Monday, October 31, 2011

Answers to comments oct31-11

Here are my answers to comments.


rocky said...
thanks sir for your revert but one thing i would ask this was swing trade and what about intra day trade on expiry day as nifty broke 3 times orb...

My Notes: This was a swing trade with the bullish head and shoulders as the base. ORB should not be traded every day, and, certainly not on F&O expiry days.
 
rohit said...
Sir but what is your gut feeling? is the bear market over? Should one start buying on dips or start shorting heavily in the range of 5450-5700.
 
My Notes: My gut feeling is that there is more downside to come. But, I do not trade on these gut feelings. Currently, trend is up while momentum is coming down, suggesting a consolidation or dip. That's the trading view.

October 31, 2011 11:34 AM

Kuldeep.rk said...
Dear Sir,
Shall we expect Nifty to fall below 5325-30 area to fill the gap till 5200?

My Notes: I should think so. But, the key question is when? Maybe now, maybe some weeks later.

Process of Consolidation Likely

After a sharp 250+ point rally, it seems reasonable to expect the Nifty to begin a process of consolidation. For intraday trading, my setup is to look for intraday ranges to breakout / breakdown. While I will take short positions if there is a breakdown, volume will be low, since we remain in an intermediate uptrend.

Focus on stocks rather than on the Nifty makes more sense. While the indices consolidate, there will be moves in individual names. Three stocks on the buy side, discussed earlier in this blog are Tata Motors, M&M and Hindalco. I am looking for corrections in these stocks to take a long position.

Sunday, October 30, 2011

Nifty Pattern Targets Reached

A bullish head and shoulder pattern in the Nifty touched its target of 5350, in fact, exceeded it since it opened higher than 5350 on Friday last. The pattern created some turbulence before it turned successful. Here is how I traded it.

I went long in Nifty Futures at 5150 approx when the initial breakout from the neckline occured. My initial stop was 5000 (right shoulder). The Nifty then moved in a narrow range, remaining below the neckline. I moved my stop to 5050 which was a pivot low. I was stopped out as the Nifty fell to 5008, while the pattern was intact. On Tuesday, F&O settlement, Nifty again moved up, I went long at 5180 (Nov Futures equivalent to 5150 October). As luck would have it, I closed the position at 5380 approx on Friday. The trade gave a 100 point gain, although it should have been 200 points if I had kept my original stop.

My review of the trade suggests that I was correct in moving the stop to 5050. Please remember that different traders would work on the trade in different ways.

What helped me was Position Sizing. In my first entry at 5150, my position was 20% of normal. I was buying at the open, and planned to add if prices went up. They never did go up. My second entry was 50% of normal because the thrust was visible but it was F&O expiry, so I remained conservative.

Reader comments and questions are welcome.

Wednesday, October 26, 2011

Happy Diwali

Wishing all traders a very Happy Diwali and Prosperous New Year.

Sunday, October 23, 2011

Stock Selection (based upon their historical volatility)

Volatility -:It is a measure of how far the current price of a stock moves from its average past prices. Greater the movement, greater is the volatility.The high volatile stocks moves fast whereas low volatile stocks trades in a narrow range.

Historical Volatility Ratio (HVR)-: HVR represents the strength of current volatility as compare to long term volatility. The ratio represents the average volatility of a stock. If this ratio is above 1, the current volatility is high. Therefore large price movement is likely.

Now the key question is how to find a high volatile stocks?

First, we will have to find stocks with current high volatility. It may happen that the some stocks have un-usual high volatility. We can use HVR to eliminate those stocks.
We are comparing Volatility and HVR because volatility shows current position whereas HVR shows the average historical volatility.

We will first select top 20 high volatile stocks.
Then we will select 10 stocks out of those 20 stocks based upon their high HVR.

These stocks can use for intraday,  positional trade both.
For an intraday trade look for the patterns like ORB; Consolidation.
For positional trade, go with the trend.

Friday, October 21, 2011

M&M Consolidation

M&M is consolidating between 770 to 820 (a range of 50 points built over a period of almost 1.5 months). This consolidation process is developing near the life time high of the stock. A break of 820 resistance or 770 support should see a big move in either direction.

Niftnear ORB Trade

How do you day trade? I would suggest: have a view on the direction, then use a method for entry and exit. On October 14, our view was for a rally in the Nifty. The method was the ORB - Opening Range Breakout. This is how the trade went: Nifty breaks its first 15 min high with high volume. We buy at breakout (5100) with a stop loss at first 15 min low (5056). Nifty retrace twice near to its low but at the end it closes higher. Exit should be at 3:20 at market price. This trade given us a profit of almost 50 points.

