.

Wednesday, May 27, 2009

Another Trading Range?

The Nify has this tendency of breaking from a consoliation through a wide range bar, then going into a huddle, making another consolidation. This seems to be the pattern once again, as the Nifty creates a trading range after a massive 600 point wide range bar last Monday. The range is between 4100 and 4400. Three hundred points is rather wide, but then, we live in volatile times.

What are the possible scenarios?
One. The Nifty spends a few more days inside this range, then breaks out above 4400, giving a target of 4700+. Because the preceding trend is UP, we should assume that the move out of the range will also be up.
Two. The Nifty actually decides to take a deeper correction. It breaks down from the range, moves below 4100 and looks to find support at 3800 approx. This scenario is possible if the world markets decide to begin a correction.
Three. The Index moves out of the range boundaries but does not reach the targets. Instead it defines a wider trading range and spends many weeks in it. This will be the tricj\ky scenario, since a breakout or breakdown will attract many tarders who may find themselves caught as the Index remains inside a trading zone.

There are many other possibilities which I have not discussed since their probability, at the time of writing, is low. The purpose of scenario building is to be mentally alert on the different possibilities in the market. We also go through a mental exercise of planning our responses.

Day Trading idea: Buy with the short sellers

Research mentioned in cxoadvisory.com blog suggests that short sellers are on average more informed than other traders, and high levels of short interest in a stock indicate poor future returns. The converse is also true, as the blog suggests that "Heavily traded stocks with low short interest generate statistically and economically significant positive abnormal future returns".

If you identify a set of stocks that have low short interest, consider going long in the stocks, as a day trader or a swing trader. This idea provides a method of creating a list of stocks in which long positions should be taken.

How do we identify stocks in which there is low short position? In the USA, stocks are sold against borrowing of securities. There is data on the number of shares borrowed which enable traders to identify shares with large or small short positions. If readers have some idea of information on short positions retrieved from F&O data, please share it with all of us.

Sigamani says:
would like to know your comment regarding trading in nifty..I read somewhere, that a person has to have a mechanical trading system (something like a visual graph with some moving averages)and it should give calls automatically...irrespective of situations just go with the calls everytime and your probability of winning will get you profits..what do you say on a system above like this?

My Notes: In our office, we have computerised systems for trading the Nifty. Many times the systems are unable to determine the market environment and takes trades which seem obviously wrong, e.g. going short on last wednesday, (On Monday the market had hit the upper circuit and momentum was on the side of the bulls). But, thank to (a) discpiline, (b) probability, these systems make money over time. Similar methods can be adopted in visual chart analysis also.

Vicky asks:
Alan Farley has published an article about the crossovers of 200Ma and 50Ma as GOLDEN CROSS(50 crossing 200 from above)and DEATH CROSS(50 crossing 200 from below).In that view a GOLDEN CROSS is about to occur(or occured) in NIFTY. Can we take that as a positive signal?http://hardrightedge.com/wheel/hrecrossovers.htm

My Notes: Yes, such crossings indicate strength / weakness in the market. Are you planning to take day or momentum trades based on a Golden Cross on the daily chart? That will be unwise, since the crossover suggests a long term change in the trend, not a short term move. An intermediate trader can take a long position after the cross (ideally after a dip), and exit on a Death Cross .

Tuesday, May 26, 2009

Elections and the Nifty

I have a new post in Practical Technical Analysis on day traders preparation . The post is a little difficult to read, but is probably worth the effort if you read it a couple of times.


A 600 point rally after the elections has changed the support and resistance levels for the Nifty.The threshold has moved up by 600 points. Thus, the lows of 2200 seen in Ocotber should now be considered 2800. A resistance expected in the 3800 - 3900 zone is now seen at 4400 - 4500. Earlier, I was looking at a dip to 3150 support. This probably changes to 3700 - 3800 now. The election is a rare event which raises the threshold of hope in the market.


Is this a bull market? Instead of classifying it in 'bull' or 'bear' terms, I am thinking that this is a market in an uptrend. This makes it easier to identify the direction in which trading opportunities lie -UP.


I also believe that our market remains coupled with international markets. All of talk of a 'Game Changer' is probbaly just talk. If world markets continue to go up, we will join the fun. If they begin a correction, we will probably correct with them.

Agra: I will be in Agra on May 30 for the CNBC Investor Camp.

afraidtotrade.com has an analysis on the intermediate outlook of the Nifty. It says "Thus, the 4,470 level holds key significance to the market in terms of likely overhead resistance that must be cleared". and.... "Let’s keep watching this powerful index to see if we can sustain these higher prices (which now seems likely) and note how far sellers bring the index down on any sort of expected pullback." The moving average pattern on the weekly - "The moving average structure - which always lags price - is still in the most bearish orientation possible (20 under the 50 which is under the 200) though we’re seeing the 20 EMA race up to break above the 50 EMA soon, provided that price holds above the 50 EMA over the next few weeks."

futures trading strategies

Saturday, May 23, 2009

How to use analyst suggestions on day trading

Rajiv Malik writes:
Quote
btw i bought 3600 call based on your closing strategy given on wednesday but unfortunately had to book heavy losses on thursday as the call bought at 104 came down to 61.
how do you think i should have avoided making such a big loss. in the early morning/afternoon i did get a chance to square off the position on an almost cost to cost basis but did not square off thinking eventually it may end up giving me profits.
don't you think it would have been better had you given a stop loss. moreover if cnbc gives a closing strategy, one they must sometime during the next day announce the exit strategy. moreover whatever closing strategies are given must be as a rule discussed and their success or failure reviewed by cnbc on the next day.
UnQuote

I cannot answer on behalf of CNBC on what they should do. But here are some thoughts on 'How to use analyst suggestions'.

