Tuesday, May 31, 2011

Recognize the Trend

Most of your trades should be in the direction of the Trend. Traders must try to take every With Trend entry and rarely take Countertrend entries, The earlier you see the trend, the more money you stand to make. If the trader is looking to take a countertrend move, he may find that he has missed out on the more important trend move.

It is for this reason that I suggest traders should have a view for the day. If the view is bullish then focus on the buying opportunities. It is likely that you will miss out on some intra day selling, but you will be taking the main trades which are in the direction of the trend.

Stocks in Play

I cam accross this term in the blog written by SMB capital (an American day trading firm). It is important to select appropriate stocks for day trading. AS the blog says "you are only as good as the stocks that you trade. You can be the best trader in the world, but if your stocks do not move, nor are liquid, then you cannot make money consistently"

The stocks that move intarday are the stocks that are in play. I have modified the ideas in the blog to suit Indian markets.
What is a Stock In Play? This could be, in no particular order:

Saturday, May 28, 2011

Nifty Wave counts look for a rally

The End of day chart for the Nifty suggests that a five wave down move in the Nifty may be complete. What should follow is a fairly decent up move which should take the pattern A-B-C.

Note the Oscillator divergence when the fifth wave was under way. A positi ve divergence together with wave counts is a strong indication that the current move may be complete.

Friday, May 27, 2011

Jesse Livermore - Gems of Wisdom

From the Crosshair Trader Blog:

Excerpts from an interview with Jesse Livermore, considered one of the world's greatest traders. The Iinterview was taken in 1922.

Trading all the time:

 There is a time for all things, but I didn’t know it. There is the plain fool, who does the wrong thing at all times everywhere, but there is the Wall Street fool, who thinks he must trade all the time. The desire for constant action irrespective of underlying conditions is responsible for many losses in Wall Street.

Some relief as a rally

Throughout this week, my own analysis has been to expect a short term low in the Nifty. This is what I have said in the morning analysis on TV - ET Now. It appears that my perception was more or less correct. I expected support between 5400 and 5350. The Nifty did slide down a bit below 5350 to 5328, but this slide was momentary. The 5350 - 5400 zone did provide support.

The importance of context (as discussed in the previous post) is visible. Nifty has fallen, almost as a striaght line from 5950 to 5350. All markets correct. In Feb-March of this year, the 5350 - 5500 zone provided a lot of support for the decline from 6350. It seems reasonable that the same levels will provide at least short term support. Because the Nifty was oversold, it also seems fair to expect not just support but also a rally to correct the decline.

This analysis provides a view on the market. Actual trading is done with the charts. Buying is done when my setups trigger a buy.

Thursday, May 26, 2011

Context for Swing Traders

Short term traders - day traders as well as swing should consider the value of context when determining their trading strategies. Context refers to a big picture of the markets, to understand where the analysis of the current time frame fits in the big picture. This includes understanding the big picture in higher time frames, in different markets, as well as in the environment surrounding the markets.

Let us assume that the Nifty has been going down for three days, with the 20 day as well as the 8 day moving average falling. This tells us that the short term trend is down. This is the analysis of the current time frame - the time frame in which we trade. But, we should consider the context in which the analysis is made. Maybe the current down move is only a correction on the weekly chart. Maybe, the U.S. and HongKong markets have started a rally which may influence our markets soon enough. Perhaps, a bullish news event is possible, Inflation numbers may be coming down.

It makes sense to correlate our own analysis with the broader view, and, avoid taking positions when significant disagrrement emerges between different markets and analysis.

I am writing this to explain that short term trading requires a common sense approach. An exclusive focus on the intra day chart is not the optimum way to trade short term.

Identify your Trend

The technical Trader should look at a chart and almosty instantly decide on the trend visible. This should become second nature. Such 'second nature' analysis is possible when the Trader is aware of the rules used to identify the trend. These rules must be used consistently, such that repeatition makes the trend process perfect.

Any number of ways can be used for trend. All of the methods eventually lead to the same goal. But, the trader should select one method and use it again and again. Be consistent. A simple trend method is to look at higher highs and higher lows which make an uptrend, and, lower highs and lower lows which make a downtrend. A second method is to use three moving averages - 200, 50 and 20. When price is above the 200 MA, the primary trend is up. When price is above 50 MA the intermediate trend is up. When price is above 20 MA, the minor trend is up. The reverse is applicable for down trend. Yet another way is to use the RSI for trend identification. RSI above 60 is strong uptrend, below 40 is downtrend, inbetween is a continuation of the previous trend. The CCI can also be use in a similar fashion.

My suggestion is: decide which method is comfortable for you, and stick to it. So, next time you open a chart, ask yourself: what is the trend? And, answer this question with the same methods of analysis.

Tuesday, May 24, 2011

CANSLIM - The Making of a Growth Guru

(The content below is taken from this post in the Investing Caffein Blog)

Born in Oklahoma and raised in Texas, William O’Neil has accomplished a lot over his 53-year professional career.
O’Neil’s system is called CAN SLIM®. O’Neil isn’t a huge believer in stock diversification, so he primarily focuses on the cream of the crop stocks in upward trending markets. Here are the components of CAN SLIM® that he searches for in winning stocks:

C Current Quarterly Earnings per Share
A Annual Earnings Increases
N New Products, New Management, New Highs
S Supply and Demand
L Leader or Laggard
I Institutional Sponsorship
M Market Direction

Here is a list of his unconvemtional thinking:

•Valuation Doesn’t Matter: “The most successful stocks from 1880 to the present show that, contrary to most investors’ beliefs, P/E ratios were not a relevant factor in price movement and have very little to do with whether a stock should be bought or sold.” (see also The Fallacy of High P/Es)

•Diversification is Bad: “Broad diversification is plainly and simply a hedge for ignorance… The best results are usually achieved through concentration, by putting your eggs in a few baskets that you know well and watching them very carefully.”

•Buy High then Buy Higher: “[Buy more] only after the stock has risen from your purchase price, not after it has fallen below it.”

•Dollar-Cost Averaging a Mistake: “If you buy a stock at $40, then buy more at $30 and average out your cost at $35, you are following up your losers and throwing good money after bad. This amateur strategy can produce serious losses and weigh down your portfolio with a few big losers.”

•Technical Analysis Matters: “Learn to read charts and recognize proper bases and exact buy points. Use daily and weekly charts to materially improve your stock selection and timing.”

•Ignore TV & So-Called Experts: “Stop listening to and being influenced by friends, associates, and the continuous array of experts’ personal opinions on daily TV shows.”

•Stay Away from Dividends: “Most people should not buy common stocks for their dividends or income, yet many people do.”

Finally, O’Neil always keeps a safety apparatus close by – I like to call it the 8% financial fire extinguisher rule.  O’Neil simply states, “Investors should definitely set firm rules limiting the loss on the initial capital they have invested in each to an absolute maximum of 7% or 8%.” If a trade is not working, O’Neil wants you to quickly cut your losses.

Saturday, May 21, 2011

Peter Brandt Rules for Trading

1. Consistently profitable trading is not about discovering some magic way to find profitable trades.

2. Consistently successful trading is founded on solid risk management.

3. Successful trading is a process of doing certain things over and over again with discipline and patience.

4. The human element of trading is enormously important and has been ignored by other authors for years. Recognizing and managing the emotions of fear and greed are central to consistently successful speculation.

5. It is possible to be profitable over time even though the majority of trading events will be losers. “Process” will trump the results of any given trade or series of trades.

6. Charting principles are not magic, but simply provide a structure for a trading process.

Saturday, May 7, 2011

Fast Moving Momentum

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Mark Douglas Trading Psychology 1