Saturday, January 30, 2010

Australian Experience

GUEST LECTURE BY PRESIDENT OF THE AUSTRALIAN TECHNICAL ANALYSTS ASSOCIATION



The Association of Technical Analysts, India is proud to announce this guest lecture on Feb 20, in Delhi, at PHD House. Full details can be had at www.taindia.org . The topic is related to automated trading systems - a subject which is rarely dsicussed. This is a wonderful chance, do not miss it.


Members will be given preference at the meeting. Attendance for members is FREE while it is Rs 500/- for non-members. This is a good time to become a member of the association. Please contact Vivek Rattan at 09350618090 for membership information. We hope to conduct such lectures every month.

Thursday, January 28, 2010

Are we near a short term low?

One of the questions traders must be asking on Wednesday afternoon must be: Has the decline been overdone? A natural corollary to this question is: Are we near a short term low?

Let us try to answer the first question.

A 9% decline in the Nifty in as many days has been seen before. I suspect, it will be seen in the future also. Therefore, while the decline is painful (for bulls) it needs to be accepted for what it is. There is no measure of how much is acceptable and how much is overdone. If analysts say that 200 point decline is acceptable, then does this mean that the market has to fall 200 points and then suddenly stop falling. It is not so. The markets do what they will do.

What does overdone mean? Does this imply that the sharp 9% decline was overdone, and, the market should stop falling for a few days then again resume its decline? In such a case why would a trader buy because a decline is coming anyway!

My point is: a market does not work in clockwork, predictable pattern. Traders have to adjust their trding decisions to what the market is doing.

The second question: Are we near a short term low? This is best answered by the Market itself. The first signal that the market is making at least a short term low will be: The low of the previous day holds.

If you are short: use intraday charts to keep your trailing stops on full or part of your positions. For example: on 60 minute charts, use a three bar or five bar high as a stop.

If you are flat: You will be looking for trading opportunities. After a steep decline, the opportunities will be: try to catch a corective up move or wait for a relief rally and go short.

Have Fun!

Sunday, January 24, 2010

Trading is about risk & capital

A Career in Trading

Reader Nirav asks:

My question on this post is that can't we pursue a trading as a profession? because your last line of this post says A career in trading will not give you stability. Is that mean that one must have some source of stable income other than trading?

On the same theme, Manish says:

it was a little bit disheartning to hear from u that career in trading will not give u stability. many people including me who r full time traders are trying to earn a living out of trading by learning technical analysis. r u suggesting that we take up a job with stable income & take up trading as a side activity altogether.


My Notes:
 
Writing a reply is taking a lot of time. Funny. I am staring a the screen, not quite focussing on the subject. I wonder why. Usually, I write non-stop.
 
Ok. Trading is all about risk. No risk, no gain. Now, risk will be controlled, since I assume that most traders are sane and sensible. But it is still there. How do you meet the risks involved in trading? Answer is simple: with your capital. Therefore, trading assumes the availability of capital, the more the better. Technical Analysis is the means to preserve and increase the money, it does not create money out of nothing. Also remember there is a learning curve in trading - years (not months!).

I think you have got the idea. Budding traders with capital - fine, become a trader. Newcomers without sufficient money - please keep trading as a hobby.

A Clarification:


Reader men writes : Mr. Sudarshan, could you please explain how your trade went out today. On CNBC you gave a buy with a sl around 4982 which would have got triggered, you may have gone long at a lower level, would you have exited around 4980 level if you went long?

My Notes: On CNBC, on Friday morning, when asked about the possible trades for the day, I suggested that traders may go long with a stop below 4980 which was then the initial few minutes' low. Such a trade would have been stopped out almost immediately. We did not trade at all on Friday since volatility had risen to unacceptable levels (systems did not give any signals). It is important to understand the difference between what may be done (by any trader) and what should be done by you.

Friday, January 22, 2010

Trading is a business also a hobby

A young reader has sent me this:

I am a student of  XXXXXX Pursuing MBA(Finance) to be completed in Feb-2010. I have a loan of 5,00,000 oustanding to be paid starting in the next 6 months and wanted to learn technical analysis. I am trading the stock markets for the last 4.5 years and am deeply interested in pursuing trading as a career.