First, understand the concept of probability. I have written about this on my blog many times. An analyst may have a trading method that gives 50% winners. Each winner gives Rs 2/- in profits and each loser has a Rs 1/- loss. This is an extrememly profitable method even though half the trades lose.

Remember, he is getting signals on all five days a week. Now, twice a week the analyst provides his trading signal on TV. Since half the signals are profitable, the eventual outcome from the TV signal is essentially a toss of the coin. Worse, there are runs in trading. 'Runs' mean streaks of winners and losers. It is possible to have 5 winners one after the other and then five losers. The net percentage of winners will still be 50% after 10 trades, but the novice taking the first five trades (winners) will think that the analyst is superb while the person taking the last five trades(loser) will blame the analyst for his misfortunes.

Consistency is the basis of profitable trading. I am not sure how a trader using TV as his basis for trading decisions can be consistent. Why not keep it easy and use technical analysis?

Thursday, May 21, 2009

Day Trading with defined trading strategy

For Day Traders & Swing Traders, it is important to have a view on the mrket. This ensures that your trades will get some advantage from a favorable market. If your view, based on world markets, key news for the day, - is negative, then you shuld be taking bearish positions in the market. The positions will not be taken blindly. The actual trade still needs a technical setup - for example, sell when the RSI falls below 50, or when the 20 Bar Moving Average falls below the 50 bar average, or something similar. But now, the actual trade is supported by the environment. Sometimes, your view will go wrong. That is only to be expected. Yet, the rewards of being right will far outweigh the mstakes. The most important advantage is clarity of vision during the trading day.


Friday is likely to be choppy with different undercurrents. The American markets are down so that is bearish. But, the positives are the refusal of DMK to join the cabinet (the absence of their ministers should add half a percent to the GDP growth!), the announcement of the union cabinet today (no surprises, but the market can latch on to some small change and cheer).


Index futures pause after a Range Expansion

This is the nature of the Nifty. It moves in one direction. That is the Range Expansion(RE). Then, after the RE, it pauses and consolidates. This pattern is likely to repeat itself as the market again consolidates after a 20% rally.

We do not know how long this consolidation will continue. Going by the last two ranges, it could be 8 to 15 trading days. Markets tend to become choppy inside a trading range. This is not about the Nifty alone. All stocks, futures, commodities show such choppiness when locked inside a range.

Often, traders will make large sums of money on a breakout, only to give up a lot of it when the Nifty moves in a trading range. While there are many ways to protect your capital during such consolidations, none of the ways are 'foolproof'. The ideal method is to trade with less volume. The second approach is to begin the trade as per your trading method but exit quickly as soon as the markets give the impression of starting a trend. (In a range, a new trend will not start so the impression that 'this is it' is actually the point where the current move will reverse). In brief, take profits quickly!

Wednesday, May 20, 2009

Traders Going International

I am pleased to inform all readers that The Association of Technical Analysts, India has been granted affiliation by the International Federation of Technical Analysts as a member society. What this means is:
The ATA will now offer memberships in India to all persons interested in the use of technical analysis.
Starting from November 2009, the ATA will offer certification exams for technical analysis (by IFTA). Membership of the local TA society - ATA, is a requirment for appearing in the exam. This will now become easy for Indians.

Please visit http://www.taindia.org/ where some basic information is available. The web site will be frequently updated, so keep visiting.

The IFTA page annoucing our affiliation is at: http://www.ifta.org/membership/developing/

We look foward to make technical analysis in India, a properly organised profession.

Managing your risk in day trading

Brett Steenbarger has some excellent suggesions.
"Never lose so much on a single trade that you can't come back and be green for the morning or afternoon;
Psychologically, it's healthy to experience defeat and then overcome it. It strengthens you to battle back and win. If you lose the wrong way--by taking so much risk that you can't come back for the day, week, month, or year--you rob yourself of the victory that could be yours by going from red to green."

What happens after strong upside Momentum Days?

Larry Connors in his book "How markets Really Work" has done a lot of study on market behavior after big up moves. His conclusion is that the market takes rest for the the next week or so. New gains come after at least a week.
This tells us:
After a big up move, buying on further breakouts may not be profitable since such breakouts could be quickly followed by declines.
Selling short in NOT profitable since the markets will resume their advance, most of the time, after a pause.
Buying on dips seems to be a safer method of trading the market after a big up move.

Tuesday, May 19, 2009

Indian Stock Markets: Another point of view

Some analysts warned the new government could disappoint investors - not least because of unrealistic expectations and more opposition than immediately apparent to market liberalisation. As the FT notes, the “bulk of the Congress party’s electoral support did not come from people seeking reform”.
All the while, India is suffering from the global downturn. Economic growth rates have fallen from 9 per cent to nearer 5 per cent this year, some estimates show.

Four Warnings from Gideon Rachman, Financial Times (ft.com)

(First) While Mr (Manmohan) Singh is an impeccable frontman, the country’s politics has a much sleazier and more disreputable side.

(Second) Just because India is a democracy, it does not follow that it will automatically side with fellow-democracies around the world. The sleazy side of Indian democracy has led to a third common notion — popular in the authoritarian parts of Asia: the idea that democracy imposes a sort of tax on India.

