Thursday, November 25, 2010

Trading the options on expiry

Well, I went long in Nifty November calls at wednesday nov 24, close. These were 5800 and 5900 calls. The trade was BTST - I was looking for an early morning gap.  On Thursday, the Nifty opened up, quickly went down. I waited for a test of the early morning highs, which did come about soon enough. Nifty was not showing much upward thrust. I sold the calls when nov futures were around 5903. My 5900 calls were purchased at 26 and sold at 25.50, while the 5800 calls were purchased at 61 and sold at 103. One more reason for selling early was my holiday, since I wished to go out after 10 AM.  It was possible for the Nifty to rally further, but there were two reasons to exit early - I did not see enough up thrust + I needed to close the positions anyway. Now, as I update my intra day charts at 9 PM, I see that futures fell all the way down to 5790.

While the markets can stop anywhere, and, do anything, significant support comes around 5550.  Traders should look for stocks where the decline has stopped. In any case, there should be no hurry to go long.

Wednesday, November 24, 2010

Missing on TV, available on the blog

I am grateful to readers who seem to have missed my appearances on TV. It is a great feeling to know that readers look forward to my views on TV.

This blog is not a market blog, at least I do not want it to become a 'tips' and 'what will the market do' kind of blog. This is the reason why I avoid giving my views on the market, in the blog. The blog is for learning and education.

But today is different. I did not watch TV (I am in Kolkata for a holday), but I assume that earthshaking events must have taken place today. A friend called up to say that Udayan made an appearance on CNBC-TV18 late afternoon because the world was crashing (This is hearsay, unverfied information, so apologies for any mis-statements). I assume most business TV channels must have carried similar 'the earth is shaking' themes.

I sometimes wonder if business TV causes crashes or crashes cause Business TV to get hyper. This is a question for which I am unlikely to get an answer.

I was trading today. But I was in my parents home. They were watching their favorites on TV so I did not want to change the channels.  I had no idea why the markets were crashing after 3 PM. I thought, if there was something serious, the decline will continue, if not, I will buy. Around 3:20 the decline did stop, so there was nothing serious. I bought 5800 and 5900 calls (November).  Now, we will see what happens tomorrow.

Cheers!

Tuesday, November 23, 2010

The Nifty gives good news and bad news

Excerpts from my comments to subscribers:

Who is in control?


We ask this question since we want to go with the long term players who have the strongest influence over the markets. When there is a conflict between the day traders and the long term players, we find that the long term view always wins. This is reasonable because the long term view is supported by the larget amount of funds available in the Market.

So, our question is: who is in control? Are long term players in control of the market? The answer seems to be: they are currently absent. Their absence is reflected by the breaking of support levels, and, the dramatic declines we see intraday.

My sense is that the market is currently in control of the day traders. When the market is in control of the day traders, we are likely to see volatility. Day traders have a very short time span, which is why there are sharp up and down moves.

Long term players are probably waiting for a base building process. They think: we cannot say where this correction will end. So why rush to buy now? Let the market stabilise.

NIFTY WATCH

Yesterday, I suggested that all long positions should be closed if the Nifty were to go below 5950 without waiting for the close. Today, in retrospect, this seems to have been a good idea. We are currently in a correction. We must wait for the correction to give signs of coming to an end. These signs will come over time, not suddenly. So, wait!

Sunday, November 21, 2010

Something Special

Trading with consistency is something special! Markets give profits and losses, so that is not within our control. But we can control the process of our analysis. We can keep this consistent. Here is an example.

In Trend Analyzer (http://www.technicaltrends.com/) , there is an indicator called TA-Stoch. The indicator identifies buying opportunities in uptrend, and selling opportunities in downtrends. This imples that the trader needs to be aware of the trend using independent analysis, but that is a requirement for many discretionary methods.

The chart below is for ACC. I selected the stock at random. The trend is assumed to be up. TA-Stoch gives a buy signal when it falls below 20. Actual buying is done using (a) Bullish candle, (b) Cross above previous high. Once inside a trade, previous lows are used as trailing stops. Since this is a plan for a swing trade, exits are also made with minor trendline breaks, bearish candles. This is a simple strategy. It Works! You can modify this method to work with your favorite momentum indicator.

Young Passion

Or, Passion for trading in the younger generation. Shabsaf says "If some have passion in any work, he can make money (little or more) but they wouldn’t have to lost any money what they earned." 

