Fundamental Flaws

I started my Stock Market investing in late eighties. I used to submit multiple applications for good primary issues and made good money. Later CCI was abolished and companies started charging premium on their issues.So there was no way to make profit but to go for secondary market investments.Trading was really not an option as there was no internet and electronic trading.

Like any other investor , I used tools like PE ratio,PB ratio, EPS etc for my analysis.I compared the company PE ratio with the Market, Sector, Industry and the historic PE of the same company. Lost a lot of money , energy and time after buying an undervalued stock and waiting for the market to discover the value.

One  fine morning , it dawned on me that I must focus on Market price and not on this ratios .So I changed the formula. PE Ratio = Market Price /  Earnings per share to MP = EPS * PE Ratio. So the Market price is a multiple of  EPS and a variable. This variable is nothing but the market sentiment. Our companies declare their results quarterly and this EPS remained a constant at least for a quarter. Then everything was clear, the focus should be on the sentiment rather than on earnings for the short term player.

People may argue that projected EPS is more important and we may need to research and pick stocks.So far I could not accurately project not even the profit of the bank branch ,where I work,for any  quarter even though nothing happens there without my knowledge. Leave alone thousands of companies operating in different sectors , industries and geographical regions.

If you do not have a lot of luck or right connections to get inside information, chances of becoming a successful investor is very remote. Buying lottery tickets can be a better option.

" Fundamentalism"can be injurious to your financial health.

31082012

Today I could not watch the Market in the morning. When I came the announcement drama was over. BOF of PDH/HOD gave a short signal and gave a fantastic trade.MSP from where yesterdays vertical move started acted as support. I expected a retest of LOD and a long signal.But it did not happen.Notice the point marked A. We can try a short here with SL above HOD aiming for FTA, BRN.

29082012

On hind sight BPB of PDL was the only reliable signal.TP at BRN 5300.I am disappointed that a strong BOF did not happen at the TR high at point A .It would have been a fantastic 40 point trade.

28082012

Nifty opened just above PDL. and immediately sold. Did not get a proper pull back to short. Initial range formed and the retest of IR low was a long signal, but skipped it as the trade was against the market bias. Went short at the test of PDL.This trade moved well. Went long when the break of the LOD failed.This trade also moved.

Rope Trick

I did my primary schooling in a small coastal village of Kerala.Those days there were no school buses and we used  to walk. There was a small water way on our way  to cross.It was real fun commuting to school with friends.A  fallen coconut tree was lying by the side of this water way and  we always played on it. We used to balance and walk on this tree trunk.

During an "Onam" vacation some elders shifted and placed this tree trunk across the water way so that they can cross it avoiding a little walk downstream.Many of us kids found it difficult to cross the stream walking on this tree trunk.We were afraid . Later we tied a rope to hold on while crossing and then we could do it without much scare.

The task was very simple and remained the same.We had done it a thousand times before. but now the focus shifted to the danger of falling down.Focus on the danger made us anxious and fearful.When there was a rope to hold ,we felt a little relaxed and was not much afraid to do it.

Trading is also very simple. The problem is, our emotions play spoil sport.Fear is the most powerful emotion and while trading we are either afraid to lose money or fear reduction in our profit.We can overcome this problem to some extent by holding the rope which is known as " Stop Loss".

But We have to make sure that  our trading method, the lumber on which we are walking, is strong and robust. If we are not sure about it and do not have total trust on it, even the rope is not going to make us comfortable.

27082012

Nifty opened just above BRN 5400. First bar gave an impression that BRN is going to hold. But next bar broke BRN and gave a BPB short signal.TP at PDL. BPB of PDL was another short. Even though it moved well I scratched the trade with a small loss.

Price Channels

Real breakthrough in my trading came when I started trading the Market as if it is in a range all the time. I consider the trend as a series of range breakouts. (Read). I try to buy the lows and sell the highs (Read). But there are situations where we cannot trade a trend with this approach. This is when the price is in a Channel.

A Channel is a very difficult pattern to trade. It is like a diagonal Barbed Wire. In fact Channels are nothing but trends. Most of the traders do not correctly distinguish between a trend and a channel. I will try to explain.

Look at the above picture. You can see two types of trends. Both look like channels. You need to look closer to know the difference. First one is a normal trend and second one a volatile trend which we call a Channel.

