Trading the Market: Methods in Madness

Technical Analysis and Investment Portfolio Management

noreply@blogger.com (Student Of Market) — Sat, 30 Oct 2010 17:55:00 +0000

I suppose even the hardcore technical analysts might have a investment portfolio in which they might buy and hold scripts for significantly longer periods of time than the time frame they use in their trading activities. I also presume that their choice of scripts in the investment portfolio probably relies more on fundamental type of analysis.

I have been investing for over ten years now. And it is only been three years that I have been learning technical analysis and doing a bit of trading.

I have been trying to answer the question: can we use aspects of technical analysis in portfolio management also?

And the answer seems to be: yes, we can.

Let me illustrate this with an example.

I have been holding Asian Paints in my portfolio for over four years now. In the last 14 months particularly, it has shot up like anything - the PE ratio is hovering above 30 + and the fundamental analysts have been saying for quite some time now that it is overvalued.

I have been watching the charts of Asian Paints and holding my position because technically the stock is in a strong uptrend.

But now, it seems the technical charts are weakening. Lets look at the chart shown below. (You can click on the image to enlarge it.)

Clearly, it has fallen below 20 day SMA, and then below 50 day SMA, and now just got a bounce from 100 day SMA ( not shown in the figure ). But chances are that the 20 day High SMA will be a tough resistance to break through. and that the stock will fall again to touch 200 day SMA from where it will probably get a strong bounce.

So, as an investor, I can probably use this technical insight to encash part of my holdings and wait to buy it back around 200 days SMA. For example, if I am holding 50 shares of Asian Paints, this might be a good time to sell 10 shares ( 20%) and use the cash when the market undergoes a severe correction which it will somewhere down the road.

That is all for now ..... Cheers

If you have any comments please write to me at stockmarket.methods.in.madness@gmail.com

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Disclaimer: The above analysis is just that - my analysis. If you choose to trade on the basis of this analysis, you will be solely responsible for the outcome of the trade - profit or loss. Please keep in mind that trading and in particular day trading is not for the novice and there is significant risk of loss of capital in trading
P.S. It feels good to write in the blog again after a long time

Nifty Trading - The Day After ....the breakout ....

noreply@blogger.com (Student Of Market) — Wed, 17 Mar 2010 02:53:00 +0000

We live and learn. The market is supreme. When the market shows her hand, you gracefully accept that hand and prepare to follow her.

Ok, looks like the market has broken through 5150 with a lot of force. True that it is now in a congestion zone and therefore trading still needs caution. But what about the breakout? How to trade that?

First thing first. This is not a market to short unless you are a genius - very few of are by the definition of genius. So, no shorting for me not even intraday.

You can take a call to go long- As SS has pointed out many times including the last posting here, the moment of break out is also the moment of maximum risk.

One way to reduce the risk ( and of course the reward too!) is to go long on a pull back which will come in 80-90% of the cases, if not today, sometime tomorrow or later this week or next week.

Question is how do you identify a dip? Here are a couple of suggestions:

1. The indicator that you have been using to detect breakout must have a support line - it could be a trend line or a 200 minute moving average or a 100 minute EMA whichever. Now, usually, the pull back to this level even breaking this support is usually a good indication that this the correction you have been waiting for. The logic is simple and works for a forceful breakout like this. The indicator that is in use and signals trend reversal is likely to have a false indication this time around. The bet you are taking is that the trend is intact.

2. Or, you can simply look at the slow stochastic on the 5day yahoo chart. and wait for the time when the signal screams oversold and then buy there. Here is a chart on the left that illustrates this point.

Now what about SL? Any sensible SL will have to be around 5140-5120. And it might be more profitable to let the trend run and not necessarily close the position before the end of the day.

That is all for now ..... Cheers

If you have any comments please write to me at stockmarket.methods.in.madness@gmail.com

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Nifty trading or perhaps time not to trade?

noreply@blogger.com (Student Of Market) — Sun, 14 Mar 2010 06:33:00 +0000

Nifty did breakout above 5000 on March 2, but upon quickly reaching 5100 it has lost some of its momentum.

One can say that the reason for this is that having broken out of 5000 , Nifty has quickly entered into a congestion zone of 5150-5300.

Now entering into a congestion and trading in a congestion zone are situations that are toughest for traders to trade in. Sudarshan Sukhani discusses this in this post and the previous post, where he says that

"
The trades that I have never found to be profitable for me are:
a. Entrance into congestion
b. A trade within a congestion
e. Trend reversal

"

When a master like SS has difficulty in this market set up, it is important to listen.

Should we then not trade at all? That is a personal decision. But here is one approach that suggests caution and it tries to preserve capital.

1. Trade only long.
2. As long as Nifty is between 5150 and 5330, trade only on major dips that take the market to its support around 4980 to 4930. A major dip could be Slow stochastic showing oversold in 15 minutes or 20 minute chart.

Now this kind of trading is difficult as it takes a lot of patience. You can ask what about going long between 5150 and 5350? The answer is it depends on your risk appetite. Given that it is a major congestion area, you are likely to get whipsawed many times trading long in this zone even though you are trading in the direction of the trend. Many mini losses will accumulate to generate a large loss. And going short is too difficult - at least for me.

So, for myself I am willing to let go of making money between 5150 and 5330 unless there is a set up that provides a great risk reward ratio - which is a major dip.