I am thinking about joining XXXXXX for the course of XXXXXX at the cost of 75000 + 10.3% tax. with live market training at the cost of loss to be borne by the company. after which they assure of a job is the performance is satisfactory.

what should i do ?

My Notes:
With some regret, I can give advice which is likely to make the reader unhappy. But here goes: The most sensible course of action after completing your MBA is to get a job. Now, if you are lucky, you can get a job in a brokerage / trading firm where you will be closer to the market, but that is not important. At this stage in your career, you need to have a stable income so that you can repay your loan. The loan comes first.

You should NOT pay for any course to learn trading. There is no assurance on a stable career path once you have completed this course.

It seems that Technical  Analysis is your favorite activity, and, I can understand this. Same here. At some point in my life, I was lucky enough to have a career in my favorite activity. But, life is what it is. There are people who love golf yet work in different areas. They devote a considerable part of their time to golf although they do not earn their living from it. And...... cricket ??

Take one step at a time. Your first step is to have stability and take care of your dues. A career in trading will not give you stability.

Cycles of expansion and contraction

I have written many times in the blog on the repeating cycles of expansion and contraction. We have now seen a classic example. The Nifty was rangebound for many days, suggesting (to me!) that it was in a consolidation prior to a resumption of the original up trend. As it turned out, The eventual breakdown was to the downside.

How did we trade: My perceptions were not important. The pattern was a contraction and an expansion should be expected once the market decides on the next step. We were short on Wednesday around 5220 when the Nifty begain its downward drift. At that point, the Nifty support was assumed at 5200 with resistance at 5300, and this I had explained on wedenesday afternoon show on CNBC also. Our trading is mainly (100%) mechanical, therefore 2 short positions were taken.(two means two times normal were taken in anticipation of a breakdown from 5200 - this part, position sizing is our discretion). 25% of the position was closed at 5150 and balance 75% at 5100.  We were also short in the Bank Nifty from Tuesday and, that position was closed in one go on thursday 3 PM.

Why did we close our positions? The short trades are against the intermediate trend (which is UP, so far) therefore require exits on range expansion in our favor.

Lessons learnt. The Market has its own mind. What I perceive about the market is irrelevant. The basic theme is: contraction leads to expansion, direction of move is unknown.

What can the Nifty do now? On its downward move, there is support at every decline. We have touched the 5080 support, then we are lookng at 5000 , then at 4940. A base, at least on intra day charts is required to justify buying.

Sunday, January 17, 2010

Will Reliance lead the next leg of the up move?

PPTrader says: "RIL is breaking out of an invs. H&S, if we join the tops of Jan 08, May 08 & May 09.Kindly comment."

My Notes: I have been tracking a similar pattern developing in Reliance. Since the swing points are different than what has been written by PPTrader, I am giving the chart below. Remember, this is a pattern under development, not confirmed.




Saturday, January 16, 2010

Lucknow, City of the cultured Indian

I returned from Lucknow today, after attending the CNBC Investor Camp. The city is known for its cultured citizens. When I started speaking, a person said "This is a compliment. You look much younger in person." Thanks. perhaps that is why I have such warm feelings about the city.

In my presentation, I explained the concept of four stages of the stock price life cycle - accumulation, runup, distribution and decline. It was my impression that a number of people in the audience were savvy enough to take advantage of the accumulation phase. One person asked me: "I bought a stock in stage 1 and now it is in stage 3. What should I do? " My suggestion was: keep a tight stop loss if you use charts. If you do not, exit slowly.

When I landed at Lucknow airport yesterday, I saw an aircraft belonging to Oman Air. Indians coming from that aircraft were waiting patiently for immigration. The line extended outside the building. Today, at the airport, a flight of Air India Express to someplace in the middle east was leaving. The small departure area was filled up. These are signs of a vibrant India. The next decade belongs to us.

Kapil Malhotra, publisher of Vision Books, kindly sent me three new books for my library. I read one of them on my Lucknow trip - Extraordinary Popular Delusions and the Madness of Crowds, by Charles Mackay. The book is a low cost Indian edition by Vision Books, for Rs 250. At this price, the book is a steal. Fortunately, Kapil does not read these blogs otherwise he would start thinking about an increase in the price. If you plan to read one book this month, then read it. If you do not read anything, then start the reading habit with this book. But, one warning : The book does not contain tools and methods for trading, although it must be one of the best books for traders.


