You can find umpteen sources claiming that they have cracked the market and found out a foolproof method to trade but there is no such thing. Even if you spend all your life doing just trading and nothing else even then there will be days when all your knowledge and experience will be thrown out the window by the market and you will find it hard to even know what is going on. In those times it is sheer stubbornness to make it big in the share market that can drive you to the next trade. The first thing a trader has to have is the ability to stay hungry for profits and not sit silent after a loss making trade.

Another analogy can come from the world of boxing. It is said that joe frazier was the kind of boxer who could take heavy punches in order to wait for that opportune moment to land his hand on the opponent. And when that moment will come joe will make the most of it. Mohammad ali later on in his career made it a habit  to let the opponent punch himself out and then ali will take charge, famous case in point is his bout against George foreman where he took the beating for seven rounds and then turned the match on its head in a matter of seconds and won the belt. If you are going to trade as the sole money earning activity in your life then you have to have the capacity to lose. You have to have a cool and composed mind. Remember not to get too happy about a good trade and neither too sad about a bad trade. Every time you exit a trade don’t remember the outcome of it just remember the logic you put behind the entry and exit. If you remember how much you made in trades then you are going to forget how you traded and shortly thereafter there will be very few profit making trades.

Technical analysis is not a method to make money. Technical analysis is a method to understand the market. Profit is a by-product. Focus on the method and profit will come, focus on profit and you will never find the right method, not to say there will be no profit either. Internet is a great learning source but it can be distracting too. Especially those tipsters who claim to give you guaranteed returns. There is no such thing. No easy way out. Trading is not for part timers. In a one-day match sachin tendulkar took five wickets against Australia and Australia was the top team at that time. But that doesn’t make sachin a great bowler. Bustor douglas beat mike Tyson,knocked him out, but after that no one know what became of bustor douglas. Trading is not easy. If you try to forget that there is method behind it all and just go with the gut feeling you might make some good calls and earn good profits but then market will hit you in the gut itself and there will be no bouncing back from that punch.

If you are not willing to drop everything else from your mind and totally be focused on share market then this is not the place for you. Better find some other job. In fact it can be said that probably the sharpest mind in the world come to share market. A sharp mind alone is not enough though. We know for a fact that share market has chewed out even noble prize winners. So it is not just a sharp mind but your overall character that is going to define your success or failure in the share market. Before you learn how to trade and how to analyse the market first ask yourself………how hard can you get hit and stand up again???

Yesterday I wrote about staying out of market and waiting for momentum in price trend and today we got just that.  The image on top left is nifty’s chart from nse homepage . On the intraday chart you will see that market opened on a positive note. An open move of 40-50 points is good enough start for intraday trading but afterwards there was nothing in that direction. If it had kept going up or kept testing the upper range there would have been a chance of a long trade there. The first up-move was not tradable because it happened right at the opening of the market and in those times it is not so clear as to which direction should be taken. Waiting for the morning fog to clear out causes you to lose some part of the move and that’s what happened today too. Though this is my normal practice. I start trading after market is one hour into the trading time. This way I know that the dust has settled and now I can rely on this price movement. For me the key thing is that price action that’s happening in that minute. For trading intraday options I don’t care for moving averages or any other indicator signals. If I see price going down I don’t care whether it is below 34 day ema or above it. Price is going down. I am not trading ema or sma I am trading price and price is going down. For me today the real action started at 2 pm. Before that it was just a waiting game.

I was sure to go heavy on long puts after nifty crossed the previous close price. That was my entry time and because it had taken a long time to cross that level in the day I had set the day’s highest point as my stop loss target, though such a high stop loss is not advisable. The thing is, if there was any upward momentum left it would have shown some effect by that time. But since the morning high was reached there was no steam left and if pressure is not forcing it up it will automatically fall down. For me the default trend of any security is down. It takes efforts to pull the trend up but it can go down without any effort. So since market didn’t make any new highs and it crossed previous close point I was ready my long puts.

