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Table of Content
Chapter 1
Passion
Confidence
Discipline
Decisiveness
Capacity to Accept Failure.
Capability to Accept Risk.
Determination.
Focus.
Chapter 2
Chapter 3
Market Participants.
Traders Type (Time basis).
Chapter 4
Trend Trading
What is Trend Trading?
Chapter 5
What Kind of a Trader Are You?
How to Trade Like a Master
Trading Only High Probability Opportunities
Never Over-Trade
Find a Shoe That Fits Your Size
Timing the Markets
Your Trade Should Fit the Type of Stock You are Trading
How Many Open Trades at a Time?
Chapter 6
Why Some Traders Don’t Use Stop Losses
Stop Loss
Using Stop Losses to Protect Your Profits
Stop Losses When Markets Open with Gaps
Stop Losses When a Stock is Being Manipulated
Chapter 7
Candlestick Charts
Overbought/ Oversold Overload
Gaps in Candlestick Charts
Weekly Charts - For a Longer Trading Position
Using Hourly Charts
Be With the Stock On the ‘West Side’ and Let it Go On the ‘East
Side’.
Chapter 8
Never Fight the Market
Buy High, Sell Higher
Winning the Game of Odds
Trading the Different Types of Rallies
The Successful Trader’s Psychology
Beware the Trading Minefields
Trading Secrets from the Masters
Chapter 1
A GOOD TRADER
“This chapter is about what are the most important qualities that a trader
should possess. We don’t believe that you have to be very intelligent to
become a successful trader; but, there are certain qualities & techniques
which one must want to learn before entering into this vast world of
trading.”.
When you thought first time you want to become a trader, what was the first
question that came to your mind? It may be anyone of the following. What
personality” traits should I have to become a successful trader? What kind
of attitude I should have towards the markets? Is it necessary to have good
knowledge about fundamental and technical analysis before entering the
markets? Who can become a successful trader? What kind of strategies I
should adopt to make money?
The first thing you need to do is to inculcate the some of the qualities in
yourself. We believe, anyone can become a good trader but following are
the important personality traits that a trader should have.
Passion
The first thing that a trader should have is the big word “Passion”. Passion
is something that reflects in your personality, in your communication, in
your attitude and behavior. If you are passionate about something you start
enjoying it and it doesn’t remain your job or profession anymore but it
becomes part of your lifestyle.
There are people who sit in front of the market since the opening of the
market till its closing on daily basis. Many times they don’t do even a single
trade in the whole day. But if they don’t sit in front of the market for few
hours or a day, they feel that there is something missing in the routine.
That’s the passion about the market.
If you are watching the markets on a consistent basis, you become a better
decision maker. You are a better judge of the market even better than the
experts. It’s always exciting to deal with the numbers. “If reading and
understanding numbers is your passion, you can become a good trader.”.
It is not necessary that you are exceptionally intelligent to become a
successful trader; or you should have a very sound knowledge of
mathematics or statistics. Any average person with a little bit knowledge
about the stock market can become a successful trader. Trading is a
competition; anyone who follows discipline and keeps a continuous watch
on the market emerges as a winner.
There are many of successful investors in the world and instead of saying
anything else I would rather say that they all are exceptionally intelligent.
All the investment decisions are made after making a lot of research.
Investors satisfy themselves with the growth of the company and
sustainability of that growth in the coming years. They don’t make any
investment unless they feel everything in the company is going in the right
way including business model, market share, customers and expansion
plans etc. If your one decision goes wrong it may eat out substantial part of
your investments. You don’t get a chance to review your decisions and
again you will have to start the process of research and churning your
investments. In history, few examples are there which proved investment
research can’t tell you the exact position of a company. Satyam Computers
and Lehmen Brothers’ were big shocks for the investors which forced them
to go back and review all their investments.
But as a trader these can be considered as best of the opportunities to make
money. Remember one thing if you feel you are stuck in a wrong position
you need to hit your out (stop loss) immediately. Investors can make money
only on one side of the market/stock whereas, a trader can make money on
both sides of the market; they just need volatility on either side.
Confidence
Always the next big thing is ‘Confidence’ to be successful. You should have
confidence in whatever you are doing. “Sometimes you may be right
sometimes you may be wrong. The most important thing is the execution
and for execution confidence is the most important quality.” Especially for
a trader; confidence can turn you to be a victor. Lack of confidence will
lead to doubt, second- guessing and you will miss out on various
opportunities to make profits. It also leads to frequent losses; when you
create a position after a long wait, you may be in a wrong position and that
will force you to exit. You must believe in ‘yourself and your decisions’ to
become a successful trader.
In trading fast and wrong is right and slow and right may be wrong. Hie
statement says that if you are confident enough to hit a position, you should
hit it immediately otherwise, you will be late and you may be picking up
tops and bottoms of the stock. If you are wrong, you always have the option
to hit your out (stop loss) losing a couple of bucks. You should be fast
enough to create the position at the right level and if you are wrong you
should hit your out (stop loss) faster. That will help you to control losses
and protecting profits. If you are slow and create a position after a long
wait, you may have already missed the move. After creating the position
you will not be able to hit your out as you are slow7 and can’t make a
decision quick enough, which will lead to ruin. Confidence will help you to
create the position at the right levels and hit the out (stop losses) with
minimal losses if you are wrong.
So always remember:.
“In trading fast and wrong is right and slow and right may be wrong.”.
Discipline
Exercising ‘Discipline * in trading can help you to be consistent. Every
game has some rules; on the similar lines trading is also not an exception.
Exercising discipline even in worst of the times can keep you out of the big
trouble. There is a routine that you need to follow till you are part of
trading. Do not allow emotions like ‘fear and greed ‘ affect your trading
decisions.
You should be in the market at least half an hour before the opening of the
market. Do the necessary research to keep yourself updated with any major
event or activity which is going to happen during market hours and which
can affect the volatility in the market e.g. interest rate decisions, fed
announcements, inflation, future and options expity and earnings etc. If you
are aware, you will not be surprised by any violent move in the market or
stock of a particular company. Every day you should be ready with three
stocks which you are going to trade today and find the important
information on the same. When market opens in the morning you should be
watching those stocks if those stocks don’t move then you should go ahead
and look at the filters (high and low) for stock selection. Trade easy money
not hard money and so on ... It takes some time to follow the system in a
disciplined manner. You should avoid mistakes and do the things as simple
as you can.
Decisiveness
Market continues moving, it does not wait for anyone to take decision.
Therefore, you need to be very-very fast in your ‘Decision-Making’.
“Decision needs to be timely on both the sides either on developing a
position or getting rid of the same.” When you are in the market it’s not
needed that you lug a position constantly, you need to rest like a mercenary
guerilla and wait for the best chance to make a trade.
There may be couple of trading possibilities where you can make profit as
well as several trades to make loss, however consistently remember that
your losses must be very limited so that it does not take up all your
earnings.
In some cases market is stuck in a variety and you are unable to go into a
trade, so you make two or 3 sell the entire day and shedding or making a
number of bucks. These days are considered as learning curves which will
eventually assist you to come to be a far better decision-maker in the longrun.
Do not go into a trade without a reason. When you develop a position, you
need to be sure of 2 points; one reason for the entry and also second out
(quit loss). Every-time you can not be right to judge a profession so if you
are wrong favorite your out (stop loss) immediately without any worry. For
that reason making a decision the out (quit loss) is similarly important as
factor of entrance to a field.
“When you create a position with a factor, hold on to your nerves; but
constantly remember you may be incorrect, market is always best.”
Capacity to Accept Failure.
Excellent traders understand that several of their fields would certainly not
go as per their assumption. However, they likewise know that nobody else
should be criticized for a bad trade. A good investor takes credit of all his
fields whether great or bad. Never ever before use the language of an
unsteady trader:.
• Market is extremely uneven today.
• Every time market goes against me.
• Why my stocks are stagnating with the marketplace.
• Instead of all great signals market is not going sturdy.
and more ...
Being an excellent trader you ought to prevent all this. Do not beverage
your head and consistently stick to the fundamentals of the trading. Don’t
attempt way too many points. You cannot condemn the marketplace or any
individual else for your losing fields. It’s simply you who is to be
condemned or appreciated for bad or great fields. Following trading rule
would aid you to hang on to your nerves as well as at some point emerges
as a successful investor.
“If you made a bad trade, neglect it; if you made a good profession, neglect
it quicker as well as go on relocating till the market is on.”
Capability to Accept Risk.
An investor is comfy with ‘Risk’ and readied to shed money from time to
time. If you are afraid to lose cash, then day-trading is not your cup of tea.
Danger is associated with every activity in day-trading.
When you produce a position, there is always some risk associated with it.
All the golden policies of trading carry threat with it e.g. “A great trader is
never worried to buy a stock which is attacking brand-new highs or sell a
stock which is attacking brand-new lows.”.
Specialists in trading claim that keeping an out will certainly aid you to
safeguard your cash which will at some point aid you to make revenues.
Taking computed risk as well as keeping sheds controlled is the mantra of
success for any kind of day-trader.
“People misconstrue equity markets, they believe that market could
understand their sentiments; however they forget that the market is the
outcome of beliefs of countless people around the globe.”
Determination.
Excellent day traders do not hurry right into trades. When they enter, they
hang on their nerves as well as wait for the maximum revenues. Patience is
called for in both the disorders:.
1. When you are making a position.
2. When you are in a position.
Here keeping perseverance doesn’t indicate wait for a very long time as
well as develop a position. Yet, you should search for the right possibilities
to go into a profession. Occasionally, market is not unstable adequate to
make a profession; in such a situation, you need to have adequate power to
rest there as well as keep watching the markets even without a trade.
You should constantly have a reason for going into a field. You can not
keep a position and miss all various other trading opportunities that already
existing out there during that time. Don’t keep your margin obstructed in
hope of a big relocate the difficult cash.
“Be individual with winning positions as well as quick-tempered with your
shedding ones.”
When you get in a profession consistently keep an out (a quit loss) as well
as do not worried to take that out (stop-loss), if you are incorrect. If you are
right, wait till that stock shows indications of trend-reversal or you can go
on altering your out with stock motion in your prefer i.e. tracking stop-loss.
Focus.
Trading is a competition of concentration as well as assertiveness. You
should sit in the marketplace since the open of the marketplace till its
closing without any interruptions. Throughout this period a trader have to
take in, assess and also perform bunch of real-time info. There are lot of
trading opportunities that are already existing out there, you have to capture
few of them and make a bunch of money.
The success of an investor relies on how well he could avoid distractions as
well as keeps attention even when the marketplace is boring. You need to be
in the market when you have a position and you should exist also when you
do not have a position (to execute the available chances).
Chapter 2
TRADERS VS. INVESTORS
“It is said that when a person try to play two personalities, he may get into
trouble. Sometimes, traders try to become investors and many a times
investors change their personalities to traders. This chapter will tell you that
traders and investors are two opposite sides of the same coin.”
A trader is always different from an investor in every aspect. Therefore,
they have to deal with the market in very different manner. We are not
saying that a person can’t be part of both the games. But always remember
the game of cricket. There are different strategies for each format of the
game i.e. Test Match, One Day Match and Twenty-Twenty. So, you need to
identify yourself that what kind of game you are going to play. You can
become a day trader, short term investor or long term investor. There are
different strategies for each of the style of making money through financial
markets. Infact, you can keep two separate accounts for trading and
investment; but, don’t try to mix the same. Following are the major
differences between the two:
1. A trader just wants the stock to move in either direction i.e. up or down.
If a stock is stuck at a level or it opened gap up or gap down and stays there,
it will not be a good stock for a trader. If a stock is opened gap up/down 2
% and it extends its move to 5 %, trader has the opportunity to make
money. Whereas an investor is worried about long term growth, earnings
and fundamentals etc. An investor does a lot of research before investing
their money into any stock. They are concerned about sectoral growth,
Government policies, interest rate regulations, inflation number and so on ...
A wrong decision for an investor may persuade him to re-assess all his
investments but wrong decision for a trader is another bad trade and losing
a couple of bucks.
2. A trader is worried about what will happen to the stock in next few
hours or minutes. If you look at the chart given below; a trader may have
made good amount of money in the stock when it was ranging from Rs.7 to
Rs.12, but actual move started when it broke out of the range and had a big
move from Rs.12 to Rs.35.
If you are afraid to create a position in this kind of move you will never be
able make good amount of money as a trader. Because even if you are late
entrant, may be around Rs.20, you could have made Rs.10 per share at
least. Whereas, an investor is worried about the growth of the company in
the months and years to come. They look at the stock when the stock is
already taken a move. Market discounts everything. A stock may overreact
to a rumour in the market but it will adjust the price when the actual news
will come out. So it is rightly said that:
“Buy rumours sell news.”