(Third) But it is still true that, for all the virtues of its political system, Indian governance has failed hundreds of millions of people. Rates of poverty and illiteracy are much higher in democratic India than in authoritarian China.

(Fourth) Euphoria about modern India has led to a fourth mistaken idea: the notion that democracy has given the country a deep and unshakable stability. It is certainly true that the political future of China looks more uncertain and alarming than that of India, Asia’s other great subcontinental nation. But India still faces serious threats to its internal stability.

Stock Futures gain, day trading today

The Singapore SGX Nifty is currently at 4585, suggesting that the market may trade today without being hit by another upper circuit.

For those traders who do not have any positions in the market, the day is not going to be easy. Volatility is high because of the big jump from 3700 to 4500+.

Day Traders must not enter at the open or even after a few minutes of trade. Suppose the Nifty falls a 100 points after you enter, then quickly rallies back to its highs, where will you be? The correct way to tarde is to wait for a consolidation. The consolidation allows traders to identify low risk exits. The support lines of such a range become your stop loss. The breakout from resistance becomes a trigger to enter.


Many a time, I find it difficult to offer futures trading strategies since most of these methods require the use of technical analysis, not just levels. Today's suggestion also needs an intra day chart. This annoys many readers who wish to receive 'calls'. But traders who do not have proper tools for day trading should not be in the market anyway.




online day trading

Monday, May 18, 2009

Exits after a Range Expansion in futures trading

Today was an Aha day, with the Nifty moving up 17% with just 55 seconds of trading. What could it do if we traded for full five and half hours?

On a more serious note, I will try to discuss the issue of exits, which causes difficulties and consternation among traders.
First, a definition of range expansion. The market moves strongly in one direction giving a move which is much above average.
As an example: suppose the Nifty has an average movement of 65 points every day. On any one day it moves 195 points in one direction. This is three times the average. It qualifies as a range expansion. I call it an RE bar.
When the market is moving up slowly but steadily, traders can apply trailing stops to manage their exits. These stops can be formed by short term (3 to 8 period) moving averages, parabolic SAR, pivot points (previous high/low). Such stops ensure that the trade is protected, while also trying to capture as much of the trend as possible.
The problem arises when the market makes a range expansion in your favor. Now, the trailing stops become redundant since they are likely to remain much lower than current market prices. In such cases the trader needs to manage her exits without having reliable technical tools. Some suggestions for exit management are:

1. Quick, take partial profits. If you are trading in multiple contracts, take some money off the table.
2. Push your stops close by, below the low of the latest bar. If the market keeps on moving up, you will get the benefits of the move, while protecting most of your open position profits. If the latest bar is the RE bar, then move the stops to the mid point of the RE bar.
3. Have a profit target based on previous resistance. Look at the chart for the past 12 or even 24 months. Is there significant resistance above current levels? If there is, that zone can become the profit taking zone.

Have an open mind, since managing trades when they suddenly move in your favor is more difficult than managing losing trades.

Ready for big move in stocks, futures & options

online day trading, futures trading strategies
No matter what you own, be ready for a big move in stock futures, index futures, stock options, index options and stocks. If you are prepared to take some risk, wait for a few days, the rally may continue more than we imagine.

OneIndia blog

I have removed the links to this blog. As the posts become more political, it is not appropriate to link it from the Trading Steps page. For those who wish to follow the blog, here is the URL:

http://india15august.blogspot.com/

The latest post is given below:

The Joy of 2009 results - end of caste

As a BJP supporter, the sheer joy of seeing the Left, Mr Lalu Yadav, Mr Paswan and Mr Amar Singh, cut down to size overwhelms the little sorrows of the BJP performing slightly poorly.

The BJP caught the imagination of the country, thanks to Mr Vajpayee. His pan indian image helped the BJP capture power in 1998, then 1999. If and when the BJP throws up such leaders again, and, the time is favorable, the party will bounce back again. Why worry?

It seems fair to say that the time of the communists is gone. In India, the last five years of TV news was dominated by Mr Yechuri, Mr Bardhan, Mr Lalu Prasad and Mr Amar Singh. The people have given thumbs down to all of these gentlemen. This is the best news we have had for a long time. This event probably marks the demise of the communists, caste based poltics, and, the caste based parties. This is good news for the country.

Sunday, May 17, 2009

Managing an Options Straddle

Rishi writes:
Quote
Thanks for the call to buy 3600 long straddle.
Now the Q is how to square off postion on Monday.
1. If Nifty opens up gap up of 200 points.
2. If the gap is more than 200 points.
3. If it opens flat with just gap up of sat 50 points.
4. Last but not least if, Madam (M) creates some problem and we open flat to negative.
Please advise how to reap max profit out of 3600 Long straddle.
Unquote

My Notes:

Method#1: Since the straddle has been taken to take advantage of the news event, we should sell both legs on Monday.

Method#2: We can sell the PUT and wait for three more days, in anticipation of further rallies.

Method 1 is useful if Nifty opens 200+ above. Method 2 may be appropriate if the opening gap is less than 200 points. Why should we expect the Nifty to open negative when there is favorable news?

Saturday, May 16, 2009

Day Trading Strategies for Monday

A futures trading strategy can easily include big news event as one of the methods of trading!Today saw the biggest election victory for the Congess since 1984! In 1984, the Congress won 400 seats on the Rajiv Gandhi Wave. This one have an equal rank, as the victory provides stability for the next five years.
The Nifty closed at 3700 on Friday. On Friday morning at 6:17 AM, I wrote in this blog,
"As I write this, the world markets are slightly up, an NDTV exit poll gives 246 seats to the UPA and the Fourth front, pushing this group within striking distance of power, without the need for left support."
In the same post, I did offer a trading idea:
You may wish to keep an options straddle by buying calls and puts of 3600 strike. That's to take advantage of any sharp post election move.