This also means that I may not be able to trade everyday. That is good - it will help me to develop patience.

And also, if I trade I will trade only one to two times a day and if unsuccessful, will escape with small loss.

Sounds boring? Well. it will protect my capital - think about it. And best of luck.

If you have any comments please write to me at stockmarket.methods.in.madness@gmail.com

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Nifty Trading - what is the trend now? may be up, ..may be not !

noreply@blogger.com (Student Of Market) — Tue, 02 Mar 2010 03:27:00 +0000

Ok, despite the huge move on the budget day, Nifty gave up about half the gain and closed right at the 20 High EMA.

My own sensing is that it is too premature to think that the correction is over and that the up move has resume. May be it has, but it has to be confirmed.

I guess the up move will be confirmed, if Nifty were to close above the high of the last Friday. Alternatively, if you go short, your stop loss should be above that high say around 5030.

So the options are: if your hunch is to go long, either wait for it to close beyond 5030 or wait for a correction to enter on the long side around 4940. The trailing SL for longs should begin with 4780 and can be moved up steadily.

If you hunch is to go short, then you SL should be 5030 to begin with and then moved down steadily. The targets could be 4940 and then 4890 and then 4780.

Only the market knows what she will do. You can trade both ways, but a.) you need to know what your plan is and b.) exit with small loss if you are proved wrong by the market.

If you have any comments please write to me at stockmarket.methods.in.madness@gmail.com

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State of Nifty - 19 February 2010

noreply@blogger.com (Student Of Market) — Sun, 21 Feb 2010 18:27:00 +0000

I guess it is a matter of debate whether the intermediate trend is down or not and also whether it is time to buy for long term now.

Focusing on Nifty, it seems that as it has fallen below the 20d EMA low, 20d EMA high will provide resistance. Therefore , safe trade is to sell on bounce up as long as the 20 d EMA high is is not breached on a daily closing basis. The picture will change if and when it closes above this resistance which is located around 4930-4950 now.

In other words, on a daily (or 5 days) 5 min chart, look for the Slow Stochasitc to go up to the overbought zone and go short as it comes out of the overbought state. The natural stop loss will be the last swing high. If the trade goes wrong, wait patiently until the market shows her hand. Never fight with the market.

If you have any comments please write to me at stockmarket.methods.in.madness@gmail.com

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Update on - Trading Opportunity - Intermediate Term- Amtek Auto

noreply@blogger.com (Student Of Market) — Sun, 21 Feb 2010 18:15:00 +0000

Amtek Auto hit the SL 170 on a daily closing basison Jan 27.

.

The price action since then tends to indicate that there is support at 160. However, there is also a declining trend line which must be overcome. For the time being best to avoid it and consider going long on a weekly close above 200d especially if supported by strong volume. Here is the latest daily chart.

If you have any comments please write to me at stockmarket.methods.in.madness@gmail.com

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Trading Opportunity* - Intermediate Term - Amtek Auto

noreply@blogger.com (Student Of Market) — Mon, 21 Dec 2009 03:35:00 +0000

**** Please read the disclosure below before reading the rest and BEFORE any action****

Amtek Auto has been , is, and perhaps will be an important company in the space of Automotive Components manufacturing in India. Like most of these companies in this space, it too took a severe beating in 2008, falling from a high of 540 in 3Q 2007 to about 45 in Nov. 2008.

Since then it has been turning around - The Hindu Business Line has recommended it twice - both from the fundamental and the technical point of view. You can read these here and here. The technical call made in their Feb 27, 2009 suggested buying it at 73 with SL at 59 and target of 100. Snce then the stock has raced to 237/- in early Oct and began to correct and of late has been moving sideways.

Now, this is what I call a potential pull back in an uptrend. Also, note that we are not talking about a fly by company with shady records - we are talking about an established company with good record and one that will not disappear tomorrow. This in my mind is an important criteria for trading in intermediate time frames so that we do not lose money unnecessarily on unknown companies.

Ok, so let us look at the price action of the last six months.

Even an untrained eye might notice that there is a significant support at 160-170 area. The Slow stochastic is entering oversold area and the width of the BB band is steadily shrinking. The time is ripe for a sharp move - which way we can not say with absolute certainty but we can take a low risk bet that if the level 170 continues to hold, the break could be on the upside with target of210 to 230

Therefore, there a trading opportunity here to buy Amtek Auto between 180 and 184 with SL at 170 and targets of 210 and 230.. This means that maximum loss is about 8% and potential gains are about 14% and 24%.

Now that is not a bad risk reward ratio.

The time frame for this opportunity to be realized is about 3-6 months.

*This opportunity will be tracked for its performance in this blog.

If you have any comments please write to me at stockmarket.methods.in.madness@gmail.com

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Managing DAILY Loss - Key to Nifty day trading

noreply@blogger.com (Student Of Market) — Mon, 14 Dec 2009 02:30:00 +0000

I have always believed that you must track your trades. Please see my earlier post on this topic here . At any point of time, you should know the percentage of profitable and losing trades as well as the average profit and average loss per trade.