3. Traders have the ability to read the order flow and capture the spread of
a stock. Traders and investors both conduct research to make money
through equity markets. But the style and technique of their research are
head and tail of a coin. As we all know an investor conduct macro and
micro economic analysis, industry analysis, cyclical trends and various
valuations. Whereas a trader conducts chart study, read the order flow,
determine the trend of the stock and identify support and resistance levels.
Traders are more aggressive than investors and they need to be. They react
immediately to any volatility in the underlying; they don’t wait for any
news, research or confirmation.
Order flow (i.e. buyers and sellers) in any underlying is the ultimate tool to
make any decision for a trader.
4. Traders may trade the same stock several times a day and investors put
their money in the stock after the thorough research. Once you have made a
trade in a stock whether good or bad, it doesn’t mean that’s all for the day.
A stock may keep on hitting new highs or new lows with pullbacks and
bounces till the close of the market.
“Good traders exit their positions where they can reestablish at a better
price.”
Being a trader you need to know the difference between notional profit and
the actual profit. Any profit which is not booked is a notional profit and it
may slip out of your hands till you keep that position.
As we can see from the chart given here that a trader may have made good
amount of money in the opening moves of the stock i.e. between Rs. 27 to
Rs. 29.50. But thereafter, there is no point in holding the positions and
waiting for more profits as we can notice that the stock is stuck around 29
levels. During the hard money in this stock (i.e. between 11.30 to 14.30),
we may look at other stocks that are moving upwards. At the same time we
should keep a continuous watch on the stocks we have traded so that we
don’t miss out on the opportunities to make money.
If we look at the chart given below we can see that this is a difficult stock to
trade, still a trader with cool mind and patience can make a lot of money. A
trader needs to exit the positions as soon as possible if it is going against
him. On the other hand if you are making money in a position,, you should
hold that position till you feel that the stock is going to reverse its trend. For
example, if you are short at Rs. 185 and stock is trading around Rs. 182,
you should wait for the stock to further add to your profits and on the other
hand always be ready to hit the out i.e. Rs. 183. You should not give up all
your profits in wait of a bigger move. If you book profits or hit your out,
you can always re-establish. For a trader number of trades is not a matter of
concern till he is disciplined.
“All profit is notional profit till it is booked.”.
5. Trader try to capture profit on each possible move and investor try to
get the profits over a long period of time with the growth of the company.
“In trading fast and wrong is right whereas slow and right may be wrong.”
Trader sit like a mercenary guerilla if they sniff a move, they establish a
position and if they are wrong, they accept it and hit the out immediately.
Traders follow this process till they are sitting in front of the terminal i.e.
since the opening of the market till its closing sometimes even before and
after that.
6. A trader needs to be alert, assertive, focused and disciplined. Whereas
an investor needs to be very accurate, precise, analytical and wise. If you
look at the stock given below, this chart shows various opportunities to
make money for a trader.
If a trader who is more comfortable in trading trending stocks, he may not
be able to make money in Reliance Capital. But if a trader is alert, assertive,
focused and disciplined he can make good amount of money being with the
trend and trend reversals in the stock at the appropriate time. These qualities
help a trader in two ways:
a. Creating the position at the best entry points.
b. Hitting outs with the smallest losses.
This will help a trader to keep the losses under control and extract the
maximum profit during a move. The stock has a range of Rs. 23 (Rs. 372 to
Rs. 395). Consider a trader has traded only Reliance Capital during the
whole day. If he made total of 10 trades i.e. 5 profit trades and 5 loss trades.
The net outcome for a good trader would be as follows considering average
profit of Rs. 5 per trade and loss of Rs. 2 per trade with 500 shares on every
trade.
The net profit at the end of the day would be Rs.7500 i.e. [(Rs.5 x 5) (RS.2 x 5)] x 500 and it’s a good profit for any trader.
“At the end of the day what actually matter, is the color and size of the
closing number.”
Chapter 3
Types of Traders
“There can be various types of traders oil the basis of their trading styles
and trading patterns. We have mentioned in this chapter the various
participants in the markets and the traders on the basis of time duration they
hold a position. Each trader would find himself in one of the categories
mentioned in this chapter.”
Trading is a style used by various participants in financial markets in order
to earn profits in a short span of time. These participants can be Retail
Investors, High Net worth Individuals (HNIs), Financial Institutions,
Portfolio,Managers, Mutual Funds, Jobbers, Arbitrageurs, and Speculators
etc. They use different strategies to make profits through trading. Generally,
trading is done in highly active and liquid stocks. Traders try to capture
small gains with minimal risk. They can hold a position from several
minutes to several hours and sometimes even several days. I would like to
give you a brief description of various participants in financial markets:.
Market Participants.
a. Retail Investors:
They are small investors who invest a small amount and expect bigger
returns. They are scared of markets but they enter in hope of big profits.
They keep jumping from here to there on the basis of rumours.
b. HNIs:
As the name suggests, they are also individuals but with a bigger portfolio
size. They are more experienced and tactful in terms of market movements.
They use advanced tools like technical soft wares etc. for their trading.
Many of them hire professional consultants to manage their portfolios.
c. Institutional Investors:
Mutual Funds, Insurance Companies, Financial Institutions would come
under this category. They make a pool of funds collected and invested
strategically. Part of these funds is utilized to capture trading opportunities
available in the markets. Most of the fund amount is invested for long-term.
d. Arbitrageurs:
They are very active participants in the markets. They have a different style
of trading. Arbitrageurs capitalize on price difference on the same
underlying in two different markets. Various strategies are designed to make
money through arbitraging. Arbitraging can be done between NSE and
BSE. NSE Cash and NSE Future, MCX and NCDEX etc. Arbitraging is a
full-time profession.
e. Speculators:
They try to predict the market or stock direction and place their bets on the
same. Generally, speculators take bigger risks than other participants in the
markets. They stick to their positions as long as they feel that they are right.
f. Jobbers:
Another category of active participant in the markets. They also trade high
volumes on daily basis. There is only one mantra to success small profits
with minimal risk. They try to capture small opportunities to make profits
that exist in the markets. They calculate their transaction cost and execute a
trade if they can get anything above it. They are experienced and
disciplined traders.
Generally, when we talk about types of traders, we think that various
participants in markets are types of traders. Actually this is totally a
misconception. One more form of types of traders can be on the basis of
their trading position time, they are categorized on the basis of timeduration; for example, long-term, short-term and medium term. These are
very confusing terms. Different traders can give you a different meaning for
the same. For example, 2 hours may be short-term for one trader and
medium term for another. We need to get back to the basics and try to
understand the general nature of a trader. A trader may hold a position for
few minutes, another may hold for few hours and many other may hold for
few days. This is nothing but their style of trading. On the basis of trading
position time, the traders can be categorized as follows:
Traders Type (Time basis).
a. Scalpers
They hold a position from 1 minute to 10 minutes. They become part of a
move in a stock. This style of day trading involves the rapid and repeated
buying and selling of a large volume of stocks within seconds or minutes.
The objective is to earn a small per share profit on each transaction while
minimizing the risk. They try to capitalize on news, announcements, breakouts etc. They don’t hold a position for more than 10 minutes. They try to
keep their funds free to encash the maximum opportunities. Their success
mantra is ‘small profits with minimal risk. * They remove their positions at
the earliest if they are wrong. Scalpers trade moving stocks, they don’t trade
hard money. They make more transactions than other traders during the day.
They create high volumes in the markets. Many of the scalpers they don’t
realize that they are scalpers. They can make many trades to earn small
profits, but they don’t allow their positions to turn out to be big losers.
Brokerage, transaction cost etc. are important issues for scalpers.
b. Day Traders
They hold a position from 10 minutes to 2 hours. Sometimes, they may hold
these positions for a little longer-time. But most of the disciplined daytraders, they don’t want to lock their funds, so they try to remove the
position within 2 hours. This style of day trading involves identifying and
trading stocks that are in a moving pattern during the day, in an attempt to
buy such stocks at bottoms and sell at tops. They take a position after
confirmation. They trade stocks with bigger range, higher volatility and
good volumes. The traders mentioned in this book would come under this
category. Their risk-reward ratio is bigger in comparison to scalpers. Daytraders may use various tools to identify trading opportunities.
c. Swing Traders
They hold a position from 2 hours to Daily. They may or may not be
professional traders. Few of the examples of swing traders are “Buy Today
Sell Tomorrow” (BTST), “Sell Today Buy Tomorrow” (STBT) etc. Traders
may hold swing trade positions for few days. Many of the analysts are
specially experts in swing calls. Swing traders use margins to cany their
position for a specific time frame. They trade less but rewards are good.
Most of the trades are executed on the basis of technical analysis. Swing
traders exit their most of the positions in profits.
d. Position Traders
They hold a position from few Days to few Weeks. They are also known as
short-term investors. Generally, they consider. trading their part-time
business. They try to capitalize on rumours or news/announcements
expected from a particular Company, Government and Regulatory
Authority’ etc.
Chapter 4
Trading Styles
“There are various popular styles of trading in the world. Traders confuse
themselves when they trv to get into depth of these styles. To make it
simple we have described here two most successful sty les of day-trading.
Let’s understand and make maximum use of the same.”
Before getting into styles of trading we need to understand the volatility’
and movements of the stock/index which are known as trends/patterns. The
general direction in which a stock or index moves is known as the trend. In
other words, it is the movement of highs and lows that constitutes a trend.
For example, an uptrend is classified as a series of higher highs and higher
lows, while a downtrend is one of the lower lows and lower highs. A trend
of any direction can be classified as short-term trend, intermediate trend or
long-term trend.
The distinctive formations created by the movement of security’s prices on
a chart are known as patterns. It is identified by a line connecting common
price points (open, close, highs, and lows) over a period of time. Patterns in
security prices may occur during different time frames (Intra-day, Daily,
Weekly, Monthly or Yearly). Traders try to identify patterns to anticipate the
future price direction. There are three types of trends:
• Uptrend/ Upward Trend/ Upward Channel.
• Downtrend/ Downward Trend/ Downward Channel.
• Sideways Trend.
A trader can identify these trends and make trading strategies to earn
maximum profit. Trading strategies depends on the attitude and trading
style of the particular trader. It’s not necessary7 that stocks always moves in
trends, it may move sideways but with big swings. Normally, it happens
when there is a rumor or news in the market and traders can’t decide about
the direction of the stock. Many of the good swing traders earn some very
quick profits during these moves. On the basis of the movement in stocks,
there can be two styles of trading, which are as follows:
• Trend Trading.
• Swing Trading.
Now, we will discuss in detail about both types of trading styles.
Trend Trading
It’s always said that trend is your friend. According to a study, the most
successful traders in the world are trend traders. In a strong market, they
choose a strong stock and look to buy it at good levels or vice-versa. We
can make good money in stocks that are trending. You want to find the
stocks that are moving with the market, or have a good uptrend or
downtrend. When a stock is trending - you are simply along for the ride. In
other words, if the stock is trending up - you must be thinking of how I can
buy this stock. If a stock is strong - you should be thinking getting long into
it. Trying to short the tops in an upward trending move is a recipe for
disaster.
If an upward trending stock pulls back, you should be looking for a good
place to buy the stock. In the above graph - even if you bought the highs for
the first 4 hours of every move - you would still be making good amount of
money.
“Resist shorting stocks that are hitting new highs, or buy stocks that are
trending downwards or vice- versa.”
a. What is a Trend?
A trend is nothing but the general direction of the price of a particular stock
or market in general. A trend can apply to equities, bonds, commodities and
any other financial market which is characterized by a movement in price or
volume.
b. What are types of Trends?
Uptrend: Uptrend means rise in a stock without any pullback. A stock rising
at an angle of 45 degree is said to be in an uptrend. Indeed, it’s very easy to
make money in these types of stocks. But it’s very difficult to find out these
kinds of stocks.
Find a stock in uptrend buy it without wasting any time and hold as long as
it follows the trend. The stock in uptrend makes a move as shown in the
chart given below.
Upward Trend: Upward trend means rise in a stock with pullbacks.
Generally, a stock doesn’t move in a straight line, it gives pullbacks. The
ideal strategy for these kinds of stocks should be to buy at pullbacks. Trend
traders wait for the stocks to pullback and create a position. Just have a look
at the chart given below.
Upward Channel: Upward channel is formed when a stock rises in the
format of Higher Highs and Higher Lows. Draw a trend-line joining the
bottoms of the stock. Draw another trend-line joining the tops of the stock.
It would form a channel. The ideal strategy here for a trend trader would be
to buy near lower end of the channel and wait as long as it doesn’t break the
lower trend-line of the channel. Example of upward channel is shown in the
chart given below.