The same message was repeated on CNBC at the 9:30 show.

Now, on Monday, the Nifty could easily open at 3900, with a 200 point gap. If you do not have any positions, how should day traders plan their strategy? I gave some suggestions in Friday's post, which I am repeating:
"The methods are: (a) Use the 15 minute breakout rule to enter the long side, (b) Buy on breakout after a period of consolidation, (c) Buy on an Oscillator dip to the middle line (zero for the CCI, 50 for stochastics & RSI). Keep a stop, but keep it slightly loose so that full advantage may be taken if today turns out to be trend day."

Friday, May 15, 2009

A Cheerful Day?

Day Traders, Swing Traders must have well defined futures trading strategies. I assume most people are into online day trading where they enter their own orders. I mentioned this since it is very difficult to go for day trading when you are calling your broker on phone.

Friday is the day before the big news event. Markets may continue to exhibit intra day choppineess or finally have a trend day. Which one is the likely scenario?
The asnwer is: we do not know. As I write this, the world markets are slightly up, an NDTV exit poll gives 246 seats to the UPA and the Fourth front, pushing this group within striking distance of power, without the need for left support.

Today's trading view is positive. The methods are: (a) Use the 15 minute breakout rule to enter the long side, (b) Buy on breakout after a period of consolidation, (c) Buy on an Oscillator dip to the middle line (zero for the CCI, 50 for stochastics & RSI). Keep a stop, but keep it slightly loose so that full advantage may be taken if today turns out to be trend day.

All of this is based on the premise that our positive outlook will prevail. It may not, in which case you will either not get entries,, or get stopped out once. That's trading.

Should you carry long positions into Saturday's big news events? My views has been: avoid trading during news events. I always stay away. You may wish to keep an options straddle by buying calls and puts of 3600 strike. That's to take advantage of any sharp post election move.

Wednesday, May 13, 2009

Volatility : Lesson in trading futures and options

The Market saw increased volatility, with sharp bouts of buying and selling. This was truly a nightmare for online day trading. Yesterday, on TV, in this blog and my lettr to clients I had suggested staying away from trading during 'big news events' like elections. Specilaly when the election cannot be called - there is much uncertainty about the results.

As I write this, NDTV abruptly stopped its poll broadcast, promising to tell all tomorrow. Just a few states were covered. I talk about NDTV because they remain the most respected TV channel for exit polls. (Thier opinions are biased but that is a different issue). Other channels have generally suggested a neck to neck race beween th NDA and the UPA.
Based on the polls, it does appear that a congress govt will not be formed withou the left. A weakened congress will have to yield a lot to get into power. Not a bullish scenario!

I have a post on buying pullbaks, which you can read Here

What goes up, comes down?

For online day trading participants, volatility can make money provided you keep very tight stop losses and understand that market can move sharply and suddenly. Only professional traders wilh well defined futures trading startegies should consider trading in volatile markets.

Now, for the Markets.

The Makets rallied nearly 4%, thanks to rumors that the opposition NDA was winning the elections and a stable Govt may be formed without the Left.
This is wishful thinking. With three days to go before election results come in, there will be more of such rumors to move the market one way or the other. Big News Events cause volatility. I always avoid trading during such periods. On balance, this policy has been successful.

Fools rush in where Angels fear to tread.
So, I will rush in to give my own assessment of the post poll scenario.
The UPA is not going to do well. In 2004, the UPA (with Left) swept eight states - Bihar, Jharkhand, West Bengal, TamilNadu, Andhra, Kerela, Assam and Haryana. Of these, Bihar, West Bengal, TamilNadu and Andhra are key battleground states. (In 2004, the UPA won 148 of the 163 seats in the four states). In 2009, the UPA seems to be losing all of the four battleground states (40 out of 163?). West Bengal is included since the Left is on the opposite side this time, so the UPA can claim only a part of the 42 west bengal seats.
An impression that the UPA is doing well is created by Punjab where anti-incumbency can provide gains to Congress. But, Punjab has only 13 seats, so the numbers will not add up.

The NDA is unlikely to do much better. They have gains in Bihar, Jharkhand, Assam, Gujrat and losses in Karnataka, Punjab, Rajasthan, Orissa, so the net result may be more or less the same as in 2004.

The Left and the Third Front will be major players in Govt Formation. If they do support the Congress, the Left will ensure that its policies are implemented. How will the Congress do this? There is likely to be instability and confusion in the coming months.

What does it mean for the market?
The most optmistic scenario - congress without Left can cause another blockbuster rally in the market. That may well be the final leg of the upmove.
The most likely scenario - congress with left support may cause only a burst of enthusiasm before reality bites. I assume that a correction will start soon.
The most unlikely scenarios are - third front govt or nda govt. Third front should lead to a correction immediately. An NDA govt may follow the same path as the congress without left - blockbuster rally that could be the end of the upmove.

With Implied Volatility on the high side, buying options is expensive. But the correct trade seems to be: buy 3700 calls and puts. Wait for the fun and games to begin.

Tuesday, May 12, 2009

IDFC Falls down, then what ?

online day trading
In the previous post, I had given the IDFC end of day chart highlighting two inside days. The suggestion was that IDFC is a sell.

