Trading Steps

Going with the flow

2012-01-26T10:50:00.001+05:30

Traders should always go with momentum. If momentum favors the bulls, then we should stay with the long side of the market. It is not our job to question the wisdom of the market. We should have one objective - Go with the flow.

The Nifty is in an uptrend. The trend has been up since the Nifty moved above 4635, and, the Index closed yesterday at 5150 at a new 10 week high. The flow is clearly UP, therefore traders should position themselves on the long side.

This week on CNBC, I have explained that traders should maintain overnight long positions in the Nifty because the big gains will come in the gaps. There are periodz when the gains come on gap ups, then the market trades in a narrow rangw throughout the day. In such scenarios, day traders do not make money even though they may be positioned on the long side.

Can this long trade go wrong? Of course, anything is possible. The trade was taken at 5100, with a stop below 5050. This level of 5050 remains the point below which long positions will be closed.

Stay with your time frame

2012-01-24T22:49:00.001+05:30

My earlier post evoked a number of comments. many thanks for your thoughts. Since trading is more of an art it is possible for many of us to have different ideas to reach the same objective (profitable trading).

Once a pattern target is met, I believe it is wise to stay with the timeframe and wait for new patterns to emerge. While 'taking a rest' seems like a good idea, the hitting of a pattern target is not a stressful event that requires subsequent rest.

For the Nifty, the pattern that has triggered is visible: the Index has crossed 5100 which was a significant pivot high. New highs are bullish. Buying new highs also carries risk because a failure can mean the trader has bought at the top. But that is the way I trade: go with the trend. The trend is up, so look for opportunity to go long. Crossing a previous pivot high is such an opportunity.

Trading after a target is Hit

2012-01-24T18:19:00.002+05:30

A target of 5070 came from an ascending triangle pattern in the Nifty which broke out at 4800. This target has been touched and crossed.

The long trade started at 4800 should be closed when the target was met. What should a trader do now, after he exits the position? This question arises because the pattern under trade is now complete so new patterns/trades will not come quickly.

Among the various suggestions that come to me:

1. Take a well deserved rest.

2. Start a search for new patterns, in different time frames.

3. Stay with your time frame , be alert to any new patterns that develop.

4. Switch to another trading method, i.e. from patterns move to moving average crossover or RSI levels.

What do readers say?

Reaching the pattern targets

2012-01-19T20:31:00.001+05:30

An ascending triangle identified on the Nifty a few days ago has now touched 5000+, within distance of 5070 which is the target for the pattern. Once the target is met (if), Nifty chart will be open for development of new patterns.

But,

The fact that an ascending triangle developed at the bottom of a bear decline carries some significance. After all, an ascending triangle is a bullish reversal pattern. We can only guess on the nature of reversal - short term or long term? since the triangle developed on the daily chart it's targets were modest. Therefore, it should carry short term significance. We should continue to assume that the short term trend is up until proved otherwise.

What happened to the bearish wedge? This pattern is now in danger of changing it's shape if there is any more rally in Nifty prices. It could then become a regular up channel which would have a different meaning a altogether.

To sum up: the short term trend is up. A reversal pattern is required to change this trend.

Nifty patterns revisited

2012-01-18T13:42:00.001+05:30

In an earlier post, I had pointed out two different patterns in the Nifty –First, an ascending triangle which was already confirmed, giving a target of 5070 approximately, and, second, a bearish rising wedge which was under construction.

After I wrote that post, the Nifty has continued to move up, which touching 4970, up from 4800 which was the breakout point. It is anybody’s guess if the targets for this pattern will be achieved. The stop for this trade is 4800 – breakeven. Short term traders cannot have such a wide stop, and, they must manage the trade with their risk management principles. I have closed the long trade at 4970 approximately. I am a short term trader, therefore, my risk profile is also designed to take minimum risk.

I am giving below the Nifty chart with both the patterns separately identified. Thanks to the sharp rally on Tuesday, the resistance line for the rising wedge has to be redrawn.

I am Never Sure

2012-01-17T09:18:00.000+05:30

I have been suggesting remaining long for the past few weeks. This does not reflect any bias towards the bulls, it is just my reading of he charts. Th Nifty continues to hold support levels, breaks out from consolidation, keeps making higher lows - these are the signs of an uptrend.

Am I sure that the market will go up? This is the question that shabsaif asks:

"R u sure this time , your bullish call on NIFTY, there is any chances to fail again.

Last many days , you had been speaking on TV that you are bullish, today also again you said "Indian Market outperform"

So when NIFTY will touch 5000 or may be not...please confirm..Thanks"

My Notes:

I am NEVER sure of any move. How can I be? If I were sure then I would be like the great Lord. And, that is not so.

Trading works on probability. We have a number of trades, some of them make enough money to provide a net profit. Traders never know in advance the trades which will make money.

Different patterns in the Nifty chart

2012-01-15T08:47:00.001+05:30

The end of day chart for the nifty is showing three different patterns, with opposing implications.

