Wednesday, August 31, 2011

Gold Again

15 minute chart shows potential for breakout

World Markets in strong uptrend

Indian markets will remain closed tomorrow also. But, so what? The S&P Nifty now trading on the CME is at 5080 (at 7.56 PM). That is a good 75 points higher than the close on Tuesday in the NSE. Markets continue to move up, in what should now be considered as an uptrend for most world markets.

The Intermediate trend remains down. But, this trend changes to up if and when the Nifty closes above 5200 which was an intermediate top on the way down. The Markets offer a number of possible scenarios:

1. The bear market / correction may be over. If this is so, 4700 becomes a bear market low. We should expect the Nifty to go above 6350 at some point of time.

2. The current rally is a normal correction in an ongoing bear market. If that is so, then the rally should face resistance around 5200, and, later at 5735. The problem is that the bear covering rally can continue for a long time, and a bull market will be announced only if the Nifty crosses 6350. But, trading tactics should be different. Once the Nifty closes above 5200, then 4950 becomes a stop. Investors should go for buying whenever buy signals come in. Traders should be long even now since a short term buy signal was given when the Nifty made a 200 point advance on Monday.

3. Markets move into a trading zone with 4800 as support and 5400 as resistance.

Readers are welcome to offer their own scenarios, with their opinion on which scenario is likely.

Tuesday, August 30, 2011

Book: The Little Book of Trading

The Little Book of Trading is reviewed in this website

Here are some excerpts from the review:

This book is mostly about inspiration from successful (Trend Following) stories. This latest Covel instalment revolves around some famous Trend Following personalities. And successful stories are one of the best ways to get inspiration and motivation.
Below are the personalities/firms covered with chosen quote(s) from each chapter.
Sunrise Capital (Gary Davis, Jack Forrest, Rick Slaughter)

Trend Following can be simple, but sticking with it is the hard part.

Make sure you never miss a potential big trend. You always want to put some kind of trade when your system says enter as your price trigger hits. If you are wrong, you have stops to protect your capital, to protect your downside. After all, you never know which move is going to be the mother of all moves.
Kevin Bruce

There is great truth in the idea that if you take care of the downside, the upside will take care of itself.

Larry Hite

Hite has two basic rules about trading and life:
 1) If you don’t bet, you can’t win.
 2) If you lose all your chips, you can’t bet

Eric Crittenden and Cole Wilcox

Wilcox, for example, has a constant process of asking, “Am I wrong?” while he sees everyone else asking, “Am I right?” If you don’t ask the correct probing question with genuine curiosity, like a scientist, you cannot arrive at the correct answer.
 The scientific method doesn’t allow you to prove anything. All you can do is disprove theories, and then, with a preponderance of evidence still left, you can accept and keep the remainder as long as you can’t disprove it.

A few key lessons from Basso helped Crittendedn and Wilcox from the beginning. Basso was blunt, “It really is simple. You hold your winners, have discipline and cut your losers. You take what the market gives and you’ll be successful in this business”. Crittenden added: “One. Don’t over-bet. Two. Diversify across markets.”

My Notes: Please read the original post at the website given in the first paragraph for the full review.

response to comments August 30

RS writes: Today you said on ET you went long at 4845 however it was around 4865 when it was said on TV. Also you said you are short in intermediate account. Can you tell how to manage / what quantity should be traded for such 1-2 day moves and for short term?

My Notes: I speak when I am asked to do so. Therefore, my positions were taken when the setup was complete, while I disclosed it when I was asked to speak. I have a bearish ratio spread in my intermediate trade account. I use different instruments for short term trading and intermediate positions otherwise it could become very confusing. Usually my volumes for short term trades are less than the intermediate positions.

RS also asks: Have 2 queries a) How to trade the White Marubozu (well almost) in this scenario and in your trading experience, what's the high probability setup following the same b) Sometime back u had sugegsted Street Smarts and Marc Rivalland's book. Could you please tell a few more good books on Swing trades with strategies et al.

My Notes:
a. the White Marubozo is a price bar which opens at the low and closes at the high of the day. This is what the Nifty did on Monday. It also made a wide range bar, so we can call it a long white marubozo. A Marubozo is a signal that bulls are strong. We should expect follow through after such a pattern. In my previous post I explained that traders should look to buy on dips / consolidation.

b. An interesting book is 'The Wallaby Trade' which discusses divergence trades. Another excellent book is: Mechanical Trading Systems by Richard Weissman.

Sudhin asks: Under the next step you have used 55sma as your basic moving average for your bull and bear set up, why 55? is it because it is a fibonacci no. or this gave your the minimum whipsaws? Could you add 5highema which could given an early indication but off course there will be some whipsaws?