Today, IDFC obliged, opening at 87 then falling all the way to 81. So far so good. Then at 2:00 PM, a rally started that took IDFC back to 87 in just one hour. What then was the final result of the trade ?

The answer lies in your exit strategy for futures trading.

First, you need to decide on the strategy before taking the trade.

Now come the possible exits:

1. If this is a multi day trade, then your stop is probably set above 92.60. You may gain from a sustained down move, or you could be stopped out. You are willing to be stopped out in exchange for larger profits which will come if a down move begins.

2. If this is a swing trade where you are willing to carry the position if it closes in your favor, then you probbaly closed the trade when it touched your enty price late afternoon. It was a scratch trade.

3. If this is a day trade, then you probbaly made lot of money since most exit strategies will put in a trailing stop that will allow you a profitable exit.

Now there are other exits possible. My point is; the profits come not because you rightly made a day trade in IDFC but because you are consistent in following rules. Maybe you planned a swing trade and got out at breakeven today. So what ? You next trade could give you a sustained trending move, allow you to exit next day at the best prices.

To sum up: You decide on the exit. But you cannot predict the outcome. You mae money when you follow your rules consistently since many times the outcome will be favorable. Allow probability to work in your favor. Never go through a process of decision regret - If only I had done a day trade today ... or If onl I had carried the position, or.. similar. How do you know of the outcome in advance ?


Sunday, May 10, 2009

IDFC Inside Days - Futures trading Strategy

A comment refers to multiple, back to back inside days in IDFC. What is the trading strategy ?

Given below is the end of day chart for IDFC Futures with annotations that explain the pattern and my suggested strategy.


IDFC Futures Trading Strategy

Futures Trading Strategy - May 10

The topic heading describes the main ideas that we discuss today in this blog. This post is to reply to a number of comments received since Tuesday. Some replies are in this post. Others will follow soon.

On Options:
Dwarka asked:
Can you please write a post on how to trade delta neutral positions and how to make money out of the same?I know how to set up a delta neutral trade and take a position,but am not sure as to what criteria to apply to exit from the same.It will be very helpful if you can write an educative post on the same, with an illustrative example.

My Notes: Setting up a Delta Neutral Position is the easiest part of the trade. Getting out of it is like Abhimanu's Chakravyuha - no exits. Delta Neutral positions require lot of time to become profitable. This means, you should take such positions when you have at least six or seven weeks till expiration. This restricts the positions to Nifty options which are the only liquid instrument.

Sano says:
But what I find here is that Nifty Options do not move about the same way it is written in most of the books on options. I mean there is no proper match between premium and the stike price. At times I see that both the prices are moving against me or for me. Can you guide me to any good books on options, Sir?

My Notes: Option theories and the actual trade are completely different. As an example, you buy a PUT when markets are falling dramatically. IV's are very high. Now, market stops falling. You will find that your put may actual be losing money even if price has moved slightly in your favor. When IV's start increasing, due to a sudden trending move, prices of calla as well as puts tend to increase even though the market has taken a trend. There are many such differences between theory and practice. Re: book, let me check up an appropriate book. I will write about it in the blog.

Oscillators

Shaq asks:
sir,which oscillator is shown in the graph...is it the RSI/MACD...any link from where we can get these live intraday mappings..thanks.

My Notes: The indicator is a smoothed CCI, with period = 20, then smoothed with a three period average. This means, you first craete a 20 period CCI, then create a 3 period average of the CCI. The average is used.
I do not know of any sites where such intra day charts are available.

men says:
After looking at the yearly chart on yahoo for the nifty, most of the indicators are showing a +ve divergence, could you please clarify and give your comments if it is a buy on declines, as usual it is a hindsight view only.

My Notes: My technical analysis software (trend mechanic and tradestation) does not have yearly charts as an option. I do not track yearly charts. (Yearly means one bar for one year : this is what I understand). But on monthly charts there is no positive divergence yet.

Tushar wrote the comments on Tuesday. He got it right.

I have 2 questions:(1)I saw a bearish divergence in OBV indicator to price on nifty futures. Does this suggests distribution?(2)Was yesterday gap up an exhaustion gap? therefore we are going for a correction if not trend reversal

My Notes: This question was asked on Tuesday, May 5. Since then Nifty Futures have been in a range between 3700 - 3600. Tushar's points are well taken. His observations seem to have been correct. Cheers! Given below is the chart for Futures & OBV. OBC can be part of an online day trading method or futures trading strategy.


Futures Trading Strategy

Thursday, May 7, 2009

Pre-Market thoughts

I have a post on recognizing strong up trend days. You can read it here

I wrote it today, since today could be one of such days. of course, we do not know. But it is fun tracking it with some discipline.

Meanwhile, my entire house went to vote at 7 AM. Doing my duty feels good. Fellow citizens in Delhi, Rajasthan, Punjab, UP, Haryana, West Bengal, J&K, Bihar - please cast your vote. Vote without fear, your vote is secret.

Wednesday, May 6, 2009

Trading the Oscillator dips - reply 2

Pi asks:
Hi, One question. Lets take an example. Two set of figures at different times in the same trading system. Max equity = 100,000, Drawdown = 20,000. Drawdown % = 20%Max equity = 1,000,000 Drawdown = 120,000. drawdown % = 12%.
So max drawdown % would be 20% or 12%. I guess 12%, but still confirming.

