Wednesday, November 30, 2011

Nifty ready for an upmove?

Just as Indian Markets closed, there came a news flash on the TV screen saying China had cut down its CRR for banks. This triggered an immediate rally in Europe as well as in US futures. It seems reasonable to expect Indian markets to open higher tomorrow, probably moving above the 4900 resistance.

A close above 4900 will give targets of 5150 on the Nifty. If this comes about, we will be seeing an intermediate up trend. Momentum will be on the side of buyers. All of this is scenario building, but such scenarios help in making trading plans.

What can go wrong? The nifty rally may stall around 5000, where we have significant resistance. Or, tomorrow may be a one off rally day, after which the market could retreat back inside a trading zone.

How do you trade this big gap up expected tomorrow? I request readers to give their views thriugh comments. Sharing helps everyone.

Does blogging help in trading?

Gopal asks an interesting question :" Can you cut your losses by giving regular insights on this blog? Thanks,"

I think the question is: Does writing a blog improve trading performance?


Sharing always helps the person who shares. This is a philosophical concept, very much valid in real life.So, writing a trading blog, sharing my views, knowledge, thoughts certainly helps me become a spiritual person.

But, does it help in trading? 

I would say, yes. Quite often, my thoughts become clear when I am writing them. Often, ideas that have been forgotten, emerge. Then, I learn every day, from the comments that come in. (Readers are encouraged to write more comments. The advantages of writing a blog will also come to people who write comments. Both are read publicly).

There a big downside, however. If I give a technical view with specific targets that often becomes a problem. See, markets can do anything. Therefore, what I write today may not be valid tomorrow due to market action. Earlier, this used to trouble me. I felt that I was letting down my readers. Now, I recognize that most readers are smart enough to understand that I am only a messenger, the Market is the boss. So, this has been less of a problem recently.

This discussion finally leads to a conclusion: The blog is more like a trading journal. It helps the trader, and, offers some insights to readers.









Tuesday, November 29, 2011

Low Risk outperforms High Risk

On CNBC, I have said this for the past 11 years: Always go for blue chips. Keep risk at minimum. Be a conservative trader. The reason is simple: Low risk is more profitable than high risk.

Now, Engineering Returns  - says that "Low volatility (low risk) outperforms high volatility (high risk) on an absolute as well as risk adjusted basis.". Read the full post Here.

Surely, this is common sense. Let us talk about a person crossing the street. The person can cross at the zebra crossing (low risk), or he can cross the street at random (high risk).  What will you do?

The study referred above suggests that stocks that have high volatility are not always profitable in trading. Stocks with low volatility, outperform the high volatility stocks. Again, let us take some practical examples. High volatility stocks include VIP Inds, Educomp, Sintex, while a low key, low volatility stock example is Hind Unilever. It is no surprise to find that Hind Unilever has outperformed the Highly volatile concept stocks.

Divergence Trading

Most technical traders know about divergences between indicators and price charts. A bearish divergence comes about when prices make a new high but indicator fails to do so. Bullish divergences require prices to make new lows with the indicator failing to do so.

The novice trader will find divergences on all types of charts. She will observe prices rising but the RSI (for example) remains flat and makes a lower high. The text books will describe this as a bearish divergence, so the trader goes short. Much to her dismay, she finds that prices continue to rise and the indicator continues to make lower highs. So, the trade starts losing money. Most traders have had similar experiences with bullish divergences where prices continue falling while the indicator rises.

The divergence by itself has little technical significance. Yet, the pattern can be helpful in ascertaining the strength of another technical setup. Here is an example. Assume that prices are in a trading range. Price moves up and comes close to the top of the range which should act as resistance. But, it is also possible that prices may breakout from the range and enter a new trend. If the trader sells near resistance and finds that prices are breaking out, she faces an unnecessary loss while finding herself on the wrong side of the market.

Here, a bearish divergence between prices and indicator can suggest that prices have a stronger probability of retreating from resistance. The resistance zone warns that prices may retreat. A similar message comes from bearish divergence. This leads the trader to go short near the resistance area.

Divergences can be useful in cases where loss of momentum can confirm another technical pattern.

Better late than Never

I missed out on writing the blog for a few days. then, I felt embarrassed at the absence and awkward in starting to write again. Therefore, more days elapsed, so more embarrassment and more days.

To break this cycle, I am writing this post to say that maintaining this blog is one of my favorite tasks each day. Not writing is my loss.

The Nifty

The Nifty has seen a spectacular decline and now seems to be making a trading range. Markets go through cycles of expansion and contraction. We saw the expansion process when the Index fell from 5400 to 4650. Now, we are probably in the contraction process.  It seems that a trading range between 4700 and 4900 may be developing. These boundaries are tentative.

 

Now, trading inside a trading range is NOT a profitable proposition. There may be day trades, or trades that sell at resistance and buy at support. Except these methods, trying to catch a trend when inside a trading range is a losing proposition. The trend can reverse many times inside these boundaries.

Wednesday, November 16, 2011

How to catch falling knives - Don't Try

Lakshman wants to buy Auro Pharma while Srinivas asks if VIP Inds justifies a buy after its severe decline.