My Notes: I used 55 periods because it was a fibonacci number and seemed to fir the Nifty chart fairly well. You can use an average of 5 period Highs, but this is a method of identifying short term swings, not bull and bear markets.

Monday, August 29, 2011

Big Gains in Nifty-Now for the follow through

Today saw an almost perfect trade for Nifty traders. The best part of this trade was anticipation. On Sunday, in my previous post, I did anticipate a gap up and then an ORB trade. Both came giving a 90 point intra day gain in Nifty futures. After the first 15 minutes, traders should have gone long at 4845 approx, which was the high of the first 15 minutes. From then onwards, a trend day was evident, so hold on to your positions till closing bell at 3.28, when futures were around 4935, for a gain of 90 points.

Tomorrow, as they say, is another day. After a large range day, the subsequent days tend to be choppy. Wise action is to hold back and trade as little as possible. The ideal trade on such days is a breakout from a long consolidation in the five minute charts.

U.S. markets are doing quite well, with almost 2% gains. We could easily see follow through in our own markets tomorrow.

Sunday, August 28, 2011

Will Monday see a gap up?

Two different news items could influence our markets on Monday morning. First, the prospect of QE3 in the USA which sent U.S, equities and Gold higher on Friday. Second, an apparent resolution of Anna's fast, which can reduce political heat, at least for some time. Both news items should be positive for the markets. Together with the news is sustained selling in the Indian markets and it is quite possible that sellers may now pause and wait for a few days.

Short term traders should manage their trades, have a plan for gaps against their position, as well as gaps in favor. If a trader does not have a position, then what will be the approach towards trading for the day? While going long above the first 15 minute high is a setup, we should remember that the short term trend is down, therefore, any buy signal should be mainly for intraday. Intermediate position traders are likely to be short with stops that should not be affected by Monday's rally.

Saturday, August 27, 2011

The Next Step

When to enter the market? The Next Step for investors could be based on an easy to understand trend following tool. The 55 period simple moving average on weekly charts is as good as anything else. Investors can add value to this average by tracking consolidation patterns which can give early warning. Chart below.



Americans Choose Gold as the Best Long-Term Investment
PRINCETON, NJ -- Thirty-four percent of Americans say gold is the best long-term investment, more than say so about four other types of investments. Real estate (19%) and stocks (17%) are distant second choices. Bank deposits come in at 14% and Govt bonds at 10%.

(source: gallup.com)

Trading under Stress

The more stressed you are, the more money you’ll lose. A fact. So if you want to avoid big losses, just stop trading when you’re stressed.

Talent is overrated

What makes people great achievers? In sports, chess, golf, business, investing etc. The main idea is that great success is achieved with hard work – deliberate practice.
The value of experience is overrated just like talent is overrated.
It turns out that everything is teachable and it is only a matter of practice… lot’s of practice… 10,000 hours of practice.
summarised from here

My Notes: I agree that practice makes perfect. A singer with lots of practice will be better than a singer with a golden voice but no practice. Same in trading.

Friday, August 26, 2011

The Lost Decade

Balu writes:
Sir Just for imagination!! what if nifty trades in a range of 2250 and 6350 for a decade. Is it impossible? if election gap gets filled, then next etc etc..

My Notes: This is not imagination. It is quite possible that we may see such a scenario or  somthing similar. This means that 2250 support could push upto 3500 or 3800 and the resistance could move to 7500. Between these two levels, the markets could move around for a decade.

Vinod D says:

Dear Sudarshan, Could you please explain how one should trade the global indices through NSE...The expiry date and contract months given in the NSE website is a bit confusing..

My Notes:
There are two sets of contracts, monthly and quarterly. This should get you started.  I am not certain on the effectiveness of trading in the S&P when U.S. markets are closed.

Shazia has a detailed explaination of how psychology can create a breakdown of the 4000 levels. You should read his comments to understand this. Market levels are only for our undestanding. The market does no care for any level. It does what it wants. Also, sometimes, the levels become self-fulfilling.

Amarjeet says:
sir, please give example on chart how 4650 support level.

My Notes: Here is the chart.


 

Nifty at new lows for this bear market

The benchmark index has broken a minor technical level - 4800. As I write this, we are trading at 4780, below the 4800 psychological number. Significant technical support on the charts comes around 4650. Now, the mrkets will do what they want, so this decline does not have to reach 4650. My point is: Around 4650, we should become alert for signs of support.

What about risk reward for investors? This makes interesting reading now. Assume that the Nifty could touch the downside target of 4000. Buyers at current levels have a risk of 780 points. Suppose they hold on while the Index goes to 4000 and then starts a new bull market. Eventually, the Index could come back to 4780 and at some point of time cross 6350. So, the risk for investors is 780 points and the reward may be 1500 points. Added risk comes in form of time - we do not know how much time the process of going to 4000 and back to 6350 will take. Then again, niether of the two targets, 4000 or 6350 are actually assured. What do readers say?

