Nifty trading or perhaps time not to trade?

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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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

Managing DAILY Loss - Key to Nifty day trading

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

Like this post? You can receive it free by subscribing. Just click on this link

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

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

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

Like this post? You can receive it free by subscribing. Just click on this link

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

Nifty Trading - Sticking to a Plan and Missing a Rally

Today, 15 July, I had planned to trade long as I thought yesterday's breakout rally would continue. The only problem was that the price had gone ahead so much that I could not afford the stop loss. I mean I believed that theoretically at least it could retest the highs of yesterday. So I wanted to wait for a dip. I use slow stochastic to detect dips or pullbacks, so I decided to wait for that to happen.

In the meanwhile, around 10.30 am I noticed that slow stochastic was beginning to decline. So, I thought let me use this opportunity to go short before going long at the end of the dip.

The problem was the dip was a puny one. It came and went. I shorted future at 4130 and my first target was 4115. The Nifty Future reached only 4118 and then never looked back.

Fortunately, I realized quickly that the edge in my shorting was gone. And I exited around 4132.

Rest of the day, I waited in vain looking for a dip that never came. I was both worried and hopeful that there could be a quick sell off that will allow me to enter but that never came.

Looking back, I realized I could have gone long at 4155 with SL at 4118 - but the SL was still on the large side and I believed a dip would happen. It didn't.

One way I am sad that I missed a great rally.

Another way I am really really glad that I did not second guess my plan nor did I go short after the first time, as I would have done many times in the past. Even around 4200, there was a sense that profit booking was imminent but I avoided the deadly temptation which has resulted on large losses in similar previous trading situations ( you can read about the deadly temptation here and here).

Also, I use a system that is ok in detecting a new trend beginning but not so great at reentry which is what happened today. I am hopeful however that if I tread with the same discipline, on other days I would be able to spot good reentry points.

To summarise: trade with discipline and simple rules - not to worry if that makes you miss one rally, there will be other days.

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

Like this post? You can receive it free by subscribing. Just click on this link

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.

Nifty Trading - Lesson from the Market - Friday 10 July 2009

Last week, I have been less regular in writing this blog than I wanted or intended to as I was traveling and visiting my parents. It was great taking a break and be with family.

In the mean while, .....

The market provided a fascinating instance of learning on Friday 10th July 2009.

Look at the five day chart.

Can you see

1. how for almost two days nifty moved in a very tight range?

2. how it broke out once one on the upside, and lastly,

3. how the false breakout reversed with great ferocity and broke through 4000?

I do not know about you, but here are the lessons for me:

1. Be patient - if you can detect a tight range - use that info either not to trade until a break out happens OR trade with low volume and increase volume after break out.

2. EQUALLY importantly, be prepared for a false breakout ( especially if it is against the prevailing trend) . Prepared but HOW? By keeping a Stop Loss. On Friday, those who traded long late in the afternoon and forgot to put a SL , hoping that 4050 will hold must have learned this lesson the hard way.

3. There is no sure thing in trading. Be prepared and have SL.

More on these themes and other stock specific ideas later in the week.

Nifty Trading - To Trade or Not to Trade - That is the question

One of the most important things to learn in trading - particularly in day trading - is when not to trade.

I feel that for quite an extended period of time yesterday - roughly from 11.30 am to 1.30 pm - it was important to stay away, unless you are extremely good in scratch trades -- meaning you are good in getting in and out of trades - which is not my style.


Lets analyse the situation in a little more detail.

The day started on a positive note, all the 3 min, 13 min, 34 min EMAs were nicely arranged and moving up.

The first danger signal came around 11 - 11.15 am. Nifty failed to move up and cross beyond 4320, below the day's high of 4338. What this meant was that a potential resistance level was established at 4320 by 11.15 am.

And the late/mid morning session continued like that. Just when it appeared Nifty was heading south, it turned back having found support at 4285.

Now, why are we spending so much time on this? Because the chance of over trading is much higher in these situations and over trading typically accumulates many small losses, resulting in a net big loss.

Coming back to the price action, depending on which Moving Average Crossover system you use, chances are that several of them may have given false signals either long or short between 11.15 am and 1.30 pm.

The best way I know of avoiding this is to pay attention to the price action realities and not project which way it was going to go. In other words, accept 4285 and 4320 as support and resistance and wait for them to be broken rather than anticipating a breakdown or a breakout.

And equally important - do not trade between the support and resistance when the range is so short.

The market is cruel to impatient traders and rewards the patient traders. In this regard at least, investors and traders have something in common - they both need to be patient in the context of their respective trading time scales.

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

Like this post? You can receive it free by subscribing. Just click on this link

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.

Technical analysis works ( in a probablistic sense)

Earlier this morning I suggested trading with a negative bias. In fact, part of what I said was

"If the market opens lower, I would wait 4480 to be broken decisively before shorting. Yesterday's high 4540 will be a good SL"

The market broke 4480 early but then went up to 4520 almost. Second time when it broke 4480, it did not look back.