Now in addition to the above, you should also have a limit - self imposed - on what the maximum amount you will allow yourself to lose on any given day. In the literature on trading, this is usually suggested as a certain percentage - say 2% - of your trading capital per trade. In other words, if you are trading 2 mini nifty in each trade , you will probably need a capital of around 1 lakh. So according to classical analysis, you must limit your LOSS PER TRADE to no more than 2000/-. Assuming that you make at least two trades per day, your maximum loss can easily go up to 3000-4000/- on a bad day.

ON THE OTHER HAND, the day you are profitable what is the average amount you are making? Using my experience of the last 14 months, and also browsing the sites of trading call providers, I believe the average daily profit is in the range of 40 nifty points - which if true is actually very good since it is 0.8% of the current Nifty value. In other words, trading mininifty, your average profit over the days you are profitable is likely to be around 800/-.

Do you see the picture emerging? You are making about 800/- on the good days. BUT ONE BAD DAY can push you back by 3000-4000/-. and then you will need one GREAT WEEK to come out even.

You may disagree with the details of the analysis in which case my suggestion is that please do your own analysis and see what you get.

But the central point is that you must set a limit to the maximum loss that you can afford in a day, and this maximum loss must be related to the average profit you make, For example, if your average profit is 800/-, then it is prudent to set the maximum daily loss limit at 1000/- to 1200/-. On any given day, if you have already lost 1200/- QUIT FOR THE DAY, and come back to fight for another day.

I will come back to this theme again and again in my posts, hope that it helps you in your trading practice and discipline.

If you have any comments please write to me at stockmarket.methods.in.madness@gmail.com

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Bangalore CNBC TV18 Investor's Camp - 24 Oct 2009

noreply@blogger.com (Student Of Market) — Sun, 25 Oct 2009 18:09:00 +0000

I attended the Bangalore meet on Saturday. This is the first time I participated in such an event.

There were four speakers.
Here are my personal take aways.

The first speaker was Sudarshan Sukhani. He was at his usual best. His statement about the market movement in the immediate future is that since the trend has been up, we must trade in that direction and there is not much use speculating where the top would be. When the trend reverses as it surely will, we should be prepared to trade in the other direction.

He presented several techniques on "Buying on Dips". He distinguished between two situations,

1. The first one was when the market in a sideways rangebound movement in an overall uptrend. The appropriate indicators are Bollinger Bands, Kelter Channels, CCI-100, EMA-50 and idea is to wait for the price to touch the lower ( or middle as appropriate) bands.

2. The other situation is when a strong uptrend has resumed, In such cases, the price may not dip to the lower bands mentioned above and the appropriat3e indicators would be Triangle formation, NR7, or Wedge patterns. The idea is to wait for such patterns to happend after resumptions of a trend and then trade in the direction of the trend.

For me, the presentation answered a long standing question as to which dip indicator is suitable for which occassion. The clarity of this presentation was just amazing.

I would summarize the other speakers in future posts.

If you have any comments please write to me at stockmarket.methods.in.madness@gmail.com

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Nifty Trading - Sellers Vs. Buyers

noreply@blogger.com (Student Of Market) — Thu, 08 Oct 2009 03:39:00 +0000

The market has once again started moving within a range. It went down to 4920 and then came up. It went up to 5080 and then came down.

Why is it moving up and down like that? I do not know the answer but I would like to reinterpret these movements in terms of classic tug of war between buyers and sellers.

Price fell from 5080 simply because MORE SELLERS EMERGED at that level than there were buyers.

Price recovered from 4920 because MORE BUYERS EMERGED at that level than there were sellers.

You might think that this is stating an obvious fact - but it has the advantage of helping you plan your trades.

For example, if 4920 were to break in the next few days, then you can take a bet on sellers having beaten the buyers and can go short at that point with a judicious SL

On the other hand if 5080 were to break on the upside, the buyers have won and you know what to do.

Until a winner emerges, it is not safe to take a huge bet on who is going to win. In other words, best to avoid trading in the range ( or trade in small volumes ) and trade in the direction when the breaking out /breaking down happens.

Until then cheer on from the sidelines.

If you have any comments please write to me at stockmarket.methods.in.madness@gmail.com

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Technical Stock Recoomendation - 05 Oct 2009

noreply@blogger.com (Student Of Market) — Mon, 05 Oct 2009 03:47:00 +0000

Looking at the chart of PVR, below, looks like it is resting after having broken out on high volume.
Buy with a Stop loss at 125. ( Please read the disclaimer below before trading)

Minimum target is 155. Trail with a stop loss

If you have any comments please write to me at stockmarket.methods.in.madness@gmail.com

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Nifty Trading .. 4700 resistance breaking, breaking, ...BROKEN!!

noreply@blogger.com (Student Of Market) — Mon, 07 Sep 2009 17:19:00 +0000

Finally, it seems, that the wait is over. The resistance band of 4600-4700 seems to have been decidedly broken.

Readers of this blog must have noticed that I have been skeptical about the upmove - my thinking was that I could not see what reason could there be for the market to go through 4700.

But the market has spoken. It has broken through 4700, Regardless of the reasons why it should not cross 4700 -- NSE PE is at 22, not cheap - or the reasons why it should go above 4700 - lot of cash on the side line - the price action is that the 4700-4750 has been broken through. It will be confirmed if on the next pull back the last swing low 4570 holds and we should all keep that in mind.

As traders, we must follow the market. So, either enter now or at the first pull back ( keep in mind that the pull back could be very short!!).