Watch 4800 for the Nifty

While the market is in a downtrend, at least for now, it appears that 4800 seems to be holding. A close below 4800 will resume the down move.

HDFC Bank weekly chart was given. While the neckline has been violated, yes, we have to wait for friday to confirm if the weekly close remains below the neckline. Thanks to DK for pointing this out.

Please undertand once again the difference between analysis and trading tactics. The analysis gives us a view. Now, trading methods provide the tools for executing the trade. Theoritically, the stop loss on the HDFC Bank pattern is the right shoulder. But, it is possible to keep a stop loss above this week's high.

Yes, my view remains that Gold and Silver are in their bull markets. Dips are buying opportunities. Both metals have become volatile. So, you need to manage your trading volumes.

Quickly added: from NSE website:

NSE to launch Global Indices on Monday, 29th August, 2011

The National Stock exchange is launching derivative contracts on the world ’s most followed equity indices, the S&P 500 and the Dow Jones Industrial Average from Monday, the 29th of August.

This is the first time that derivative contracts on global indices are being launched in India. This is the also the first time in the world that futures contracts on the S&P 500 index are being introduced and listed on an exchange outside of their home country, USA. The new contracts will include futures on both the DJIA and the S&P 500, and options on the S&P 500.

Thursday, August 25, 2011

HDFC Bank bearish head and shoulder was discussed on August 19. That pattern has now been confirmed. See chart below.

Commodity prices and the Dollar Index

Taken from Yahoo Answers

Why do commodity prices rise when the dollar falls and vice versa?

consider a loaf of bread. costs one dollar. that one dollar is worth one dollar. it's an even trade. "the dollar falls". the dollar is now no longer worth a dollar. the bread is still worth the price of the dollar before it fell, so the price must be raised to compensate for the lower value of the dollar.

The Tragedy of Missing Out

This comes from the Zen Habits blog

A father and his son went fishing on a small boat, hungry.
The father helped his son reel in his first fish, and it was a beauty. “Great catch, son,” the father said.
“Yes, but I’m worried I’m missing out on better fish,” the son said. “What if I could catch a bigger, tastier fish?”
“Maybe you should try,” the father said.
And the son did, catching an even bigger fish an hour later. “A real beaut,” the father said.
“But what if there are better fish out there?” the son asked.
“Maybe you should try,” the father said.
And the son did, catching a bigger fish, then wondering if there were better fish, catching another, and so on.
At the end of the day, the son was exhausted. The father asked, “How did the fish taste?”
The son hesitated. “I’m not sure. I was so busy looking for better fish that I didn’t taste any of them.”
The father smiled contentedly, patted his belly. “Don’t worry. They were delicious.”

We are all of us like the son. We all worry, at some time or other, that we’re missing out on things.
..........(read the zen habits blog for the full post)

My Notes:
When we trade, we should focus on the patterns and securities that we are comfortable with. There is so much movement in the market, we cannot catch all of it. I am usually content with what I am doing. What about you?



Day Trading View for Thursday

This one is easy. Today is futures and options expiry day. There is lot of intraday volatility. I never trade on big news days and the FnO expiry classifies as a big news day.

The Nifty has seen weak rallies and strong declines. This is characteristic of a bear market. Most traders are now waiting for a strong rally to (a) go long, and/or (b) sell into strength. But markets may not oblige us by following a path dictated by 'most traders'. So here are two possible scenarios:

1. The Nifty shows choppy action around 4900, building some kind of a base, then begins a sharp, sudden V shaped rally.

2. The Nifty does not make any attempts to rally. After some choppy days, eventually the Index falls below 4800 and slowly slides towards 4650.

While the markets will do what they want, I am assuming that one of these scenarios should eventually materialize.

Analysis vs Trading.
What I just gave you was analysis. Traders cannot trade on analysis, they need specific trading plans to go in the market and make money. The analysis gives you a bias. That helps. For example, the trader is looking at scenario 1 and identifies a range between 4800 to 4950. The trader uses momentum to locate overbought and oversold levels where he takes low volume intraday trades. He does not carry positions overnight while the Index is in the range. A simple plan can do wonders for your trading. Just be consistent.

Wednesday, August 24, 2011

Gold gets a bearish head and shoulder

What happened to Volume?

In my chart setup, there is no volume. Sasi writes "about your strategy - I am quite surprised to see you not using volumes which I thought till date was the basic necessity'.