My Notes:
Max drawdown will be Rs 120,000. But it should be a percentage of max equity before the draw down occured. It is possible that max equity was recorded much later, but you suffered the drawdown on a different equity value.

Mr Sudhin Batheja asks:
Quote

How mcuh will the eps of your company go up as you are being paid for the ads. Can't help it as I track the eps of tech companies to arrive at the targets, cheers have a nice trading day.

UnQuote

My Notes: Currently I get enough from google to have two dinners every month, for four people, in a moderately priced South Indian restaurant. If I add a movie to this list, I will know whome to thank.

Mr Bathija also asks:

Quote

Based on the intraday setup what percent of the set up were you successful in getting, and how do arrive at the entry and exit levels. Also a word on setting the stop loss for the above.

Unquote

My Notes: If I understand correctly, 'percent' successful refers to the hit rate. Now the 'hit rate' - percentage of trades that were profitable, is an absolutely meanigless idea. Suppose I have 90% profitable trades that make Rs 1 each and 10% losing trades that lose Rs 10/- each - the system wil be a loser.

Entry is when the oscillator moves up after a sustained decline. I usually enter on signs of strength (above the high)

Exit is after a range expansion. I move my stops below the last low.

Stop loss is below the swing low which is visible when I take the trade.

This is NOT a mechanical system. The first requirement is to have a view on the market. But, like most profitable trading methods, this one works because it is based on a common sense idea - buy dips in an uptrend.

You get better in trading this or any other method by practice. lots of practice. The Americans say it takes about ten thousand hours of practice to reach a level of sucess.

Trading the Dips with Oscillators - reply 1

VS asks:

Quote

Your 'trading the dips' using oscillators is interesting. A few queries.
1. Do you need to consider volumes while taking the decision?
2. Is there a good real time source in the open public domain for intra-day volumes at script and group (say an index) levels?
3. In the case of an index (say nifty) what is the importance of Advance/ Decline ratio?
4. Of the two - A/D ratio and volumes - which is of more importance?
5.How will you resolve cases when the signals are contrary to perceived trend?


Unquote

These questions are well thought out. I am giving my views on them.

1. Do you need to consider volumes while taking the decision?

I do not use volume. The problem I face is: soemtimes volume or volume oscillators will diverge from momentum. Then, there is confusion. Also, I never could derive buy/sell signals from volume. Traders may consider using an oscillator which includes volume as part of its calculations, like Money Flow Index.

2. Is there a good real time source in the open public domain for intra-day volumes
at script and group (say an index) levels?

Not that I know off. Other readers may help with any sources they are aware of.

3. In the case of an index (say nifty) what is the importance of Advance/ Decline ratio?

The A/D line, ratio and all its derivatives can add value to your analysis of the Nifty, mainly by pointing out divergences. They can also be used as part of a well defined trading strategy.

4. Of the two - A/D ratio and volumes - which is of more importance?

By this time you know what I am going to say - the A/D ratio is significant.

5.How will you resolve cases when the signals are contrary to perceived trend?

Readers should understand the depth of this question. For example, the perceived trend on Monday & Tuesday was up. So, I planned to take only the buy signals. But what happens if the buy signals generated whipsaws while the sell signals provided momentum. By taking only buy signals, i would be standing on the wrong side of the market.How do I resolve it ?

Now, there is no easy answer. Oscilaltors are not automated methods that can be followed blindly. So, if your perception of the market and the actual moves are more or less same, you continue with the oscillators. If the actual market moves differently, you take you loss, stay out for the day. Sometimes your perception may change because of indications on the charts, by the A/D lines or sector specific moves.

Tuesday, May 5, 2009

Trading the Dip

Today morning, I suggested that we could use oscilaltors to identify intra day dips and go long. I had also given a chart. I am giving below a chart with two trading setups today. Both resulted in fairly deent rallies. Traders should plan to exit once a range expansion has taken place.


[Some people have asked me if why there are ads in the blog. These are ads inserted by Google. When a reader clicks on the ads, Google pays a small amount of money to the blogger (me, in this case).]


Now for the 5 minute chart. Ask yourself the right questions: how will I enter ? Where will be my initial stop ? Where is the range expansion bar ? Today's setup worked mainly becasue I was having a view that the markets were in a strong uptrend.



We do not short uptrending markets

For those who still cannot watch the video, here is advice from Mustafa:


"For those who are not able to watch properly, just click on pause button after you start playing the video, and then play the video again after the whole buffering is over. This way the video can be watched uninterrupted."


The main topic: We do not short markets in strong up trend. Therefore, markets must first tell us - "maybe I have gone too far". The three drive pattern gives this message when the third top exceeds the trend line. That line is around 3770 approx. A swing low was marked on the chart with a horizontal line. It is 3350. I would expect a break below 3500 to be a clear sign that the bulls are going away. Till this happens, I prefer to stay on the long side. (If markets keep going up, these lows will change).


While it is psychologically easy to take a contrarian stand, the profits really come from going with the trend. The tend is UP.

How about today - tuesday ? The US markets are roaring, going up, day after day. Traders may like to buy an intra day dip in the Nifty. Here is an example from yesterday.



Monday, May 4, 2009

the third leg as an intermediate top

Before I discuss the main topic, I received a comment from S Gupta, which says : Sir - Am not able to view or hear the video - wonder if other viewers are also facing any such problem?