For investor, however the challenges are somewhat different. One challenge is not to chase price but wait patiently for a pullback, the other challenge is to preserve capital when the pendulum swings too far - the best way to do that is through asset allocation. Rebalacning asset allocation is an absolute must as we head into somewhat uncharted territory.

If you have any comments please write to me at stockmarket.methods.in.madness@gmail.com

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Trading .. Paying homage to my teachers

noreply@blogger.com (Student Of Market) — Sat, 05 Sep 2009 15:45:00 +0000

Today is teacher's day. I spent part of the day in silent remembrance of a few outstanding teachers who had taught me in my high school. Having traveled many parts of the world and having met various people in several academic organisations, I can safely say that I was very lucky to have been taught by two or three of the best mathematics and science teachers anywhere in the world.

In the world of trading and investments, there are three persons who have shaped me immensely. None of them I have met and none of them know me or know of me. But that does not matter. Through their writings, they have taught me over so many months. I mention these gurus below.

First of all Ajit Dayal of Quantum Advisors Pvt. Ltd. It is hard to imagine someone else who is so steadfast in following value investment philosophy. He does not offer the moon to anyone and in fact all his writing is about how you can protect yourself against the those who will offer you the moon. The most important thing I have learned from him : Think of the downside before and when you think of the upside.

Next on my list is Sudarshan Sukhani of Technical Trends. Here is a very talented trader who is also so very down to earth. And so generous in sharing his learnings with so many of us. The most important things I have learned from him are - Market is bigger than any analysis ( including his own ) ; The trend is intact until it is broken ( i.e. do not anticipate end of a trend); Focus on following a disciplined strategy rather than focusing on making the correct call is what works in trading.

The third one is Brett Steenberger. His copious writing on many facets on trading has been tremendously helpful. But particularly his tips on monitoring own trades and identifying and anlysing failure and success patterns have made me much more aware of my own self as a trader.

All the three above have this tremendous ability - like so many great teachers - to distil the essence of any idea to simple words, and in doing so they simjulataneously display a great humility and a sense of service to others.

To you, my teachers, I offer my salute and my most profound respect.

Nifty Levels - Watch out for Triangles ... Watch out for Rectangles ...

noreply@blogger.com (Student Of Market) — Mon, 24 Aug 2009 03:01:00 +0000

Nifty made a spectacular down and up trip last Friday. It opened gap DOWN but then arrested the down move and began a steady climb UP that decisively broke the 4500 barriier.

Only trouble is that there are resistance levels sitting at 4600 and 4700.

In fact the daily charts - not shown here - suggests that the last swing high was at 4600 - therefore, there is a possibility that Nifty may turn back and reenter the trading range.

At range bound times like this a weekly picture is helpful. The we months weekly chart is shown here ( click on it to get a bigger view).

Several things marked on the chart are clear:

1 There are two rectangle box formations - the one at the bottom lasted 6 months. The one at the top is still forming and is about 4 months old - and may have another month or so to go. Notice the phrase MAY HAVE - this implies it can break out this week also.

However, if Nifty does reverse from 4600, then clearly the box may stretch out. The bottom line is that the rectangle box formation at the top is not complete yet and is worth watching out.

2. Equally important - the rectangular box at the top is actually not yet a rectangle in price formation but is an ascending TRIANGLE. If it breaks out above its range, it will be explosive, but that is a BIG IF. I also think that reversing from 4600 might negate the triangle - so this and the next week may be a decider on the triangle.

3. What if the market reverses from 4600 / 4700 renteres the rectangle? What if after another two months, price actions falls below the bottom of the rectangle? Two months is a long way - but if it does happens, it will probably mean that the up move is over for the next six months!!!! It might mean moving into cash at that time. Mind you, this is just a scenario planning and no action needed now except to keep this possibility in mind and keep observing.

All this confusion seems to be affecting swing and positional traders. Overall for day traders, despite a bit of volatility, reasonable amount of daytrading set ups have been available so far. and even in the days price actions, watch out for the resistatance and support. Stay away from initiating position if you are unsure - and in fact assume that you are wrong and enter into the trader only if you can tolerate the loss in case your are wrong.

Happy trading and watch out for these traingles and rectangles .....

If you have any comments please write to me at stockmarket.methods.in.madness@gmail.com

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Nifty Rangebound .... What is the BIG Fuss?

noreply@blogger.com (Student Of Market) — Thu, 20 Aug 2009 03:02:00 +0000

A number of blogs are lamenting the fact that Nifty has been rangebound - a fact that I had discussed more than two weeks ago in my blog Nifty Trading - Range bound ... For how long? . It is worthwhile to quote from that posting as it continues to be relevant two weeks later!!!

"
Whichever way you look at it, whether it is the daily chart or the weekly chart, Nifty has been trading in a 15% range (4000-4600) since the big gap up post election.

Thrice it has tried to breakdown below 4200/4100/4000 and thrice it bounced back - the last time it bounced back it made a fool of people - including me - who had discovered the head and shoulder and thought that the market was about to go down and close the gap.

On the upside it tried to take out 4700 and failed; again in the last week and this week it is trying to breakthrough 4600, and right now it is faltering a bit ( who knows what will happens today and tomorrow and next week ..... ).