Downtrend: Downtrend means fall in a stock without any bounce. It’s very
difficult to find stocks which are falling in a straight line. Ideally, a trend
trader would find out these stocks and short-sell without any wastage of
time. They hold the position as long as the trend will continue. Example of
a downtrend stock is given below.
Downward Trend: Downward trend means fall a stock with bounces.
Generally, in downtrend when a stock starts falling, it falls with bounces.
Ideally, a trend trader would try to short-sell these stocks without any waste
in time. Chart given below is an example of a stock in downward trend.
Downward Channel: Downward channel is formed when a stock falls in the
format of Lower Highs and Lower Lows. Draw a trend-line joining the
highs of the stock. Draw a trend-line joining the lows of a stock. It would
form a channel. A trend trader would try to short-sell this stock near the
upper-end of the channel and hold the same as long as it doesn’t break the
upper trend-line. The example of a stock in a downward channel is given
below.
Sideways Trend: Generally, there is no trend in these kinds of stocks.
Stocks get stuck in a small range for a particular time frame. There are no
tools for analyzing of this kind of stocks. So, only one word is enough for
trend traders in this kind of stocks i.e. ‘Avoid’.
What is Trend Trading?
The trend trading means trading with the trend of the stock. Trend trading is
one of the most effective and easy to use methods for making money in the
market. Trend trading success depends on identifying and catching the trend
after it has started and getting out of the trend as soon as possible after the
trend reverses.
It is very effective tool for day trading. Most of the times market moves in
trends. If a trader can identify’ the real trend of a stock he can make money
applying different strategies. As shown in the types of trends, a trend trader
would follow different trading strategies according to the stock movement.
It is well said that “Trend is your friend”.
a. Advantages of Trend Trading:
1. Trend trading is easy to understand and execute. There is nothing much
to research. Most of the successful day-traders in the world are trend
traders.
2. With trend trading the trader has a very favorable risk- reward ratio. The
success ratio of a trend trader is better than other traders in the market.
3. Trend trading will help you to take larger profits out of the market
without watching the market or stock tick by tick.
4. Being with the trend helps you to ride along the move. The concept of
trailing stop loss can be very well executed in trending stocks.
Swing trading is a style of trading where traders believe that a stock may
take various swings during the day. We don’t have to stick to a particular
direction in a stock. They believe in taking small profits and exit the
position as soon as possible. This swing trading is different from what we
discussed in types of traders. A swing trader would execute the following
trades in different kind of markets.
Uptrend: They avoid this kind of stock.
Upward Trend: Try to buy on pullbacks and short-sell at the top.
Upward Channel: Buy near lower end of the channel and short-sell near
upper end of the channel.
Downtrend: They avoid this kind of stock.
Downward Trend: Try to buy near 1OWTS and short sell on bounces.
Downward Channel: Buy near the lower end of the channel and short-sell
near upper end of the channel.
Sideways: Lot of buying and selling is done in this kind of stock.
a. What is Swing Trading?
Swing Trading takes advantage of brief price swings in volatile stocks to
ride the momentum along with the flow of the orders. Swing trading
combines best of the two worlds-- the volatility7 of the stock and the
momentum of the trend. Most of the swing traders hold stocks for few
minutes. They are more of scalpers than day-traders. Swing Trading is a
high-speed day trading. Some people call it momentum investing, because
you are trying to play the momentum of the stock. By rolling your money
over rapidly through short term gains you can quickly build up your equity.
Swing traders are very active to change their direction along with the order
flow from the market. Swing traders take small profit on every single trade
but at the end of the day generally their closing number is big. They trade
very high volumes as they try to capture each small move in the stocks.
b. How does Swing Trading work?
The basic strategy for swing traders is to jump into a volatile stock to ride
the move. They don’t play dead or low volume stocks.
The stocks which are in strong trend often makes a quick move then
consolidates or pulls back. Swing traders quickly enter into these stocks and
take very quick profits. Often, they try to short-sell the stock where they
exit their long positions.
After making a pull-back the stock will again continue its trend. This
process is repeated over and over again. One can also play on the short-side
in a downtrend stock. The trader can make big profits in small moves. For
example, if a stock has taken a move of 3 %, swing traders can earn as good
as 5 %.
In brief a Swing Trader’s goal is to make money by capturing the quick
moves that stocks make during the day, and at the same time controlling
their risk by proper money management techniques.
c. What are the advantages of Swing Trading?
Swing trading combines best of the two words i.e. the volatility7 of the
stock and the momentum of the trend. They can earn bigger profits in small
moves.
Swing Trading works well for part-time traders, especially those doing it
while at work. Swing traders hold a position for few minutes and take quick
profits. But remember they can’t take their eyes off the screen as long as
they hold the position.
1. While most of the Day Traders try to identify trending stocks to make
money, Swing Traders try to ride “swings” in the market. Swing Traders
buy fewer stocks and aim for bigger gains.
2. They pay lower brokerage and, theoretically, have a better chance of
earning larger gains. Their total transactions are more but they book profits
in most of their trades. Many small profits make it a big number.
In nutshell, swing trading is a very effective way to make money. The
traders should have some qualities to become a successful swing trader. He
should be active, assertive, adaptive, flexible and pragmatic. He should be a
quick decision-maker. They have to be very fast in decision making and
execution of the same.
Note of Caution: Whether you are a swing trader or a trend trader; always
trade with a stop loss. Stop-loss is must for any kind of day trader. No trader
can be successful without learning proper execution of stop loss. Swing
traders keep targets and exit the position as soon as it is achieved or as soon
as they sniff reversal of the trend. Trend traders keep riding their position
with trailing stop loss and set higher targets. Indeed, swing traders design
trading strategy with one stop loss and one target. Whereas, trend traders
design their trading strategy with one stop loss and multiple target e.g.
Target-1, Target-2 and Target-3.
Chapter 5
The How, When and What of a Trade
You can race on a daily basis or for a couple of days, Or for the long term.
Depending on the trading time period you decide, the charts you look at. the
resistance and support levels you analyze, or the price/ volume time
alignment you consider are entirely different.
When trading for a day, it is important that you close the trade on the same
day no matter what, i.e. whether there is a profit or loss. If that discipline is
lacking, it is best not to do a day trade. If you plan to hold a trade for a
number of days, it’s best to check that the stock meets the price, volume and
time criteria, and that you are trading the body of the price move.
When trading long term, a clear understanding of resistance and support is
critical. Your list of stocks also narrows as fewer stocks can sustain a price
move on strong volumes for long periods of time. Trades within a day are
usually referred to as day trades. Trades for a couple of days are termed as
swing trades and trades for a longer duration are called position trades.
Swing trading is a style of trading stocks that attempts to capture short term
moves in the stock market. A swing trader typically holds a stock for two to
five days. This is a perfect time frame for those that have a job and cannot
day trade. This time frame is also unique in that you can potentially capture
explosive moves in a stock in a very short period of time.
A swing trader does not delve into the fundamentals of the company or the
products it sells. His only focus is the move in price backed by volume,
which he expects to last for a few days.
So if you swing trade a stock, just ask the following questions:
• Is there money flowing into this stock or is there money flowing out of
this stock?
• How can I get into this stock with the least possible risk to my trading
capital?
What Kind of a Trader Are You?
What you should trade depends on your stage of trading. The following
categories broadly define the stages most traders go through.
a. The Novice
You have just started out in the markets. You are not sure how technical
work, how markets factor in news, financial information, buyer/ seller data.
etc. You think charts, or trading on charts, is just a sales pitch.
b. The Student
The student is one who reads technical analysis and starts checking whether
the patterns work. He may have already begun to put his money in trades.
However, he is frustrated as most of his trades are losing money. He thinks
he has understood how a stock should move, yet the stock is not going the
way he thinks it should go. In certain cases, as the stock price falls, he is so
convinced that he has found the right stock that he buys more with every
fall in the stock’s price.
c. The Sceptic
This is a person who has lost money in trading. He has become sceptical
about technical charts and doesn’t believe that they work. He has also
started doubting financials, news. etc., believing all such reported
information to be manipulated. He has either quit the market or will quit the
market for some time only to return another day to try again.
d. The Oracle
This person strongly believes in his gut instinct. This person could also
have an astrologer or numerologist giving him the right’ picks. Clearly, the
oracle believes that he is lucky and gets things right. Learning?
Knowledge? What is that? That is his attitude.
e. The Trader
The trader is a natural student. He closely studies his losses to figure out
what went wrong. He doesn’t blame the market but wonders if his own
psychology is restricting him from doing things right. He studies everything
about technical, futures and options and commodities. He studies thousands
of charts. He is constantly amazed at how much more there is to learn. Most
importantly he takes responsibility for both his right actions and his wrong
decisions.
How to Trade Like a Master
A trading master combines a psychological make-up to trade and a robust
trading system. A loss does not bother him. And when he has profits, he is
in no hurry to take them. He is not concerned about where the market is
headed but knows what to do when it gets there. He is not concerned about
being right. He simply adjusts his trades to fit the movement of price. He
does not try to outguess the markets. He never gets flustered-- he is as calm
about winning as about losing trades. He does not consider losses to be
proof of his lack of trading skills nor does he consider a winning trade to be
a vote for his intelligence. He knows a few winning trades can be a streak.
But consistently beating the markets is expertise.
Holding winners is critical. Because eight out of ten times, your trades will
lose. That’s good. You must be closing out all losing trades quickly. The
two trades that are winners must be held till they stop running and not at
some arbitrary level like double the price’ you bought at.
Trading Only High Probability Opportunities
‘All abnormal profits in the stock market are just short term loans.’.
- Murry Pezim.
Hard work does not equal success in trading. Most times, you need to just
sit and do nothing. When a stock gets a clear direction in terms of price and
volume, the trader needs to get active and find stocks where the odds of a
downside are miniscule compared to the chances of a big upside. In most
cases, that can only happen if the markets, sector or stock starts a
unidirectional uptrend.
Never Over-Trade
Try and limit the number of stocks you trade to less than ten. Stocks have
their own personalities and it is important to study their charts over a period
of time. Moreover, if you trade in more than ten stocks, you lose the edge
that you may develop by keeping the focus intensely on ten stocks at any
time.
Find a Shoe That Fits Your Size
Before you start trading, prepare a trading plan. A trading plan consists of
the following:
• What do I want to do? Day trade, swing trade, position trade?
• How much money am I willing to commit?
• How much can I lose without losing sleep? The amount you decide to
trade should not give you sleepless nights.
• Do I understand charts? Am I clear what the support and resistance
levels?
• Which stocks will I trade?
• What will be the support and resistance on these stocks?
• What will be the stop loss on the stocks I trade?
• Does the trading system fit my personality? In other words, will I stick to
the system? Ami too impulsive to be able to stick to my system?
• How long can I hold stocks? Some of us get itchy about selling in a day,
some can hold for longer. Only those stocks that fit your holding time
should be part of your trading portfolio.
There are some broader questions that should also be answered when you
are preparing a trading plan:
• What rate of return makes me happy?
• Do I trade full time, part time or occasionally?
• Do I get stressed when I have pending trades?
• Do I like action all the time?
Timing the Markets
Each stock must be traded keeping only that stock’s price, volume, time in a
trend, resistance and support. If you have lost money on a trade, don’t try to
average or buy some other stock to make up for the loss, or hope that the
stock will turn around.
If you plan to sell short, it’s better to do so when a stock is either unable to
break a resistance or falls back from the resistance. Selling short on a
market sell-off is not always a great idea as sell-offs tend to stop, or reverse.
Pullbacks after a stock has dropped significantly provide a day trading
opportunity. Sometimes, a pullback turns into an uptrend. Observe a
pullback to see if it is sustained by volumes and crosses a significant
resistance. Once it gets beyond a significant resistance, wait for the stock to
stop its uptrend before getting out.
A rising market or a promising sector will drive all stocks higher. In such
markets, we have to find stocks with the potential to rise the fastest. When
markets are not moving much or there is no clear sector rally, picking
stocks based on price and volume action, and on resistance and support,
becomes essential.
A stock that is in a long term downtrend may find concentrated support and
make a sudden surge of 30 % to 50 %. Such surges are similar to a dying
patient on an artificial respirator, i.e. the stock is being supported. Such
surges don’t last especially if they are not being driven by an overall sector
or market rally. Use such an opportunity to get out of the stock and thank
your stars for getting an opportunity to recoup some of your losses.