Gourav has answered the question of how to keep your passion without losing money "For last many months I havent taken a singl trade but still keping trake as if I have a position in the market.I am not trading because of insufficient funds however guding my friends in trading the NIFTY and i becaome very happy when they make money in my suggestion"

Shabsaf has a fair point. We must have a passion that is sustainable.

Traders can survive only if they do not lose money. We lose money because of indisciplined trading. If we face a loss we may well end up getting out of trading. Therefore, any new trader should have capital preservation as the main, primary objective. Trade in small volumes. Do not increase your volume in your initial years in this buisness.

An equally important point is to maintain consistency in our trading approach. Have a set of rules, then follow the rules. This is much more difficult than not losing money. If you are consistent, you are actually going to make money, even in the starting period as a trader. For example, if you trade using MACD, just use MACD. Remember, with every method, you have to add the examination of price charts. But, please be consistent.

Friday, November 19, 2010

Trading is a Passion

Friday afternoon, I came home early to have lunch and watch the market from my home. While I was on the screen, in the next room my wife had switched on the TV where Rishi Kapoor and his son, Ranbir Kapoor were speaking at the HT leadership summit. I could hear their voice while watching the markets fall. Suddenly, I heard Rishi Kapoor speak out some remarkable thoughts. I am recollecting his words:

"My son Ranbir had decided to enter the film industry. He told his mother that he wanted to be in films. When I heard his wishes, I said that Ranbir should do a course related to the film business. There is no sense in making him do engineering or management in anticipation that if he fails as an actor, he can then become an engineer / manager. People enter the film business because films are their passion. If he fails as an actor, he may become an editor, a director, producer or even a spot boy, but he will remain in films. So, let him acquire the skills of films rather than study some other subject"

When I heards these words, I realized that we, traders are in trading because this is our passion. We may make money, may not make money, but we continue since this is what we enjoy doing most.

Reader thoughts are welcome.

five wave decline in Nifty

On the five minute charts, a five wave decline in the Nifty is complete. When the fifth wave was being made, we had oscillator divergence. We should expect at least an A-B-C up move. Remember, these are probabilities. (wave counts by Trend Analyser. http://www.technicaltrends.com/ )

Morning musings

A trader should have no opinion. The stronger your opinion, the harder it is to get out of a losing position. – Paul Rotter


Our charts on the Nifty give a consistent message - there is support in the 5950 area. We are in a bull market, so trader should try to buy dips, until....
If this support breaks on a closing basis, then short term traders should assume that more downside is coming. Our own views are worth nothing. We have to listen to the message of the market.

Vix is an interesting tool for short term traders. When Vix starts rising after a decline, this is usually a sign of market volatility as also a possible fall in prices. When Vix starts falling, this is often a sign of rising prices. I
have given a broad picture. Traders have to develop their own methods.
 
Oh, about the GM IPO. The issue price was 33, it opened above 35, then closed around 34. Rcom anyone?

Thursday, November 18, 2010

Silver dazzles

Here is a chart that shows comparison of Silver and Gold  today evening. This is 5 minute but look how Silver is outperforming.

The message is: strong trends can persist for a long time. Always go with the flow.
chart + data from Trend Analyser at http://www.technicaltrends.com/

Light Reading

Irish Stew

In Ireland, banks are feeling the pressure of withdrawals. Financial Times reports that Irish bank customers have withdrawn an estimated 11% of deposits over just a few weeks. The Irish banks are now relying heavily on the ECB for liquidity.

WSJ.com says "Markets are finally betting on a bailout for Ireland.". This means that the Irish debt problem will be sorted out in some way or the other. It could certainly mean a lot of pain to Irish citizens, maybe, some pain for European banks who have Irish loans. My sympathy goes to the citizens who are now paying for the follies of the banks. Pity. But, at least we have a sense that the world is not coming to an end. Therefore, a market decline based on Ireland may not be justified.

All Time Highs
247wallst.com tell us about some commodities and services which have hit all time highs. Here is a list:
Gold
Tution Fees
Shipping (Transportation of goods)
Cotton
Prescription Drugs
Checking Accounts (cost of using a bank current account)

GM IPO
Shares of GM (General Motors)  are selling at 35.44, up almost 7% from the IPO price of 33 dollars.