Markets move in swings. A swing high is a minor resistance and once broken it may act as support. There is an imaginary line above each swing high which I call Price Flip Line ( PFL) In a normal trend generally price respects PFL .Some times pull backs in a trend reverses before testing a PFL creating a buffer zone. A Buffer Zone indicates the trend is strong. Once the price breaks the low of the swing that made the highest high, we can safely assume the trend has reversed..

A Channel is volatile trend where price will not respect the PFL. Pull backs will reverse somewhere between PFL and Pivot Low. Be very careful while trading dynamic DPs such as HOD and LOD. Ensure that you are not in a volatile trend which is called a Channel.

If you are in a trade and riding a trend never exit before the PFL cracks and never stay in a trade after the Pivot low cracks. I have shown the long example only, but this is applicable in short side also.

24082012

Nifty opened just above PDL. First bar gave an impression that it is going to hold. But immediately broke PDL and BRN and gave a pull back. Shorted here expecting a further fall. My stop was behind three barriers BRN, PDL, HOD.but stopped out. BOF of LOD gave a long signal which also did not move. Scratched.. Mother of all Barbed Wire Pattern

23082012

Nifty gaped up into PDH and got rejected. IR formed and BOF of IR High gave a short signal which did not move. Scratched the trade at a small loss.BOF of PDH/HOD gave another short which moved very well. A 50 point trade.. I was a little bit scared to go long  when price reversed and went above PDL( was it a BOF or BPB ?) without a retest of LOD.Skipped it.

22082012

Nifty opened within previous day range. I was looking for an opportunity to go long. But the first signal was a BOF of IR high. Did not move to IR low as expected. Scratched. Skipped the retest of Range low. BOF of PDH (wrongly marked as HOD in chart) gave a short which moved till the range low.There is no commitment from neither Bulls nor Bears

21082012

Nifty opened above PDC and formed  an initial range as a Barbed wire around BRN 5400.Bias was bullish skipped the TST of IR low as it was forming a barbed wire. BPB of IR High gave another long signal. Took it even though FTA PDH was too close. This trade moved well.

Deliberate Strain

In an earlier post, I had written about the three stages of Trader Development. (Read). Having defined the structure and identified the methods and tactics to trade, we must acquire the ability to take the right action at the right time. This cannot be achieved without a lot of practice and experience.

The problem is experience will not lead to expertise always. Despite repetition, we may fail to become an expert in what we do. We can find a lot of people who have worked at something for decades without really improving their performance in their chosen profession. What we need is “Deliberate Practice”.

Dr. Anders Ericsson is one of the pioneers researching “Deliberate Practice” .One of Erickson's core findings is that the expertise development is depended on “How one practices” rather than “How long one practices”. An expert breaks down the skills that are required to be an expert and focuses on improving those skill chunks during practice with appropriate feedback. 

Another important feature of deliberate practice lies in continuously practicing a skill at more challenging levels with the intention of mastering it.

We need to take "Deliberate Strain" and "Deliberate Pain"  for real improvement.

17082012

Nifty opened near PDC and went up straight. Skipped BPB of BRN as PDH was close. When it broke PDH , it had run almost 40 points and I expected a range. Price made a Barbed wire around PDH. BOF of Range low gave a long signal which did not move Scratched the trade .BOF of HOD gave a short and it moved very well.BPB of range low was a good location to add.Anybody paid attention to WWAP.during the fall ?

16082012

Nifty opened within previous day closing range. After two days up move I was expecting a range or a sell off. First two bars were bear bars and the bias was bearish. Looking for shorting opportunity. BOF at IR low was a long signal but skipped it as the bias was bearish and BRN 5400 as FTA. BPB of IR low was a short signal, but did not move as expected. Scratched the trade.. The next two trades were BOF of BRN . Both trades moved well.BOF of LOD came too late to trade.

14082012

Nifty opened near PDC. Failed to go above PDH. BOF of the IR low gave a long signal, which moved well. TP at BRN. Did not attempt any other trade as there was no reliable signal.
Wish you all a happy and "safe" Independence day celebration.

13082012

Nifty opened within previous day range. BOF of  IR high gave a short signal.I was expecting the market to break the other extreme. Covered at a nominal profit. BOF of IR Low/LOD gave a good long signal which moved very well.Notice the area marked A . We will be tempted to cover and reverse the trade here. If the move is originating with a BOF of a range low after a prolonged range move almost always price will break out of the other extreme.