Request to all readers:
Please let me know if you could hear and see the video which was posted at how-to-test-trading-system
Your feedback is important since I plan to use these video broadcasts to share charts, ideas with you. If you are not getting the content, then my effort will be useless. So kindly send me your comments (a) you could hear and see the video, or (b) you could not hear and see the video. I will not publish these comments (to avoid clutter), but they are important for me. thanks.

Now, for the main topic:
Aashish said:
You had made an interesting comment this morning on CNBC about the 3rd leg usually accounting as the intermediate top...Could you please elaborate a bit more on that?

My Notes:

For some reason, three moves in one direction is the sign of the trend reaching a short term saturation.

case 1. Elliot Waves, where three moves in the primary trend (Wave 1, 3 & 5) signal short term exhaustion.

case 2. Head and SHoulders, where three tops or bottoms are formed.

case 3. Broadening formation, where thre points are required on one side to confirm the pattern.


So we come to the three drives pattern (this is different from another pattern based on Fibonacci ratios).

In case of a rally,

(a) Two higher tops are made. A trendline is drawn connecting these tops. A third rally begins which exceeds the trendline (showing exuberance).

(b) A momentum indicator like the RSI, CCI or Stochastics shows bearish divegemce.

Sell when prices retreat from the third top, giving a sell signal by closing below the nearest swing low. An intermediate top may be in place.



Monday morning - big gap possible

I finally got a much better video working. The "How to test a trading system' is reposted. You can actually see the numbers that I was discussing. Have a look again, at How to test a trading system. (This is a video with sound).

The SGX Nifty suggests a 100 point gap up. That is strong, bubble like momentum. Traders have two options : (a) Buy the gap, or (b) fade the gap. Such a large gap does not offer much more prospects for intra day gains. The possible trades are, (a) buy a severe intra day dip, or (b) sell a rally that begins after the gap open. The selling is done only if the Nifty continues to rally after a big gap, then begins a consolidation at higher levels. The consolidation acts as a stop loss for the sell.

The Market does seem to be going beyond itself, before the election. Please see my earlier post on the possible scenario if markets continue to move up before results.

Sunday, May 3, 2009

How to test a trading system

Mind Without Fear, asked a question on trading systems :
Quote
I am trying to answer a slightly different question and I seek your help in trying to figure out what could be the right approaches to address it.
You see I am using essentially a 2MA difference system. Back testing suggests it is profitable over the 6 month period.
I am wiling to try it out for myself at this point.And that brings me to the question. How can I set up a process to detect whether the 2MA system will still be relevant over the next year or two years?
In other words, If I assume that the system that worked for the last six months might degrade over the next year, how can I detect such a degradation as early as possible?
UnQuote

Before actually using a trading system, it should unergo a test. I created a video on this topic with a commentary, (the video cannot be seen since google rendered it in a small frame, but the commentary is easy to understand). You can hear it Now

The main question was: how to detect a degradation in the system ? The way to do this is: determine the three or four important parameters for the system. Identify a cutoff point for these parmeters. In actual trading, if the system begins to go below the cutoff points, you have to relook at the system and accept the fact that the environment may have changed. One way is to calculate the maximum loss incurred till date. In actual trading, if the loss exceeds twice the recorded maximum, then a relook is neccessary.

Markets: What the world is saying

Citibank analysts in their European Strategy team say:

Markets in Twilight Zone, may have bottomed out.
Quote
2009 is shaping up to look more like a twilight zone. Earnings are falling faster than share prices, the market is re-rating, cyclicals are re-rating aggressively and earnings momentum strategies are struggling — all signs of twilight zones. Are we saying that the next bull market has started? No, but we are saying that markets have stabilised and are unlikely to fall beyond the March 2009 lows. Earnings declines have further to go from here. So with flattening prices and falling earnings, we think this is the start of a protracted twilight zone. It is sensible to gradually increase exposure to risk through the year. But, near term we would be less willing to chase the current risk rally.
UnQuote

But the other point of view is this:

Clusterstock says: The bear market has much more to go.

Quote

Now that stocks have rallied nearly 30% off their low, pundits agree: It's a new bull market. So be very afraid.
Market punditry is a lagging indicator, not a leading one. Pundits are excellent at describing what has happened, not what is going to happen.
But doesn't the 30% rally off the bottom obviously mean that the bears are fools, that it's finally safe to get back in the water? No. It doesn't obviously mean anything.

UnQuote

A chart of the previous three major bear markets is given in the site. These were: the 1929 bear market in the USA, the 1989 bear market in Japan and the ongoing 2000-todate bear market in the Nasdaq. The chart says that the markets remained below their bull market highs, even after 10 years. The price action was essentially sideways for most of this period.

My Notes: While we cannot say what will happen in he next 10 years, it is very unlikely that a new bull market will start suddenly.
Factors working against a new bull market starting Now:
The NSE website tells us that the trailing P/E for the Nifty on 29-Apr-2009 is 16.53. This is not a bargain level. With earnings likely to remian under perssure, any increase in share prices will push the PE up. That is high risk.
GDP gowth is expected to be between 4.5 and 6 percent this year 2009-2010. Not enough to meet the bare requirements of a growing population.

But the markets can go up anyway.
Traders must go with momentum, follow the trend. If it is up, we buy. But, we must understand that the rally (if it comes about now) will be a big bubble. So ? This is what I plan to do:
In my overall portfolio (this is about investing..), increase equity allocation only on sharp declines. Take profits on part of the portfolio if markets show a range expansion.
The risk in following such a strategy is to have lower gains if the current rally continues for ever, never giving a sharp correction. This is a low risk for me, since markets will always correct. The bigger risk is this: Sometimes markets continue to move up, without any pause, thus making many investors feel 'left out' in the rally. The investors then cannot bear the pain of being left out, and end up entering the market almost at the top. You need a calm mind to avoid falling in the 'left out' trap.