Morgan Stanley: Here's Why Half The World Suffers Food Price Inflation While America Doesn't



A key reason why commodity price volatility is such a threat in much of the world, while being far less of a threat in the U.S., is that Americans eat food whose cost of production is far less exposed to agricultural prices.
For example, the price of peanuts is just a small fraction of the price of a jar of branded peanut butter. Thus when peanut prices rise 10%, the cost to produce a jar of peanut butter doesn't rise nearly as much. Yet in nations where people eat less processed and branded food, buying meats and vegetables from a fresh market for example, then a 10% surge in commodity prices is far more painful for consumers.
This and other factors leads Morgan Stanley to believe that commodity surges we've seen so far won't cause high inflation in the U.S.:
(http://www.businessinsider.com/)

You never know

While we were sleeping

The US markets closed flat. Attempts to move higher did not quite succeed. The bull case is that they did not go down, so this one is neutral.
But, Asia has opened higher, and, thanks to almost a one percent gain in the Nikkei (so far) the S&P500 is trading higher in after market hours trading.

For Swing traders/Day traders in the Nifty, the Daily Pivot for Near Month Futures is 6035. Bullish above this number, bearish below it. The ORB (Opening Range BReakout) may also be appropriate for today's trading.

Silver: yesterday evening I took a small position(long) in Silver. Overnight Silver is higher. I am using simple trend following methods to track my position.

In the USA, GM is coming up with an IPO that is about 23.1 billion dollars. That's about One lakh crore rupees. Coal India was fifteen thousand crores, so this one is certainly big.

Wednesday, November 17, 2010

Some More Nifty

There was a reference to Clouds in one of the comments. Since I use Ichimoku lines,  I thought I will offer a chart with Ichimoku clouds. Here is the Nifty end of day chart with (a) Ichimku clouds, and, (b) TA-Forecast. The clouds are an excellent trading method. Information on them is available on Google. TA-Forecast is a proprietory method (http://www.technicaltrends.com/) which provides forecasts of support or resistance zones in the future. It is a predicitve indicator. Both, the clouds and the TA_Forecast suggest there is support in the 5950 area. But, the last word always ermains with the market.



Saurabh wanted the Nifty analyzed with indicators. Well, here is the Nifty with the 14 day RSI. Comments are given on the chart itself.


Nifty Chart Checkup

Thanks to a holiday, we can take some time to look in detail at the end of day Nifty chart. Here is chart with my notes coming in after.


This is a candlesticks chart for Nifty, end of day. Three moving averages are applied to prices, 20 day, 50 day and 200 day. The moving average lines are marked, so readers should be able to identify them. Have a look at the current position of each of these averages before you read on.

Prices have cut through the 20 MA, and yesterday also through the 50 MA. The long term trend, as represented by the 200 day average is UP - the average is rising, as also, prices remain well above the average.

The bearish crossover of prices below 50 MA is disturbing since it usually signals the start of an intermediate down trend. There are 2 reasons why we are not calling for a downtrend - First, sometimes the 50 MA acts as support and prices bounce back. Note a similar support in late August. Second, the crossover has come about in a strong support area. Therefore, the breakdown of support will be a clearer signal than this crossover.

How do we know that support is holding? You need a bullish candle! This will be the first sign that some kind of support has emerged in the 5900-5950 area.

What happens if support breaks? A close below 5900 approx will be a sign. Traders should not have any long positions, if they sense a breakdown since the next support comes much lower at 5300 - 5500. Note the gap between 5500 and 5900 - nothing in between!

Reader comments are welcome.

Tuesday, November 16, 2010

Correction or More?

So far, the Nifty has shown itself to be in some kind of a correction. After a 1000 point rally, the Index was likely to correct, our question was: when will it correct? Therefore, the current dip should not come as a surprise. The sharp decline is certainly unusual, but then markets will not oblige us all the time.

When will this analysis go wrong? First, when the Nifty closes lower than 5937 and then remains below this support, consistently. Once we realize that the market has not held on to 5937 support, we should assume that a deeper correction lies ahead. The next zone of support is the 5200 - 5400 consolidaiton which lasted for four months in mid 2010.

Assuming that 5937 does hold, what lies ahead? I assume that we will see a period of consolidation. We should remember that the months of December and Janaury are usually up, so the seasonal factor favors the bulls.

Why worry? The only cause for worry comes when traders are over-leveraged. You should worry about the ill effects of leverage even in normal times. Keep your exposure to a sleeping level, and you will find that up or down, you will enjoy being part of the market.

Finally, one reason for this exaggerated decline may well be TV. I think the channel begins to highlight the declines as if it is the end of the world. As we know, it is just a dip. Nothing much.