Well, yes, Sasi. Volume is certainly important. Now, here is a confession. I rarely look at volume. This simply means that I am comfortable with using price alone to identify trend, and, setups. I have done some work with raw volume and I could not find a correlation between price behavior and volume movment. I know that text books talk about the importance of volume and I respect these ideas. It is probably my failure to identify relationships.

But, a number of volume indicators are used in my strategies - Money Flow Index is a favorite. So, volume with price does help when used in strategies.

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Sudhin says "but u have never answered most questions reaised here why?"

My Notes: When I find a question which is easy to answer, mainly because I understand that topic, I do reply quickly. However, I will try to respond to more questions.
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Deepak Longani writes "Sudarshan ji me not been able to understand what is this "The deep blue line represents a 34 period zero lag moving average" can you please explain regards"

My Notes:
In the chart shown, there is a deep blue colored line. I am referring to this line. This is a moving average. The moving average is calculated with 34 periods as the lookback. Now, a number of new moving averages types have come up in recent years. This one is called a zero lag average. The commonly used ones are the simple moving average (SMA) and exponential average. Zero lag should be used independently - when it is rising the trend is up, when it is falling the trend is down.

 

My Charts Setup

I am sharing the setup which I use on my charts. I mainly use 5 minute, 60 minute charts for day/swing trading and daily, weekly,monthly charts for an intermediate/long term view. All my charts have the same setup - Candles and three technical tools. I am giving the Nifty EOD chart with the three tools which I will explain.



The Green and Black bars are candlesticks, which all users will recognise. If you do not know what candlesticks are, you should go a google search, now.
The deep blue line represents a 34 period zero lag moving average. The slope of this average gives me the intermediate trend. If the line is moving up, intermediate trend is up. If the line is moving down, the intermediate trend is down. 
The light black line is a linear regression line with 8 periods as lookback. I look at 'hooks' in the LR8 line - change of direction in LR.
The Oscillator in the lower pane is called TA-Insync. This oscillator is a proprietary indicator in Trend Analyser (available from www.s2analytics.com). But, similar results can be simulated with a stochastics using a long lookback. I have 55 as the lookback here, with 5 as the value for the trigger line - the red line. The trigger is simply a 5 period average of TA-Insync.

How do I use these tools? For analysis, mostly I look at the candlesticks and determine the trend, as well as identify any chart patterns that I can see. The tools are useful when I wish to take a trade. When trading, I need clear, well defined rules and indicators provide the rules. A crossover in the TA-Insync from oversold or overbought levels gives me a trading signal. So also does the 'hook' in the LR line. Once you want to go for disciplined trading, any number of rules can be created with any kind of indicators.

Tuesday, August 23, 2011

Nifty gets ready for the second step

The Nifty found support at 4800 and bounced off these levels. The move from 4800 to 4950 was relatively easy. Remember that the Index had been following for many days, was quite clearly oversold. While oversold could contiue falling, the Index stopped falling when it touched 4800 and this was a sign that a countertrend rally was starting.

The move from 4800 to 4950 was easy. After all, the first bounce from oversold levels should come with a lot of comfort to the bulls. Short sellers rush in to cover while bargain hunters are buying. So, the market rallies quickly.

Now, we are probably entering the second step - when buyers will have to step in to keep upside momentum. This will be more difficult that the first, initial rally. We think of the next move as the second step in the upswing. If the second step can be taken by the bulls, then a sustained rally may be possible.

Resistance levels for this rally will be 5050 and then 5200.

Silver - Cup and Handle is bullish

a writes: "sir dont you see a bullish cup and handle pattern in the u shaped base and the rectangle.even the volume actions have been similar to a bullish cup and handle..dont ya think there s a lot of accumulation taking place...targets please"

Yes, a. The cup and handle pattern in Silver is visible and confirmed due to a breakout from the handle. Traders must know how to trade this breakout. I would wait for a dip / consolidation.

Monday, August 22, 2011

Silver uptrend meets targets

Breakout from a rectangle in daily Silver has met the pattern target of 65,300 approx. Silver can of course continue going up, but at least its target price has been touched. Chart given below. Once a target is met, then I switch to short term averages to look for an exit. I will exit completely if the 8 period linear regression turns down.

Sunday, August 21, 2011

Bulls in the Hope Stage

As the Nifty touches 4800, there may be a fair amount of hope among the bulls. The feeling is: we have touched the final lows of the bear market. Finally, the bulls may say, the end of the bear is visible.

I would disagree. Bear markets do not end with a lot of hope. They end with pessimism and capitulation. This is not visible in the market, at least not yet. At some point, bear rallies are likely to come about. I will treat any rally as a correction in a bear market, eventually expecting lower levels.

A head and shoulder pattern in the Nifty suggests a target of 4100. We should remember that patterns can fail, fall short of targets or exceed them. Therefore, a pattern is not an assured outcome. markets can do anything. But, patterns are what we have to trade with. Here is the Nifty head and shoulder.