Rallies in a sector tend to take all stocks up. The rise conies first in stocks
that best represent the sector i.e. the benchmarks. It then spreads to the next
rung of stocks, and finally it catches up with all kinds of stocks in the sector
- even those of the dubious variety. While conventional wisdom is to stick
to the bigger stocks, a good trader finds the biggest accumulations (or rise
in prices) in the smaller stocks. These are the stocks where operators pile in.
ramping-up schemes flourish and retail investors pile on as most retail
investors prefer to buy low-priced or low denomination stocks in a rally that
they missed in the initial phases. As long as the accumulation continues,
trading profits can be significant. While the risk of reversal is significant in
such stocks, in a sectoral rally chances that such stocks will slip before the
rally gets over, is low. The point then is that these small stocks are the last
to rally in a sectoral rally, but usually rally the most. They are also the first
to see distribution and fall the fastest when the sectoral rally is over. They
will usually begin to stagnate in price, or fall, before the bigger stocks in the
sector start to fall.
Your Trade Should Fit the Type of Stock You are Trading
There are three types of markets where you will make money but profitable
stocks will be completely different in each market.
a. Fundamental Stocks
You can run a trade on a stock s fundamentals, but it is not a good way to
trade. Trading on fundamentals is like trading on a requirement’. For
example, you have to finish a Bachelors degree to do a Master’s degree. But
doing a Masters degree is not a guarantee that you will succeed. The biggest
issue with fundamentals is that no one agrees on what constitutes
fundamentals and most of us have different degrees and interpretations of
information. For example, a company’s promoters may know a month in
advance that they will report a loss, but the public may not know this till the
results are announced.
b. Technical Stocks
Price, volume and time are the only three ingredients when trading on
technicals. This must override any personal bias on valuations,
fundamentals, etc. Trading on technicals requires us to assume that the price
reflects the collective bias of all market players and that all views about
valuations, fundamentals, etc. have already been factored into the price.
c. Supply Choke or ‘Punting’ Markets
Certain stocks or group of stocks are closely held. Examples are
government banks or government fertilizer companies. Since it is known
that the government will not trade actively in the market, anyone trying to
drive the stocks higher has to concentrate on the shares that are with the
public. If the public holding is low or if a sophisticated trader/ institutional
investor buys the available stock out of the market, prices can rise very high
creating a supply choke, i.e. the non-availability of supply at constantly
rising prices.
How Many Open Trades at a Time?
How many trades should you have open at any time? That depends on
whether you are day trading, suing trading or are running a long term trade.
If you are day trading, it’s best to limit your trades at any time to one or two
stocks. That’s because day trading requires constant monitoring of the price
and it is impossible to focus on more than two stocks at any given time.
However, once you close one trade, you can take another trade on the same
day. Swing traders should not exceed three to four trades at any given time.
You can run up to ten trades if you are a long term trader. Since long term
trades don’t require minute monitoring and depend on trends, trading a
larger number of stocks is fine.
Each stock has a life and character of its own. There is a definite edge or
advantage for traders who track no more than ten stocks for day trades,
swing trades or long term trades. This way you can get under the skin of the
stock. You get know its patterns, its behaviors, its highs and its lows. Such
information and insight enable you to trade with an edge.
How do you select these ten stocks? It’s a continuous process. Stocks that
have lost their trends need to be dropped, and others that have developed
new trends have to be tracked. Whatever you do.keep the total number of
stocks to ten.
Let’s say you have ten stocks of which two stocks are in the oil and gas
sector. However, due to government subsidies, their uptrend has come to a
halt. Meanwhile, a new trend has started in plastic packaging stocks. Add
two stocks from this sector to your tracking radar. There should be one tenstock list for swing trades and a separate one for long term trades. There is
no need for any list for day trades. Day trade stocks must be picked for their
price fluctuations within a day.
However, in day trades, too, it makes sense to develop a focus on a few
stocks.
The type and number of trades that you run also depends on whether you
are a full time trader, or hold another job and trade part time, or trade for
surplus income. If you don’t trade full time, it is advisable to avoid day
trading altogether. Day trading is a full time job and works only for full
time traders. If you like to trade but can not devote the whole day swing
trades in no more that three to four stocks at a time is best. If you have little
time to trade but absolutely love to do so then longer term trades based on
long term trends are best. This way, you don’t need to check the stock’s
price all the time. All you need to do is assess the stock when a long term
trend has reversed in order to decide whether you should hold on or sell.
When picking stocks for day trading, you can start with your personal bias
on what you think will run up. If the stock s move or direction supports
your personal bias, do the trade. If it does not support your bias or opinion,
i.e. the stock moves the other way-- avoid the trade. The trick is to trade
only if the stock behaves in the same manner as your thinking/ opinion, and
avoid the stocks that don’t do what you think they will do.
Chapter 6
Risk Control: How to Stop Losses and Protect Your Gains
There is no basis either in logic or in experience for assuming that any
typical or average investor can anticipate market movements more
successfully than the general public, of which he is himself a part.”
— Benjamin Graham in The Intelligent Investor
“We all go through periods when we are out of sync with the market. When
I’m doing things correctly. I tend to expand my rate of involvement in the
market. Conversely, when I start losing. I cut back my position size. The
idea is to lose as little as possible while you’re in a losing streak. Once you
take a big hit. you’re always on the defensive.”
Your upbringing makes us averse to losses. Consequently, we try to avoid
losses at any cost - and also avoid accepting that we have a loss. Trading
requires you to not just take the loss but take it quickly. When you do that,
you will end up with more loss-making trades than profitable ones. On the
other hand, the losses in each trade will be small and your bigger gains will
more than make up for the larger number of small losses. Expect to lose
most of the time. Gains in trading are few and far between.
Keeping to your trading plan even when you have to take a loss frequently
will lead you to those fewer big trades that end up in a deluge of profits.
It does not matter how many times you win. Only the size of the win is
critical. Let us consider an example. Let’s say you place ten trades. In the
one trade you made money, you made a profit of Rs 100. In the nine other
trades in which you lost money, your combined loss is Rs 40. Are you still
ahead? Of course, you are. Ahead by Rs 60 this can only happen if you get
out of trades that are not going your way as quickly as possible.
Now let us take another example. You make money in nine trades and their
combined profit is Rs 40. That’s because you want to “lock” in your profit
in every trade and exit prematurely. On the tenth trade, you have a loss but
strongly believe the stock is going to bounce back. The next day the
company announces that its CEO has been arrested. That was the reason
why the stock was headed down, only we did not know the reason earlier.
The stock collapses. You end up losing Rs 100. Did you lose at the end of
the ten trades? Of course, you did. You lost Rs 60. Statistically, winning
nine out of ten trades looked great and yet it produced a loss because we
refused to listen to the market and close out the loss quickly.
Market drops and crashes are sudden and severe but last for shorter
durations. A markets rise takes time and it is generally a steady rise. Except
when a stock is close to its peak, it usually rises steadily, taking a
considerable time to reach its highs. Keep that in mind at all times when
trading.
Since you are dealing with a highly emotional crowd, chances that it can
react impulsively, or like a herd, at any moment to some news disregarding
all logic. You have to have a mechanism that allows you to bolt the door to
unacceptable losses. There is a magical way of doing that. It is called a stop
loss. Once placed, the stop loss literally stops your losses, or limits them to
a predetermined fixed limit you have chosen. For example, if the price is at
Rs 100 and your stop loss is at Rs 90 you don’t need to worry where the
stock finally goes when the world turns crazy for some reason, or there is
very negative news on the stock. Your loss is limited to Rs 10, because at
Rs 90 what you bought will get sold off automatically.
While magical tool is available and. wonder of wonders, it’s free, not all
traders use it.
Limiting your loss is the first requirement of trading. Since the charts are
based on how humans react to stock prices reaching certain points, all
prices are not equally critical. A price of Rs 50 on a stock may be critical if
it is a strong resistance or support but may mean nothing if it is not. Stop
losses then make sure that we appreciate the significance of a particular
price and also appreciate that beyond that price the stock may behave
completely differently. Think of it as a house with many doors. Every door
is a support or resistance. If we open it the next room may be very different
from what we saw in the first room.
You can see in Figure 6.1, how long it took the stock to move up but how
fast it gave up its gains. If you had a stop loss, you would have kept most of
the gains you made. Without a stop loss, you were quickly back to where
you started from.
I cannot overemphasize the importance of a stop loss. It will save you much
grief and pain.
The chart in Figure 6.2 shows how severely you can be punished without a
stop loss.
It is rare that markets will give you a 10 % return on any given day. On the
other hand, a market can fall 10 % much more often than you think. It can
fall 30 % to 40 % in a matter of days. Such a fall can wipe you out. This is
the ‘Black Swan” you have to be reach-for. And. in most cases, a stop loss
can save you from being wiped out.
Remember, a stop loss is the level at which you will get out of the stock
should it not head in the direction you expected. It is the maximum loss you
are ready to bear should the stock not go your way.
As a rule of thumb on stocks falling this fast, get out at an early support. If
the stock is starting to behave erratically, i.e. moving up one day and down
another, it is possible it may begin its rally again. In such a case a stop loss
at the first support will get you out of the stock which may then move
higher. So in stocks that are not going one way, a stop loss at a lower
support is better.
Why Some Traders Don’t Use Stop Losses
Why is it that many, if not most, traders don’t use stop losses? Why is this
rule broken as a norm? That’s because it goes against our natural grain. We
are taught never to “give up” in adversity. This behavioural programming
makes us “not to give up” when we have made losses. We hope our losses
will be recouped and the stock will recover. In most cases, it does not
recover and losses simply turn into deeper losses.
The stop loss, therefore, needs to be practiced and enforced with discipline.
You have to draw a line in the sand - a Laxman Rekha - that must not be
crossed under any circumstances. Once you master working with stop
losses of a fixed nature, you can then start to build your own strategy and
more sophisticated ways to put a stoploss.
Stop Loss
a. General Rule
A stop loss is the traders most valuable tool to keep losses capped in any
trade. For any new trade you make, always keep the stop loss at 5 % below
your purchase price. If the stock starts to move up.raise the stop loss it keep
it 5 % to 10 % below the current price.
b. Trailing Stop Loss
If you are trading a fast moving stock that is backed by high volumes then
keep raising your stop loss
and keep it at 10 % percent below the current price. This also works when
you are already sitting on very good gains and want to be sure you don’t
lose them all. A stop loss should never be more than 10 % below the current
price.
c. Stop Losses for Volatile Stocks
Placing stop losses also depends on the volatility, i.e. the price fluctuation,
in the stock you are trading. Some stocks fluctuate very sharply on a daily
basis. Others fluctuate very sharply over a month’s time. Still others don’t
really move much on a daily basis, or even on a monthly basis. A stop loss
has to take into account the type of price fluctuation the stock demonstrates.
Let’s say you trade a stock priced at Rs 100 that fluctuates 20 points every
day. In such a stock, you cannot place a stop loss at 10 points below your
purchase price. Since the fluctuation itself is so large, your stop loss will
have to be below the 20- point fluctuation level. Yet if you buy the stock for
Rs 100. The stop loss should be at Rs95. The stop loss at 5 % from the
purchase price cannot be changed. If you believe the stock will fall by 20
because of its volatility, don’t get into the stock.
If you buy the stock at Rs 100 expecting it to go to Rs 120 and put a stop
loss at Rs 90, chances are the stock may well first dip to Rs 90 and then
head to Rs 120. You would then have been right about the stock’s uptrend
but its price fluctuation (volatility) would have left you with a loss of Rs 10
instead of a profit of Rs 20.
As a rule, though, avoid trading very volatile stocks. The risk of losses in
such high volatility stocks is not worth the return you may get out of the
trade.
Using Stop Losses to Protect Your Profits
“I began to realize that the big money must necessarily be in the big swing.
And no matter who opposes it. the swing must inevitably run as far and as
fast and as long as the impelling forces determine.”
— Edwin Lefevre in Reminiscences of a Stock Operator
Letting profits run, namely not taking profits too soon, is the only way to
make trading profits. Taking losses quickly on a trade that has not gone
your way - which is the right filing to do - may result in losses in seven to
eight out of ten trades. So you need to make enough money in the other two
or three trades to pay for your losses plus give you overall profits. The only
way you will make enough profits overall is if you don’t take profits too
early in a stock that is moving higher, and extract the most profit from it.
That’s where the dilemma begins. On the one hand, you want to make sure
that you don’t lose all your gains if the stock heads down. On the other
hand, any stock in a strong rally will not just pause, but may temporarily
give up some of its gains in a sharp manner from time to time. Now the
question is - is this fall just a pullback, i.e. a temporary reversal, or is it the
end of the rally? Understanding this difference will enable you to continue
to hold a stock till you have taken maximum profits and. at the same time,
put a stop loss in such a way that you do not lose all your gains.