All of us love a bargain. If a product worth Rs 100 is available for Rs 50 then surely we will try to buy it. Therefore, when a share falls from 560 to 280, we tell ourselves - here is a share available at half the price - surely it is a bargain, let us buy it for the 'long term'. Please continues reading, since this is a real life example. After we buy the share at 280 we wait for the 'long term'. Then, in Nov 2011, the share price falls to 29. Yes, twenty nine. The share I just described is Bajaj Hindustan. The company makes Sugar. It is respected in the business, so it is not a scam. But, share prices have their own logic.

When share prices are falling rapidly, there is a strong desire to buy the share since 'it cannot go down much more'. As buyers have realized, share prices can, and, do go down lower than we imagine.

When we try to buy in a falling market, we are trying to catch falling knives. If we catch the knife, we will own the knife, but if we get hurt while catching the knife, we may be in deep trouble. So, why try to do so?

The only reason to catch falling knives in the market is: inside knowledge. If you have in depth knowledge of the business, then you have some kind of inside knowledge. But if you are basing your decisions on information based on TV, Newspapers etc.. then you have no edge over the people who are selling the stock. What makes us feel that we are wiser than those who are selling now?

Sometimes, prices fall, then suddenly reverse and rally sharply. This is called a V reversal. Such reversals are unpredictable. Traders should not try to catch these sudden, violent moves. Trades that emerge from accumulation or distribution are much easier to manage.



Intraday trading

Srinivas asks:
Which time frame graph is suitable for intraday as well as positional trades for index and specific stocks?

My Notes: For Intrday trading, 5 minute or 15 minute charts should be suitable. For positional trades, the end of day chart should be used.

Sudhin asks:

Is Tata Steel forming a H/S pattern with a probable target of 280?
Also where could I get the historical PE for individual stocks.

My Notes: I could not determine such a pattern. Tata Steel is at lts lows while a head and shoulder pattern is ideally made at an intermediate top. To me, it was easier to identify a trading range for tata Steel between 400 and 500. A breakdown below 400 will suggest pattern targets of 300.

amarjeet says:
please explain why u r bullish on hind uniliver .because now it makes domed house chart pattern.i am bearish on.

My Notes: HindUnilever is making life time highs. That's bullish for me. I turned bullish when it crossed 300 which took the price into unchartered area. It will certainly have corrections and dips, but the long term trend has just turned up, may, have more upside.

Sudhin on Inflation and Stock prices
My Notes: please read the comments by Sudhin on link between inflation and stock prices. I hope readers will be able to answer his question through their comments.

Rohit on Nifty breakdown:
Does that indicate that we will make new lows? if yes then will the decline be fast and furious?

My Notes:
Yes, my sense is that the Nifty will make new lows for the currernt bear market. Fast and Furious? Cannot say.

Tuesday, November 15, 2011

Nifty: Trading range Breakdown

On Nov 11, Friday, the Nifty closed below 5200 signalling the possibility of a breakdown from an ongoing range between 5200 and 5350. On Monday, yesterday, this breakdown was vonfirmed as the Nifty went through  bearish trend day and closed for the second day, below 5200.

Pattern targets for the decline are 5050 / 5000. The trade has a stop loss of 5230 which was Monday's high.

It does seem that the intermediate uptrend is probably over. This means that the bear market has resumed its downward march.

Saturday, November 12, 2011

Expectations from trading - contentment

An exellent blog post on the expectations from trading is available at Carl Futia's Blog. Readers MUST read this post in full.

Some Excerpts are:

I have been in this business full time for nearly 30 years now. I have known many traders. The majority of them were only in the business a relatively brief time. Most of these left because they lost money but some left because, even thought they were making money trading, they couldn't stand the constant frustration traders experience.
...............

So as a practical matter you should count yourself fortunate indeed if you consistently capture a small part of any given market swing.
................

There is much more. Go to the blog and read the post, not once, but over and over again.

Friday, November 11, 2011

CNXIT–A Look at charts

Rushabh Shastri said...
its out of this subject But somehow IT index dont look encouraging at current time, bulls need some more confirmation it looks targeting below 6000 cnx it.

My Notes:

The CNX-IT Index had a strong up move. There are signs that this up move may be coming to an end. I am giving the chart for CNX-IT with my notes on the chart. The Notes are explained in detail, here.

CNXIT-NOV9-11

 

1. A pattern of lower highs is possible given weakness in the markets. The fIrst high was at A. After a correction at B, prices have moved up to C, which remains below A. If prices remain below the high of C, then we will see a pattern of lower highs. Once price goes below B, the lower lows pattern will also kick in. Remember, this has not happened yet.

2. A short term sell signal came in when the short term moving average (dotted line) moved below the intermediate average. That signal continues, so short term traders should look to sell on rallies.

3. the TA-Insync, an advanced momentum indicator has broken down from a 6 week support area suggesting weakness.