Saturday, August 20, 2011

What is happening in Europe: A primer

Here is a quick primer on what is actually troubling Europe. I wrote it to explain the situation to myself, and, share it with readers.

A. It is th EU - European Union
Most of Europe is part of the European Union, which has a common currency - the EURO. We are talking about the EU. Now, by joining the EU, countries have given up their right to manage their own currencies. In India, if the Govt faces a deficit, it can take loans from the reserve bank, print money or devalue its currency, to cover the deficit. But, EU countries cannot do so, since they do not have their own currencies any more.

B. So they take loans
In the good times till 2008, Ireland, Spain, Portugal and Greece had booming economic conditions, together with the rest of the world. Big spending plans were made, with a lot of money going to different sections of society. Their budgets were in deficits. To finance these deficits, the countries borrowed money from banks, mainly European(German and French) banks. A lot of this money was used in spending, for example in subsidies and such. Then came the 2009 slow down which has continued till date. Revenues fell, while spending remained the same. Soon, banks became reluctant to give more money.

C. How will the banks be repaid?
That's the big issue. Actually, countries need to borrow continuously to pay previous loans and continue spending. Once the country cannot borrow, they cannot pay the loans already taken. Fortunately, for the Greeks that is, most of the money was borrowed from French, german and british banks, so it is these countries who are worried about the PIGS. (Portugal, Ireland, Greece, Spain).

D. What is the solution?
There are no easy ways. The rich countries of Europe insist that the PIGS balance their budgets by incresing taxes and reducing spending. Then only will the rich give money to the PIGS. This money will be used to repay the banks which belong to the rich countries. But, then, instead of the bank, the rich country will become the lender. So what is the difference? Not much. German citizens are not happy at the idea of their money being given out this way.

I have given a simplified version of the issues facing Europe. The point seems to be: there are no easy solutions to the mess. Reader comments and their views are welcome.


How to survive a bear market

from: This Blog

This is what characterizes bear markets:
  • Sellers are in control
  • Oversold often stays oversold for a long time
  • Markets drop a lot faster than they go up
  • Bear markets burn and churn accounts with long only exposure
  • Volume and liquidity can dry up but price can still drop significantly
  • ‘Cheap’ can get a lot ‘cheaper’
  • Hope is slowly destroyed
  • Vicious bear market rallies try to suck in traders to trap them
  • Expect lots of gaps to the downside
  • It takes a long time until market participants throw in the towel
This is appropriate trading behaviour during bear markets:
  • Either in cash or short
  • Sell the rallies mentality
  • Do NOT buy the dips
  • Do not even think about going long if you are not an active and experienced trader

Friday, August 19, 2011

High Performance Trading: Book Review

High Performance Trading is written by Steve Ward. The book is published by Vision Books (www.visionbooksindia.com), New Delhi, India. The price is Rs 495 only. I am obliged to Vision for publishing an excellent book at a low price. (just to compare, similar publications in the USA wold be $40 or more, i.e. Rs 2000 or more).

Every trader needs to read this book. Trading is not about obtaining tips. It is a business, more complicated to manage than an average business. High Performance Trading discusses 35 practical strategies to enhance your Trading Psychology and Performance. Each of these startegies contains numerous ideas and practical suggestions to organize your trading, and, improve it.

In "Strategy 15: Run Your profits, Cut Your Losses" tells us something we already know. But do we follow it? The chapter gives exercises, top tips and gives five reasons why traders cannot follow this Golden Rule. The reasons are:

1. Taking excessive risk in relation to their trading account
2. Placing stops at levels which give uncumfortable losses
3. Not fully accepting losses as part of trading
4. Not having stops and profit targets in the first place
5. Trading when you need to make money

Each page is worth not one but many reads. So, my suggestion is: This book should be part of your library, to be read many time.

Watch HDFC Bank

Thursday, August 18, 2011

Where is the correction?

Again in a trading range

The Nifty appears to be drifting into a range with quite narrow boundaries. We have visible support at 5000 while the top of the range could be either 5100 or 5150. In any case, the Index is in some kind of a sideways movement.

What happens from here? The advantage of a range is the visibility of clear cut breakout levels. Sell below 5000 and buy above 5100 / 5150. Inside the range itself, there are unlikely to be any trading opportunities, although individual stocks may have tradeable movements. If you already have a position, then hold on to it.

When prices move inside a range, eventually small movements get magnified on the charts. Suppose the Nifty is moving in a 20 point range for past 4 hours. Your 5 minute charts will still appear on the full screen. Now a 5 point move will fill up 25% of your screen, giving the impression of a major move starting. But, it is just 5 points inside a range. Therefore, the wise action is to compress your charts so that you get a larger picture.