I don’t like the last half hour of trade. That 30 minutes bit is mad men trading zone. I see to it that I don’t open any new trades and don’t keep any running trades open in that time frame. So today too I booked my trade at 3.00 pm. All this was done based on 10mins candlestick live chart.  I don’t use any indicator or any other setting for decision making. Nifty went from 6350 to 6210 today. This is a huge day for any options trader. If you got your trades right you could double your capital in one day. But that will mean taking some risk, some extra risk and being hyper active. I am good with risk but not so good with being hyper active.  So I focus on sure shot trading bits and be content with what I earn.

Two important lessons from today’s market – first, follow the price. Don’t try to predict it, don’t try to move ahead of it. Just follow the price. When it goes up, buy call and when it goes down, buy puts.  There should not be any confusion in that. And there should not be a third choice either. Second, when price is not doing anything you better not do anything too. Yes today it opened positively but after that it stopped and went into a tight range. If you had taken the early morning trade and made profit in that first upmove then it is a job well done and if you didn’t enter at that time then wait now. Don’t get into a trade because you’ feel like doing so’. If you have to look twice to identify a trend that means there is not trend to identify. Leave it alone. Let it be. Stay out. Don’t trade. Let the market tell you in clear terms when to trade and when not and if you watch the price closely and carefully it will give you ample time and opportunity to make good money. You don’t have to make it complicated. Keep it simple. Follow the market. Follow the price. Be a follower.

An options trader is always working against time decay.Reversal is a good thing because it gives a chance to exit in long call/put and enter in long put/call.A reversal whether up or down will keep the call and put both moving.In a reversal after an uptrend you can see that calls lose and puts gain simultaneously.But in a retracement on an uptrend calls will lose but gain in puts will be small and difficult to trade. Because reversals start a new trend they will have more momentum and retracements fizzle out very soon.

let’s see, if nifty has been on an uptrend and moving 50 points up every day , on average, and then one day it goes down by 30 points, then what will your analsis be. We are not talking about any chart pattern any indicator reading here. Just the price action. It goes up for a few days and then one day it goes down. You can either continue with your long trades because you think trend is still strong. Or, you exit your long trade and take a short trade thinking that this is the peak of this trend and now it will reverse and if you take a trade here then it will be maximum profit. Or, you exit your trade and wait for the next day before you take another trade on either direction.

I am a very short term options trader. So my mind is tuned to think in that time frame. My decision at times like this is to exit the long and wait for the next day. If i see that trend is continuing then i will get into long again but before that i will ensure that price has crossed the highest point of this trend. If the highest point of this trend is not crossed but price is going up then i will hold until that level is breached. Once the peak is broker i will go long. If price stops right at the peak point of this trend and hovers around then i will not take any trade. Neither short nor long. And if price is going down then i will wait till yesterday’s lowest price is broken. Just like in the case of highest price for long i will watch for lowest price for short trades. Breach of yesterday’s lowest price will tell me that there is enough steam in this move to last atleast one day and one day is what i trade for.

Anywhere between yesterday’s high and low price is my retracement zone. In this zone i am not going to take any trade. If the whole day is spent in this range even then i will not jump the gun and take a trade by predicting the market. I never predict the market and i strongly recommend one should never predict the market. Never move ahead of the price , more on that in other post. So after one day’s opposite move to the trend i will have three possible actions for the next day. It all depends on price level. Ofcourse it can be made easy if you include chart patterns and indicators in the analysis. Sometimes using too many tools is also a problem. And most often i find that indicators make me jump the gun and move ahead of the price. It must be because i am using them wrong. So many trades follow indicators that it is impossible to even think that indicators are useless. I must be making some mistakes in their use. And instead of correcting that mistake i chose to ignore indicators and focus on price and chart patters. There are “N” number of ways to trade and analyze. If something suits you and brings good results and you feel comfortable with it then there is no need to change it ever. Remember, its your money you are risking so don’t be guided by others.

Learning all major candlesticks patterns might be a tough thing specially for people like me who forget things very quickly and easily. Candlesticks nonetheless are the best charts for a trader. So there is no question of avoiding the because there are two many patterns to remember. Rather if we break down the price move it becomes pretty easy. A pattern is ultimately doing just that for you. If you find it hard to remember what is hammer or hanging man or spinning top just forget the technical names and focus on what a candle tells you. Four things – open high low and close. Instead of finding patterns just find out what a candle is telling about that day’s market action and you will be right most of the times. Later on as you practice more you will automatically remember all the technical terms for patterns.