Slippery Slopes

You might have read a lot about the process of Trader Development. There are tons of materials available all over the internet. As always, I have a very simple approach to this subject also.In my humble opinion there are only three stages in trader development. You need to negotiate two slippery slopes and a plateau. These stages are Structure, Tactics and Action.

Structure

First stage is defining the structure of the market. This is a slippery slope and most of the traders fail to climb this. Structure is simply a frame work within which the market moves. Imagine a foot ball field. There are certain rules under which the game is played. If you are not aware of these rules, you will think that the moves are random. Markets do not have such hard and fast rules, yet you need to define a framework to trade it.

Nobody knows the exact structure of the market. Indicators, Market Profile, MAs, Elliot waves, Gann etc etc are all attempts to define the structure of the market. We need to define this structure and identify the "Actionable" price levels where we can initiate trades.Observe and ensure price is respecting these levels repeatedly and these levels are “Actionable”.There is no point in proceeding any further without total trust in your defined structure.

I Consider Market to move between levels which I call Decision Points. Observing a lot of charts, I am convinced that Market respects these levels repeatedly and these levels are “Actionable”.

Tactics

The second stage is deciding upon the methods to trade the price moves within the defined structure. This is all about tactics. This is relatively easy part and can be achieved with a little bit of trial and error. Interestingly many traders think this is the most important stage and try to trade without properly defining the Market Structure. I have seen people trading candle patterns paying no attention to the location. I trade patterns like TST, BOF, BPB and FTC at Decision points.

Action

The next stage is Decisive Action. This is going to be another slippery slope. Having defined the structure and identified the tactics to trade, we need massive action. We need to acquire the ability to take the right action at the right time. It is going to take some time and we need to preserve our capital and survive the learning curve. Visualization can be very helpful during this stage. We may need to address many issues related to poor money management, trade management and psychological issues such as impatience, fear and greed.

There will be set backs. Instead of identifying the cause and rectifying it, many traders come back to stage two and start  dealing with patterns again  or worse start defining their structure again putting themselves all the way back to stage one. Trading Consistency  will remain elusive for them.

10082012

Nifty opened near PDL and chopped around it like a Barbed Wire pattern. Went long when the third push down to break IR low failed.TP around IR High. Then I suspected a channel move but it failed. BOF of LOD gave a good long signal which moved well. Then I noticed a triangle pattern which broke to the down side as expected. Took a BPB short and stopped out within no time.
Decision points are not brick walls. These are only locations where we expect other traders to act forcefully and decide about the future direction of the Market. If a DP is not behaving like a DP do not pay much attention to it later in the day . For example PDL in this chart.

Visualisation

Visualization can help us very effectively to reach our trading goals.I have written an earlier post that fantasizing about our future success will do more harm than good.(Read ). People  think mentally simulating an outcome will help them to reach the goal. Wrong

But another kind of Visualization  can be very helpful in achieving our goals. Visualize the process through which the end goal can be achieved rather than the end state of achieving it.Thinking about the process will help us to focus and identify potential problems and probable solutions.

Vtsualisation is nothing but mental practice. Mental practice is as good as real practice,because our mind interprets reality and imagined things similarly and both strengthen and reinforce our  neural pathway.By practicing something in mind, we are effectively increasing our training time.

As I am still working and not a full time day trader, my screen time experience is very little. I have compensated for this through effective visualisation of my trading process on historical charts. I have done this on a thousand charts at least.I just open the historical chart and walk through it bar by bar, paying attention to the locations, patterns and trade setups.This has helped me a lot to streamline my thought process during live market..
Choose the behavior we want while trading and use mental practice to reinforce it through visualization.

09082012

Nifty opened within previous day range. Stayed out till IIP data is out. There was no forceful selling even after disappointing data.Nifty was channeling down.waited till it escaped from the channel. Skipped BPB trade at PDL as I felt there was not much down move left. Long on the TST of LOD added one more lot at the break of range high. Stop kept just below PDL. Later stopped out of the trade.I suspect Nifty is now in a reverse channel.

Test Video

This is only a test video of todays price action, See how 5350 is holding. Let me know whether videos could be helpful.