Tuesday, August 16, 2011

Big decline in mid cap stocks

Today's market action was significant in many ways:

1. The Nifty close was the lowest so far in the current down trend. New lows are usually bearish.

2. A gap up was not sustained, with the Index moving down almost 130 points before rallying by a small amount. Markets that open up and close lower are usually in bear phases.

3. A number of mid cap stocks were hammered. In fact, they were beaten down so badly that many of them are now close to their 2008 bear market lows.

With today's decline, the Nifty has come down to test its 4950 lows made last week. This test gives a trade. It may be possible to go long with 4950 as the stop loss. Remember, Positions are taken after considering the environment for the day.

One more gap up

The Market is moving like a yo-yo --->  up one day, down the next, up again and so on. Day Traders have the advantage of avodiing overnight risk, but a large gap also squeezes their potential to make money.

If Nifty futures open higher by 70 points (for example), a lot of the possible gains are already in the opening price. How do you trade?

1. Fade the gap. Assume that the gap was against the trend, look to sell with a stop above the day's high.

2. Trade the gap. Go in the direction of the gap, which is up. This can be done in many ways:

a. Use the Opening Range Breakout - 15 minutes cool off, then buy above the high of this 15 minute, with stop below the 15 minute low.

b. Wait for a correction to a pivot level or fibonacci support, then buy.

c. Look for a trading range / consolidation then buy a breakout if it comes about.

There can be many more ways of trading the gap, or even for fading the gap. each trader will develop his/her own tools. The important point is to have a view - will I trade it or will I fade it.


Monday, August 15, 2011

Follow the Trend

Profitable trades are often made in the direction of the trend. The obvious question is: how does the trader define the trend?

Traders should realize that the definition of trend is subjective. There is no mathematical formula to identify the trend. If there were such a formula, every trader would reach the same result, there would be only one view of the trend, and, no one would take the other side of a trade.

The trader, then, needs to find his view of the trend.

How do you look at charts?

If you look mainly at raw price charts without any indicators, then the up trend is probably a series of higher highs / higher lows and opposite for down trend.

If you are focussed on moving averages, then the trend should be defined with the moving average.  Newer ways, such as zero lag averages should be considered.

If indicators is what you like, then look at the MACD, CCI with a longer term lookback (say 55 instead of the default 20), or experiment with an oscillator which has a look back of half the cycle period (cycle periods will be determined with tools such as FFT).

The actual tool you use is your choice. Difference between various tools is not much. What is important is consistency.Once you decide on a method to evaluate the trend, stay with it for some time. Do not switch quickly.

Smile on our faces - A tribute to Shammi Kapoor

Shammi Kapoor,  cinema idol of the 1950's and 1960's, died on August 11. To an entire generation of Indians, Mr Kapoor gave hope, cheer and laughter.  I was too young to watch Junglee. My first Shammi Kapoor movie was Janwaar. I watched fascinated as Shammi Kapoor wooed Rajshri with his Lal Chadi, sang Tumse Acha kaun hai wrapped in a blanket, played pranks and, all in all, entertained viewers. The best film of his career was probably Teesri manzil in 1966. I saw it three times when it was released, and, many more times as a rerun on TV. I saw Brahmachari released in 1968 which was his last success.

In the late 1960's, when I was old enough to watch movies, Shammi Kappor's career was coming to an end. Thanks to TV, it was in the 1990's and beyond, to this day that Shammi Kappor has entertained an entire generation of Indians who grew up in the 1960's and 70's in an era that young people now cannot imagine.

Shammi Kapoor's world will be evergreen. Anyone who watches Aiya ya Suku Suku knows that Shammi Kapoor lives in our hearts for ever.

Sunday, August 14, 2011

Finding your comfort level in trading

In comments,  Amarrdiip Kumaarr suggested that emphasis on swing trading could cause confusion in mind sof readers. He posted an article written in his blog which says that he is more comfortable with day trading.
Well, what I said was that in my tests (quite comprehensive, I assure you), swing trading makes more money while day trading does not respond well to automated trading. These are test results. The fact is that traders must find their own comfort levels. All kinds of trading is good if it is good enough for you. You really need to find your own comfort level.

Why does swing trading become troublesome at times? The answer lies in the nature of markets. Sometimes, markets are almost perfectly oriented towards swing trading. Sometimes they become volatile, almost random when the only method that makes money is intraday.

However, when you add up all the gains and the losses over a large period of time - my tests are from Janaury 1, 2007 to date, giving about four and a half years, swing trding makes most money.

No matter what trading method you follow, you have to understand that there will be times when the systems simply go out of sync with the current market.