Clearly, one possibility is that it will breakout above 4700.

The other possibility is that it will be range bound between 4000-4600 for another 10 weeks!!!

"
However I do not understand what the big fuss is about. In the last two weeks, there has been plenty of good intra-day set ups. So day trading is un affected by this. The interesting fact is that day trading ( or any trading ) requires just the right amount of volatility appropriate for that time scale.

The real difficulty caused by the rangebound Nifty is being faced by positional trader and swing trader. Because every time they think that Nifty is breaking down or breaking out, it reenters the range.

But such is life, the market is not going to oblige your style all the time. However, I strongly beleive that trading opportunities are still there IF YOU LISTEN TO THE RANGEBOUND MARKET.

If you have any comments please write to me at stockmarket.methods.in.madness@gmail.com

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Easy ways to make money? ... Just subscribe to sms service?

noreply@blogger.com (Student Of Market) — Tue, 11 Aug 2009 02:53:00 +0000

I have been somewhat irregular in the last ten days. Several distractions on the family front, professional fronts etc. etc.

In the mean while, I have been catching up with my reading.

One of the things that strike me is the number of "sms" "yahoo messenger" and "email" services that has come up for intraday trading. Here is a partial list:

www.SnpNifty.com
www.calloptionputoption.com
www.technicaltrends.com
www.investinshare.com
www.onlyprofitsnoloss.in
www.eqwise.in
stockmaniacs.blogspot.com
www.kalpataru.org
www.buzzingstreet.com

At the very outset, I am recommending neither for nor against any of the above. However, nothing wrong in trying to understand these offerings in greater detail.

Now most of these claim to have a success rate of 85-90%. And the ads are very inviting, and go something along the following lines: " earn 5000 per day" !! or "10,000 to 250,000 in a few moths!!!!" Then there are a few who do not claim such outlandish claim and are quite sober in the offering of their service.

Before we get carried away, lets us revisit the old saying that if something is too good to be true, it probably is!!!! For example, here is a fallacy with the claim of upto market calls with 90% accuracy. It does not talk about what the average profit and average loss amounts. And here is the eye opener: Suppose you have 80% success rate with average profit of 1% ( this is quite a high percentage for day trading, I think becuase this impliues that your average nifty point earnings are 40 points or so !!!). and you have just 5% average loss for the 20% loss making trades. Then your expectancy is 1x.8-5x.2= -.2 which means that you are going to go bankrupt!!!

I had tried afew of the services myself. I have not found it easy to follow them. For one thing, there is always a lag between the "call" and the market price - this is inevitable as the market moves very fast and most of these services are trying to cash in on these fast breakouts - and this puts me personally in a qaundary whether to trade on that call or not.

And here is another sobering thought. Money making is not easy. If the day comes when instead of 97% losing money, 97% makes money, it will no longer be the avenue to make quick bucks out of thin air. Fortunately, the day is still not near when that will happen. In the mean while, 97% will keep losing money - unfortunately I am still in that group.

So, why am I still in the loss making category? Several reasons, poor disciipline being one of them. However, right now I am paying tution to the market rather than to a call maker and I hope I will come out having learnt something rather than the lesson of how to execute a trade after receiving a sms.

However, to each his own. If you do not have the time to learn, then by all means, use such a service but take them with a great pinch of salt.

If you have any comments please write to me at stockmarket.methods.in.madness@gmail.com

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Trading Discipline - Self Review - Walking the Talk ...

noreply@blogger.com (Student Of Market) — Mon, 03 Aug 2009 03:12:00 +0000

Ok, in my last posting I talked about the importance of record keeping and the importance of looking yourself in the mirror.

How am I doing it myself?

I must say, that even though I have been trading for about a year now, it is only in the last three months that I am keeping these records.

So without further fuss, here is a sample of the records of ACTUAL TRADES in the last four trading days in July. Please click on the image at the left to get a better view. Please keep in mind that I predominantly trade in mininifty. Each trade represents buying or selling 0ne lot of mininifty.

The data is kept in a excel workbook. I think most of the fields are straightforward and self explanatory.

As you can see, in the last four days of trading, I had a positive expectancy.

For the whole month of July 2009, my numbers are as follows:

1. Percentage of winning trades: 41%.
2. Average Profit per winning trade: 24.04
3. Average Loss per losing trade: 13.73
4. Expectancy value for July: +1.78

which makes July a positive month.

I hope you are using a similar or better method to track. Please do share if you have a better and simpler method, I will appreciate it.

If you have any comments please write to me at stockmarket.methods.in.madness@gmail.com

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Trading Discipline - Self Review - Are you upto it? ...

noreply@blogger.com (Student Of Market) — Mon, 03 Aug 2009 02:45:00 +0000

We hear so often that discipline is one of the most important success factors in trading. Now there are two types of disciplines involved here - one is discipline in execution and the other one is discipline in planning and tracking trading performance.

It is obvious that the second type of discipline is far easier than the first one. Lets face it, if you do not have the discipline to track your performance it is hardly likely that you will have to discipline to trade without emotion. In fact the reverse it also somewhat true: If you track yourself with discipline you are more likely to trade with discipline.

What will demonstrate that your are disciplined in tracking and reviewing your own performance? Try to answer the following questions:

How many trades did you execute in July 2009?
What is the percentage of winning trade?
What is the average profit for winning trades?
What is the average loss for the losers?
What is your expectancy value?

