Thursday, December 29, 2011

Managing a Position Trade

A position trade tracks the intermediate trend of the market. It follows that the trade should continue while the intermediate trend remains in place. But, trade management does not always blindly follow the trend. A number of exit rules may be built in, which are necessary for proper money management.

A position trade that I took for the Nifty was based on these rules:

1. I am expecting a move down to 4000. I will consider exiting once prices come in the 4000 - 4200 zone. this is my profit target.

2. Because I am looking for a large profit, I have to give a fair amount of room to the trade, accepting a number of counter trend rallies while the main trend remains down.

3. If I have clear signals of a rally, I may consider closing my positions, only to restore them after a rally or after a failure of the market to rally. In the first case I will make a small trading profit while in the second case I will have to reenter at a lower price. Since I am prepare to restore my closed position, I consider that I am in the position trade even when I may have actually closed my position partially.

4. My positions consist of mid month Puts.

My notes on these rules: I actually closed most of my positions at the close at 4560 - almost at the low of the swing. These positions were restored when the nifty crossed 4700. The reason I closed my positions was the relentless decline in the market day after day. Finally, 60 minute charts were giving large positive divergences at 3 PM.

A Position Trade

As swing traders, we keep on taking  trades which are in harmony with the short term trend.  These trades last from a few hours to a few days. However, the market is controlled by the larger trend. It is wise to maintain a position that goes with this larger trend. Such a position is called (by me) as a Position Trade. These trades will last for weeks to months, although I may enter and exit a few times while the larger trend is continuing.

As of now, I have a Position trade in the Nifty which is a short position, taken at 5200 and then added to at 5000. The stop loss for this trade is currently at 4800. The trade continues, since the Nifty has not yet closed above 4800.

As time goes by and new patterns form on the end of day Nifty chart, the stop or even the basis of the trade may change.

Wednesday, December 28, 2011

Gold is a big story

A sharp decline in Gold prices has been the big story in the last fortnight. Prices have fallen from 1700+ to 1570 and the intermediate trend has turned down. The impact of lower prices has been subdued in India, thanks to the sharp devaluation of the rupee. But prices have fallen.

In daily charts, Gold has been making a pattern of lower highs and lower lows - confirming a down trend. So far, this pattern continues, traders should stay away from buying.

Tuesday, December 27, 2011

Welcome to a New Year

The year 2011 has been difficult for traders as well as investors. investor saw significant erosion in values of their portfolios, while fresh opportunities for investing were absent. For traders, the year saw a series of small trends interrupted by counter trend moves. Small trends are difficult to make money. What then is the possible scenario for the New Year - 2012? When we look at long term charts of the Nifty, we see the scope for further declines. While markets will do what they will do, it does appear that the recent low of 4530 may not be the final low of this bear market. At some point, the markets will bottom out. But, that point is not within sight.

This is what 2012 could look like: 

Trading will continue to attract the best minds in business, because of the intellectual challenges, mental satisfaction and independence that the profession offers. 

Markets will bottom out in 2012, after which a new bull market will start that may last for several years. 

High Frequency Trading Systems will dominate scalping, but individual traders will dominate all other time frames including swing trading which lasts for a few hours to few days. 

A number of stocks will never revive from their bear market. 

Gold will continue to be in a bull market after a deep correction, while silver bulls may remain disappointed during the year.

Are cash stocks bottoming out?

Any number of small cap and mid cap stocks have seen catastrophic losses. A question crops up: have these stocks seen their worst? VIP Inds has fallen from a high of 205 to a low of 73.5 in 4 months. GMR infra has fallen from a high of 94.75 to a low of 17.4 in 30 months. Titan has fallen from a high of 238 to a low of 154 in 4 months. Suzlon has fallen from a high of 145 to a low of 17.45 in 30 months. Similar stories can be repeated for many other mid cap / small cap stocks.

The question comes up: have these stocks seen their worst? Are they ready for a rebound now?

My Notes:
The bottoming out process in share prices is fairly easy to determine. Prices stop falling. A small rally comes about. The test of a bottom comes when a new decline starts which does not make new lows. This is the first sign that prices may have bottomed out. Smart traders can begin accumulation even before the last high is crossed.

We have started seeing small rallies in many beaten down stocks. These rallies will be followed by declines which should not make new lows. That will be the first sign of bottoming out.

Some fundamental inputs are required to ensure that we do not land up buying poor quality stocks. Many of the current fallen angels will never go up. Thus, I always stay with the blue chips. This is a decision that each investor must take on his/her own judgement.







Monday, December 26, 2011

Winning a lottery

Rajiv Malik points out a link which explains how to make rs 60 crores with twenty thousand investment (in the market, I assume. I did not read the link, just Rajiv's comments). Balu points out that it is possible since lrry Williams and his daughter have done it.

