Saturday, February 26, 2011

First they rocked, then they rolled

On Friday morning (Feb 25), I was at my usual interview with Nikunj, stocks editor with ET-Now. Nikunj was giving a brief glimpse of overnight markets. Talking about crude prices he said, crude prices were all over the place. First they rocked, then they rolled. This meant that first the prices went up (rocked) then they came down with equal momentum (rolled).

I quite enjoyed this explaination of price movement, and said so. I am available every morning on ET-Now from 8.15 to 10.00 AM. Between 8.15 to 9.30 a lot of premarket and market open talk goes on. Around 9.55, just before signing off, I give whatever trades I have done or plan to do after having observed the first half hour of market action. All said and done, I have opportunity to express my views, dicuss my trades, which I think provides lot of guidance to viewers.

If for some reason readers are not watching ET-Now, then they should. I think the morning program is the best in the country, and, certainly the most useful for traders and active investors.

Tuesday, February 22, 2011

Importance of charts and levels in trading

Shazia said;
If everyone played according to the charts and levels, wouldnt it now alter the change in the pattern of trading? Or would it make TA more efficient?

My notes;

Market consist of many type of traders. Some traders use technical analysis, not all. Out of those who use TA, many use indicators, patterns of different types, not related to levels. Finally, some traders use chart levels for trading. Each of these traders can use levels in different ways. Example: The daily pivot calculated with pivot numbers can be used as a dividing line by traders. If the stock remains above the line for the first fifteen minutes, then the trend for the day is up. Some other traders will say: if I get an MACD buy while price is above the daily pivot, I will take it, otherwise not. There can be any number of methods to use the same numbers, with each method a valid idea. The key is not the level or the chart. The key is your understanding of the market trend, momentum, management of risk and position sizing. Therefore, the same tools are used differently by different hands. There is virtually no danger of overuse.

Finally, sometimes, the same tool is used in the same way. That is definately a warning sign. In Summer 2009, a well watched head and shoulder pattern emerged in the S&P 500. Everyone was watching it. The pattern failed. The failure triggered a spectacular rally on the upside. Such events are so rare that they can be considered an exception.

Monday, February 21, 2011

Stage Analysis

Every rally (from its start to end) consist of four stock market stages. These stages tell you if you should be buying, selling or stay in cash.

Stock stops falling, finds support, goes in range.
Smart money begins small purchases

Prices move up. Sometimes with big uphrusts.
Smart money gets fully invested, while public becomes aware.
In Stage 2, stocks will move up, then develop a base, move up again.
We have multiple bases in a stage 2 run up.
Buy stocks starting a STAGE 2 move.
Due to Multiple Bases, there are many entry opportunities.

Stage 3. TOP ( EUPHORIA )
Prices start flying all over. There is a sense that this time ‘it is different’ –prices will go up forever.
Smart money is selling, while public finally enters the market.

Stage 4. DECLINE ( FEAR )
After making a top, prices start falling.
Public thinks it is a correction, waits.
Finally, prices fall big time, public is filled with fear. They sell when the market is near its final low.

Thursday, February 17, 2011

Why technical analysis creates equality

Krishna said;
Is it really necessary to have chart reading skills to handle equity mkt ?
How come peoples used to execute successful trades when charting; technical analysis; computers; internet; data itself was not available so easily.

My notes

If you are buying in a downtrending market then it will give you a loss. Trying to sell in a rising market is also a recipe for losses. Charts help you to find a trend of the market and also the price pattern of the stocks. Chart reading skills provide you an opportunity to find the current trend of the market which help you to maximize your profit and minimize your loss.

The concept behind technical analysis is - people react in similar manner to similar situations, thus history repeats itself. Earlier, traders used the concept of trend instinctively, without the availability of charts. But the concepts were still there. For the past 120 years, charts have been widely used, therefore the task of technical analysis has become easier. There was a time when access to data and markets were restricted to the priveleged few. Now, computers, internet have made these methods and markets easily accessible to each and every trader. This has created a level playing field for the first time for the masses.

Friday, February 11, 2011

Mind over Optimism

Jitendra said,

The mechanical part of my mind asks me to go short almost everyday after see technical indicators but it has to face huge resistance from the optimistic human part of it, which everyday hopes for a bounce back from oversold level. "Winning in trading requires winning emotion first."

My notes,

Market is in intermediate downtrend. Nifty is making new lows. Discipined trading requires following the trend - correctly desires to go short. But, the experience of the past two year bull market remains with us, every dip is followed by a sharper rally. This causes conflict between the optimism and trend. Well, you have to sort it out yourelf.
You should also have some emotions while trading because sometime these emotion save us from a big loss.

Thursday, February 10, 2011

Holding a bluechip stock in a falling market

Men said,

You said that there is a possibility of nifty coming to 4k and u also said that investors should hold on their blue chip stocks, if the index had to fall it would be these index stocks which would fall.

My Notes:

On ET-Now, and in the ET-Now Investor Camp (broadcast Live), Nikunj has asked this question: What is the worst case scenario for the Nifty? My answer was: It is possible for the Nifty to reach 4000. This is a probability, NOT a certainty.
I also suggest holding on to your blue chip stocks. Why? Because, some part of our portfolio should always be devoted to equity. This portion is invested in shares, irrespective of market conditions. We do not trade in this portion, meaning, we do not buy and sell it according to market ccyles. We suffer through the inevitable bear cycles (like now) and also gain from the long term bullishnes of the market.

Backtesting a Method

Nirav said;

I want to ask you about trading method/system.

  • Period of back test.
  • Type of market for the back test.
  • Duration of using that method.
My Notes:

The period of back test should be according to the type of trading. If you are a short term trader then the period should be 5-6 months, and if you are a long term trader then the period should be at least 2 years.

Type of market depends on which type of market you trading. If you trading in a bullish market and taking a back test result from a bearish market then it is worthless. You want to select a market that has been different types of price action - up, down and sideways. Stocks/Futures that trend well are suitable candidates for backtesting.

All mechanical systems degrade, go through long periods of disharmony with actual markets. This fact should be kept in mind while backtesting, since the future remains unknown.