It is critical for your success that you are able to answer these in less than a minute. Which means you need to collect the data and maintain it without fuss. By the way, if you do not know what the expectancy value is, it is defined as follows:

expectancy = (average profit per winning trade) x (winning trade percentage) - (average loss per losing trade) x (losing trade percentage)

For example, if your winning percentage is 60% with average profit 10 and average loss 16, your expectancy = 10 x 0.6 - 16 x 0.4 = -.4. This means that on the average you are losing money per trade, and unless something is done to turn the above number +ve, you will go out of business.

On the other hand, suppose you winning percentage is 40% with average profit 30 and average loss 10, your expectancy = 30 x 0.4 - 10 x 0.6 = +6. Which means that on the average you are making money per trade.

Why do we shy away from keeping these records? It is always hard to look yourself in the mirror especially if the mirror says you are losing money. But it is even more important to keep these record in case you are losing money; how else will you change a loss making strategy
into a profit making strategy?

In my next posting, I shall walk the talk and share with you a template I keep and my July numbers.

Good luck and please keep a record of your trades.

If you have any comments please write to me at stockmarket.methods.in.madness@gmail.com

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Nifty Trading - Range bound ... For how long?

noreply@blogger.com (Student Of Market) — Thu, 30 Jul 2009 00:10:00 +0000

Whichever way you look at it, whether it is the daily chart or the weekly chart, Nifty has been trading in a 15% range (4000-4600) since the big gap up post election.

Thrice it has tried to breakdown below 4200/4100/4000 and thrice it bounced back - the last time it bounced back it made a fool of people - including me - who had discovered the head and shoulder and thought that the market was about to go down and close the gap.

On the upside it tried to take out 4700 and failed; again in the last week and this week it is trying to breakthrough 4600, and right now it is faltering a bit ( who knows what will happens today and tomorrow and next week ..... ).

Clearly, one possibility is that it will breakout above 4700.

The other possibility is that it will be range bound between 4000-4600 for another 10 weeks!!!
now, why did I pick up that number 10 weeks?

If you look at the weekly chart, you can see that Nifty - after the break down in October 2008 - entered in a range of 2500 and 3100 on a closing basis for 23 weeks!!!! Of course in percentage terms that was a bigger range of about 20% but that was also because of the low base effect. In other words, it will not be unusual for Nifty to be range bound for another 10 weeks (since it has already spent 10 weeks in this range).

Now, people like excitement - for many of them range bound movement is boring and worse still, it catches them off guard apart from tasting their patience. Just when they think the market is going to break out or break down, the market reverses and reenters the range!!!

So lets recap the two possibilities.

1. Break out above 4700. You know what to do. Buy on dips with SL at 4500 perhaps , if you are trading on a weekly basis.

2. Range bound movements - here you sell at the upper end 4600-3700 and buy at the lower end 4000/4100 with SL above and below. It may be boring but then you have to decide whether you want to be entertained by the market or you want to earn money.

If you have any comments please write to me at stockmarket.methods.in.madness@gmail.com

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Trading Nifty - Dealing with Monday AND Reliance - 27 Jul 2009

noreply@blogger.com (Student Of Market) — Mon, 27 Jul 2009 03:24:00 +0000

I always find it difficult to trade on Monday mornings. I mean the world has had chance to review and plan their moves for two days. I feel intimidated with a feeling like being me vs. the world on Monday morning. This may not be logical or whatever, but that is just me.

And I have realized that trading is such an individualistic activity that it is very important to develop and follow a plan with which you are emotionally, psychologically at ease. So for me no quick trades on Monday morning; in stead, there is waiting and understanding how the world has decided to act after two day's of thinking.

Now this morning, in addition to Monday, we have to deal with Reliance result which most analysts are saying is below expectation and is likely to drag the script down.

Now the question is will it impact the uptrend in Nifty?

Lets look the chart comparing Nifty vs Reliance for One year:

The chart shows that for a major part of the last year, Reliance performance has lagged behind Nifty . BUT MORE SIGNIFICANTLY, in the last three months Reliance has consistently underperformed Nifty.

What is the conclusion?

Perhaps, the broad market will react negatively for a few hours or day, shed a few tears or two for Reliance - after all, the market does need an excuse to take a breather, consolidate etc. but after that it will ignore reliance and likely to follow its own trend.

Of course time will show what happens, but as long as Nifty remains above 4100 any dip whether because of Reliance or otherwise, is likely to be a buying opportunity.

If you have any comments please write to me at stockmarket.methods.in.madness@gmail.com

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Nifty Trading - Trying to Anwer a few Questions.....

noreply@blogger.com (Student Of Market) — Thu, 23 Jul 2009 03:49:00 +0000

I got a few questions from one of my readers. For the benefit of all, I am posting the questions and answers here.

The reader wrote:

"""
I have few queries w.r.t. to slow stochastics indicator which you seem to be using for intra-day trading:

1. What kind of chart is appropriate for using slow stochastics as a intraday trading indicator - 2 min or 5 min chart?
2. Do you only use slow stochastics or use it together with RSI, MACD or Bollinger bands?
3. I understand that one can get a entry point using slow stochastics. But how do you decide exit point and stop loss? Please try to help me understand this.
4. Finally, isn't slow stochastics a good indicator in range bound markets and not in trending markets? What indicator you use in trending markets?