Yes, of course, in this market anything is possible. But, I do not believe that Larry started his trading competition with the objective of making a million dollars. He joined a competition, in which, he did well to make a million. Please remember that Mr Williams did not replicate this achievement again.

When you buy a lottery ticket, somebody is going to win the lottery. Does this mean if we buy lottery tickets after detailed examination of the numbers etc.. we will be able to assure a win?

While the lottery is not an exact comparison with trading, making 60 crores (600 million) from twenty thousand is almost like winning a lottery. While it is possible, I would not expect such an outcome in trading.

Why this mild bullishness?

For past few days, I have been suggesting on CNBC, that markets should see a rally, therefore day traders / short term traders should be positioned on the long side.

In this post, I will share with you my reasons for saying so. We saw a deep and sharp decline from 5200 to 4531, The Nifty bounced back from its 4540 lows with a gap up, on wed, Dec 21. This decline will see a correction, which started when Wednesday saw a gap up.
To me, the first resistance came at 4640 which was taken out on the gap up. Crossing of a resistance level gives a short term buy trade. The next resistance is at 4800-4840.  While markets will do what they want, for short term traders, the trend is up while the Nifty remains above 4640.

For the past three days, the Index remained above the lows created on Tuesday, at 4531. We now have a swing low. If the Nifty goes below 4531, there is a clear, sell signal coming in. An earlier sell comes in at the break of 4640. So far, the index remains above this number, it has the potential to continue with this corrective rally.

Now, corrections are difficult to trade, so traders don't have to take these long positions.  They can wait for this rally to exhaust itself and then take short positions as the bear market resumes.





Friday, December 23, 2011

Quiet markets may be ready for thrust

Quite often, a sleeping market is actually giving a message - an expansion in prices is coming.
For the past two days, the Nifty has been in a narrow trading range, almost sleeping. There may be a message here - that a thrusting move is coming soon. Thrusts are expansion which make prices move in any one direction. Expansion results in trend days or periods which are the basis of most trading profits. Then, sleeping markets (like the one we saw for the past two days) are in fact good news for traders, since they suggest that an expansion is coming soon.

Wednesday, December 21, 2011

A rebound is likely

The Nifty closed at 28 month lows on Tuesday, December 20 (Yesterday). Today, thanks to a 3 percent rally in American markets, the SGX is suggesting a 2 percent higher open for the Nifty. It is quite likely that the market may be in the process of starting a rally.

 

The primary trend is down – we are making lower lows and lower highs. Yet, all primary moves will see secondary corrections against the trend. The market is likely to begin a minor uptrend today. Traders should look to participate in this up move, since bear market rallies can be quite sharp and swift. The easiest way to join the party is to use a trend indicator on your intraday charts. While the trend remains up – stay long.

Tuesday, December 20, 2011

It is a Book

Dear Readers,

 

My First book as Author has been published. It is available at www.visionbooksindia.com  . Please have a look.

Monday, December 19, 2011

Nifty continues in a downtrend

This blog has been fairly consistent in calling the currently ongoing bear market. Once, 5200 broke down on November 15, a trading range breakdown was confirmed. Since then, the trend has been down. There have been a few rallies, but these are more in the nature of random movements which occur in any trend.

The previous low of 4640  was expected to offer only minor resistance. On Friday, December 16, we saw this previous low broken with ease, and the Nifty closed at 25 month lows.

 

The message is this: Just as new highs are bullish, new lows are bearish. The Market is making new lows which is bearish. A pattern target of 4000 is available, using the recent price action. (A head and shoulder has broken down. Chart not shown today, I will try to post it later).

 

Worries: From 4600 to 4000 is not a difficult travel. It is just 600 points. We have already fallen from 5200 on November 15 to 4600 – 600 points in a month. So, we understand that another round of selling can take us to 4000 or close by. The worries are elsewhere. Are we looking at levels lower than 4000? Any number of stocks are showing long term breakdowns on their monthly charts. Quite possibly, I am wrong in my interpretation. But, as traders we should be open to the basic fact: The markets can do anything.

Thursday, December 8, 2011

Inside a Trading Range Again

The Nifty is back inside a trading range. A rally that started from 4640 is now over, with the Index moving into a fairly well defined range. Today's decline saw the Index define the range boundaries support around 4900 and resistance around 5100. This is a fairly wide range almost 200 points.

If the Nifty were to move below 4900, the range will breakdown with an initial target of 4700. A second possibility is for the Index to remain within 4900 and 5000 for a few days.

How do I trade this? Trading ranges are not easy to trade. Overnight positions can often result in losses since the market may open with gaps which go against the trader. The reason for such adverse gaps lie inside the trading range itself. Going with momentum, traders will often sell at levels which are support for the range. The support holds, hence a gap open which goes against the trader.

My own sense is to take day trades wherever possible and avoid carrying positions. All ranges will eventually breakout or breakdown. To take advantage of this imminent thrust, I often buy straddles when prices are inside the range.