I hope to answer the remaining questions in my next post, and, also share some ideas.

Thursday, January 14, 2010

It's Magic

This is an excerpt from the newsletter sent to clients on wednesday evening (Jan 13):

It's Magic


Yesterday, we wrote to our subscribers:

Quote

Support for the Nifty comes around 5180 which is where it had encountered resistance many times earlier. If this area holds, then we should expect a period of stability, and, who knows - another up move that touches 5400 or nearby.

Unquote

This information was also given to CNBC viewers. Today morning, (wednesday morning), I appeared for a brief tech call on CNBC which was probably broadcast around 8 AM. I said that buying is suggested if the Nifty dips to 5180 where significant support comes.

Today, the Nifty fell, touched the 5180 support zone, twice, then rallied to close strongly above this support, at 5233.95, gaining 0.45%.

Quite often, Support and Resistance levels act like MAGIC. This one did so.

The Nifty seems to have completed a period of correction, and is well poised for another round of gains. If this is a false signal, the first sign will come if the Index closes below 5176 - today's low. Until that happens, I feel the trend is UP and buying should be done.

The current decline looks like a Flag. A flag will normally come half way is a trend. Let us look at the move for the Nifty:

Top of the latest up move: 5310

Start of the up move: 4943

Net gain: 367

Flag breakout occurs around 5240, therefore, if this breakout actually takes place, we may be looking at a target of 5240 + 367 = 5607. Now, these are only probabilities, but the market can surprise us, which is also a probability.


Cheers!

Tuesday, January 12, 2010

Better Late than Never

I apologize for missing out on my blog posts for the past few days. The cold, chilly weather is to blame.  Even my commentaries to our clients have been either missing or extremely truncated. The weather in North India has been unusual, with no sunshine for the last seven days. Hmm.... Global Warming ?

Meanwhile, there is a lot of reader comment which should be responded to. So here goes.

Reader Pradhan says "May I ask you how can one extend his profits on a trade which is going right in one's direction. My problem is I tend to book out early. I am not being greedy here but I want to know.


They say, if its been a good day, make it a great one!"
 
My Notes: One of the few sayings in the Market, which is absoultely correct is: "Cut your losses short and let your profits run". The problem lies in the mind of the trader. Suppose you run your profits and the market suddenly goes against you. Now, you end up with much lower gains as compared to what could have been. You start kicking yourself for being such a greedy pig and promise to take profits quickly. Now, trading is going on in the mind. Next time, you exit quickly, then watch the stock make the move of the year.
 
The solution does not lie in any 'magic' indicator. You put your stops and tighten them as the mrket moves in your favor. Essentially, you let the market take you out of a trade.
 
But, this rule may not apply to day traders who do not have the benefit of time. They should take profits at predetermined targets / time.
 
Nirav asks: "Is there any difference between trading methodology and trading style? And yes then please tell what are the difference between them? Because as you have said in this blog only that Swing Trading is style of trading so what is trading methodology?"
 
My Notes: The trading methodology is the basic structure that defines your trading. It could be systematic or subjective. Systematic traders follow rules to enter and exit trades. Subjective traders have well defined rules but also use their instinct to make trading decisions.
Trading styles define the way in which you trade. There are four main styles: scalping, day trading, swing trading and position trading. How you trade depends on your available time, the markets you choose to trade and your personality.
 
kk has this on the U.S. Markets "I THINK FOR THE LAST 10 YEARS ALSO DOW IS IN RANGE OF 14000 TO 6000 . AND WHO KNOWS AFTER 5-7 YEARS OF CONSOLIDATION IT ONCE AGAIN RESUMES A BULL MARKET ."
 
My Notes: Quite possible. The only way to find out is to let the market tell us what it wishes to do.
 
Reader Sahil on my suggestion to have a bias for the day trader, he says "my suggestion is never develope bias, a professional traders should only trade on charts"
 
My Notes: I think this view needs to be expanded. For example, if the share is in a bull trend, then the bias should be towards going long.
 
