Thursday, July 26, 2012

Symmetric Triangle Pattern in Silver

Silver is forming a Symmetric Triangle Pattern in Daily Chart. A symmetrical triangle is simply defined as a technical pattern forming a triangle from a descending resistance line and ascending line of support. Since silver is in a very tight range, so traders must wait for a breakout to trade. Below is the chart of silver;

Tuesday, July 24, 2012

Identifying Contraction

There are no set rules for identifying contraction but some properties are available, that indicates or suggests that the contraction may start;

  1. When prices are far away from MA
Suppose a stock have in a strong uptrend in EOD Chart. In 60 min chart, if the 20 period MA is far below from the prices then there is a strong chance to begin a contraction.

  1. After a rally of 30-40% in Stocks and 20-25% in Index
Prices have a tendency to trading in a range after a rally.

  1. When volatility are its low
A high volatility in a stock suggests the movement will be more and a low volatility suggest the movement will be less in price.

  1. When volumes are decreasing
Decreasing volumes in a stock suggest that the interests of traders are coming down in a particular stock. This will lead a less movement of the prices and a range may visible.

This post has been adapted from a  presentation by Mr Sunil Miglani, made at ATA on July 14.

Trader vs. Analyst

There is a big difference between an Analyst and a Trader.
An analyst tries to be correct on his call whereas a trader should think about profit only.
Analysts study industries, companies and economic conditions. Traders study price and could care less what company the price represents.
Analysts are paid for being right. Traders are paid for managing risk. These two skill sets are a world apart. Most of the people who try to be traders by being analysts usually lose their grip at both ends of the rope.
Peter Brand Blog

Monday, July 9, 2012

Buying at Support

As traders we are aware of the concept: Buy at support, sell at resistance. This is a fine idea as far as theory goes. We also know that this concept works well when (a) markets are in a trading range (b) markets are in an uptrend in which case prices should bounce off support.

Then again, Support will be broken if the Market decides to go down. This can get confusing. When does the market hold support and when does it break down from support?

Like most other technical methods, there are no straight forward answers to this question. A lot depends on the context, the current market environment, short term and long term. Finally, it is about probability. Not all buy at support decisions will work out. Enough should work out to justify this theme as a trading method.

I am discussing this concept today because the Nifty came down to 5270 support. Should we buy here?  There is no certainty that a buy will make money tomorrow. But, we did buy, and, this trade was discussed on CNBC at around 3 PM.

There were two reasons to buy: First, Nifty was standing at a well recognized support level, and, we are in an uptrend. Second, there were two days of declines. Again, if we are in an uptrend, then a bounce is possible. If the market opens weak tomorrow, we should be exiting without delay. The actual decision will depend on the open.

Readers are welcome to provide insights into the concept of buying at support.

Sunday, July 8, 2012

Hitting the Bulls Eye

The title for this post should be "How Sachin hits a sixer on every ball", but bulls eye sounds a little more professional.

SantoshG asks the method for identifying two stocks that will likely gain 10% the next day.

This is like asking Sachin to hit a six with every ball he faces in his cricket games. I have two points:

First: Why should Sachin hit a six on every ball? His career is one of the best in the world of cricket. That does not mean he has to be a superman.

Second: The expectation then is that Sachin will not get out. We expect the Master to keep on hitting six after six after six, because if he gets out that will prove that he is not a good cricket player and we all know that he is a good player.

Now I come to the method of identifying two stocks likely to move 10% the next day.

We cannot predict how Sachin will play in the next game. So, also, we cannot predict which two stocks will move up tomorrow.

We can predict that over a period of time, Sachin will play the best game among all players. So, we can predict that over a period of time, stocks x,y and z will outperform the market.

But, tomorrow? On a day to day basis, outcomes cannot be guaranteed.

So, we should go with market flow.

Saturday, July 7, 2012

Trading Journal Example

Jitender Yadav, who often contributes through comments in this blog, has kindly shared some charts which he uses to maintain his trading journal.

Friday, July 6, 2012

Trading one side of the Market

My post titled Do you need to hedge your trades has evoked many thoughtful comments from readers. All the comments are worth reading.

Dinesh Rishi says
 "In some of your posts you have mentioned that you trade only one side of market.

Plz explain something

"about one side trading" 

My Notes:

Traders should be aware of the trend. Most of our trading should be done in the direction of the trend. In fact, we do not have to do anything. Our trading setups should give us only those trades which are with the trend.