Have Fun!

Early Morning View

Overnight, markets have not been kind. The S&P has given up all its intraday gains to close lower. Asia is flat, while the SGX Nifty (at 7:11 AM) suggests a slightly lower start.

The intermediate trend remains up. This trend wil change to down if the Nifty were to close below 5937 - the previous intermediate low. The minor trend is down, but may have bottomed out yesterday when the Nifty went below Friday's low, and bounced back. It was a successful test of 6050 approx.

For Day Traders in the Nifty, the early morning view does not indicate any kind of trending day. Traders can use the Daily Pivot to determine the day's bias. For Tuesday, the DP is 6096. This number can be considered as the dividing line between bulls and bears for the day. A second method is to remain with the intermediate trend, which is up. Then, wait patiently for an intra day sell off. Watch your momentum indicators. When you get a buy after the sell-off, go ahead and take a long position.

It is wise to determine a strategy before the market opens.

What about the longer term?

The Trading Range that developed in the 5100 - 5400 area has now become significant support. So far the Nifty remains above this support band, we are in a bull market. Within this bull market, there will be sharp corrections, pullbacks and the dream rallies.

Monday, November 15, 2010

Market forecasts

The bull market is not over.

That said: the easy money in the stock market has been made. The issues that confront investors are very complex now and the influences are truly global. Change will come rapidly and volatility will be high. We are in the post-crisis period, but the aftershocks of the crisis are severe and troubling. We believe that markets will continue to climb this wall of worry, as they usually do. We do not see any of the signs of complacency that characterize the end of a bull market. We do see an abundance of fear and uncertainty. Those characterizations suggest that stock prices can and will go higher.

-- 




To think ahead, you need to start with historical perspective. If you are open-minded, accepting facts whether bullish or bearish, you must have noticed the positive changes in the last few months. One-by-one, the list of worries -- including recession, skepticism about earnings, the Hindenburg omen, political uncertainty, the head-and-shoulders pattern, etc. -- has been reduced.

Is it a world without worry? Of course not. The employment and housing problems remain paramount. If there were no problems, we would already be at Dow 20K. Potential investors who wait to act until all problems are solved will wind up buying at Dow 20K.

On balance, the investment world has become much more attractive. Meanwhile, stocks prices have only just regained the pre-Lehman levels of 2008.

-- Blog: A Dash of Insight

Bubbles

"The US monetary policies may be positive for Asia, but these policies could also cause bubbles in emerging markets via capital flows."


-- Marc Faber on QE2

Questions on Stop Loss

Anas Elias Batla uses three different MACD indicators, each with a different set of inputs. He located lower highs in the MACD while the Nifty was making higher highs. He asks:


1) Can the whole movement be considered as A NEGATIVE DIVERGANCE on the daily charts , (of nifty with macd indicator)

My Answer:  Yes. When the Indicator makes lower highs while price makes higher highs, we get a negative divergence. But do not rush into conclusions, read the answer to the next question.

2) if yes, than does that mean , that there is further downside in store for the NIFTY INDEX.

My Answer: A negative divergence does not automatically mean downside for prices. A negative divergence warns of the possibility of a decline in prices. But, remember, a possiibility is just that - it may or may not come about. So, you still end up watching prices - support, resistance, lower lows candlesticks and so on to get a sense of the trend. Therefore it makes sense to listen to indicator divergences when they are in the direction of the intermediate trend. Then, they have strong possibility of actually working out.
3) Can the divergence fail, and when it is possible to confirm the failure.
My Answer: I have answered this quesion above. Divergences will fail, more often than not. When price makes a higher high, that is a sign that the divergence failed to work out.

Murali says:


I was also facing the same issue with stochastics for day trading with on one minute average chart for Nifty. But I found that all oscillators have this disadvantage with water fall decline.

So i used MACD to complete it. In the macd when the divergence bar is lower / smaller than the previous one, I go short. The reverse holds for going long.

Please suggest me on this method.

My Notes:
Well, Murali, you have a decent intraday method. I find it difficult to watch one minute bars, leave alone trade with it. But, if you are managing to use one minute bars, good for you. My advice is: focus on price action more. Slowly, you should be able to trade intraday without much help from indicators. That should be your objective.
Pankaj asks: Where do you get your live feed for stocks and commodities?


My Notes:
http://www.technicaltrends.com/  Ask for Santosh, at 011-26466090, 26496091, 26464544.