"""

My answers:

1. What kind of chart is appropriate for using slow stochastics as a intraday trading indicator - 2 min or 5 min chart?

I typically use 5 minute charts. But Yahoo charts allow me to update the chart as often as I would like. So, even while using 5 minute charts I might update/refresh the data every two minutes - I have written a three/four line code that does this for me automatically so that I need not hit refresh button manually all the time, and instead focus on the market.

2. Do you only use slow stochastics or use it together with RSI, MACD or Bollinger bands?

I personally find it confusing to use so many indicators at the same time. Which indicators to chose is a very personal decision. It is like having friends vs. acquaintances - there is nothing wrong with people who are your acquaintances but you select only a few friends.

Recently, I have begun to use Moving Average ( EMAs) cross over systems along with slow stochastic. For me, MACD and two moving averages convey almost similar info. Therefore, I would like an independent oscillator type indicator such as RSI, Stochastics. I have a hard time acting on RSI, hence my PERSONAL choice is Stochastic. Why slow stochastic? because the fast one is too jumpy for my taste/ability to deal with the information.

Bottom line, I like to work with simple systems which rules out using many indicators and I chose two moving averages and slow stochastic.

3. I understand that one can get a entry point using slow stochastics. But how do you decide exit point and stop loss? Please try to help me understand this.

I try to decouple entry from exit. The simple reason is once I am in, my entire focus is on managing the trade, trailing stop loss OR ( on those days when trailing SL too tight is not the right strategy because it might hit ) on getting out with a profit. Of course, my SL has already been decided before I took the trade. On trending days, I move my attention to one of the two moving averages as trailing SL. I still keep an eye on the slow stochastic to see if there are indications of trend reversals.

Deciding on SL is an art. In my blog, I have already posted few articles on this. I will continue to return to this topic.

BUT BOTTOM LINE IS: focus on minimizing losses.

4. Finally, isn't slow stochastics a good indicator in range bound markets and not in trending markets? What indicator you use in trending markets?

I believe Slow stochastic is an excellent indicator to use in strongly trending market as well - though in a rather subtle way. First of all, the fact that the market is strongly trending is indicated by Slow Statistic as it remains in the overbought/oversold zone and refuses to come out. But then it does come out, and one can wait for it to go to the other direction. So, for example from overbought it goes to oversold. This is an indication of a DIP in the original trend, and can indicate a entry/rentry point.

Ok so there it goes. Please remember to use your own judgment while using my responses in your trading. Trading is a very individualistic activity. What might work for me might not work for you and vice-versa.

On a lighter note, all the above might give an indication that I am a big DADA in trading. Hardly. I have been trading for about 9 months now, and I lost so much in the first five, that I am yet to break even. MY most recent goal is to have two positive months in a row! ( Now you might think twice before asking me anything !!!) Please wish me luck AND DISCIPLINE.

If you have any comments please write to me at stockmarket.methods.in.madness@gmail.com

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A Pause is a Pause ... is a Pause?

noreply@blogger.com (Student Of Market) — Wed, 22 Jul 2009 03:43:00 +0000

The markets finally took a breather. Is it a pause before moving up or is it a pause before moving down?

I wish I knew.

However, not knowing for certain cannot result in inaction. And today, I have no action to suggest beyond what Sudarshanji has mentioned this morning in his blog. Reading that carefully is likely to help traders prepare well. The summary of what he says is that a breakdown of yesterday's low 4436 will probably result in further downward move towards 4350. Trading above yesterday's high of 4510 will signal resumption of the upmove towards 4700. You can read his posting in its entirety here.

What about the unlikely possibility that the resistance 4500 holds? Well, we shall discuss that if 4350 is broken on the down side which seems unlikely now but since the market can do whatever she wants, it cannot be ruled out for sure. But we can wait for that to happen before making actionable plans.

Yesterday, I came up with the following saying that

"If everyone one knew where the market was going, the market probably would not go there".

Perhaps it has been said before, but it does not matter - it is the joy of thinking these thoughts that matters the most.

If you have any comments please write to me at stockmarket.methods.in.madness@gmail.com

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Trading Nifty: Disbelief? Better Believe it.

noreply@blogger.com (Student Of Market) — Tue, 21 Jul 2009 02:44:00 +0000

Many traders - I am included - watched with disbelief how Nifty climbed to 4500 while they waited for a big dip, or thought it had risen enough and "must" fall anytime now, etc.

Those who believed in the Bull presumably went long or stayed long and were happy as their belief paid handsomely.

And then, there might have been some traders who despite their disbelief reposed faith in their mechanical trading system and participated in the trend. Which was up in case you did not notice it.

This episode - in which I did not do well - has again brought home to me how mechanical trading system / rules can help trader set aside their emotion ( fear/disbelief) and trade in the right way.

After all, when most of the moving averages are so beautifully aligned UPWARDS and keeping a constant gap between them, why shouldn't you go long?

You see the very terms belief and disbelief are rooted in human thought processing - in contrast to something like rules in physical sciences - for example, when an apple falls on your head, you may experience disbelief and other emotions but the apple did not care, it had to fall. And whether you believed or not liked it or not, it fell!!!