The key lies in keeping stop losses far away from the current price when
you are trying to protect your gains, say 10 % away. It is common for a
stock on a strong rally to periodically fall by 5 % to 10 %-- and then again
continue with the rally. The higher the stock has risen, the greater the
chances of sharper and sharper dips because the number of non-believers
grows at higher prices. But it is precisely because of the actions of these
non-believers that not only may the stock not reverse, but actually
accelerate and rise at an even quicker pace as it goes higher. Why? Because
those who went short and got it wrong will have to buy back the stock at
higher prices, helping accelerate the stock’s upward move. You can relax
the stop loss of 10 % from the current prices to even 15 % to 20 % of the
current price if the stock has gained more than two times your purchase
price, i.e. the price is up at least 200 %.
As the stock goes higher and higher, your stop losses must be placed farther
and farther away from the price since price swings and pullbacks may
become larger and larger.
Stop Losses When Markets Open with Gaps
‘‘If you can’t take a small loss, sooner or later you will take the mother of
all losses
- The New Market Wizards
On some days the markets may open with either a gap up or a gap down,
whether driven by global markets or by some positive or negative news
overnight. The question then is - should you remove the original stop loss
because the gap could trigger the stop and close your trade whereas the
market may recover later in the day and move in the direction you
expected?
Here is the answer: Remove the stop loss if you expect the market or the
stock you are in to open with a gap up or a gap down from the price it
closed on the previous trading day. Observe how the market is set after the
gap opening and then put the stop loss once the price stabilizes.Let’s take
the example of an oil and gas stock that is moving up strongly. After the
market closes, there are news reports that the company may have overstated
its gas reserves. But this news report has not yet been confirmed by the
company. You are, however, sure that the stock will open with a gap down
and your stop loss will be triggered. What should you do? In such a case,
remove the stop loss. Let the stock open with a gap down. It is possible that
the news report is motivated to provide an exit to those who are short in the
stock. Then, if the stock opens with a gap down but quickly recovers, it may
signal that the report is not credible. However, it is also possible that the
stock opens with a gap down and continues to drift lower. In that case,
institutional investors or sophisticated traders may have decided that the
news report is damaging enough to break the trend. You should then put a
stop loss at the next support level so that you don’t end up losing a large
amount. At the same time, you would have ensured that a temporary dip has
not left you with a loss because of the stop loss being triggered, rather than
the profit that you would have made had you let the stock recover from a
temporary pullback.
Stop Losses When a Stock is Being Manipulated
A stock’s price may be manipulated to show a break of support or
resistance, especially in stocks that trade on low volumes. For that reason,
in manipulated or operator-driven stocks your stop loss should never be at
the support or resistance levels but 5 % from the pur-chase price and at 10
% from the current price once you have made a 200 % return on your trade.
Here is an example. A stock trades 10.000 shares daily on an average. It has
a resistance at 120 and a support at 80. All of a sudden, the volumes shoot
up. The traders - or whoever is pushing up volumes - know that other
traders will be watching the resistance and support levels. In order, then, to
entice traders to enter the stock, they may move the price across many
resistance levels to show its strength. You may get tempted into thinking
that the stock is going to head higher and higher. Believing that the stock
price has entered its body, you buy the stock at a point where it would have
broken many resistance levels, which is normally a sign of strength. But
after you buy it.the stock suddenly reverses and heads down.
If you choose to buy such stocks, then you cannot follow the practice of
placing your stops at normal resistance and support levels.
How does one know if a stock is being manipulated and the manipulators
are taking advantage of the traders’ focus on resistance and supports? Well,
such stocks usually make a straight run. Since they are in the hands of a few
manipulators, such stocks rarely show any dips on their way up. They will
run up for a week or a month without a pause and once a sufficient number
of traders get interested, they will reverse course. A stock that is making a
straight run, whether up or down, is likely being controlled by a few
interested parties and in such a case it’s best to come up with your own stop
loss levels.
Chapter 7
The Art Of Reading Charts
There are a number of charts that deliver information on the price of a
stock. The most commonly used-- and perhaps the best ones to use for
trading - are line charts and candlestick charts. Line charts are best used for
longer periods of time, like a month, a year, etc. If you are day trading or
swing trading, then using a candlestick chart may be best.
Candlestick Charts
A candlestick chart shows you the high, low, closing and opening prices of
a stock over any time interval - even small as a 5-minute interval (see
Figure). That’s why this chart is a ‘must use’ for day traders. Some
candlestick charts show high, low, closing and opening prices of the stock
for the day. In other words, each candlestick may represent a day. There are
some candlesticks that show the high, low, closing and opening prices for a
week. Such charts should be used if you are trading or getting in and out of
a stock over a longer period than a day.
If a stock closes at a level higher than its opening on a candlestick, it
indicates an uptrend in the stock. If the opening price is higher than the
closing price, it may indicate a downtrend. Normally, candlesticks showing
the opening price to be higher than the closing price are red in colour.
Let’s take the example of candlesticks for a stock during the day with 5minute intervals. Let’s say that in the first 5-minute period, the closing price
(10) is higher than the opening price (5). In the next 5-minute interval, the
opening price (10) is lower than the closing price (15). The trader can now
see that the trend is upward and perhaps run a trade in the next 5- minute
interval, expecting the trend to continue and the stock to close at 20.
However, if that does not happen and the stock starts to head lower than the
opening price, the trader must accept that he misread the move and should
exit the stock.
Overbought/ Oversold Overload
Markets and stocks may end up making extreme moves in short bursts. This
could happen because of operator activity, or because those who have short
positions in the shares are getting trapped, or for a variety of other reasons.
Let’s say a stock goes from Rs 100 to Rs 200 within seven to ten trading
sessions. The speed of the rise indicates that buyers i.e. the demand, was
way ahead of the sellers, or supply. However, such moves also create a
feeling among buyers that this is too good to be true. This type of price
level is considered an overbought position.
Gaps in Candlestick Charts
Breakaway Gaps: When a stock has been trading sideways and then
suddenly opens at a much higher or lower price, the stock is said to; gap
away from the price pattern.
Continuation Gaps: may occur when there is a strong advance or decline in
price.
Exhaustion Gap: When a stock is ending its buying or selling trend, a gap
may be caused by a final burst of selling or buying and may indicate a
change of the trend.
The key to reading a gap is to determine whether it is based on retail selling
or buying - which tends to be more emotional - or buying and selling by
informed or institutional investors, which is usually based on something
they know.
For example following figure is the chart of Fame India before and after its
sale of promoter stake to INOX.
Informed and institutional traders will usually buy after a wave of selling,
or sell after a wave of buying, has finished. Individuals and amateur traders
on the other hand, usually ride the wave and may get in when professional
traders may be starting to sell.
How do you know that buying is coming to an end? If there are gaps even
after a wave of buying is done, it usually indicates that the amateurs are
trying to buy into a price rise they have already missed. The same may
occur in the case of a stock that has been sold. If a stock opens with a gap
down after a wave of selling, it may indicate that amateurs may have lost
their nerve and sold out at the lowest point.
Weekly Charts - For a Longer Trading Position
Once the daily charts look good, take a look at weekly charts to confirm
whether the stock is in an uptrend or a downtrend. Institutional traders will
refer to the weekly charts to confirm their buying and selling decisions.
If you are using a weekly interval chart, it may make sense to look over a
one to two-year period. Charts longer than this period have little relevance
for traders unless you are using technical analysis to hold stocks for the
long term.
Using Hourly Charts
These are best only for day traders. If you are using an hourly interval chart,
you may want to look at an hourly chart over the previous five to ten
trading sessions. Look for a break in trend in this period of time.
Be With the Stock On the ‘West Side’ and Let it Go On the
‘East Side’.
A stock will go through three phases-- accumulation, mark up and
distribution.
We will call accumulation and mark-up as the ‘west side’ and distribution
as the ‘east side’.
Good traders stay with the stock only on the west side and get out when the
stock heads to the east side.
How do we know whether a stock is in the accumulation or mark-up stages,
i.e. on the west side? In the first phase of accumulation, the volumes will
rise and the price will rise sharply. This is because when big buyers begin to
accumulate the stock, few sellers are in the mood to sell. The latter have
usually bought the stock at very high prices and want to recoup their cost.
After a sharp rise in prices and volumes, the volumes will continue to rise
but the price rise may slow down in the next phase of accumulation. In this
phase, many sellers find that they can get back the amount they invested
and get out of the stock. We thus reach a point when the amount of stock
available with the public has been reduced to a trickle. This is the end of the
accumulation phase.
Prices now rise very fast as there is little stock in the hands of the public,
and anyone who wishes to buy the stock has to pay higher prices to buy it
from those who accumulated the stock. This phase is called mark-up.
Traders must always remain on the accumulation and mark-up, i.e. the west
side, of a stock.
After this starts the distribution phase - or east side - of the stock.
In the first phase of distribution, volumes are high but the price either
remains stagnant or falls only a little. This happens because those who
accumulated the stock begin selling it but there are enough buyers to absorb
any selling. In the next phase of distribution, volumes increase and prices
fall very steeply. This phase is characterized by dumping of stock by those
who accumulated it matched by those averaging or buying more stock as its
price falls, or those who are buying ‘value’ and with other such
justifications. In the third phase of distribution, volumes start drying up and
the price keeps falling. This happens because demand has dried up but some
of those who bought the stock at highs are now trying to get out but find no
buyers.
As you can see, there are numerous warnings during the distribution phase
and traders must get out early during in this phase.
To master your trades, there are a few habits you will need to cultivate:
Take responsibility. All gains and losses are caused by your own decisions.
Expect to make mistakes. Analyze them and reduce the chances of
repeating them. If it seems that the risk cannot be reduced, don’t do those
trades again.
If you need to check with someone about a stock that you wish to trade,
don’t trade the stock. Don’t trade any stock where you don’t believe the
chances of making a profit are excellent. Stocks to trade should not be
picked on sector or personal likes, but based on their charts. Stocks that
have the strongest charts and are most likely to break through resistance
should be selected for trading.
Once you are in a trade, stick to your conviction and trading plan, and don’t
listen to others. If you find yourself blaming others for the stocks you trade,
it’s best you don’t trade.
Chapter 8
Trading Strategies
Never Fight the Market
‘I can calculate the movement of the stars, but not the madness of men.’
- Sir Isaac Newton, who lost a fortune in the South Sea Bubble
The price of a stock you are trading in is falling, but you hear yourself
saying ‘The fundamentals are good’, or ‘the company has a very good order
book’, or ‘I expect the GDP to grow at 10 % so infrastructure companies
(the sector the stock belongs to) are bound to do well.’ This is hope fighting
reality. The only reality is that the stock is falling. It may be falling because
you may not know something that the insiders know or there is something
that has not been publicly disclosed as yet.
A successful trader never fights the market. If the price is falling, there must
be some reason. There could be a single reason or ten reasons or even a
hundred reasons. Whatever it is, the price is reflecting it. Respect the price
and bow out. That is why if a stock breaks a support, it’s best to let it go.
And it is never a good idea to average.
A trader’s advantages are many. He never ventures far from the coast. If he
sees a storm, he returns quickly. He does not have to face shipwreck since
he accepts the reality of a stormy sea and hastens back to the safety of the
harbour. If the winds are in his favour, he sails farther than others. When
they are against him he has no ego problem in returning back to the coast.
The market owes you no obligation to make up for your losses. But with
discipline and learning you can figure out the right time and strategy to
trade. You don’t tell the sea to behave the way you want it to. But you can
use the winds and waves to your advantage.
Good traders don’t care about proving that they got it right or that they got
conned by the market. They realize they screwed up or let the flow get them
and simply design a better system to deal with it next time.
a. Don’t Trade When You Don’t Have Any Edge
Trading should neither be an addiction nor driven by a compulsion to
always be profitable. There are many times when it’s best not to trade. Then
markets turn turbulent, it’s best to sit out. It is better to trade in a market
that moves half a per cent a day but keeps its uptrend intact rather than a
market that goes up 1 % and then falls by 1 % on the same day.
Another time to keep out of the market is when a stock has entered a range.
If a stock does not move beyond a few points, it provides no trading
opportunity. Let’s say you throw a coin in a fountain or a pool. It goes down
to the bottom and stays there. If there is a big splash or wave, it moves a
little bit from its old position. Whatever it does, it rarely moves away from
the bottom of the pool. Stocks that behave this way are not worth trading.
Then there are some stocks that are just not trading stocks. Stocks that have
no volumes, stocks heavily owned by the government, stocks where there is
no trading interest, are some examples.
If you have lost money on a number of trades, don’t try and trade even more
to get back your money. In fact, that’s a time to not trade at all. Take a
break. Think about why the trades went wrong. They could have gone
wrong because you may have traded in a very volatile market, a rangebound market, or in stocks that were at the bottom of the pool. Or you could
have traded in distribution zones rather than accumulation or markup zones.