Here we have SBI,trading symbol on nse is sbin. We look at the 7 months chart.  There are 10 crucial points in this chart. Number 1 is the top for the channel. Price came off that point two times. That is a double top. The text book definition is a little strict. What we need is the idea. On the chart at 1 price couldn’t break it twice. That is good enough for us. We know that it is not going to go any higher. Naturally it should go down but we have to wait before it does go down. That wait is over at 2. Price broke the channel range. We are good to short.  Price does not always run away. It will test highs and lows and then chose the direction. The candle plays a big role. If the breakout at two was with a small candle with  a long upper shadow i will take it as a sign that bulls still have some force. But that candle has no upper shadow. Price opened and simply went down with not a single tick on the up side. This is clear indication of bears force.  The next point at 3 has three white candles in a row. Price is moving down and a white candle shows buyers were stronger that sellers. But here those white candles didn’t make new highs. Look at the long upper shadows. Means buyers did pull price up but couldn’t sustain it there. Signal is still bearish. When you draw a top or bottom line simply focus on close beyond that line. Price crossing a line but not closing beyond it is no signal or reversal.

Points 6 and 8 are v shaped reversals. Prices turns violently without forming a proper base. Base is the launchpad of any reversal. Though these two did pull price up but it couldn’t cross the high line. Also notice at 11,6 and 8 price is lower than the previous low point. The upmove after these points were more like retracements than reversals.

Then comes the base. Point 10. Here price didn’t reverse in a jerky way. It made a base. A proper launchpad. That base was tested soon too and held good. Now price is much more likely to go up. Among the upmoves from points 11,6,8 and 10 only 10 had a clear candle formations. Look at candles after 10, mostly white. This is the effect of having a proper base in place. Earlier all retracements had mixed bag of candles,some white some black.

You can afford to totally ignore what those candles are called technically. As long as you know which candle is bullish and which is bearish you will do good.  On Monday 23-01-2012 the target will be to break the high price line. If it does that then you can expect more upmoves. If it doesn’t atleast it is not likely to have another selling spree considering that the bottom has been found. If i am long in sbi my personal target will be to book partial profit if it closes at 2000. And buy some more if it goes above 2000 and hold till 2100.

Infosys in last six month is as ugly as a candlestick chart can get. Too many gaps. Though most were in one direction even then its too much of a jerky ride. A short term trader with bad habits of missing stop losses this is sure death. There was one good up move in October 2011 but even that is too confusing and candles are not in a good shape there too. Price did rise high but this will not be a peaceful trade. Stock hit a clear strong resistance at 2900. Staying true to its jerky nature came down all the way to 2600.

In this kind of stock your month’s profits can be wiped out in one bad day. So if you are not a long term investor who buys and hoards stocks stay away. And in case you have enough capital to facilitate a short trade margin then this is the stock for you. Short it. Wait for a close below 2600 and then it is a blind short trade. But do keep your stop loss in mind. Even though an up move is unlikely to sustain for long make sure you have an exit plan in place. Below 2600 if 2500 is broken too then there is no support for the stock.

This is what happens with stocks that gap too much. There is no base when they go rogue. Below 2500 I can not spot any support before 2200.

Tatasteel is a short term trader’s delight. This is one stock that is never out of momentum be it up or down. As of now it is on the up move. In last six months there have been many gaps. Gaps only tell that there are jerks in the stock. It is never a smooth moving stock and your stop loss has to be very very tight. It can go against an established trend in quick time. Right now facing resistance at one of the previous down gap starting point. If this could be broken on the upside then there is some more room left for up move.

Even on a positive break out beyond that gap the upside is limited. Right after 450 it faces more resistance. 418 is the first support point for me. It is trading at 435 so that gives me almost 15 points as check point on either side. Considering the swift this stock shows this range is pretty good to take a bet and keep a tight stop loss in place. For longs first exit sign is 450. Book partial profits there and if it keeps going up then just wait for the next resistance without buying more. For short keep building up until 450 is broken convincingly.  Last three days no new high is made. That suggests that buying pressure is losing steam.