Kotesh has a plan to sell covered calls against positions in the futures markets. he wants my opinion on it. I do not think selling calls against futures positions is a good idea. Covered calls are and should be sold against equity owned by the trader.
 
PPtrader has an analysis on Aban "According to my reading ABAN has broken out on weekly timeframe.I am posting for the first time so i dont whether my observation is correct or not. Kindly comment."
 
My Notes: Aban has broken out of a weekly congestion, true. But just above current levels exists another resistance in the 1500 - 1650 range, so a new breakout is likely when it moves above this resistance.
 
Reader sam has two comments. First, the reader wants to know about automated trading. Second, quite correctly, sam says that it is tough to predict the market, so, "why not draw a line around a pivot point and trade in following way.


BUY ABOVE THt line if sustain and sell below if..."
 
My Notes: Automated trading refers to mechanical methods of generating buy / sell signals. Traders develop rules which are used to get trading signals. No human interference is accepted. The trades may be fed automatically in the exchange system or may be fed manually.
 
The ACD system written in the book 'The Logical Trader' defines such a system around a pivot point.
 
Reader Ravi has graciously shared his trading method with us. He writes "I've been using stockhastics, 20 dma, volume charts and MACD indicators to see stock moves. Stockhastics have very successfully indicated many a times overbought and oversold stocks, I was having trouble with predicting sideways consolidation then I added MACD to my watch and that helped me understand a sideways stock. The 20 dma also helped me in identifying buying opportunities.


Now I'm having trouble in finding out how to decide a stoploss and a definite target, are there any other indicators that I can use for this purpose? Searching had yielded no results.

And also I wanted to ask if you can suggest any other indicators that I can add to my watch."

My Notes: Stop loss and targets can be chart based or indicator driven. The best method is to use charts, identify piot points and keep your stops under / above these points. As the tops lp moving closer, there will cme a poin when the market wills top you out.

A number of indicators can be used as a stop loss, for example, moving averages applied to price can be a stop. To define a target with indicator, the averge true range is often used. Calculate the ATR when you enter the trade. The target is a multiple of the ATR added to your entry price. If you enter a long at 5100, and the ATR is 65, then using a 3 ATR target, your target will be 5100 + ( 3 * 65 ) = 5295. The advantage of ATR stops and targets is that it adjusts to volatility.

Cheers.







 

Thursday, January 7, 2010

Trading is serious business, not a game

Reader Ashok uses five minute charts with the Parabolic SAR system. His problem is: "Also, for a beginner, SAR is the best indicator or he should simultaneously learn to watch multiple indicators ? Or, in other words, for a beginner, which minimum indicators DO YOU suggest, which maybe JUST ENOUGH to do the job and yet not be too engrossing."

My Notes: The parabolic SAR will not make money if used blindly. Neither will any other indicator. Since you are a day trader, having a view on the market + on the day, is the starting point for analysis. When you take a trade, the SAR will allow you to ride the trend and stop you out when the trend finally turns around. Therefore, you can use the SAR for exits, but the entries will still have to be determined by you.
What do I suggest?
First, establish a bias. Decide the direction in which you wish to trade. This will normally be the intermediate trend of the market.
Second, before market open, determine the rules to be used to trade the market on that day. Examples: Opening range breakout, MACD, Using stochastics to buy dips or sell rallies, buying pullbacks to the 20 MA, .....
Then, when the trading day starts, follow your rule for that day. As you get experience, you could really use more than one rule.
More important, there will be many days with whipsaws when you feel that nothing is going right. That is part of trading. You will end up as a winner since your discipline ensures that probability will be on your side.


Reader Arun writes: ".i m great fan of you.Trading at 9:00 am gives people like me more time to trade.i can only trade 9:00 to 9:30 and 2:30 to 3:30.Every morning i search for you in CNBC.Most of your recommendations turn out to be right but unfortunately for me


i shorted one lot each patel engineering @ Rs-455/-and educom @ Rs-737/- and suffered huge losses.Would you plz tell how to decide correct stoploss?"
 