Saturday, November 13, 2010

Why Traders Need StopLoss

Trading decisions are often made with technical indicators. For example, on my screen, I have an indicator called the TA Insync. I smooth it to reflect a trend rather than just momentum. A buying opportunity comes when the indicator turns up and / or the indicator cuts above its signal line. reverse for selling. It is just like the MACD. Sometimes, in a fast moving market, prices will suddenly go against me, the trader. In such cases,the change of direction in indicators will follow, but after a few price bars. To protect from this 1 in 10 occurence, it is important to have a stop loss in place, always. If we do not have a stop, then a sudden change in prices will make the trader into a frozen rabbit - unable to move while the market goes against him.

I am showing the chart for 60 minute SIlver where a sudden waterfall decline left the indicators behind. A stop loss is neccessary to protect traders from sudden events.


Friday, November 12, 2010

Selling in a Bull Market

The Nifty is in some kind of a correction. While it is possible to make money by going short during these corrections, the big money will still be made when going with the main trend - up. Yet, learning to sell is important.

1. We sell to reduce market risk. When our charts suggest a topping out pattern, ot signs of a correction then we close our trading positions to lower the risk of our portfolio. Your decision to sell is made when you see distribution in the time frame you trade.

2. We sell to reduce individual stock risk.
■Sell a stock that you may have bought incorrectly (i.e., too early, too late after a breakout buy point, a stock pattern fails or you erred in reading a chart incorrectly) and performance disappoints shortly after the purchase.


■Sell any stock that has a surprise including such events as reporting an accounting error, a badly missed earnings announcement, a significant top management change or terminated merger and acquisition discussions.
■Sell a portion of a stock position that, because of a large run, ends up comprising too large a percentage of your total portfolio and thereby increase its risk .

■Reduce exposure to an industry group if it falls out of favor.

■Sell a stock that has underperformed the market and you expect to continue doing so over the near term future as measured by its relative performance during the time you’ve held it

(Rules adapted from stockchartist.blogspot.com)

But, go ahead and sell. Buying and selling together make up the trading plan. So buy, and, when required, sell.

Thursday, November 11, 2010

Contraction and Expansion

The cycle of contraction and Expansion is probably the most reliable pattern in the Market. I am giving the 60 minute chart for the Nifty Futures. Note how prices contracted into an extremely narrow range before breaking down.


The Trend (Expansion) and Range (Contraction) process lies at the core of short erm trading. Develop a practised eye to detect this pattern.

Wednesday, November 10, 2010

Silver - volatility is suggesting an intermediate top

I have been trading in Silver for many months. The uptrend was smooth with trading ranges, subsequent breakouts, then a range, then breakout ... almost a perfect chart. That has changed. In past five days, Silver has suddenly exhibited increased volatility, with almost bubble like moves. First, it dropped by 1200 points on the day Bernanke was announcing QE2. Then it started a rally that took it from 36000 to 42000 in just five days. Today, the white metal fell from 42500 to 39500. For all I know, it could rally again, but these wild swinging moves tell us: stay away, the end is near.

I have this theory: All markets correct. Therefore, a fresh large position in Silver is justified only when there is a large enough correction. But, markets do not oblige us by falling just because we want them to. So, we wait. Remember, waiting makes money.

Dull Days

Well, I am writing this at 12:14 PM, afternoon. I do not have any intra day positions, although my Swing Trades (long in Nifty, Renuka & Dena Bank Futures for past few days) are ok. I had mentioned in an earlier post that day trades are coming down, at least for me.

So far, the Nifty has been insde a narrow range today - between 6328 and 6295, just 33 points. hence a dull day. This can also be called range contraction. Markets move into Expansion after a period of contraction. In the 5 minute time frame, we can expect a big move, soon enough.

Yesterday, I had asked readers to avoid buying in Silver since the metal prices rise was becoming a bubble. Today, Silver is down by Rs 2000 about 5 percent. We need to see a significant correction in the metal before another attractive buying opportunity emerges.

What does an overbought oscillator suggest?

Rob Hanna from Quantifiable Edges says this:

Most swing traders understand that the market has a tendency to oscillate. In other words, strongly oversold conditions will often lead to a bounce and strongly overbought conditions will often lead to a pullback. The trick in trading a swing time frame is understanding when the likelihood to reverse is strong and when it isn’t.