Or you could have traded in stocks without significant volumes. Whatever
the cause, taking time off will allow you to analyze and better understand
the reasons and decide if the factors were within your control.
If you traded a non-trading market, then all you need to do at such times in
future is to sit out till the time the market starts to move up or down in a
trend. If the losses are being caused by your mistakes, or the wrong
selection of stocks, taking time off will allow you to pick the right stocks.
Whenever you feel the itch to trade, ask yourself what your edge is. Is there
a market reversal or break you have seen? Is there something you have
observed in the stock’s price or volume behaviour that makes you believe
the stock is starting a big trading move? Without an edge in the stock you
wish to trade, its best to stay out.
b. Trading Pitfalls and How to Avoid Them
New traders believe that they’ll wake up one day and stop making rookie
errors. But that isn’t going to happen because the market gauntlet forces us
to deal with the twin emotions of greed and fear. These potent forces have
tremendous power to blind us. But we can certainly mitigate their influence
and keep it from undermining our efforts.
Bad timing: You sit on your hands watching a big rally or sell off. You want
in. but you’re too scared to act. Finally, the fear of missing out overcomes
your better judgment, and you jump in. The move stops dead cold as soon
as you enter the market, and you’re left holding the bag.
It is tempting to enter a bigger trade than we are capable of handling. For
example, if we can bear the loss of 10 points, we may have taken a potential
risk of 100 points by buying stocks or futures on margin. If things go our
way, great! But what if they don’t go our way? Can we take the loss? That
is the question we must ask before getting into a trade.
c. How much should you trade?
No more than what you can afford to lose-- and not what you expect to
gain. Emotional control is a must for a trader. Our tendency to get a
swagger, a belief in our invincibility when we get a few trades right moves
us into rash trades. Our losses on trades runs us into despair. We start to
look for ways to recover our losses, which results in our making other rash
trades. What ends up happening then is that our profits vanish with rash
trades and our losses multiply due to a desire to recover our losses.
Have you ever felt like you got out of a stock just before it shot up? ‘Why
does this only happen to me?’ you may have asked. You are not alone. Most
of us get out of stocks just before they shoot up. This is not the way it need
be. A stock should not be sold based on any pre-decided profit level;
instead, let it run if it has more steam still left in it.
Trading is about focusing on the stock and its price, volume and time
momentum-- and resistance and support levels. This is what is of immediate
concern. It is easy to get carried away with all lands of news like
geopolitical uncertainty or a rise in crude prices or a radiation leak at a
nuclear power plant. While these things can affect the stock markets, but in
the overall scheme of things, we have to give priority to what the charts are
saying rather than confuse our minds with all kinds of information whose
impact and markets reaction is impossible to determine with any accuracy.
Trading and gambling have absolutely nothing in common. Yet popular
beliefs and clichés make us believe that they are one and the same thing.
However, when you treat trading like gambling, i.e. trade for fun, trade on
impulse, trade driven by winning or losing streaks, trade based on your
belief in luck and many other things that symbolize gambling, you can be
sure that your losses will be way steeper than in gambling. Trading based
on a company’s earnings expectations, its acquisitions or order book etc. is
akin to gambling. Trading requires a single-minded focus on price action,
volume and time, a discipline to stick to resistance and supports and the self
control of a trader. In fact, if you put some of your trading principles to
gambling, you will see your gambling winnings increase dramatically! An
example is the discipline of leaving a table once you have reached your
limit for losses etc.
Buy High, Sell Higher
‘All truly wise thoughts have been thought already thousands of times; but
to truly make them ours we must think them over again honestly, till they
take root in our personal experience.’
- Goethe
a. Going for the Jugular Trade
As simple as it sounds, buying high and selling higher is difficult to do. We
have a tendency to compare ourselves today with what we were yesterday.
Think of what we say to ourselves and hear others tell us. ‘I used to drive X
car and now I drive Y car.’ ‘As children, we could not afford X things, now
we can afford 15X things.’ A farmer who owned a plot of land thought he
had made a killing by selling it for? 10 lakh. However, the buyer resold the
plot for 50 lakh. And the second buyer sold it to a company which plans to
build an airport on the plot of land for 5 crore. Had the farmer foreseen the
value of the land, he would have made fifty times more. This is called the
‘anchor’ effect.
In the case of stocks, we look at our gain from the point of view of our
acquisition cost, and accordingly assess whether it is too much or too little.
But the stock does not know us. We don’t know what is hidden in the
stock’s price rise.
Now think about the stocks you trade in the same way. If they are going up,
why would you sell at twice your cost? Put a stop loss and stay with the
trade. What if the stock has gone up four times your cost? Put a stop loss
and stay with the trade. Try and squeeze the maximum out of the trade.
Think of a trade like squeezing a lemon. You don’t need to throw away the
lemon till you have squeezed the maximum from it.
About 90 % of your profit will come from 10 % of your trades. And these
are the long term trades. This is the kind of trade where a stock is in a very
long term uptrend, or there is a structural change in the stock, or a change of
management, or the discovery of oil reserves, or a large mineral reserve has
changed the fortunes of the business and the stock appreciates five-fold,
ten-fold or even a hundred-fold. These are the signs of a ‘go for the jugular
trade.’
How do you find such a jugular trade? Usually it a trade whose origins are
in a fundamental change or a merger of a listed company with a very big
unlisted business. Just go to any site that has technical charts and see charts
that show stocks with tenfold and even a hundred-fold appreciation over a
period of five years. Such a trade requires one to continue holding stocks
that are heading higher. That is not natural to us as we usually sell a stock
that gives profits of two, or three or ten times on our purchase price. We
rarely hold a stock till it goes up hundred-fold times.
The belief that everything we buy in a ‘sale’ or a ‘bargain’ is a good buy, is
largely a myth. We equate getting something cheap with getting a good
deal. It does not work this way in stock trading. The trick is to buy high and
sell higher. How high? That is determined by the first three secrets we
discussed in this book:
1. Price, volume and time.
2. The head, body, and tail.
3. Support and resistance.
Buying high ensures confirmation of the price, volume and time criteria
being met. It confirms that we are in the body rather than the head or the tail
of the trend. It also confirms that the stock has broken a major resistance. If
you buy high based on these criteria, you are assured of getting even higher
prices at your exit. Now, would you rather buy at a ‘high’ that gets you an
even higher price or would you buy a ‘cheap’ stock which may get even
‘cheaper’?
b. Trade With What You Can Afford to Lose
‘The speculator is the parent of the idea . . . the position takes on meaning
as a personal extension of self, almost as one’s child might. . . . Another
reason that Johnny does not sell, even when the position may be losing
ground, is because he wants to dream. . . . For many, at the moment of
purchase, critical judgment weakens and hope ascends to govern the
decision process. Dreaming in the markets is a luxury that nobody can
afford. If your trades are based on dreams, you are better off putting your
money into psychotherapy.’
Dr. Roy Shapiro
There is every possibility that you will do very well in imaginary or paper
trades. That is why many winners of stock market games are unable to
perform in real life. When you put your money on the line, your skills are at
test. If you are wrong, you lose real money. The element of fear enters the
mind and decision making can be significantly different when money is
involved. The nature of the trade changes from ‘I think/ believe the stock
will go to -’ to ‘What if I am wrong?’.
So who does well in real trades? Someone who can read charts and
technicals. Someone who can devote time and attention to not just placing
trades, but in studying why a trade went wrong. And, most importantly,
someone who employs only that portion of his money for trading which he
can afford to lose. If it is money you cannot afford to lose, i.e. If you trade
with the money need for your day-to-day life or with your essential savings,
there is every chance your trading decisions will be severely clouded. They
will be driven by such thoughts, as I could have bought a car with the
money I lost’, ‘I could have gone on vacation with the money I lost.’ Such
thinking not only confuses you about when you should get in and out of a
stock but makes you desperate to recover from the market the money you
may have lost. That in itself is a recipe for further losses.
You must not trade if you are expecting the trading profits to pay your bills
or make you rich. These are emotional desires that have a negative effect on
trading performance.
You don’t have to do anything till you believe that the odds that you will
lose money are very low, and the potential for gain is high. Protecting your
principal is the single most important thing. And protecting principal also
means that we ‘stop the bleeding’, i.e. being able to take a loss and exit a
trade is as important as the entry price.
Here is one way to keep losses to the minimum - don’t commit more than 5
% of your capital to any single stock or trade in the starting phase of your
trading. Trade only in those stocks whose trading pattern you have observed
for a few days. Knowing how those stocks react to news, earnings and
market moves, gives you an edge. Select a maximum of ten stocks, indices
or commodities to trade.
Define the criteria for a stock’s liquidity, volume, volatility and price to
determine the ten stocks you plan to trade in. Day traders need to make
money in a day. As a rule of thumb, trade in stocks that have a 10 % up or
down movement from their stock price.
c. When Day Trading, Be a Fruit Vendor.
A fruit vendor buys his stock in the wholesale market in the morning, and
tries to sell it all before he heads home at the end of the day. He realizes that
if he holds the fruit overnight, the fruit will not remain fresh, or he may not
have a storage place to hold them. A day trader does the same. He does not
hold his stock. He tries to sell them before they rot. In case of fruit that are
in big demand and can last for a couple of days, he holds them till he gets
the best price (swing trade) and does not day trade.
Winning the Game of Odds
TRADING IS NEVER ABOUT WINNING OR LOSING. It’s all about
getting the same return with lower risk. So when you place a trade, ask
yourself this simple question — ‘What are the odds that I will lose money
on this trade?’
If you have to decide between two stocks, pick the stock where the odds of
losing money are lower, or the odds of the stock moving in the direction
you expect are higher. When a stock moves in the direction that is against
your expectations, get out fast. In this case, the odds have gone against your
expectation resulting in a higher risk of loss; avoid this by exiting. High
trading volume is a good confirmation of a trend. If prices rise to a new
peak and the trading volume also reaches a new high, then prices are likely
to re-test or exceed that peak.
If a stock has touched a new low, but volumes continue to be high, it is
likely that the stock will fall further. Before a stock’s trend reverses, there
may be a climax-like fall. That usually happens because the last set of
believers in the stock also get out. That usually is the bottom for the stock
and a reversal may take place.When a stock has no resistance and it moves
from one peak to another but volumes start to slow, it may be time to short
the stock-- or at least get ready to exit. When a stock reacts against its
uptrend, volumes may shoot up as traders take profits. If a dip happens
without high volumes, it indicates that buyers are in no hurry to sell even
though the stock is falling. When volumes dry up, it indicates that the
reaction is ending and an uptrend will resume.
Downtrends will be marked by rallies which are driven by heavy volumes.
Once the weaker shorts have been taken out, the volume will shrink again
and it is a signal to again go short - or at least close out your trade.
For traders, opening and closing prices are the most important ones.
Opening prices reflect how eager buyers were to bid up prices from the
previous day’s closing; alternatively, they indicate how eager sellers were to
bring down prices from the previous day’s closing. That’s why stocks
sometimes open with gaps from their previous closing price. Opening prices
are usually driven by individual buyers rather than professional traders or
institutions.
Generally speaking, a market where the closing prices are higher than the
opening prices is in an uptrend.
a. Secrets of Open Interest
An open interest is created when one buyer and one seller create an options
contract. So if one call option is bought and sold, the open interest is one.
An increase in open interest indicates the conviction of buyers and sellers
on the direction of the markets. A reduction in open interest shows that
buyers and sellers don’t expect the market to move in their favour.
If open interest increases during an uptrend, buyers are buying more and
sellers are shorting the stock as they find the stock’s price too high. If that’s
the case, shorts will close out at some point and propel the market even
higher.
If open interest increases when a stock is in a decline, traders may be shortselling the stock and bargain hunters may be buying it. In this case, bargain
hunters will get out of the stock if prices fall further and their selling will
cause the prices to head even lower.
An increase in open interest indicates a stock’s trend to continue in the
direction it was headed. If open interest stays the same as the market heads
up, buyers will need to buy from other buyers and so no new open interest
is created. It also indicates that the short sellers also expect the market to
head higher and are staying out of the market.
If a bear trader has the conviction that the stock’s price will head lower, he
will sell short. If bull traders are afraid to buy from him because they too
see a downside, a bear trader can sell to another bear trader who was short
earlier and now wants to take his profit. Their trade will create no new
contracts and so no additional open interest will be created. In that scenario,
the market will fall further but without increase in open interest. No
increase in open interest in a falling market may show that bargain hunters
or bottom pickers still don’t find the market worth buying.