My Notes: Welcome, dear fan. Whenever I suggest a short selling candidate (about 1 in 20 suggestion is for short selling, rest are for bying because this is an uptrend) I always give the warning that short selling is only for professional traders. Since you work in a PSU, you are NOT a professional trader. You should NEVER take any short positions in the market. I feel extremely distressed when I read about experiences that cause such losses.  The issue is not about putting proper stop losses. The issue is: you are doing something which you have no business to do.
 
I am giving a story I read in New Market Wizards:
 
A group of Doctors deided to invest in buying a Stallion. Well bred stallions cost a lot of money. When their stallion arrived, eventually they discovered that the animal was a female. Their friends teased them, and the doctors said "next time we will inspect the horse thoroughly before buying".
But that is not their mistake. Their mistake is in trying to do a business in which they have no expertise. If they start trading futures, they will fall in the same problem of not knowing the job. It is like a trader deciding to become a neurosurgeon after reading medical books over a weekend. He is doomed to fail.
 
Have Fun!

Wednesday, January 6, 2010

The Professional Trader

Prabhakar asks: " I heard you saying that shorting has to be done by professional traders only. Could you please elaborate why shorting may not be suitable for everybody."

My Notes: (a) Shorting involves the use of Futures, which is a derivative. Derivatives require the use of margin & leverage. Leverage can lure the innocent into over-trading. (b) The use of derivatives MUST be accompanied by strict money management (stop losses). Novices will not use stops, thus causing a lot of grief to themselves. (c) The stock market has a secular uptrend (generally). The short seller tries to take advantage of quick bursts of movement against the broad secular up trend. This requires great skill, which only professionals with lot of experience can have.

My regards to Prabhakar for asking this sensible question.

In response to my reference to probability, Reader Jagdish makes a valid point  "As brilliantly put by Larry Hite - IT IS INCREDIBLE HOW RICH YOU CAN BECOME BY NOT BEING PERFECT."

Ashok wants to know if I am going to attend the Lucknow Investor Camp. The answer is: I hope so. The camp is scheduled on January 16, Saturday.

HOT Lists

Traders MUST have a short list of stocks in which they intend to trade (day or swing). These lists are reviewd from time to time (weekly or monthly) but such lists should exist. If you do not have a list, then go ahead and create one for yourself.

Traderfeed.blogspot.com discusses Day Structure here
Dr Brett Steenbarger defines each trading day into a possible seven types:

1) Range Day - The market will oscillate around an average price value with relatively low volatility through the day

2) Upside Trend Day - The market will open near its low price for the day session and build its way higher through the day, closing near its high price.

3) Downside Trend Day

4) Upside Breakout Day - The market will open within a range, but will build volume and attract participation at the upper end of that range, leading to a price break above the range.

5) Downside Breakout Day

6) False Upside Breakout Day

7) False Downside Breakout Day

The Americans continue to lead the world in research and new methods of trading. Dr Steenbarger is a pioneer.

Cheers.

Tuesday, January 5, 2010

Buying into Strength

We have an old adage: Buy Low and Sell High.

Yet, we can never say what the actual Low is? Therefore, if you, the trader believe that prices are likely to go higher then the current price is a Low.

This is a recurrent theme in many of my CNBC Investor Camp presentations.

Now, we can never know with certainty if prices will go up in the future. Therefore, we, traders, rely on probability.

Think about it.

Sunday, January 3, 2010

Understand the Context

The stock market does not give the same signals to all participants. A stock may be a buy for a long term investor, it may be an exit for an intermediate trend trader and could be a buy / sell for the swing trader. The context is important to understand when trying to use any advise that comes to you.

Reader men seems to track my utterances very carefully. He writes "On CNBC you said an investor should buy R power as you are expecting a bubble sometime in 2011is there any thing on the charts that such a thing is possible? U also said that if the market were to correct then this stock would also fall, then in such a case what should the stop loss be or is this a purely contrarian call."

My Notes: The Power generation sector is waking up after a long process of consolidation. RPower is a speculative stock which could well turn into a bubble if the sector were to begin a bull market.  Now, this and most other stocks will fall if the market does so. My statement to this affect was a warning to understand that RPower is not being suggested as 'THE' stock.