Not to belabor the point, the mechanical rule ( for instance EMA lining upwards ) does not care about your belief once they have been formulated - the rules are not handicapped with disbelief.

Don't get me wrong. I am fully aware of the importance of belief systems in many spheres of human life. What I am suggesting, however, is that with respect to trading the proper and rightful place of reasons and beliefs are in formulating the rules and not in minute to minute trading decisions during the madness of market hours.

In other words, put all your reasons and beliefs in formulating the system. Once formulated, believe in the system and not in your thoughts/beliefs during actual trading.

OK, now coming back to how did I do yesterday?

Embarrassing to admit - especially after such theorizing above - but I did not do well. I kept waiting for a dip - a big dip - that never came. Twice I followed slow stochastic to catch a potential turnaround - a dangerous thing to do, but at least I used an instrument, slow stochastic, rather than gut feel - and thrice I got stopped out - and then finally I went long around 4880 spot only to get out after ten points as I was overcome with worry that I must manage my loss for the day to a smaller amount. Loss!! On such a day!!

But there are silver linings - Just about two months ago on a similar day I would, like a deranged person, try to catch the top and go short repeatedly thereby losing 70-120 points ( in a day!) . I have now learned to NOT TO DO THAT - clearly my learning is not complete otherwise I would have shorted perhaps only once and not thrice - but my learning and improvements are in the right direction.

I write all this, dear reader, for two reasons: ONE, it helps me to learn even more efficiently. Public disclosures always has that effect that it reduces the chance of fooling yourself. And TWO, I hope there are some readers who may not only learn from my experience but also regain a sense of hope and self worth which are two biggest casualties when you lose money in trading.

Thank you for your time and Good luck.

If you have any comments please write to me at stockmarket.methods.in.madness@gmail.com

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Nifty Trading - The Consensus View on Monday Morning - 20 July 2009

noreply@blogger.com (Student Of Market) — Mon, 20 Jul 2009 02:59:00 +0000

A quick reading of most of the financial blogs indicates that the consensus view is that the market has formed a low around 3900 and has resumed its uptrend now.

What do the charts say?

The charts say that what was lost in the week of July 6 has been regained in the very next week of July 13. We are back to the state we were in before the budget. The chart also says short term uptrend will be tested at the resistance of 4500 and then at 4700. Presumably, these are the chart patterns that have generated the consensus view mentioned above.

My own thoughts are that yes, the short term trend as measured over one week is up, as measured against 2 weeks is flat, against 6 weeks is probably down and as measured against 13 weeks ( 4 months ) is again up. Which probably means that the market is fighting to keep the uptrend intact and we should give the up trend the benefit of doubt; therefore, we should trade with a positive bias.

BUT and this is a BIG BUT, because the market is fighting, there will be bloodletting even if the eventual up trend resumes. In other words it will not be easy to pick the dips on where to buy, if you are planning to buy on dips. My view is that only way out is that you must have predetermined technical criteria and stop loss to enter the market - step aside if the market proves you wrong and enjoy the ride if you get it right. AND do not overtrade.

Also, have a lot of patience - do not chase the market in either direction. Remember that before you count your potential profit pay attention to protecting your capital.

OK, after all these generalities a specific contrarian thought and suggestion. What is the probability that the market will retest 3900 before the end of month of August? My pick is about 50-50. In which case, I want to protect my investment assets. One way to do this is to buy one or two August Nifty puts. Please note that this is not trading in options but purely a measure to buy insurance against a possible unanticipated move towards 3900.

Good luck and always keep in mind that you can count on the market springing surprises and leaving a lot of blood on the street.

If you have any comments please write to me at stockmarket.methods.in.madness@gmail.com

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Herd Mentality and a Refreshing Blog

noreply@blogger.com (Student Of Market) — Sun, 19 Jul 2009 05:44:00 +0000

A couple of days ago, while writing Pre-Market Opening thoughts - Trading Nifty- 14 Jul 2009 , I wrote the following lines:

""
It seems therefore that we may have a uptrending day - the problem with my statement is that almost everyone may be thinking the same - where is the edge then?

""

This reflects an agony I always feel when I write - am I saying something different or am I just following the herd? We will return to the importance of this chain of thought some other time, but I must say when I read blogs - especially related to the market moves - I am struck by how many of them are saying the same things.

Over this weekend I accidentally came across a blog that I liked a lot, primarily because the freshness of its line of thinking and its similar preoccupation with search for what is not obvious.

The blog contains a presentation (webinar) which is excellent - it was presented on June 7 ( not that old ). The presentation can be found in a pdf document here. As a summary there are three points from this PDF that I found very striking and am quoting here.

"A GREAT EXERCISE Investors should do regularly is to ask you: What's the one thing that nobody expects to happen?"
"I try to make it my business never to get too bearish or too bullish."
"There are hundreds of ways to analyze markets. The key is chose yours and respect others"

There are many other gems here. Any serious student of market will do well to read the above pdf document and the blog.

The blog, by Deepak Singh, can be found here: http://www.stateofthemarket.net/blog/.

Another refreshing thing about this blog is that it does not try to sell you market calls, treats you as a thinking individual and leaves you with a lot of ideas.

I hope you will ENJOY the articles as much as I have.

If you have any comments please write to me at stockmarket.methods.in.madness@gmail.com

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