However, when markets are rising and open interest dies out. It may signal
the slowing down, or end, of a rally. That’s because buyers are selling to
other buyers. And buyers who try to get in at the peak of the rally usually
have almost no idea about how markets work. If open interest starts to fall
in a rally, it indicates that earlier buyers - usually the more savvy ones - are
getting out.
If open interest falls in a rising market, new buyers are not picking up the
stock from older buyers and the short traders either no longer have interest
in shorting the stock or have already closed out their short trades. A fall in
open interest in a strong market rally is one of the strongest signals of a
market that may reverse course.
By how much should open interest change to be significant? If open interest
falls by 10 % in a rising market, it indicates chances of a reversal. If it falls
by about 25, it is usually a definite signal that the market will reverse
course.
A rise in open interest by about 25 % in a rising market indicates that short
traders are trapped and are struggling to close out their positions. It is
usually in these circumstances that the stock’s price rises the fastest. When
open interest rises by about 25 % as prices fall, it indicates that bargain
hunters find the market’s valuations compelling.
But a rise in open interest in a falling market is not always a clear indicator
of the trend. That’s because it is possible that bargain hunters are wrong
and, as the market descends further, they may sell off the stock thereby
accelerating the fall. A rise in open interest in a stock which is in a trading
range may indicate that the stock’s price may head lower. It is usually
professional traders who short a stock that is stuck in a range. That would
mean that while they are going short, amateur investors are on the other
side of the contract, i.e. they are the ones buying as the short traders sell.
Since amateurs don’t usually have holding power, chances are high that
they will sell out, too, as prices continue to fall. Such selling can, in turn,
accelerate the fall.
If open interest falls significantly in a stock which is in a trading range, it
indicates that professional traders have decided to close their positions. That
would happen if they expect the stock to rise.
If open interest falls during a rally, it indicates that both buyers and sellers
are not sure if the rally will continue. Buyers are taking profits while short
traders are covering up. It’s best to sell at such times.
If open interest falls in a stock as the stock’s price is falling, it may indicate
that short traders are closing their positions and buyers who bought earlier,
have sold out. This may indicate a reversal. However, this is not a very
good signal. Low open interest may also indicate that traders have no
interest in the stock. Any selling from institutional investors in such a
market could cause the stock to fall under its own weight.
When open interest stays the same in a rally, the uptrend may be coming to
an end. It is best to place stop losses at this point and avoid buying more
shares. If open interest stays flat in a decline, stop losses need to be placed
on short positions because the market could reverse anytime.
If you are in the process of picking stocks to trade, select a stock with high
open interest. That’s where the maximum trading momentum is.
It is just as important to pay attention to time as to price and volume while
trading a stock. Time is the edge you need as most chartists get lost in price
and volume data and miss the element of time.
b. Riding the Longer Cycle
Understanding a long term cycle helps you ride a tide where returns could
double or even triple. This is often better than the smaller profits that come
out of day trading or swing trading.
In markets, like in seasons, there is spring, summer, autumn and winter.
Once a trend is over, stocks get ready for winter. Once a stock starts moving
from winter to spring, the volumes and price start to move up but the main
trend sets in the summer. A good way to trade is to buy in spring, stay put in
summer, sell out-- or go short-- in early autumn, and stay short - or exit - in
winter.
c. Consensus Indicators
Financial media publishes market opinions throughout the day. Typically,
the media is busy following a trend and turning points are usually missed.
Many professional traders tend to go against the financial media; in other
words, they trade the reverse of what the financial media propagates.
Brokers’ views should also be treated the same way. When all of them reach
a consensus that the market, or a particular stock, will run, it usually
reverses. These are called consensus indicators and are used as indicators of
trend reversal.
Prices are established by buyers and sellers. Any imbalance tilts, the prices.
So, for example, if there are more buyers than sellers, the price will move
upwards. A major imbalance between buyers and sellers would take the
prices sky high. Once a majority turn buyers, there are then not enough
sellers to lend support to a bull market. The same also works in reverse.
d. Channel Trading Systems
Sometimes prices get stuck in a channel - or a range. When they touch the
lower end of the range, they move back up till the higher end of the range,
and vice versa. It is almost as if there is an invisible floor and ceiling price.
In other words, stocks that are in a range have a strong support and
resistance.
At supports, buyers have a greater interest or intensity than sellers. At a
resistance, sellers have a greater intensity than buyers.
While the stock may be in a range, the range could be sloping up or down.
If the slope is up, it shows the stock trend is upward. If the channel is flat,
then the stock may move within the same support and resistance.
If a stock starts to fall before reaching its resistance in the range, it is a sign
that the trend is over. If it shoots beyond the resistance, it may indicate that
the stock is breaking out of its price range and may have a strong uptrend.
Professional traders trade against deviations from a channel and the return
of the stock price back into the channel, or range. Most moves out of the
channel don’t last. However, breakouts can produce very strong gains. A
major trend pushes the stock out of the range.
e. Improving Your Odds
A trader’s goal is to pick stocks that maximize his returns at the same risk
level, or to reduce his risk at the same level of returns. The following are a
number of ways he can do that Each stock has a trend. We have to pick a
stock with the strongest trend. And we need to exit from a stock when its
price does not respond to our expectations.
For Example, there may be two stocks priced at Rs 100 each, both of which
you consider having a very strong trend. Yet one stock may have a
resistance at, say, Rs. 110 no and the other one may have just crossed a
major resistance at, say, Rs 95. This implies that the stock with Rs 95 as the
major resistance has better odds to sustain the uptrend. The stock that has a
resistance at Rs 110 may stop at Rs 110 and may not be able to move
higher.
Stocks moving in a strong uptrend will face opposition from traders who
don’t believe that the stock should be priced that high. They will try to push
its price down by selling their holdings, or by selling short. Such behaviour
will create a counter trend within the uptrend. We have to decide how much
we can afford to lose in this counter trend.
For example, a stock you bought at Rs 100 moves up to Rs 120 in a strong
trend. However, it encounters turbulence at Rs 120 and gets pushed down to
Rs 115. Since we all have different levels of pain, some of us may want to
get out at Rs 115. Some may be able to bear the counter trend till Rs 110.
So you must pick stocks that not just meet your requirement of strong trend
but they should also meet your personal comfort with the level of a counter
trend.
Even if you are trading for the short term, take a look at the stock’s charts
for the previous three months and one year. That will give you an idea of
the kind of opposition the stock will face.
For example, suppose stock A and Stock B both rise from Rs 100 to Rs 120
in a week. However, when you look at Stock A’s charts over a 3-month
period, the price has dropped from Rs 200; and in the last one year, the
stock price has dropped from Rs 300. So while the stock looks strong in the
week’s chart, a look at the longer term charts show that the stock is weak
and that the previous week’s move may be a fluke. Stock B, on the other
hand, may have been at Rs 80 three months ago and at Rs 40 a year ago.
Stock B, therefore, looks like a strong stock. You will perhaps prefer going
with Stock B.
There will be times when a stock is stuck in a range or a channel. Avoid
such stocks as you will not be able to maximize your returns at the same
risk level. A trader needs to be patient and wait till the stock moves out of
the range. The longer the stock has been in a range, the lower the chances
that returns can be maximized.
How much are you willing to lose? The answer to this question will not
only help you pick a stock with a strong trend, but also let you shorten the
list of potential stocks by eliminating those that have a higher risk of
correcting from time to time, or a high risk of large fluctuations.
Let’s take the same stocks A and B. Both have risen from Rs 100 to Rs 120
in a week. Stock A is a very erratic stock and you expect the stock to
fluctuate between 100 and 120. Stock B rarely fluctuates 10 points in any
week. Your choice then is Stock B in order to keep your risk of loss low.
For every stock you wish to trade, you have to decide between entering a
trade in the stock-- or doing nothing. Doing nothing is sometimes the best
option though one we rarely consider.
If you are impulsive, it’s best to avoid stocks that fluctuate wildly. Even if
their trend looks very strong, chances are that you will sell out on impulse
thereby creating a bad return for the same risk. For a cool and calm trader,
the same stock trade could have produced an excellent return on the same
risk.
A stock’s chart, while looking strong, may have all the elements of noise.
For example, the stock may be manipulated. An operator may be pushing it
above a resistance to entice others to enter. A trader needs to cut out stocks
with noise from his trade.
A large number of us have experienced the market taking back, in one swift
move, everything it gave us in profits. Actually, the market did not take it
back. The truth is, we gave it back. How? Well, because we traded without
a plan. The stop losses went missing, we did not define the maximum loss
we were drilling to take, and we did not take into account the fluctuation in
the stock’s price.
After you have picked a stock to trade, enter the trade at a price ahead of a
very strong and critical support. This way your risk is low. There is. of
course, the risk that the stock could even break through the critical support,
but that’s a risk you have to take. Measure the price difference to a very
strong resistance. That’s your return potential.
Here’s an example.
Let’s take two stocks that you have chosen to trade. Both have a support at
Rs100. Stock A s support of Rs 100 is a very strong long term support and
the stock has bounced back from Rs 100 at least six times in the past three
months. The stock also has a very strong resistance at Rs 150. It has
bounced back from that resistance level twice. Stock B also has a support at
Rs 100. It has bounced back from that support three times in the past year
but just once in the past month. This stock’s resistance is also at Rs 150 and
the stock has not crossed the resistance thrice in the past month. In this
case, it is preferable to go with Stock A because it has a strong support at
Rs 100 and the odds that it will break the Rs 100 support are low. Both the
stocks have a resistance of Rs 150, so it’s better to go with a stock with a
strong support as it lowers your risk level.
There is money to be made from options expiry. Around options expiry,
identifying stocks where there is excessive bearishness or bullishness can
provide you an attractive day trading opportunity. Sophisticated traders and
institutional investors keep a track of how financially strong are the traders
who are taking the stock up or down. If they find that it is being moved by
amateur traders, or those who can not hold on to their positions, or pay
margins, they will trap them on the last day of the options expiry by pouring
money on the other side of such positions. If you can ride the wave with
these sophisticated trades, there may be some neat day trades here.There is
also money to be made in gaps. Let’s say you know that there is geopolitical
uncertainty and the markets are headed down. Some air strikes are going to
take place overnight which could create a pressure on oil. You have also
noticed that global markets are under severe pressure. Knowing that, you
could buy into an oil and gas stock before closing. The next morning,
because of a sharp rise in crude oil prices or geopolitical instability, the
markets open with a gap downwards. However, oil and gas stocks move up.
It will provide you with a profit opportunity since the stock opens up with a
gap.
Trading the Different Types of Rallies
As YOU MOVE UP THE SKILL LADDER and become a sophisticated
trader, you will start to see the difference between various rallies and the
kind of stocks that can be traded with low odds in each kind of rally.
a. Short Covering Rally
Take, for example, a short covering rally. A short covering rally is limited to
a few stocks and both prices and volumes continuously move up in these
stocks. Such rallies provide excellent opportunities for day trades. If you
can identify the
stocks that were being shorted earlier, you can buy these stocks as a short
covering rally starts. The odds that you will get a neat profit from such
trades are high. In a short covering rally, the short traders are compelled to
buy back the stock at any price. Traders, who hold the stock, know that and
create a ‘squeeze’ by not putting up any stock for sale thereby creating a
rapid rise in price at low volumes.
b. Long Term Rally
Some rallies are long term. If a rally starts from the index stocks and
spreads to mid- and smaller cap stocks, there are high chances that it is a
sustainable rally. In such rallies, even if you missed the rally in index
stocks, you may still get very good trading opportunities in mid-cap stocks.
Most mid-cap stocks demonstrate a very sharp price move behaviour and,
in rallies, they can rise fast on a daily basis. In long term rallies, identifythe
stocks that are rising the fastest and ride them. Such trades, by their very
nature, require stop losses using the pointers mentioned under stop losses.
c. Sectoral Rally
Sectoral rallies allow traders to ride a wave. For example, a rally in the
banking sector eventually takes all bank stocks up. In some cases, sectoral
rallies can take up stocks in that sector by over 100 %. Sectoral rallies
usually last for a couple of months and are preferable for longer term
trading. However, once a sectoral rally ends, there is no sense in averaging
or in buying stocks in the sector because they are ‘cheaper’. Sectoral rallies
must be played like a wave.
The Successful Trader’s Psychology
If the market’s behaviour seems mysterious to you, it’s because your own
behaviour is mysterious and unmanageable. You can’t really determine
what the market is likely to do next when you don’t even know what you’ll
do next.’
- Mark Douglas
• How did you feel at the time of placing the trade? Were you convinced
about the trend?
• Were you absolutely sure about supports and resistances
• Were you sure that the trend was backed by volumes and had a time
confirmation?
• Were you anxious about losses at the time of initiating the trade?
