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Friday, July 31, 2009

Trend Day

Its still not 12 noon while I write this. Today is quite likely to be a trend day. I have written about trend days earlier too on this blog.

What is a trend day - On a trend day, there is substantial buying or selling pressure and prices mostly move in one direction for the majority of the session and close near the high or low the day respectively.

Why are trend days good for us - Trend days are good days to trade, cause Nifty moves in the direction of the trend and often goes much longer then we think it will. The best part is that this happens with low volatility and with high probability - making it an easy trade where one can make good money.

Now the important question is how can one identify a trend day. Its not an exact science - but I can offer a few pointers -

a. Global markets would be strong/weak and our markets would open with a gap up/down
b. The larger trend should be up/down and market should have shown days of good upmove/downmove before
c. The gap does not get filled - rather, market continues to move up for the first hour with small sized candles showing more strength
d. Most important - Stochastics & RSI go into overbought zone early and stay entrenched there and infact even move up higher towards the 100 levels. This should remain so for atleast an hour.
e. Advance Decline ratio should be very high and should be increasing
f. Higher beta sectors should outperform and continue to that

After a few of the above indicators give you a sense that today is going to be a trend day then one just sits back and waits for a pull back. A pull back will be like in the chart below -



Stochastics & RSI will pullback to the mid line or lower, but prices won't really show a major drop - just a relatively small pullback. They will mostly pullback to the 20EMA line (in red) and take support there. It is this pullback that we should look to buy cause 70-80% of times it will turn around and continue to move back up and close substantially above the buy price. The rest 20% of times, we get out with a small loss.

So buy the pullback and stick on for a nice ride up.

Markets finding strength on every dip

This is the scenario that one can clearly see being played out day after day. Every time the bears bounce back with a sharp 40-60 points fall large amount of cash based buying comes in to support the market.

Technically speaking I can see and notice a marked difference between markets this past fortnight and the time before that. Earlier large bouts of selling in short periods used to be followed by more selling, often right till the end of the trading session. There were very few periods when market showed such similar action but on the bullish side. This time round already in a span of 20-22 days we've had 2-3 when buying has sustained through the day and only taken market higher and higher through the day till it has closed at nearly the highest point for the day.

Such intraday chart patterns and strength clearly shows which side market participants are stacked on. As technical traders we simply try to follow the market - and since at this moment it is on the long side, we try to buy on any dips.

Wednesday, July 29, 2009

Some error in Yahoo finance Nifty chart today

Today there was some error in the Yahoo finance chart for nifty where the chart was not updated for the first couple of hours. Now this really creates a problem for people like us who are so used to seeing this chart everyday trading day of our lives. Seriously I am so used to it for taking my discretionary trading decisions that it becomes exasperating if I don't get to see it. But anyways, things can't and won't always be perfect - at times one would have infrastructural issues. Its best to keep out of markets at such times, when one is handicapped due to any reason.

The other things with such data missing is that the indicators then have false values for quite some time even after prices start filling in. For example, RSI is based on past 14 period values - now since those are missing in the chart, the RSI value would tend to be wrong for the next 14 periods, till we have proper data for all the past 14 periods.

Is Options trading really safer?

This question should be asked by all those who blindly believe in the above. Most retail investors don't dabble in futures and options, and those who do, do so in options and not in futures - seemingly believing that options are a safer bet.

Yes they are a safer bet, if used properly, and the leverage controlled. Rather what seems to happen with most of us is that when the market moves against us and the value of options decline a lot, we buy more of them in the hope that we are reducing our cost and when the market will go in our favour we will make double the money.

There are two problems with this approach. First is that most times market won't move in our favour, or won't move as much in our favour as we would expect them too. This is especially true because most retail investors pick up deep out of money options, cause they are seeming cheaper. Yes they are cheaper, but what this also means is that market has to move so much more before we end up making any money.

The other and the most important thing is decay. What happens with options is that there value keeps on reducing everyday as we near expiry, regardless of market movement. So if market moves in our favour we make money, but not as much as we would expect because decay would eat away some of the gains. If market moves against us, we lose on both counts - both decay as well loss due to market movements.

It is because of this factor of decay, and the fact that people implicitly don't get out of a losing option, which then decays to a value of zero - unlike a stock which retains values and will go up someday, or a futures contract - where once one makes a certain amount of loss, one will be forced to pay up the loss amount and this would ensure that once the loss gets beyond a certain amount one is automatically stopped out of continuing with a losing position.