Traders Summary: The short term trend is down. The intermediate trend remains up but has the possibility of breaking down. Aggressive traders should follow the short term trend managing their volumes and risk. Conservative traders can wait for the charts and the indicators to give the same signal – both should be bearish or bullish.

Thursday, November 10, 2011

Stop Loss and other issues

Pratik Mukasdar said...

Sir a very important part of trading is putting stop losses.
How should one keep a stop loss?
Should it be a rupee a stop,near a resistance/support level
or keeping in mind the risk reward ratio ..Sir pls explain

My Notes:

Stop Losses come in two types:

First, a catastrophic stop loss. This represents the maximum loss that you are prepared to suffer in the trade. This is the ‘last resort’ stop. Suppose you risk a maximum of 1% of your trading capital, in any one trade. Then, for every trade, you have a catastrophic stop at a level where you lose 1%. Such stops should be triggered only rarely.

Second, a ‘trade is not working’ stop. This is a stop that is actually useful. AT some point in your trade, you get a sense that the trade is not working. That point should act as a stop. Since the point of ‘not working’ will be different for different traders based on their entry rules, this stop loss is personalized. Each trader will have his or her own level.

If you have entered a trade based on higher highs / higher lows, then the breakdown from a previous low will be your exit signal. If you have entered based on the MACD buy then a reversal of the buy or even a divergence could be your exit signal.

My point is: Exits are different for each trader and different for setups.

 

ramprasad said...
dear sir,
COULD U PLEASE EXPLAIN ME FIRST 15 MIN RULE WITH AN EXAMPLE PLEASE.

My Notes:

Please do a search of my blog and you will find many posts that give this answer.

 

rocky said...
How to develop a view on markets each day before we actually start trading

My Notes:

Use the end of day chart to determine the short term trend of the market. You should have one of three choices: up, down or choppy.

In the morning, check out overnight markets, pre market rates (SGX Nifty for example) and news, if any. Correlate the eod trend and the pre market indications. If both are similar then you expect a satisfactory trading day. If they differ, then expect choppy market conditions.

Kuldeep.rk said...
Dear Sir,

People like me, who are big fans of yours & follow your guidelines but working people, do not get a chance to see CNBC during market hours. Most of the times, we do some swing treads in NF, based on own analysis backed by your kind words.
Request you not to stop updating NF & other trades on this forum, which really put value in our trades.

My Notes:

Thanks to Balu for a proper response to Kuldeep. This is what Balu writes:

Balu said...
@Kuldeep.rk

You can find all views by sudarshan on cnbc here

www.moneycontrol.com/technicals

(technical outlook)

Wednesday, November 9, 2011

Trading as a Business

Most professional traders understand the need to treat trading as a regular business. For a Business venture, the needs are:

1. Capital

2. Understanding of the business

3. Management of risk

4. reasonable expectations of return

These are the principles that should be applied to the setting up of trading as a business.

More on this topic, soon.

CNBC: I appear on CNBC at frequently during the day, starting from 8.15. Since I discuss my Nifty and broad market views extensively on the channel, I plan to discuss other relevant ideas in this blog. Readers are welcome to ask questions on the Market.

Monday, November 7, 2011

Gold at New Highs

After a brief correction, Gold is hitting new highs.  The message is: Strong trends persist for a long time. Sure, there will be corrections in between. Quite often, trends will surprise us. This seems to be working with Gold. For a few weeks, we had sharp dips, and sideways movement in the metal. That eventually gave way to a resumption of the uptrend.

Is the Nifty going the same way? This question cannot be answered easily. We have to answer a question: which trend are we talking about? The bear market or the recent up move. Answer to this question leads us to the concept of multiple time frames. The bear market covers a large time frame, while the recent up move refers to a lower time span. For swing traders, the time frame and the current trend will be different from the two time frames discussed above.

Tuesday, November 1, 2011

Return of Common Sense

WIll Europe allow its economy to be devastated for a Greek loan of US8 billion? The obvious, common sense answer is: certainly not.

Markets will go up and go down. For many reasons, traders will be bearish / bullish and so on. But, the end of Europe should not be a reason to become bearish. Because, Europe is NOT coming to an end.

European and American markets have just seen the best month for bulls since 1987. Surely, markets will consolidate, become choppy, go through dips after such a spectacular rally. That should be a reason to expect a decline of sorts. But, Europe coming to an end: No way.

ABAN is showing some strength.

After a decline of almost 390 points, the chart of ABAN shows us some strength in the stock. First the stock saw a decline of almost 390 points. Then we say a consolidation between 373 – 417 for a period of almost 4 months and now it breaking up from its resistance. All this suggests a decent rally in ABAN is possible(see the chart below).

Mid Cap Wake up call?

I am pleased to inform readers that I will be seen on CNBC starting today.

Two mid cap stocks that should be kept in mind for trading as well as positions are: Dish TV and Motherson Sumi. Both shares were relative outperformers before the current crash when the mid caps were crushed.

Now, mid caps charts are suggesting breakouts after a sharp correction. While the broad market trend will determine if these breakouts move further up, it is time to focus on the strong performers, look to buy on dips.

I have no positions in either of the two stocks.