Be ready to move in at either direction. Get the entry and exit points ready and stop losses in place.  It all depends on the next day. If it is seen making a new high then long if not then short.

The overall trend in this stock is down. It came down substantially and right now trying to make its way up. It made a good base around 230. There is a nice little flat base there. No confusion that for the short term it is not going to be broken. After a big down move if a stock is seen rising sharply it doesn’t mean much in terms of power of that reversal. Until you have a platform to jump from you can not jump high. Here the stock has a good base. But as of today the stock has moved up pretty high enough already. So the question now is what is to be done next? If I didn’t but it at the bottom should I buy here now?

The immediate resistance is at 350. And the next is at 380. Today’s move in the stock is useless. There was no clear direction.  Though the upmove since the new year is good and strong I think this has run out of steam for now. Better to wait and watch. Today 340 put gained a lot. That also tells me that the downmove from here is much more expected.

The operative range for me between 300 to 350. Considering that is more than 15% on this stock I will go long if the stock holds above its previous day close point(318). And go short if it closes anywhere below yesterday’s open (312).

Never trade by an indicator only. You have to look at the price of your stock too. When you put AD and price line on one chart then you can use it properly. The indicator tracks down flow of money into and out of a stock.  When money flows in it is accumulation period. More traders are buying than selling. When money flows out of a stock it is distribution, more traders are selling than buying. The AD line thus only give you a trend. When it looks like the price chart and you have to put it in conjunction with the price then what is the significance of this indicator? Why to look at it?

Look at it to know which phase is going on in a stock. When you see that AD is rising or is constant at one place after a good rise you know that stock has more buying force than selling force. You see a divergence in price and AD line then i suggest you pay more attention to the price chart of the stock. Use the indicator for secondary confirmation only. Never trade solely on the indicator. When you see that rise in price is stagnant and price is also in a range you know it is time to book partial profit and wait before buying fresh. When you see that a stock is falling down and AD is also going south you know what is to be done.

Chose the time frame as per your choice. Some traders use different time frame of same indicator. If your system allows you can put 2-3 time frames of AD. With one price you can have this AD as the filter. If you see the change in shorter period AD is not in sync with the longer period AD then you can wait. And when all time frames show the same move it is that much more confirmed move.  Right now reliance is trading at 770 and AD is showing a top is made for the day. Price chart also says that today’s high is not yet broken and price is not going to go up. So i will not buy fresh reliance right now. Instead if i have some shares i will book partial profit and wait for the next move. ONGC is trading at 268 and AD is rising with the price. For me that is confirmation that stock still has some buying pressure. I can hold to my longs or buy some more.  NTPC is at 167 . Price chart is falling and AD line is flat. Price has come off the day’s high and AD is not doing anything too. I will not dare buy fresh NTPC.

This is the easiest setting of AD. You can add more. You can add more than one time frame and trade within the time frames. You buy when short period AD is rising and hold till the long period AD is gone flat. This might give a small profit. But trading like this you will be at the edge of your seat. And that is not a good position to trade from. Rather be cool. Look at the price and wait for AD to show the same shape as price. One indicator will give you different results as you change your trading style. You want to buy at the open and hold till the very close or you want to scalp every 20 minutes. Its upto you. But one thing is sure as you increase your trade frequency and number of trades your profitability will fall.

The drawback with AD is during a strong trend it gets a little slow. It will hang. It is not as live as the price itself. It will lag a little but in the long run that is a good thing for trader. Use AD if you are good at studying line charts. Not otherwise. Indicator is secondary, not primary.

As we saw in the last pose that indicators tell you when to go in and out. Some indicators move ahead of the market and some behind it. In both cases you are almost never in line with the price of the underlying. This is the biggest thing with using indicators. RSI may say that a stock is overbought but it doesn’t mean that there will be selling immediately in the stock. Selling might take some time to come to relieve the pressure of an overbought. In some cases a selling trend might never come. An overbought stock might be caught in a range and during that range the RSI will adjust itself. RSI will go down and once the range is broken RSI will again start going up. An overbought stock doesn’t always mean a selling spree. So if you bought puts thinking that RSI reading says it is overbought then you will be caught on the wrong foot if selling doesn’t come.