Trying to sell short when an uptrend gets overbought can be a dangerous endeavor. Often there will be no downside edge when trying to short into an overbought condition in an uptrend. When the market is strongly overbought due to a sharp acceleration in the trend as occurred late last week, it may even suggest an upside edge.
 
 In any case, the point is that though the market is short-term overbought, this is by no means an ideal short setup. And in general odds seem to favor a continuation rather than a strong, immediate drop.
 
My Notes: The study had a simple rule: SPX (S&P) closes above its upper Bollinger Bands for the second day in a row. It also closes at a 50 day high in the last 2 days. The strategy is to buy at close and exit after X days. Mr Hanna tested X from 2 to 10 and found all days profitable, with the profits increasing if you hold for at least 3 days.
 
The point he made was: what seems overbought can become even more overbought. Therefore, rather than consider overbought and oversold, consider trend. This is what I tell my clients, seminar participants.

Tuesday, November 9, 2010

Stray Thoughts

The Powergrid IPO makes a lot of sense. Yes, we should apply for it.

A raging bull market is going on in Silver.  A little less, but significant enough, in Gold. Our TV channels keep on talking about stocks while the big money was being made in precious metals. If you have control over your trading, meaning you can exit if prices do not move your way, then Gold may have some upside left. I would avoid Silver for now.

ANAS asked "are volatile markets, profitable for traders, who go for writing an option?

(i assume them to be profitable, )
REQUESTING YOU TO CORRECT ME IF I AM WRONG

My Notes: Yes, traders who write an option, (meaning Sell an option) should do so after a large increase in volatility has occured. Volatility expansion is followed by contraction when the value of options will fall, quite sharply, sometimes.

ANAS asks another quesion on mobile enabled trading. "NSEINDIA & BSEINDIA both have launched MOBILE TRADING FACILITY. With that, we can access to our trading terminal, directly from our highend, GPRS enabled mobile handsets. (with direct streaming rates, net position, multiple market watch etc. )"

My Notes: I think this is downright silly. Any trader who is so involved in day trading will probably have a laptop with a portable internet connection. Why should he use a small screen mobile? And, those who are not professional traders will simply get caught in this trading by mobile craziness. Keep trading simple. If you are moving about, you can as well avoid trading on that day.



Keep a Watch on VIX. A low VIX is a sign of compalcency. India Vix is quite low. Therefore, follow the up move, but have a clear exit plan.

One Way Street

The Nifty remains well above 6000. We should remember that the same index was at 2500, two years ago, in 2008. Therefore, at 6280 yesterday, the market has done remarkably well. Sentiment was already positive. Now, thanks to QE2 (Quantitative Easing round 2 announced in the USA), the feel good factor has turned into a bubble. We are now told - this market cannot go down, because - this time it is different.

Here are some thoughts:

1. It is never different. All markets go through cycles of optimism and pessimism. We are currently in the optimism cycle. The trend is up, so traders should be looking to go long. This has nothing to do with QE2, or, Mr Obama's visit, or any other 'news'. Trend is up because prices are going up.

2. It is posible to lose money buying within a bull maket. Some reasons are - Leverage, tight stops, bad selection of stocks, overtrading. You will note that all the reasons are actually within the control of the trader. Therefore, a sensible trader should make money in runaway markets - of the kind we are seeing now. Just exercise some control.

3. Do not go short. This is easy to understand. By shorting, you are tryng to catch the corrections inside a bull market. So, why not try to catch the main trend itself?

Monday, November 8, 2010

The Future of ICICI

Ravi asks in a blog post: "what is the future of ICICI and where will the Nifty close at expiry?".

This question made me want to post an immediate reply. First, ICICI. I think the question is about share prices of ICICI rather than the company. My chart analysis suggests that ICICI Bank may outperform the broad market over the next year.

Now about the Nifty at Expiry. Frankly, I cannot give any idea on what the Nifty will be on a specific date.  For a trader wishing to keep a Nifty position till expiry, the current trend should be considered. We identify the current trend - UP. If the market appears to be topping out (in the short term), then maybe the trader can tighten stops, or exit partially or exit fully. But, we should not try to forecast a speicific price on a specific date and time. That's for God to do.

Sunday, November 7, 2010

Who is in Control?

The futures market operates in multiple timeframes. The scalper works for just a minute or a little more. He buys in anticipation of  - may be - a one point gain. His timeframe is one minute or less. The day trader,watching five minute charts is looking to make a few points carrying a position for some hours. The swing trader is watching 60 minute charts wishing to carry a position overnight planning to keep it for, maybe, two or three days. The position trader keeps a position for a few weeks looking to capture a significantly larger trend. Finally we have the institutional traders, who maintain a position for months or even years, and there time span is much more.