I do not want to say merely that technical analysis work - what is more relevant is to say that if you u use technical analysis AND trade with discipline, then you increase the odds in your favour to buy low and sell high OR sell high and buy low. In this case discipline meant selling below 4480 and keeping SL above 4540!

The day's action has opened the doors for positional traders. I will write about this in my next posting.

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

Listening to the Market - 10 Jun 2009

We seem to be at an interesting juncture. While the intermediate up trend is still intact, there is a debate whether Nifty will immediately break out above 4650 or whether it will take rest for some time and head towards a resting place around 4000. 3800 etc.

No one knows.

And yet we must act in some way. This is where your own sense of the market comes in.

Given the fact that we are at a significant resistance, it may be prudent to trade the next few days with a negative bias. Is there a contradiction between saying the intermediate trend is up and trading with a negative bias?

Not really, since we are talking about two different time frames - several weeks to months for the intermediate up trends vs. trading now for the next few days.

For today I will watch the 4520 -4530 Nifty level - this is a level Nifty tested several times yesterday before finally breaking above 4540 and racing towards 4560.

If this level breaks, then Nifty might begin to drift towards 4490 for the day. It might make sense to trade with two lots ( Nifty or Mini nifty ) - close one for quick gain and allow the other to develop. This is if the market is kind to you. If not, the stop loss must be at Nifty 4570.

Conversely, you can use the strength of 4520 support to go long with a SL at 4490 - the choice is yours !!! Today's Pivot points are as follows: PP:4493, S1:4423, R1:4620, S2: 4296, R2:4690.

What would be the biggest mistake that a trader with a negative bias can make? The biggest mistake is to get hooked to the negative bias and not listen to the market if it does race towards 4650 and above. If that were to happen, either stand aside or participate on the long side.

This is what listening to the market means - be right or wrong in your bias but correct yourself when the market proves you wrong.

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

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.

Are you over trading?

Over trading is often mentioned as one of major mistakes in day trading.

Now I ask the question what is over trading in day trading context.

First of all I follow essentially a trend following system. Which means I must detect a trend before I trade.

Going over many days of nifty daily 5 min charts, I notice a pattern that most major trends last about an hour or an hour and a half. Sometimes a trend lasts through out the day.

Therefore, it would seem that on most days, I could aim to catch may be one major trend. This would mean one trade per day. If I allow for missed or misinterpreted trends, may be I should add 2-3 more trades.

Which means that I should not be placing more than 3-4 clean trades on any given day. I checked my trading record and discovered that typically any day I have traded more than 6 times I ended up losing money.

There you go, if you are putting more than 3/4/5 trades daily, you are probably guilty of over trading and are probably paying for it too.

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

Analyzing actual Trades - 04 Jun 2009

This morning, I said

Quote

For Traders with a SHORT TERM BEARISH VIEW OF THE MARKET

Go short if Nifty trades below 4470, SL at 4530 or 4575 depending on your risk appetite and position sizing


For Traders with a SHORT TERM BULLISH VIEW OF THE MARKET

Go long around 4490 ( nifty ) with SL 4430. If 4430 breaks, stay away until a dip is clearly visible

Unquote


As it turned out, the first group of traders would have perhaps broken even with a bit of tight management of SL , while the second group would have made a good amount of money.

For myself, I chose to trade with a negative bias, and was a bit more aggressive than I had suggested. Also, for me preservation of capital is of great importance. Hence I try to break even as soon as possible. Here were my actual trades from today.



First Trade:

Time: 10.08 am: Sell Short at 4494.25, Initial ( Mental ) Stop Loss @ 4540
Time: 10.24 am: Nifty at 4484, placed Actual Stop Loss @4512
Time: 10.39 am: Nifty at 4472, moved Stop Loss to 4591 (BREAK EVEN after commission, YES!)
Time: 11.00 am: SL triggered.
No gain no Loss on this trade.

Second Trade: ( still staying with Negative bias )

Time: 11.14 am: Sell Short at 4487 Initial (Mental) Stop Loss @4512
Time: 11.17 am: Nifty at 4493, placed Actual Stop Loss at 4504
Time: 11.27 am: Nifty at 4475, moved Stop Loss to 4485 ( In the Positive , YES!)
Time: 11.36 am: Nifty at 4463, moved Stop Loss to 4474
Time: 11.45 am: Nifty at 4457, REALIZED STRONG RESISTANCE at 4450, moved Stop Loss to 4563
Time: 11.47 am: Stop Loss triggered
Net Gain - 20 points after commission

What happened during the rest of the day? Watched the market recover ground, realized my negative bias is not supported by price action, chose not to participate.

What is the moral? If you have a reasonable strategy, and you stick to it, you have a reasonable chance of getting somewhere even if you misread the market.

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 day trading is not for the novice and there is significant risk of loss of capital in trading.