 

Friday, August 12, 2011

Day trading or taking positions

Anshul asks:

sudarshan bhaiyya i still feel in todays world of tablet computers also,it is positional trading which rakes in the real money.Intraday trading just keeps some chutta paisa going and keeps u engrossed. Yes in positional calls some times gap openings play havoc but partially dey can be hedged by buying at money options. Please give ur views

My Notes:

I do a lot of testing on trading rules. It is a hobby as well as a business. My conclusions are:

1. Swing Trades make the most money. These are trades with 1 to 5 days of time horzon.

2. Day trades are useful for keeping the trader occupied. These trades require significant trading skill. At least on automated systems, day trading makes less money than swing trades.

3. Position trades can be defined as trades with time frames of weeks to months. These trades make the most money but require proper stock selection. Since traders cannot ever know in advance which stocks will move the most, position trades are best suited for baskets of stocks / futures. You trade a lot of them and some will work out in a spectacular fashion.

Thursday, August 11, 2011

The cat bounce is on

My last post explained that a dead cat bounce is not a one day wonder. Today's sgx nifty behavior is interesting. After hitting a low of 5078, it is now trading at 5139 which proves my point. Just as markets can go down more than we expect, they also rally, often more than expected.

How do you trade this? Have a view - up or down. take a position and stick to it. the volatility will ensure that you will see a profit soon enough, although your position may see a lot of turbulence in between.

Wednesday, August 10, 2011

What is a dead cat bounce?

After a sharp fall in prices, in a bear market, prices will sometimes begin sharp and swift rallies. Such rallies are called a 'dead cat bounce'.  The term suggests that the rally is likely to be a short term phase.

The term was created when day trading was not a trading feature. There were no computers or real time data. Positions were taken for days, weeks and months. After a bear market decline, prices would begin a rally, which was likely to face resistance sooner or later, hence a dead cat bounce.

The bounce then, did not refer to one day or a few hours. It referred to an upswing which was likely to fail. My point is this: How can we say that today was a dead cat bounce and the rally is complete? We should expect a short term uptrend. The bounce did not refer to one day, it referred to an up move that was likely to fail.

The up move from 4950 - low to whatever high is made is likely to be classified as a dead cat bounce, but it is not just one day.

Rally fades out: Intraday update

The first 15 minutes high has not been broken till 1.45 PM. There has been no buy signal yet. While a breakout from consolidation can still give a buy, it would be a weak signal since the breakout will come much below the first 15 minute high.

Following a set of rules will usually keep us out of trouble. I have discussed the 15 minute rule many times in this blog. Just do a search using the search option available in this page. This simple method ensures that many of my orders will not get triggered because the market never follows through above the first 15 minute high or low.

If you are trading, then have a set of rules. Keep it simple, but follow it.

Big up day likely

With American markets rallying big time, almost 4% +, we can expect the Nifty to open with an up gap, then, stay higher. It now seems that 4950 will act as a short term low.

Trading ideas:
 1. Opening Range Breakout. use the first 15 minutes as the support and resistance range. Buy above resistance with stop under support.
2. On intraday declines, look to sell PUT options. This may work since implied volatility was very high on Tuesday. I.V's could come down on wednesday but may still be high enough to be sold into. See my earlier post on this trade.
3. Buy Futures on intraday consolidation / dip.

Manage your trade carefully. Do not take unneccessary risks. Keep volumes low.

Tuesday, August 9, 2011

A Relief really - probably

There is some sense that today's low at 4950 may have been at least a short term low. The Nifty bouned from these lows to close significanlty higher. While intraday volatility remained high, the close did suggest that 4950 should hold for now. Ideally, prices should come down to test the 4950 level, and the test should be successful. But, in the absence of this test, we should assume today's low to hold in the short term, given the intra day price action.

What should traders do now?

Buying options is not a good idea given large implied volatility increases. With 4950 as a stop, it is possible to sell put options. This gives a bullish bias. You must then have a profit target which could be abut 50% of the selling price of the put. A second method is to buy futures. Your stops should be closer than 4950, maybe the inraday low.

This is written at 7.47 PM. It is possible that the scenario may change overnight, depending on the U.S. markets.

Volatile Markets are not good places to trade

I have been suggesting that volatile markets are not good locations to trade. Trading is done when probability is in our favor. In volatile markets, news, rumors and panic prevail. These emotions are not part of normal price movements, therefore technical analysis does not capture them.

My point is proven by the random nature of Nifty movements. On Friday, the Nifty opened lower, moved a 100 points down, then recovered 100 points back. It opened lower again on Monday, moved down, moved up 150 points then down 100 points. Chances are similar drama will be enacted today (tuesday). So, I stay away.