Thursday, October 13, 2011

A dip in an ongoing up trend

Today’s small decline is viewed as a dip in an ongoing uptrend. My line of control for Bulls is at 5000 in Nifty.  While the Nifty remains above 5000, I assume that any decline is a normal correction in what is now an ongoing up move. I obtained 5000 from the hourly chart for the Nifty where the low of 5000 was made before the bullish breakout above the neckline of the pattern. Chart below:

 

nifty60min-oct13-11

 

This pattern is coming inside an uptrend, which itself is part of a correction in an ongoing bear market. It remains anybody’s guess if the pattern will meet its target of 5350. Since, we have to trade on probabilities, I remain a buyer while the Nifty is above 5000.

TATA Motors Life Cycle

A stocks cycle consists of three cycles - Accumulation, Realization and Dsitribution. TATA Motors has gone through its distribution stage. Its weekly charts suggest a process of accumulation. The next stge may be realization. A realization stage starts when a stock breaks up from the base. After breaking its base, the stock tries to move up very fast. Chart below:



Hindalco touches support

Hindalco trading at its support level. I have taken a retracement down in Hindalco from Low made at 36.75 on 08 March 2009 to High made at 252.85 on 09 Jan 2011. From there, the price retraced at 0.618 retracement at 119.30 (this is also the low of the hindalco). Now at this point we can buy this stock. The relative strength of this stock is not very high so we have to take a tight stop loss just below to 0.618 retracement line at 110.





Wednesday, October 12, 2011

Mystery of the missing trailing stop

In response to my trades given in the previous post, I have comments on the trailing stop loss which was ‘missing’ in my trading plan.

mbansalicy says “one thing i missing in your trading plan is trailing stop loss”. Nikhil says “Also, one should keep trailing stop loss”.

So, what happened to the trailing? 

My Notes: A bullish trend day will usually open in the lower part of the day’s range and close in the top part. Within the range, there may be some choppiness which is difficult to predict. A trailing stop may stop me out and then the trend could resume. My risk is well defined – it is the low of the day. I have to accept the intraday choppiness if I want to catch the trend day. This is the reason, there is no trailing stop in ORB trades (essentially the ORB leads to a trend day).

I have done ample system testing to justify this view.

Nifty Live Oct 12-11

Here is a description of my Nifty trades for today. Pre-Market, I expected the Nifty to gap up and stay up. This means I was looking for a trend day. Well, the Nifty did open higher with a gap. It then started a move up. I went long at 5034 and 5022 (on a dip) (Values are for October futures). My stop was the day’s low at 5006. If the market is to go up, then the low should not be broken. Futures rallied nicely to 5060  then IIP numbers saw the Nifty dip to 5022. My trade continued. We saw another rally to 5066 then a sharp and sudden decline saw the Nifty fall below 5006. I was stopped out. I was convinced that we were looking at a trend day, but the trading must be done with discipline, so I was stopped out. There was a reentry plan. I would go long again at 5066 which was the day’s high (till then). It would be a breakout trade, but I have to take it since the intra day charts were upbeat.

The Nifty started a rally, I went long again at 5066, then exited the trade at 5115 – almost at the close of the day.
Lessons learned:  (1). Follow your plan.   (2). Trade without tension. – If I were in tension, I would have made any number of mistakes. The reason I am not in tension is due to control of my trading volume. I still make mistakes – many of them – but at least I am not in tension.
A bullish head and shoulder in the 60 minute chart, suggests a breakout giving a target of 5350 approx. Well, the markets will and do surprise us.

Tuesday, October 11, 2011

Point and Figure Charts

Nikhil asks “do you follow Point and Figure charts also? Did you try this type? what's your experience? with them?
Are not they less 'noisy' than normal bar/candlesticks charts?”

My Notes: Since this a question that I can answer easily, I picked it up for a reply as soon as I read it.

All technical tools work as promised provided the trader follows the tools, consistently. Then, point and figure charts are as good or as bad as most other technical methods. The skill lies with the trader.

I do not track point and figure charts. I have experimented with them earlier. I realized that I was comfortable with standard O_H_L_C charts and classical chart patterns. Point and figure charts also have their own pattern recognition methods.  Any one method of analysis is good enough.