08082012

Nifty opened within previous day evening range.BOF of PDH gave the first short signal. TP at PDC. Skipped the long TST trade at PDC. Price tested the range high and drifted down. I was expecting a BOF at LOD.
Price was still trading within the previous day closing range.Nifty refused to go down below 5350. Low of four bars were 5350. Then price turned and started moving up.Another push down also failed to go below 5350. I went long as I can keep my stop loss below LOD .I was lucky to get very good profit on this trade. Last trade was BPB of HOD. Went short when price re entered the range. Could get 20 points on this.

07082012

Nifty opened near previous day close. BOF of BRN 5300 was a signal to go long. skipped the trade as FTA( PDH )was too close. Expected a pull back after the breakout of PDH. I would have gone long keeping the stop loss below PDH. if the price came  within my risk tolerance level.
I thought it was going to channel but later on traded in a very tight trading range. BOF of this trading range gave a long signal which moved well.

06082012

Nifty gaped up and spent the entire day within the Initial Range.TST of Range low was the only signal.

SS, We Salute You

Sunil Saranjame of timamo has just published a post on Gap ups. He has done a detailed and elaborate study on Gap up openings during the period November 2010 to April  2011.Read the original post here

Sir, I really appreciate your spirit, determination and hard work.I consider you as a role model who can guide us during our development

SS, You deserve a Standing Ovation

Special claps go......

Markets :Perception of Reality

03082012

Nifty gaped down below the PDL. Bias was bearish and I  shorted the opening bar with a stop above PDL. I have made a separate post on how I deal with gaps (Read). This trade moved well and I took profit near LOD. Nifty moved in a 10 point range for a long time BOF of LOD gave a long signal. Added one more lot on the break of range high with a limit order.. TP near PDL. Did not attempt any other trade because after two directional moves I was expecting a Barbed Wire around PDL.

Gaps

Gaps are regular occurrences in futures market. Gaps occur due to the overnight change in sentiment of the participants. Being technical traders we are not bothered about the "why" but concerned about "What".

Every gap is unique and require different treatment depending upon the situation. Still general guidelines can be formulated to deal with gaps.

There are two types of gaps depending upon the location  of the gap open. Inside Gaps and Outside gaps.Inside Gaps are gaps happening inside prior days range and do not need any special treatment. Let the market trade and interact with a Decision Point .We can trade the price action around DP as usual.

When the price gaps outside the previous day range, it is called an Outside Gap.When the price start trading outside the previous day range , it is a major transition and a change of sentiment.Price is likely to continue moving in the direction of impulse.

Outside gaps can be further classified into two categories.Trend Gaps and Counter Trend Gaps.

1.Trend Gaps are gaps in the direction of the previous day(or days) trend. For example Gap up above the high of a previous up day ( or days) and Gap down below the low of the previous down day (or days).Trend gaps are likely to attract profit booking at the first sign of opposite order flow.

2.Counter Trend gaps are gaps against the previous day ( or days) trend. For example a Gap up above the high of a previous down day(or days) and a Gap Down below the low of a previous up day (or days). Counter trend gaps will attract orders in that direction from new traders as well as the covering from trapped traders.CT gaps are likely to trigger an impulse move in the direction of the gap.

As you know , my trading revolves around Decision Points.I always try to hide my stop behind a DP. If the gap is an inside one , I let the market trade and wait till it hit a DP to make a decision.

In case of an Outside gap, if it is trading within my risk tolerance level, I take a position without waiting for the price to hit a DP. I hide my stop below the PDH or above the PDL depending upon the direction of the gap. If the price is not within my risk tolerance level , I let the market trade and reveal its intention.

02082012

Nifty gaped down a little and sold. Bias was bearish . I was looking to short . Did not retest DO-IR High. LOL BOF of IR Low/PDL was a long signal. Got stopped out. Hesitated to go long at A after the second BOF. Missed a good move. TST of DO gave a short signal which made a little profit. Last BOF of HOD was a scratch.
Follow up action is missing even after strong BOF.There is a lack of interest in the market. There is no participation from traders. Volumes are drying up what could be wrong ?

01082012

Nifty opened near previous day close.Broke above PDH . BPB of PDH failed.Later BPB of HOD-IR high also failed to move.Both trades stopped out.Did not attempted the first BOF of IR low as FTA was too close.Second one did not test the extreme. So avoided.