First, an ascending triangle in the Nifty has been confirmed when prices broke out above the horizontal resistance at 4800. A pattern target is set at 5070. If this actually does work out then later when stock market history is written, this pattern will be identified as the start of the new bull market. If the pattern fails, then it will be consigned to the dustbin of failed patterns, forgotten.

Second, the current rally in the Nifty is taking the shape of a rising wedge. A rising wedge is a bearish pattern which comes about half way in a downtrend. Assuming the downtrend started from 5100 and continued till 4530, the half way points are 570. Then, a breakdown is the wedge, around 4750 should lead to a decline of 570 points, giving a downside target of 4180.

Third, a symmetrical triangle as broken out on the upside. I am not a fan of this pattern, since it has a large percentage of failure. So, I am not looking at this one.

The question is: will the ascending triangle meet it's target or fail? We will find out in the next few days.

What does an NR7 suggest?

2012-01-11T21:08:00.001+05:30

Nilesh points out that today was an NR7 day for the Nifty if Saturday's truncated session is ignored. He says that the dollar index is moving up, which taken with an NR7 should lead to a big move on the downside.

My Notes: NR7 days are signals of indecision. The market is undecided on it's next course of action. Since any active market cannot be undecided for long, an NR7 actually tells us that a big move may be coming which will emerge when strong hands decide on a direction.

But, how can we say that the big move will be on the downside. It can well be so, but we cannot say this. We have to let the market tell us where it wants to go. If the Nifty were to break below today's low, we will probably see a downtrend of sorts. Here also, there is A caveat. Tomorrow is Infy results and this could lead to short term choppiness. The break we a talking about should come after markets stabilize, post results.

How does a bear market end?

2012-01-10T23:08:00.001+05:30

We are in a bear market. This is evident even after today's rally which took the Nifty to 4850. At some point of time, this bear market will come to an end. We just do not know when it will end, and, at what price levels.

What will be the indications that the end of the bear market is close by?

First, the nifty should start making higher lows, and close above the nearest intermediate top. The intermediate top is 5100.

Second, at least some of the blue chips should exhibit bullish reversal patterns on their charts. This has not yet come about.

Third, there must be a general feeling of disinterest and aversion to the stock market. I think we are close by.

Fourth, the final phase of the bear market is marked by significant declines in the value of blue chips. This occurs because investors who wish to raise money by selling their shares a forced to sell blue chips since there are no buyers for the small cap and mid cap stocks. This position has not come about.

Summary: while I could easily be wrong in my analysis, it appears that the current scenario does not confirm the end of the bear market.

View on the Nifty

2012-01-07T12:30:00.000+05:30

For short term traders, the Nifty gave a trend day on Tuesday. After a big move, markets were expected to remain choppy. On Wednesday and Thursday, the Index moved inside a narrow range giving a range boundary of 4720 and 4800. On Friday, a breakdown was quickly proved false as the Index went below 4720 then recovered and closed inside the range.

Now, the Nifty has been inside a fairly narrow range for three days (four, if we include Saturday). It is reasonable to expect this process of contraction to move into expansion, soon enough. This means, we can expect a breakout / breakdown and a trending move.

When? And, in what direction? Both the questions will have to be answered by the market itself. What is easier to do is to avoid trading inside the range. A risk then arises, what happens if markets open with a breakaway gap (up or down.)? Traders who wish to avoid this risk can buy an options straddle - Buy 4700 put and 4800 call. Here, the risk is of price decay in options if the Nifty continues to remain in a range. But, then there is no free lunch.

Trading Friday's move:

Pradeep Rajput writes: Need ur view on today movement. since it breached the 4720,but soon came back and made the day high and finally settled almost flat. though it went above to SL 4780, in this kind of sudden spike do u follow ur SL or wait for the market to settle down with ur open position continue.
Ur comment is highly appreciable.

My Notes: Thanks, Pradeep for this important question. On Friday, the Nifty went below 4720, triggering a short trade. Once I am in a trade, I feel I should remain with the position unless proved otherwise. I look for the market to close above the opposite side of the range. In this case, I waited for the Nifty to close above 4780, an event that has not yet come about.

The reason for this rule is to avoid making many whipsawed trades while prices chop around intraday. So, I have an initial short position in the Nifty. I will add to this position if the markets move below 4720. On Monday, I will exit the trade (a) if the Nifty gives a bullish ORB breakout and then goes above 4780, or, (b) finally closes above 4780.

A discussion on my book - Trading the Markets

2012-01-04T22:34:00.001+05:30

Many blog readers have purchased and read my newly published book - Trading the Markets. The book is published by Vision Books. This post answers a few points raised by readers, and, some points which I think may be worth explaining.