The other thing with indicators is that when they were calculated the first time they were calculated using the end of day data. Most traders use them in intraday trading. Without adjusting the fact that end of day price is a different story than intraday price. RSI in end of day charts will be much smoother. You see the same indicator in intraday chart and you will find many whipsaws. The reason is that input data increase. In end of day indicator when data range increases it flatten the indicator. It removes whipsaws and also the effect is that it removes trade signals. In intraday trading when data range increases the same indicator becomes more violent and both whipsaws and trade signals increase. This causes all the more trouble.

So what should an options trader do when deciding which indicator to use for trading? There is no final answer to that. You need to understand you own trading style. How much capital you have and what targets have you set for yourself. Once you finalise all that then you go about making a trading plan. And part of it is choosing the indicator. I think traders who rely heavily on intraday trading are the ones who are trying to make quick money. I personally am not a big fan of this theory. For me the swing method is the best way to approach both stock and options trading. But those who want to go ahead with intraday trading must first study the indicator. Don’t just read a short note on any website and think that this is all you need to know.

If you don’t know how an indicator is calculated then you will not know what affects the indicator and how it behaves. You will end up trading all signals it gives. And before you know it will be too late. The key to trading indicators profitably is in understanding the indicator first. What it tells, how is it calculated and what factors affect it? Both in intraday trading and swing trading. If you know your indicator then you will be able to use it well. And then trading is an art altogether. Indicator is just a brush. Now we move on to the next part. Picking indicators and decoding them. These are my views. I don’t say this is the absolute truth. I am a student of share market. Not a master. If you think i am making a false assumptions please feel free to point it out. We share, we learn.

The first thing we need to clear our mind about is that we are looking to find an indicator that suits options trading needs. Most of the indicators that are known are based on underlying’s price movements. And options is also based on an underlying’s price movement.  A share moves up and down. Its price is used for an indicator. The indicator then calculates the price in a manner and presents an idea of the behaviour of that stock. We use that indication for trading. Some traders are hardcore indicator traders. They use only indicators and don’t even look at the chart. Some use bother charts and indicators. Some use only charts. The biggest thing an indicator does for you is that it takes the emotional element out. And this is a big achievement. Here is how an indicator is normally used in trading. Say you are using RSI, a very popular and common indicator. You decide i will buy when the stock is oversold and sell when stock is overbought. A simple and effective strategy. If you start looking at the chart there will be so many patterns and distractions that it will be very painful and confusing for you to decide when a stock is overbought or oversold. You switch to RSI and now all you have to do is wait till the RSI gives a signal of a stock being overbought or oversold. This way you reduce your work. When RSI says oversold you jump in and buy. When it says overbought you jump out and sell. If you are using only RSI looking only at RSI then this will be easier for you to do. It will leave no confusion in mind.

But everyone will be making huge money if using an indicator was that simple. Indicators are defined under two categories , leading and lagging. Those that are leading indicators move ahead of the market and the other move behind it. In both cases you are either ahead of the market or behind it. This causes dissatisfaction in most indicator traders. Ideally you should take whatever profit is coming your way without any desperation for maximizing wealth in short time. But that rarely happens.  When you use a leading indicator you go short or long before market falls or rises. Sometime the gap might be 4-5 days long. This may cause you to change your position and take an opposite one. And suddenly you will find that market has kickstarted the move and now you are standing on the wrong side. This can be avoided if the person is trading in stocks with a slightly medium term view. That timeframe will give him enough time to hang on to a position until market moves in the same direction. Patience is more important that capital in trading. And patience is what most people don’t have. Indicators need you to be patient.

Using indicators in options poses a different problem. It is the behaviour of premium with its underlying. This is a tricky thing. You can read in a book how out of money, at the money and in the money strikes behave. But it is a different story altogether when you come to real trading world. In the next post we look into this behaviour and then see what are the challenges with indicators in options trading. Later on we will pick all popular indicator and try to decode them for options trading.