However, markets do move in both sides - up and down. Often, traders will feel that there are trading opportunities which are against the trend. Such opportunities should be ignored. We should decide the direction in which we want to trade and then stick to it. For intra day traders, a vie should be taken at the start of trading and for that day trades should be done only in that direction. This is a flexible concept. The trader may take a view that he will trade a breakout or breakdown from the first 60 minutes range. Here, he is not having a predetermined view, but is asking the market to give a trend. That is fine.

I feel that buy and sell trades should not be taken in any one trading session because this reflects a confused mind. Again, there will be rare exceptions, but the general idea is to have a view on the trend, then go on that side.

Thursday, July 5, 2012

Do you need to hedge your trades?

Nivas asks: "You have always advocated to go with the trend does this mean one can take unhedged positions. I always tend to buy some puts to hedge my longs even on a uptrend. Willing to change my strategy. Your thoughts."

My Notes:

A layman reading the above comments will feel that an 'unhedged' position is a terrible place to be in. In reality, all positions should be straight forward, in the direction of the signal, without any hedge. When the trader gets a signal, he should just take it. 

We should manage our risk by position sizing. If we want to take less risk, decrease your quantity. If the signal is to buy, what is the purpose of taking a short position through puts, for example?

Wednesday, July 4, 2012

Accepting that it did not work out


The Quitter Always Wins

Failure means that you have to quit doing what you’ve been doing and do something different. Doing something different is an amazing thing. It allows you to really think deep at what you’re currently doing and how the next step is going to be better than before.

Tuesday, July 3, 2012

A trend that continues

It is the nature of trend to make significant thrusts (in the direction of the trend), then pause, consolidate, even correct, and finally resume the advance by another thrust.

When the trend pauses, a natural question arises: is this a correction or a reversal? As traders, we must always believe that the trend is our friend (this sounds like a filmi dialog, but it is true). We must always assume that the trend will continue unless proved otherwise.

If the trend resumes with a breakout from the existing consolidation, new highs should be within sight. Finally, there will come a breakout, which will fail to reach its targets, cause volatility to increase and eventually make lower highs, lower lows, on lower time frames. This will be the first sign that a real correction is starting.

Monday, July 2, 2012

Should I trade a correction?

Corrections are moves against the main trend. Since trend following makes money, it follows that trading in the direction of the main trend should make money. When the trader gets a sense that a correction is starting, then trading should be stopped since trades in the direction of the main trend may no longer be profitable.

It is wise to step aside and let the correction take its own course. There is no sense in trading with the main trend when prices are moving against it.

But, should we trade in the direction of the correction? The answer is: do not trade the correction, initially. If a pattern of trend continuation develops (lower highs, lower lows), then it is possible to trade the correction because the main trend itself becomes uncertain.

To relate these ideas with the current scenario: we may well start a correction soon enough. Traders should avoid short selling until a pattern develops that indicates lower levels are coming.

Sunday, July 1, 2012

The Power of Leverage

Investopedia defines leverage as "The use of various financial instruments or borrowed capital, such as margin, to increase the potential return of an investment."

" Leverage can be created through options, futures, margin and other financial instruments. For example, say you have $1,000 to invest. This amount could be invested in 10 shares of Microsoft stock, but to increase leverage, you could invest the $1,000 in five options contracts. You would then control 500 shares instead of just 10."

Traders understand the power of leverage very well since it is the use of leverage that can provide above average returns to traders. But,leverage is a double edged sword.  Just, as it can provide above average returns, it can also provide rather quick destruction of trading capital.

On last Thursday, I had taken bullish positions in the Nifty, a position which was explained repeatedly over CNBC, so I will not go into the explanation. Most of the positions were in 5100 July calls. Some were in 5400 calls. As it happened, the 5400 calls were sold on Friday at more than double the cost. That's leverage working in our favor. IF the market had opened even slightly lower, the calls could easily have become half of their cost. So, a 50% destruction of capital was possible, rather quickly.

The 5400 calls were only a percentage of the overall bullish position, and, we had to accept the real possibility that the calls could result in big losses. Hence, their volume was controlled.

My point is: As this up move continues, traders will find many opportunities of leveraging their trades to obtain larger gains. They should do it. But, understand the risk, always.