I respond to specific questions on stocks therefore it is neccessary to understand the context. For RPower as well as for RCom (mentioned below) the context were questions from viewers who generally said that they wished to invest in these stocks. If I perceive a bearish trend I would have said - please do not invest. RCom (like most other telecom stocks) is probably building a base, and, is justified as an investment.
Men writes:
"Also you have given a contrarian call on rcomm for an investor is this purely on fundamentals, and if so since when have you started investing purely on fundamentals, because if I remember correctly in one of your posts you have said you generally ignore fundamentals and go purely by the charts, at least in rcomm case then it MAY BE AN AVOID if one were to consider the momemtum.

On JSPL with a pe of >50 you have given an out performer, kindly suggest some levels to enter and exit."
 
My Notes: JSPL is a chart call. This is a stock that has been making new highs. In my dictionary, new highs are bullish. So, the PE may be unacceptable but that may mean that earnings will rise to match prices.  You really need to track the charts to determine your entry and exit levels. It also depends on your time frame - for an investor either a deep correction or a long consolidation are ideal points for entry.

Cheers.
 

Four Little Bars

Reader Danish suggested a few posts back that we should also discuss trades that did not go our way. So here is a trade that I currently have:

The Nifty was in a narrow trading range for the last four trading days. Actually, it was for the entire week since Friday was a holiday. This is how my analysis went:

Primary trend of the Market: UP
Intermediate trend: UP
Significant Pivot: Yes, at 5200

The Narrow range comes in a strong uptrend. I therefore assume that this range is a pause in the ongoing up move. A move above last week's highs may result in a decent upthrust. Taking out the pivot should add more steam to a breakout.Therefore, we went long in the Nifty on Thursday afternoon, choosing deep in the money calls rather than futures. (Because we had a three day weekend, so you never know! Calls have much less risk).

So, this is an ongoing trade, which can do well or go wrong.

Now this is a discretionary trade. We also run systems (for our trading as well as for clients) which are fully mechanical. These systems are either flat or long, depending on how they are structured, but none of them is short. (Most are flat, I think).

Meanwhile, I am going to see 'three idiots' - the movie, although working in the markets, I wonder if I will get new insights into human nature. (We have seen it all).

Cheers!

Saturday, January 2, 2010

Nifty at significant pivot

The Nifty is now standing at 5200, which is a significant pivot level, looking back over the past 18 months.

A breakout from 5200 resistance may well signal a parabolic rally in the market. A pullback will find support at every dip, so at least for now, the buy on dips strategy should work.

Every breakout is a point of maximum risk. This will also apply to a move above 5200. Risk comes with reward, and, traders who take the trade understand this.

It is freezing cold in Delhi. I talked to my colleague in Chandigarh who told me it is probably colder there. All of North and East India comes under a cold spell from mid december to mid february. Many people commute for one and half hours, to reach their work places. Asking employees to come to work at 8:00 AM is unfair because the early trading is unlikely to result in any added value.

Cheers.

Friday, January 1, 2010

Happy New Year

An Old Irish Blessing  (http://www.kirkreport.com/)

Here's to the bright New Year


And a fond farewell to the old;

Here's to the things that are yet to come

And to the memories that we hold.

May God be with you and bless you.

May the best of this year be the worst of the next.

May you be poor in misfortune, rich in blessings.

May you know nothing but happiness.

From this day forward.

Happy New Year!

A Trading Journal

This free service comes at (stocktickr.com) . You may like to try this service to maintain your trading journal.


Why the U.S. market decline on Dec 31 may not mean much  (The Big Picture - http://www.ritholtz.com/  edited on jan 2)

"As for 2009’s final day, it ended with a bit of a thud. Stocks and bonds broadly fell, while the dollar and commodities inched higher. Coming on the last day, and on light volume, these moves may not mean very much. Then again, the VIX did awake by popping the most since Dubai’s woes hit the tape. While it’s a bit of a reach to lay blame for the decline in equities and Treasurys on any one item, the middle two stories below reminded investors that one of the prices of economic recovery will be higher interest rates."


My Notes: The two stories are: Jobless claims in the US fell dramatically, suggesting that the recovery may NOT be jobless. If jobs start increasing, then the stimulus will be withdrawn leading to higher interest rates. The second story discusses thoughtf by the Fed on how to begin withdrawing the stimulus.

The US economy may be growing. This is likely to be good news for India, as well as metals & energy.