1. Cost. The publishers determine the cost of the book. As author, I have no voice in this decision.

2. Reason for writing this book. Believe me, earning money is NOT the reason for writing this book. The effort required to create any book is far more than the monetary rewards from it. I found this out when I started writing. The ONLY reason to write such books is to share my thoughts and ideas with readers. This applies to most trading books written.

3. What will the book give to you, dear reader? The purpose of this book was to share real life trading experiences. It is great fun to analyze and write after the event. But, I write a newsletter every evening, talking about tomorrow. That is much more difficult.

4. How should you read the book? I suggest that you read the book from start to finish just as you would read a novel - lightly, without stress. Then you open any chapter / page and read a few pages. You will slowly understand the basic concepts of trading which I use, and, which should help you in understanding the markets.

DOJI, India, China and Thanks

2012-01-03T09:01:00.001+05:30

First, my thanks for this comment by mbn:

“Completed reading half of ur book. I liked it the way u tried to analyze wid out prejudice”

My post on the DOJI has evoked these questions by Nitin:

“1. Based on the DOJI and otherwise, do you see Nifty moving past 4800 in this series and where could the expiry be? 2. Does the DOJI suggest reversal of Bear market trend from a positional trader perspective”

My Notes:

The DOJI taken along with the NR7 and upbeat world markets tells us that an up trend may be starting. Once a trend starts (up or down) it can travel a lot of distance, so the Nifty could well cross 4800. I do not know if this will actually come about, but there is a fair probability. This is a DOJi that signifies the end of a minor down trend. It does not suggest reversal of the bear market. Bear markets end with lot of base building. We have not even started the process.

Unnath has some thoughtful comments on the prospects of a bull market in India, after we finish with the bear. He says

“….this year the Shanghai index has broken the previous lows made in 2009 and trading way below its all time highs. Similarly is it not possible that we see a rise in our market just because we fallen from 6300 to 4500 in 13 months and Nifty may come back and trade below 4000 or so for a long time like china is doing right now”

My Notes: Markets can do anything. For the Nifty to mimic the Chinese market will require (1) a break of the 2010 lows (we have done that), (2) A sideways range for 30 months (we are in the process of doing that, by mid year 2012 we will have achieved a range for 2 years).

For the Nifty to trade below 4000 for an extended period of time, we will have to see the Nifty fall to 3200 or near by. If this happens, 4000 will become resistance. Then a new range can probably develop below 4000. To me, this looks like an unlikely scenario. But, it is the Market which needs to decide.

The Nifty gets a DOJI

2012-01-02T22:51:00.001+05:30

Monday, January 2 saw a DOJI in the Nifty daily chart. The DOJI has come about after a down move with today as the lowest day so far. A DOJI at the lows suggests that bears are getting uncertain. Quite often, the DOJI will become a reversal signal. When this happens, traders can enter almost at the high or low of the trend. But, not each DOJI becomes a reversal. Some of these DOJI’s do nothing.

So, what will today’s DOJI show? We should take the context in which the pattern comes. It has come about after a decline, suggesting that sellers may be exhausted for the short term. Today was also an NR7 – narrowest range in 7 days. This pattern represents contraction, suggesting that a big move may be coming soon. This move could be on the upside!

Starting the New Year in a bear market

2012-01-01T20:02:00.001+05:30

The calendar year 2012 starts with stocks in a bear market. It is not stocks alone, other asset classes such as gold, silver and real estate (in most cities) are also seeing decline or consolidation in prices.

For the stock market, it is quite possible that the year 2012 may actually bring good news to the bulls. The current bear market started in Nov 2010. Bear markets seldom last for more than 2 years, in fact they end in anything between 12 to 18 months. If we follow the same pattern, we are probably seeing the last Phase of the bear market. Surely, this is good news for bulls?

For investors, cash is king. Money can be deployed in the best blue chip stocks on an SIP - which is a systematic investment plan, in which regular investments are made usually once a month. Investors should NOT attempt to dabble in mid cap or small cap stocks. It is too early for such investment.

For traders, the nature of the market (bull or bear) is much less relevant. Trading is done based on setups. The main difference is in position sizing. Usually, bull markets offer larger rewards and remain easier to trades in. Therefore, positions increase in size when trading within bull markets.

Managing a Position Trade

2011-12-29T21:34:00.001+05:30

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

2011-12-29T08:35:00.001+05:30

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.

Gold is a big story

2011-12-28T21:12:00.001+05:30

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.

Welcome to a New Year

2011-12-27T22:07:00.001+05:30

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?

2011-12-27T14:07:00.001+05:30

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.

Winning a lottery

2011-12-26T11:52:00.001+05:30

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?

2011-12-26T08:56:00.002+05:30

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.

Quiet markets may be ready for thrust

2011-12-23T22:58:00.001+05:30

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.

A rebound is likely

2011-12-21T08:51:00.001+05:30

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.

It is a Book

2011-12-20T21:34:00.001+05:30

Dear Readers,

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

Nifty continues in a downtrend

2011-12-19T08:48:00.001+05:30

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.