Point and figure charts have a distinct disadvantage, which was not so much of an issue earlier,  but is now a clear drawback. These charts do not show gaps. Thus, overnight gaps are not visible. For intraday or even swing traders who use intraday charts, this becomes a major problem. Twenty years ago, intraday trading was not popular so the issue of gaps was not important. Now, if you are any kind of intra day trader , I cannot understand how you can use point and figure charts for such trading.

Reader comments are welcome.

Aiming for a better trade

This post gets its ideas from the SMB Training Blog . You should read their full post. The basic theme is this: what factors contribute to a well made trade? A well made trade will not always result in a profit. But, it provides satisfaction to the trader for correctly identifying, then executing the trade. This is what the blog says:

  • Having a time stop – scratch a trade that does not work for me after a given period of time
  • Being ultra-selective – trade only Radar/In-play stocks, which haven’t moved out of their ATRs, and still have rooms to go
  • Covering risks – initiate with 2 lots on higher R/R setups, and covering risks with 1 lot into the next up move / down move
  • Internalizing “second rat gets the cheese” – it is okay to miss the first 20c; you don’t have to be the 1st one in… let them do the battle, confirm the price action, and then I enter with more confidence

My Notes: Being selective in picking trades is probably the main cause of better trading – in choppy environments as this.

Monday, October 10, 2011

Long term view of Nifty

Nifty is trading in a large trading range from 4720 to 5170. This is a large 450 point range which has been established over a period of 2 months. A breakout at any level of this trading range will give us a long term opportunity for buying or selling. Nifty touched twice its support and resistance inside this trading range.

Saturday, October 8, 2011

Zen stories for Traders

Here are some Zen stories for traders:

Working Very Hard

A martial arts student went to his teacher and said earnestly, "I am devoted to studying your martial system. How long will it take me to master it." The teacher's reply was casual, "Ten years." Impatiently, the student answered, "But I want to master it faster than that. I will work very hard. I will practice everyday, ten or more hours a day if I have to. How long will it take then?" The teacher thought for a moment, "20 years."

Wanting God

A hermit was meditating by a river when a young man interrupted him. "Master, I wish to become your disciple," said the man. "Why?" replied the hermit. The young man thought for a moment. "Because I want to find God."

The master jumped up, grabbed him by the scruff of his neck, dragged him into the river, and plunged his head under water. After holding him there for a minute, with him kicking and struggling to free himself, the master finally pulled him up out of the river. The young man coughed up water and gasped to get his breath. When he eventually quieted down, the master spoke. "Tell me, what did you want most of all when you were under water."

"Air!" answered the man.

"Very well," said the master. "Go home and come back to me when you want God as much as you just wanted air."

Chasing Two Rabbits

A martial arts student approached his teacher with a question. "I'd like to improve my knowledge of the martial arts. In addition to learning from you, I'd like to study with another teacher in order to learn another style. What do you think of this idea?"

"The hunter who chases two rabbits," answered the master, "catches neither one."

Going with the Flow

A Taoist story tells of an old man who accidentally fell into the river rapids leading to a high and dangerous waterfall. Onlookers feared for his life. Miraculously, he came out alive and unharmed downstream at the bottom of the falls. People asked him how he managed to survive. "I accommodated myself to the water, not the water to me. Without thinking, I allowed myself to be shaped by it. Plunging into the swirl, I came out with the swirl. This is how I survived."

Hero Motor Corp at its support level

Hero Moto Corp is now trading at its support level. This support level comes from Fibbonacci Retracement. HeroMoto is trading near to its 0.618 retracement at 1917. I have taken this retracement from low made on 8/8/2011 at 1720 to high made on 9/9/2011 at 2237. This suggest that the support comes at the 1900-1920 zones. It is possible to go long with a stop below 1830 which is the .78 retracement. Reader views are welcome. Chart below:


NR 7 in Nifty Weekly Chart

Nifty made a pattern of NR 7 in weekly chart. For the weekly, NR 7 represents, narrowest weekly range over the last 7 weeks. The NR 7 represents the contraction phase. After a contraction we expect an expansion. The key question is, "In which direction".

A move above the week's high at 4922 will suggest that the expansion is coming on the upside. Chart below:

Friday, October 7, 2011

trading with a gap open

Today should see one more gap open. Previous posts have discussed The process of trading a gap open. The same process can be used to exit short positions. Wait fair a specified period of time - 15 minutes to 45 minutes. Then, identify the high and low of this period. If the Nifty crosses the high, short positions should be closed immediately. If your system demands an immediate exit at the open, then follow your system.