So avoid being a buyer of options, rather be a seller instead, or trade in futures if you have to actively trade. Being an options buyer is mostly a losing proposition.

Friday, July 24, 2009

Are trading options really safer

There are many, rather most retail traders who think that trading options are safer. Is that really the case?

- From my personal experience, I can say without a doubt a big no !!! WHY ?


a. Because traders think the risk is less, they tend to hold options against the trend, even when they know they should ideally cut their loss, and not hold onto a losing position.

b. Because options are so cheap, when a trade goes against you, instead of getting stopped out of a position, most retail traders would tend to add more leverage in form of options just cause its so cheap and inexpensive. Thus not only are they holding onto a losing position in the first place, they are adding more to it. In trading you don't throw the good after the bad. You cut the loss and get on trying to find a trade in direction of trend.

c. The BIGGEST and most important reason is time decay. If you hold an option from one day to the next, and the index stays where it was the previous day, you will still end up losing money as they value of the options starts decaying ( reducing) with each passing day as expiry nears. Not only this, this rate of decrease also starts increasing as expiry. So not only is the first derivative of value with respect to time to maturity negative, and second derivative too is negative. Thus option values keep on falling and falling faster, traders load on more leverage, till it all ends up with a zero value.

The same is not the case with futures. That is so because futures have the concept of margin requirement. Once your margin falls below the minimum threshold your position will automatically be closed ( though at a substantial loss), but this would still ensure that your capital does not go to zero.

With the kind of undisciplined trading that happens with options, one mostly ends up losing all of one's capital.

How to trade Nifty futures intraday


Use the chart above. Follow instructions given in post below.



Nifty Futures Intra Day Trading System with RSI Stochastics EMA and PSAR

Quick instructions on how to take trades

Buy – When RSI moves above 20 from below & when the Blue stochastics line rises above the red from below 20.
Sell – When RSI moves below 80 from above & when the Blue stochastics line falls below the red from above 80.
Keep stop of 15-20 points. Keep target of 30-40 points (twice that of stop). This kind of trading setup is more suited to range bound markets rather than trending markets. In strongly trending markets, things can remain oversold or overbought for long periods without correcting. So, if you do two trades in the same direction & both of them get stopped out, stop trading for the day.

If there is a gap of more than 1.5%, there is a strong chance that today might be a trend day and stochastics and RSI wont work in that case. In case you see, market moving into overbought/sold zone and staying there continuously without correcting the move, then assume the day might be a trend day. The correct way to act in such market is wait patiently for stochastics and rsi to come down from overbought/oversold, wait for price to come near 20EMA line and then take a trade in the direction of the trend.

Cheers !!
Click here for Detailed instructions on how to use this chart and the various indicators
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Other intraday charts for indian stocks and indices.

Wednesday, July 15, 2009

Understanding how to trade Nifty intraday

Hi,

For all those looking to trade Nifty , here's a little bit from what I have been able to understand by looking at nifty charts for the last couple of years i guess.

Infact, for the majority of the first 12-16 months, I traded without any reasonable logic - just based on hunch or gut feel. A lot many of novice traders do that and end up making losses. We first have to understand what is happening and then see what we are doing. Most people who trade by gutfeel simply try to catch retracements. "Market has fallen so much, it will now bounce back, it has risen so much it should now fall." With such logic most people are inherently playing against the trend - and a vast majority of time they would be wrong and lose large amounts, and when they are correct they would only make a pittance as they would exit their positions quite early.

The thing to understand is that equities tend to trend in one direction for large periods of time, and money is made by trading with the trend rather than opposite it. And it is for this reason that I would advice people not to try and trade only intraday but rather carry positions overnight and stay with the trend and you would be amply rewarded. But for those who insist to only day trade here's what I have understood.

There are two kinds of markets and trading strategy has to be adopted accordingly - trending and range bound. Trending markets move mostly in one direction, whereas range bound markets move within a range and don't make large movements in either direction. The way to play the first market is to obviously stay with the trend and stick on - trending markets move much further than most people expect them to.One should use pullbacks in price to reenter in direction of trend. Thus even if one misses the first move, one can still reenter at a later stage. In rangebound markets the idea is to buy and sell at extremes of a range. The range can either be defined by previous support/resistance levels or one can look for overbought/oversold indications on RSI or Stochastics indicators for entry into trade.

I will be elaborating on both these kinds of markets further in my later posts. In the meantime, one can track the Nifty intraday chart here -

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