It is easier to suggest that markets should find a short term low in this week. This can be identified by a reduction in volatility and watching the charts.

Have Fun.

Monday, August 8, 2011

SGX suggests a soft open, no panic

As I write this at 7.18 AM. the SGX Nifty suggests an 85 point decline. This is really not bad news. On Friday, the Nifty had touched 5100, so if we go down to 5100 today, we are really seeing a test of Friday lows, no more.

I have given my views in previous posts. We should see a short term low soon enough.

Sunday, August 7, 2011

Waiting for tomorrow

About 27 months ago, Election results announced on Saturday gave a victory to the UPA coaltion. This was market friendly news, therefore the markets were expected to gap much higher on Monday, which they did - higher than assumed.

Now, Saturday morning IST, the S&P ratings cut was announced with all markets closed for the weekend. The first reactions will be at monday morning in Asia when the markets open in Japan, around 6.30 AM IST.

For Investors: remember, you are in for the long term. Short term volatility must be accepted as part of investing. Do not panic. If you have spare cash, then go for something like an SIP - systematic investment plan in which you invest a fixed percentage when markets go down by say 10%, or in which you invest a fixed percentage every month.

For Traders: increased volatility can result in bad decisions. try not to trade for a day or two. If you have positions, then you have to manage them. Do not feel depressed if the positions turn unfavorable. This is part of trading.

Downgrade: Storm in a tea cup?

The S&P downgrade of the USA to AA+ may well be like the Y2K scare in the year 1999. Remember Y2K? The world was going to end because there was tons of legacy code that couldn’t accommodate the rollover to the new century. As we now know, January 1, 2000 came in without major incident.

It isn’t yet clear what the impact of the S&P downgrade of the US to AA+ will have. There are good reasons to believe, despite the media hyperventilating, that it won’t add up to much.

Many economists and bloggers have reminded us that the S&P was the same agency which was giving top ratings to securities just before the sub prime crisis in the USA. It is a private company, managed for profit. They have about 100 analysts analyzing 136 countries - a lot of responsibility, for an organization that failed to recognize the collapse of the sub prime market.

My Point:
While initial market reaction could easily be volatile, I do not believe that this action will have any impact that lasts for more than a few days. What will happen is different: there will be a world wide debate on the power of private companies who virtually control the world through their manipulative actions. Since this time, the U.S. govt will be on the opposite side, I assume that the end result will be efforts to curb such power.

Impact on Markets:
Volatile markets are not good places to trade. Have patience. In the enxt few days, I expect a short term low to be in place. This could lead to a tradeable rally. My view remains that we should eventually see a correction to the 4300 - 3800 zone, but that will take its own time.

Saturday, August 6, 2011

The Downgrade

Saturday morning in India brought really breaking news - that the S&P had downgraded USA. The news was quite exciting for business news channels, with many running exclusive programs on the event. The downgrade was announced after American markets had closed for the week, therefore the impact, if any, will be felt only when Asian markets open on Monday.

I assume that the main impact of the downgrade is psychological - a warning that the USA should set its fiscal policies in order. The other two rating agencies, Moody and Fitch have maintained their top ratings for the USA which means that the downgrade is not accross all rating agencies. Moreover, the power of the rating agencies may have been overestimated, after all it is a private company managed for profits which is doing the ratings!

What happens on Monday? The answer is to wait for the Asian markets and the SGX Nifty to give clues. Even if there is a gap down, I do feel that next week should see a short term low in the Indian Indices. But, over the next few months, Indian markets are likely to underperform the American and European markets.



Lesson in chart patterns - Hindalco


Friday, August 5, 2011

Buy when base building starts

When markets fall sharply and dramatically, the desire to buy comes out strongly. But, this is not a good idea. Traders and Investors cannot buy randomly. There must be a method behind taking any trade.

Once markets show signs of entering into a bear trend, as our market is now doing, then buying should wait till the decline ends. How do we know that markets have stopped falling? The only way is to wait for base building. This process requires markets to go into a range after a significant decline. When prices break above range resistance, the first signs of buying will emerge.

A long term correction

The Nifty rallied from 2250 (october 08) to 6350 (october 10) in a bull market that lasted about two years. This large rally will have to see a correction.

On TV, as well in this blog, I have suggested a possible downside target of 4000 in the Nifty. The 50% retarcement of the up move comes at 4300. A 61.8% pullback comes at 3816. My target for 4000 is roughly mid way between these two correction numbers. The intent is to identify the market direction which should see the Nifty in the low 4000 range. No once should try to predict the exact levels.

Coming back to Life

I was busy in many othre activities and wih a lot of regret, I did not get sufficient time to write this blog.

I hope the blog will come back to life, with today's post as a start. This brief post is just to tell you that the blog is alive and kicking.