• Did you close the trade in desperation?
• When you closed your trade, did you feel plain lucky or did your
support, resistance and trend readings at the time of placing the trade turn
out to be correct?
Your emotional make-up at the time of running a trade is even more
important than your knowledge of the charts. Feeling afraid or upset may
have a negative impact on your trading results. You are trading against, or
with, the sharpest minds of the world. The entire trading business is set up
to ensure the failure of a majority of the traders. So getting both the charts
and your emotions in sync are critical.
Practice makes perfect. Test your trading rules on real trades and improve
your trading system with the help of the lessons learnt from your mistakes.
How do you develop a positive self- belief? The starting point is saying, I
accept total responsibility for my trading I will not blame others for my
trading mistakes.’ ‘I will develop my own trading system and continuously
test it by improving it for my trading mistakes.’ Then you get started and
your trading will improve with experience. It takes about two to three years
to master trends and about ten years to master the entire market cycle.
a. Trading Replicates the Behaviour of Fish
Trading stocks replicates the behaviour of fish. Fish swim in schools, or
they swim with bigger fish, or on their own. Stocks do the same. If we can
identify each stock we trade with the appropriate ‘fish’ category it falls into,
we will be able to get our trading right.
Small Fish Moving with Big Fish
Stocks of smaller companies often move in tandem with the stock of a
larger company in the same sector. For example, many banks will move in
tandem with the stock movement of a big bank. If we can identify the
stocks that move in tandem with a big company’s stock, chances are we
have a much better edge in making a profitable trade. While the big
company’s stock will be widely followed and lots of sophisticated traders
will be trading it, the smaller ones would have few followers. That’s
because only a few traders (or maybe no one) study how smaller stocks
move in tandem with a larger company’s stock. This is your edge. Trade on
it!
‘We are Family’ - Stocks of a Family Moving Together
You would have observed how stocks belonging to the same sector usually
move together. This is especially true of ‘commoditized’ stocks such as
those of the cement sector. An increase in cement prices usually lifts all of
them. In fact, it often lifts the smaller ones with lower volumes much more
than it lifts the large cement stocks. This kind of trading works especially
well when there is a longer term rise in the trend for group of stocks in
industries where supply takes a couple of years to adjust to demand. A good
example is hotel stocks. Once demand for hotel rooms reaches the capacity
of rooms available, it will take two to three years for more rooms to come
up. In that period, existing hotels can charge higher and higher prices
thereby driving up the prices of hotel stocks many times over.
Small Fish Randomness
Sometimes, a stock moves on its own. Let’s say a company manufactures
sorbitol, which is used to make toothpaste. Because of the closure of two or
three other plants, this company is the only one manufacturing sorbitol and it can sell all it can manufacture. This is ‘small fish randomness’ - a
stock that moves on its own or finds a life of its own. If you can identify
such stocks, you may find your trade generating significant returns.
Small Fish Have Found Food
Once a rally in big stocks ends, it moves on to mid cap stocks and, further,
down to small stocks. The rallies in mid and small cap stocks can be rapid
and reach much further than those in bigger stocks. A trader needs to catch
the mid and small cap stocks when a rally shifts from the bigger stocks to
these stocks.
b. Stop Blaming Others
Reading charts is like being a sports commentator. You report on what is
going on. In any game of cricket or soccer, fortunes will swing many times.
Correspondingly, the commentator is going to swing your thoughts one way
or the other. To blame him for changing his position’ would be
preposterous. He is simply reporting on a game and can only say what he
sees. Now since he is human, his bias may come into play, but largely he is
reporting on a live game. Similarly, blaming a technical chartist for saying
something one day and something else the next is like telling a sports
commentator that he changes his opinion every minute - but he is merely
reporting what he sees on the field. Of course, you can have your own
opinion on the game and don’t have to agree with the commentator. In the
same way, you don’t have to agree with every chartist.
The mistake we make is not understanding the role of the technical chartist.
His role is that of a sports commentator - and not that of sports historian.
c. Don’t Have Preconceived Notions About the Market’s Direction
Traders must not have any preconceived notions about where the markets
will go. Do you know when a tsunami will hit? Or, what will its ferocity
be? Or, what damage will it cause? Just like a tsunami, no one knows where
the market is headed. Having ‘bullish’ or ‘bearish’ ideas are like predicting
tsunamis - both predictions have little value. However, once a trend is in
place, you can ride it. Just look for the trends and go with the direction of
the trends. Look for the signs of a reversal of the trend and trade
accordingly.
While rising stocks almost always need volumes, falling stocks can
continue to fall even when volumes drop off. That could reflect a drying up
of interest. If stocks enter such a phase, getting out - even with losses - is
the best thing to do.
d. Reading the Mind of Others Who are Trading Your Stocks
The market is made by the minds of many men. The state of these minds is
reflected in the prices of securities in which their owners operate.’
- Richard Wyckoff.
Reading a Market Reversal.
Imagine a market that has been stuck in a range. The market index
fluctuates in that range. Let’s say the range is between 5,400 and 5,600. A
range sets the stage for a market to break out in either direction. This
equally applies to a stock.
In the first stage of a breakout, volumes increase though they are still lower
than the stock’s average volume, and the price rises. This continues for a
few days. Prices rise from the bottom of the range and, in a few days, are
close to crossing the top of the range. They then cross the top of the range
without stopping. At that point, the rise in price accelerates. That’s because
those who were short in the stock now try to close their short positions,
thereby adding fuel to the fire and driving up prices even faster. That is why
you would have noticed that when a market reverses, its rise starts to
become sharper and swifter after a few days of an up move. The big
challenge arises when the market stops running up because those who were
short have all exited. It is possible that those who were short now start
buying the same stocks and drive the next phase of the stock, taking it into
another price orbit. But how do you know if it is not a false up move? If the
stock faces resistance a day or two after trying to get out of a range, and
falls, it may indeed be a false start.
Each long term move in the market gives out enough signals that it is a long
term move. This is backed by the speed and ferocity of both price and
volume movements, and the sustained single direction of these moves. A
longer term move will be preceded by a flat market with lower volumes,
especially on the futures and options (F&O) segments. The ratio of F&O to
cash volumes will also decline significantly. This will be followed by a
period of decline but that could set the stage for another bigger rally.
Profit from the Gap.
From time to time, gaps will appear in a stock’s price. Let’s say a stock
closes at ^ 50 and opens the next day at 60. This is a gap. Or, let’s say a
stocks has traded at 50. The very next trade is at ^ 55. This, too, is a gap.
Why are gaps important? If we can figure out the kind of gap a stock has, or
the reasons behind it, we can plan our trade in a way that we benefit from
the gap. Gaps also send a number of signals on the strength of a stock or its
weakness.
The most common gaps are breakaway gaps. They are caused either
because a new trend is starting or because those who were short in a stock
are trapped, or squeezed, and in order to close their trade have to buy the
stock at prices that are higher than the previous quote. Breakaway gaps may
also signal the start of a new trend.
If a breakaway gap occurs and volumes show a significant increase, it is
safe to run a short term trade. Don’t sell the stock should volumes continue
to increase and price starts to leap. If the stock shows volume increases
after the breakaway gap but prices stagnate, get out of the trade. In such a
case, the breakaway gap may be the result of a single trade and may not
indicate a trend.
Continuation gaps are created when a fast moving stock hits a speed
breaker. Let’s say a stock is rising from Rs 30 to Rs 40, to Rs 50, and so on.
Suddenly, an institutional investor sells a large lot, putting a brake on an
otherwise strong uptrend which sends the stock down by Rs 10. So the
quote goes from 50 to 40 creating a continuation gap.
If a continuation gap occurs at very high volumes, it may indicate that the
demand for the stock is high enough to absorb any selling. This is a good
time to buy the stock for a short term trade. However, if the continuation
gap occurs on lower volumes, it may indicate the stock is unable to take any
selling pressure.
A stock may get exhausted after a fast sprint upwards. That creates an
exhaustion gap. The first sign of an exhaustion gap is a drop in volumes and
a stagnation of the stock’s price. The next stage will be the exhaustion gap
where the price opens several points below the last price. An exhaustion
gap provides an opportunity to short the stock. If the stock falls on low
volumes, it shows the stock’s inability to absorb any selling. This will lead
to severely sharper price falls if the selling continues.
Beware the Trading Minefields
‘With great hope, in the private place where we make our trading decisions,
our current idea is made ready . . . one difficulty in selling is the attachment
experienced toward the position. After all, once something is ours, we
naturally tend to become attached to it. . . This attachment to the things we
buy has been called the “endowment effect” by psychologists and
economists and we all recognize it in our financial transactions as well as in
our inability to part with that old sports jacket hanging in the closet.’
Dr. Roy Shapiro
Not being able to exit from a stock that is losing money is perhaps the most
dangerous minefield for any trader. If you have gone through this, you are
not alone. Most of us are unable to get out of a trade that is losing money.
However, with practice and discipline, you will get used to getting out of
losing trades, and that will be one of your most significant achievements on
the way to becoming a master trader.
Our upbringing is the core reason why we find it difficult to quickly exit
losing trades. We are programmed to ‘not give up. Giving up gives us a
feeling of defeat and hurts our ego. And that is precisely why getting out of
losing trades requires practice. It is not our natural programming to accept
defeat.
Markets that are not moving much, and those that are moving in a very
large range, are not suitable trading markets. It makes sense to stay out of
such markets. An example is a stock that has been moving within a range of
2/6 to 5 % in an entire month or, on the flip side, it fluctuates by 3 % up or
down, and there are no trades in either of the two extremes. The odds that
you will lose money become very high once a stock goes flat over a period
of time, or gyrates wildly in short spans of time.
You may have got a trend right for a 3-month period but placed a trade for 2
or 3 days. The trend for 2 or 3 days may or may not be the same as it is for
the 3-month period. For a day trade, or a 2 to 3-day swing trade, importance
has to be given to day charts, then week charts, then month charts, and
perhaps a glance at the longer term 3-month, and l-year charts.
For placing a longer term trade, priority has to be given to 3-month and lyear charts, and as a confirmation that there is a trend developing, or that
the trend is sustained, we can look at monthly charts and weekly charts.
Technical indicators present a unique risk. Many of us follow indicators to
get in and out of stocks. An indicator is just that. It is not a gospel truth.
And once you disregard price and volume in favour of the indicator,
chances are the trade is going to go the wrong way.
Some traders look beyond the charts. They try and check the
‘fundamentals’. What are the fundamentals? Think of fundamentals as a
library. Let’s say the library has one million books. Even the most voracious
reader will end up reading perhaps a thousand books in a lifetime.
Similarly, there are so many aspects to fundamentals’ that the best of us will
miss most, and what we don’t know will hurt us.
Trading has also little to do with ‘gut’ feeling or ‘enthusiasm’. For instance,
if stocks of paper companies were going up, we get in too. What if this is
just a day move? Do the charts confirm a longer term trend? This kind of
trading does not elevate trading to the discipline required to make money.
Stop losses are rarely used. Why? The general refrain is that they get
triggered all the time catching your trade at the wrong time. Not using stop
losses is similar to stopping medication for diabetes because it makes you
hungry. Without the medicine, your sugar levels can be fatal. You have to
control those levels for survival even if it makes you hungry (an urge).
It takes several years to get your trading right. So don’t drop off if you are
making losses. That is part of the learning process. When you start, do so
with a small portion of your ‘play money, i.e. money you don’t need for
your daily needs, your planned needs, or for your investments.
Don’t put more than 5 % on any one stock or trade at anytime. This way
even if u make a mistake it could be small loss with a great learning
experience.
Trading Secrets from the Masters
‘You have to know what you are, and not try to be what you’re not. If you
are a day trader, day trade. If you are an investor, then be an investor. It’s
like a comedian who gets onstage and starts singing. What’s he singing for?
He’s a comedian.’
- Steve Cohen
• Use a trading system and stick to its rules.
• Traders test their ideas and improve their trading system with the
mistakes they make in real trades.
• Most traders lose money in the first few years and find the experience
invaluable in improving their trading system.
• Don’t get excited by either gains or losses. Be detached. Stay low on ego.
• Believe in your own convictions, make decisions and take action quickly.
• The ‘crowd’ reacts to the market. We must react to the crowd. If we can
gauge the mood of the market, we will be ahead of the curve.
• Don’t go looking for trades. Let them seem so obvious to you that you
have no doubt they will go your way.
• There is no need to convince others about your trades. Let the profits
from the trade speak for themselves.
• When you have made the right trade and profits are building, close the
position only if the charts indicate the requirement to close.
• It is best not to pick fights with professional and institutional investors. If
the market is falling fast, there is a reason for it. Trying to buy without any
real edge will result in a loss.