What about traders who are long? The same process can be used to decide on an exit. If the nifty goes below the low, you may consider exiting, wholly or partially.

For new positions, same rules apply. First, decide on your view. Do you have a bullish view or a bearish view. Then take a position on a breakout or breakdown.

Thursday, October 6, 2011

Silver Pushes against Resistance

short term charts for Silver suggest interesting possibilities for a trade. Currently, prices on the 180 minute chart are pushing against a resistance line - around 53,000. If prices do cross this resistance, buying is possible on a dip with a stop around 51600.

An unusual continuation pattern in the Nifty

A continuation head and shoulder pattern is a rare pattern. Normally, head and shoulder patterns are reversals. Rarely, we have a head and shoulder which is formed in the middle of a trend. The Nifty has made a bearish head and shoulder pattern inside an ongoing downtrend. Here is the chart:

Nifty-daily-oct5-11

The neckline was violated for the past two days. We can assume a rally on Friday which is likely to push prices back inside the neckline. If prices go above the right shoulder, this pattern is cancelled. But, the right shoulder is far away, so a stop should be above 4880 – the is the high of the day which was completely above the neckline.

Sudden Rally

While Indians celebrate Vijay Dashmi / Dushehra, world markets are going dramatically up. Suddenly, in two days, Risk is back again. So far, it appears that the Nifty could open almost a 100 points higher tomorrow. That would certainly be a gain for traders who went long with a stop under 4750 – which is a significant support for the Nifty (see my previous posts).

But, what about trading tactics? The Nifty closed at the lows of the day (almost) on Wednesday. When an instrument is closing near its lows, remains in a protracted down trend, it is reasonable to expect traders to be and remain short in it.  Therefore, if you are following any trading method, it is likely that you were short over the holiday.

 

Well, the answer is: follow your rules. If you are short, and your rules require you to exit at a loss on Friday morning, so be it. There will be many days when the same discipline will fetch profits.

Nifty at 4750

In the previous post, I had suggested that the Nifty is finding support at 4750. That view holds. The Index fell to 4750 four times in the past few days. There is now a thin line - 4750 remains support because it has been touched many times. IF it is broken, long positions should not be taken / should be closed.

There is a time to be old and a time to be bold

There is a time to be old and a time to be bold, but not a time to be bold and old | PeterLBrandt: "The time to be bold is when the markets are clear. The markets were clear to me. It was time to be bold — in trading and in the narrative of this blog.

I am no longer bold. The old adage prevails — when in doubt, get out. I feel no obligation to always have an opinion or a position. I have made this fact clear. Classical charting principles do not always measure a market."

These lines from Peter Brandt are a gem of wisdom for each trader. When our charts are clearly giving a trading message, we should be bold. If the charts are not clear, then take it easy. Equally interesting is his statement about classical charting principles. Sometimes, market environment may change (for the trader) while charts may not reflect that change. So, be conservative at such times.

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Wednesday, October 5, 2011

Afternoon review

The Nifty remains in a downtrend - this much is obvious. For the position trader, there is only one trade - look to hold on to short positions or sell on rallies. For the swing trader, the Nifty is providing some sense of receiving support around 4750. If this support holds, an upswing is possible. The first sign of support will come if nifty trades above today's high. This can be possible only on Friday, since. tomorrow is a holiday.

Any move below 4750 will be considered as a continuation of the downmove, therefore, should be sold into.

Nifty - Long Term View

A weekly chart for the Nifty shows the possibility of a major breakdown below 4500. There is a sharp rally in 2009 between the Nifty level of 2900 and 4540 approx. This vertical rally pushed the Index up quickly. That was great. But, now, on the downside, the straight line rally does not have any support levels, so there will be no defense if the Nifty begins a decline below 4500.

The area between 4500 and 4700 should provide a fair amount of support. I do feel that eventually, the Nifty should go below 4500, but that is  perception. Even if this event happens, we can expect a fair amount of movement inside the 4500 - 4800 zone.

Chart below:

Tuesday, October 4, 2011

Higher High - Higher Low pattern in CNX IT

CNX IT Index is making a pattern of Higher Highs - Higher Lows. This pattern is an indication of relative strength in the index, compared to the broad market.




Bear market shows its strength

The bear market is very much alive and kicking. This is the message we are receiving time and again. This blog has been consistently asserting that Indian markets are in a cyclical bear trend. A possible pattern target has been identified around the 4000 level in the Nifty.

My advise to investors is to have patience. While long term investing is possible at current levels, most investors will gain by waiting for this bear market to end.