Saturday, May 2, 2009

Sell in May, the final words...

It is rather bold and unacceptable for me to give the final words on any subject. Thus, these are not the final words, just my final thoughts.

I gave 'The Sell in May' example to show a seasonal tendency for prices to rally more in the Nov - March period. This was proved by processing data for the past 19 years on the Nifty. I do not know how such information can actually be used by traders. Much more work is required to incorporate these ideas into a strategy. Perhaps, position sizing is one area: increase volumes in the Nov - March period. Many readers made the same point. I fully agree with them.

The reason why we keep on doing these studies, research and scenario building is to keep our reflexes active.

The second issue is about the possible repetition of a 1993 pattern. Since there is no assurance that the pattern will repeat itself, we do only an academic exercise when we examine such possibilities. The same problem comes again: how do you incorporate such ideas into a strategy ? The answer is: not easily.

Some more scenarios:
A 1000 point rally in the nifty gives us almost 40% gains in seven weeks. We remain coupled with international markets, so more gains world wide could easily lead us into higher levels.
But, in India, we have an event that is likely to have some affect on market sentiment: the results of the general election.

Let us do the scenarios:

Scenario 1: The market continues to rally. Therefore, if the Congress wins enough seats to form a govt without the Left (unlikely, but possible), the markets will not respond at all since they have already moved up before the election. But, if there is a hung parliament, the risk is two fold: First, After such parabolic ralies, markets fall sharply as they correct. Second, the results of the election offer more risk. Therefore, we may see a sharp sudden market crash.

Scenario 2: The markets get jittery before the elections and see a sharp, sudden correction. A Congress win will see sudden, sharp rallies. A hung parliament may see just a couple of days of dips since the market is already oversold.

These are short term scenarios, the longer term will be affected mainly by the sentiment prevaling world wide.

Friday, May 1, 2009

Sell in May ? Not this May!

Ajay Singh finds similarities between the 1990 - 1994 and 2003 - 2007 bull markets and subsequent price action. We found the same similarities, wrote about it in our newsletter to clients. I also explained this scenario in the Nagpur Investor Camp on April 25.
This is what the pattern is:
A 30% + gain in the Nifty over six weeks was recorded only once earlier in 1993. In 1993 the gains came after the a severe bear market in 1992-1993. After the gains, the Nifty consoliated for about 10 weeks. It then rallied another 27% to make a final bull market top in 1994, in about 10 months (the rally was slow and choppy). After this bull market top, the Nifty went into a four year trading range, touching previously made bear market lows.

This is what Mr Singh writes:

Dear Sir,

If we are talking about history, here is another piece of interesting history;

Check out the Nifty graph of the period 01/02/1990 to 28/02/1994 and you will see an almost matching graph as last 4 years:
Graph of 1990-1994
Graph og 2004-2009
Here are the similarities:

1). Nifty had a bull run from 300 to 1200 - that is 400% gain during 1990-1992, just like we gained 400% from nifty 1500-6000 during 2003-2007.

2). Then Correction/Bear Market started from the end of May 1992 to July 1993, exactly 13 months, just as current bear market from Jan 2008-March 2003, that is 13 months period.

3). In both bear markets, nifty gave 3 bear rallies, that is 3 tops with deeper corrections.

4). Both caused 55%-65% drop from the peak

5). After the 3rd drop, a rally started in July 1993 and gained 30% without a single day of correction in just 30 days period, similar to current rally that has gained 30%.

6). The index remained flat for the next 2 months during Sep-Oct 1993, and we have been flat for 15 days now and accordigly another 1-2 months we could remain flat around these levels.

And now here is the surpise, as to what comes next?!! Check out what happened after that! Surprisingly nifty rallied non-stop to the peak in the next 4 months, the complete bear market drop was recovered and the market was back to its high. Only after it reached high, the actual volatile years (not "days") started and the market remained in a broad range for the next 4 years, after which a fresh bull rally started.

So do we have the same thing in cards now?!! Are we about to have amazing unbelievable ride back to nifty 6000, were most retail investors keep sitting on the side lines and the market keeps moving up, and the institutional investors panicing and keep jumping in with the cash they have been holding, causing an unstoppable rally back to the highs.
See the nifty chart between July 1993 to March 1994 if you can't believe such thing to happen!

So here is my theory; we are consolidating at these levels for the next one month or so, and then we breakout of the bear market charts and have an amazing rally back to the peaks of 6000 nifty in just 6-8 months. And only after reaching there, we will have the worst trading "years" of atleast 3-4 years where we will be unable to break the highs of 6000 and keep droping back to 4500, that is we will remain in the volatile years range of 4500-6000 nifty. Then after 3-4 years we will see a new bull run that will take us back to the twice of the peak, that is 12000 nifty in the next 2-3 years from the start of that bull rally. And well by that time we will complete the 8 years cycle and enter in the next bear market territory.

So why "Sell in May and Go Away", and miss the actually rally that's on the cards??!!Please let me know your comments about my theory, and if you feel this could be possible, you may publish my theory on your blog.

My Notes: Mr Singh has drawn an eight year path for the stock market. While scenario building is useful and neccessary, we should trade what the market is telling us, not based on our scenarios. Also, on the ligher side, another up move after the elections means a surprise result in the elections.!