Wednesday, December 7, 2011

Why overbought means higher prices

Mouli writes: On Friday (2nd December)when Nifty December Futures was around 5000 the stochastic and RSI was consistently above 85 and 75 respectively in 5 minute and 10 minutes chart and I went short at 5025, but it went till 5090. How to trade in such situations and avoid such mistake.

 

My Notes: It appears that you are new to technical analysis. Traders understand very well that overbought levels in momentum indicators are actually bullish when found in an uptrend. The trend is much more important than momentum levels. On Friday, the trend was up.

 

Anmol says:  i have beenreading your blog for last three years .it helped quite good in improving my trading.i also watch your recomendation at cnbc tv 18.three days back you had given apollotyres as making HS PATERN but i am unable to find its stop loss.kidly clarify

 

My Notes: I am giving the chart for Apollo Tyres which will show the pattern, with stop loss.  The initial stop is placed below the right shoulder. Then, once strong momentum is seen, the stop should be moved to the candle just preceding the breakout, which is shown for the second (subsequent) pattern. You should be aware of how the targets are calculated. Do a web search if you are not sure.

apollo-tyres-dec7-11

Technotrader says: Sir, have u have watched HOEC I think it is forming H&S at the bottom, huge increase in volume seen, indicators are also moving up and close above 135 with volume will confirm the pattern? Is is Ok sir?

 

My Notes:

 

Chart for HOEC given below, with my comments.

 

HINDOIL-DEC7-11

Tuesday, December 6, 2011

Trading with the Bulls

I can undertsand the difficulty for most traders when trying to take a bullish position. We have been in a bear market for the past 13 months. There have been significant rallies yet, the main trend has been down with the Nifty falling from 6320 to 4640.

Now, the market is going up. The key question is: Is this  bear market rally or is this the beginning of a new bull market?

Experienced traders will immediately realize that the question posed above does not have a reply as of now. The Index will confirm a new bull market when it closes above 5400 beginning a new pattern of higher highs. Since this event has not yet happened, there is no way to suggest that we are in a bull market.

Traders should attempt an answer to this question with another question. They should ask themselves: What is the time frame of their trading? If  you are a day trader,then the current upmove is actually a roaring bull market. If you are a swing trader (few hours to few days) then the trend is clearly up since intraday charts have visible up trend and bullish signals. If you are a position trader with time horizon running from months to years, then the trend has not changed to up. So, there is no rush to buy.

One way of trading with the bulls is to understand our time frames. If we are into short term trading, then the longish bear market is not relevant, which the current up move is relevant. A second point in trading with the bulls is to accept what the market wants to do. If your trading strategy is to buy dips in an uptrend, then you should buy the dips that are coming in now. Accept the wisdom of your trading signals.

Sunday, December 4, 2011

The Nifty Takes a View

A dull start to the day changed into a blistering rally after the first two hours of trading. In my earlier post, I had suggested that the nifty was at a point of decision. This turned out to be a good suggestion. The Index moved. up to cross 5000 and then 5050, all in half a day.

The short term trend is up, confirmed by price action which has seen a breakout of two seperate levels: 4900 and 5050.

Is this just one more bear market rally, or is this the start of a new bull market? This question is asked each time the market stages a dramatic rally. The answer is always: Let the market tell us. What we know is this: The Nifty is in a short term uptrend. If the Index retraces and the retracement makes a higher low, this will be the first sign that the trend is changing to up. Let us wait. Meanwhile, let the market show us where it wants to go.

Thursday, December 1, 2011

Markets at decision point

A breakout above 4900 was the highlight of today’s price action.  This qualifies as a breakout from the crude trading range setup between 4700 and 4900. So far, price action has been bullish. A minor setback for bulls came in when the Nifty failed to hold the highs established in the morning, and, closed near the lows.

The Market has two courses of action. First, it can confirm the breakout by moving above 5000. This should give a target of 5150. Second, it can disown the breakout by moving below 4900, effectively returning back into the 4700 – 4900 range.

Therefore, the next few days could show bring about some kind of decision – trend or range.

Standing in front of a running train

A big gap up (130+ points in Nifty) has come about for the Index. Traders who are long have the pleasure of seeing their positions in large profits. Yet, what about traders who are short? The Nifty short term trend will be up, after this gap. The Index has opened above 4900 giving a breakout from a 4700 - 4900 trading range.

If the trader has PUT options to catch the primary bear trend, then no action is required. Inside a bear market, there will be many upside corrections. The PUTs are a positional trade. But, Short term traders have to protect their capital. Going against the trend is not a good idea. Having a swing trading short position will be like standing in front of a running train. Not a good idea! Traders who are short should use the 15 minute range to exit. As I write this at 12:09 PM, this range has held. If prices go above the high of the first 15 minutes, close your short positions.

What about the trader who does not have any position? Since the trend is up, it is wise to go with the flow.Again, a dip to 4900 or nearby is the preferred location for going long.