With so many different participants in the market it is likely that different perceptions of the market will exist. The scalper may capture a two-point decline which he thinks is a bear market. On the same day the day trader may capture an eight point rally where he feels he participated in a bull market. Finally we have the institutional trader who is looking at a much bigger picture and decides to enter the market because he feels that markets are likely to be higher after two years. So, which of these participants actually control the market?

Before we examine this question carefully we should understand that institutional traders have the largest amount of money. If most of these traders shared a common viewpoint then they are likely to control the market. Whent his happens, we see trending moves. Sometimes, in periods of uncertainty the institutions do not share a common viewpoint. This leads to a trading range. What may be a trading range for the institutions may be a trend in the lower time frames. When the market is in a trading range, the lower time frame traders are in control. When the market is in a clear, visible trend, the institutions are in control. In such cases, the lower time frame straders who go against the institutions are likely to be crushed.

Short term traders should think on these terms and ask themselves: who is currently in control of the market? They should go wth the people who are in control.

Wednesday, November 3, 2010

Happy Diwali and some Replies

Nirav wrote: "As we know that in Trading three things are most important. 1st Method, 2nd Money Management and 3rd Mind. Here I want to ask you about a Money Management techniques or Risk Management methods which can be used in the market to remain in a market for a long term as a trader. Please explain money management for a trader and if possible could you tell us that what method you follow for the same? Kindly also suggest some books on money management for traders if possible. "

My Notes:
How about a different view? Trading requires three elements: A trading method, Discipline and Practice. Discipline includes money management and mind. Money Management comes in two parts: management of trading funds and management of your trades in the form of position sizing, stop losses and profits.

Most books on trading include a chapter on some kind of money mnagament. I will do some research and share some names, or ideas. Please give me some time.

Anuj wrote: 'You said "buy stocks that offer value even in bubble like periods"

Can you elaborate on this point. How do we find "value" in a stock.I can understand that value can be ascertained using fundamental analysis PE,PB etc.Can we use Technical analysis to find value as well?If yes,can you tell how.As I am familiar with Technical analysis and not that much comfortable with Fundamental analysis

My Notes:
I look at a price chart where the share price is emerging from a base or at least a deep correction. I corelate this with the EPS for the latest as well as past quarters. If the Price earnings Ratio (EPS divided by current share price) is low enough, that is a stock which I should consider for buying.

Shazia  wonders "There is no easy way in anything.. an investor shouldn't go with the herd but a trader usually has to be with the trend (herd). no?"


My Notes:
Actually, yes. I think your 'no' also meant 'yes'. Most traders will make money by catching the trend. The trend is herd driven, or, maybe the herd is driven by the trend. Something like the chicken and egg. Investors will lose money by running after the trend, since they may end up buying at the top with no clear exit strategy. So, always invest on dips / corrections.

Ilan asks "explain VIX practically"

My Notes:
VIX stands for Volatility Index. Five near money Nifty calls, and five near money Nifty puts are taken, their implied volatility (IV) is calculated and averaged. Usually, high IV's reflect an exclited market. Markets are mainly excited at panics. Low IV suggests stable markets, which are usually bullish.

Andy "what is algo(software) trading. is this useful for a retail trader?"

My Notes:

Algo software is fully mechanical method for trading. Since it is mechanical with no human intervention, it is ideally suited for automated trading. Just switch it on, and, you can go to movies, play golf, do whatever else you want to while your software trades for you. Please note that this does not assure you profits, it simply automates your trading process.
In fact, most Algo software will fail, some very quickly, while some others soon enough. Ask yourself: if this thing is so good, why is the seller not using it? Ask more: If this is so good, why is Goldman Sachs, Reliance, Warrent Buffet etc... not using it?

Tuesday, November 2, 2010

Thoughts for the festival season

Will the market be up at next year Diwali ??

The answer to this question is not easy because no one knows the future. At least, traders are wise enough to understand this.

Given the market picture as it stands now, I assume that Indian markets will remain cheerful (means: on the bullish side). This does not mean that markets will not come down. What I anticipate is a number of shallow + sharp corrections as well as range bound moved. But these are normal to any market. So, we may now begin a 'normal' bull market.

Have Fun!