Going with the flow

Traders should always go with momentum. If momentum favors the bulls, then we should stay with the long side of the market. It is not our job to question the wisdom of the market. We should have one objective - Go with the flow.

The Nifty is in an uptrend. The trend has been up since the Nifty moved above 4635, and, the Index closed yesterday at 5150 at a new 10 week high. The flow is clearly UP, therefore traders should position themselves on the long side.

This week on CNBC, I have explained that traders should maintain overnight long positions in the Nifty because the big gains will come in the gaps. There are periodz when the gains come on gap ups, then the market trades in a narrow rangw throughout the day. In such scenarios, day traders do not make money even though they may be positioned on the long side.

Can this long trade go wrong? Of course, anything is possible. The trade was taken at 5100, with a stop below 5050. This level of 5050 remains the point below which long positions will be closed.

Stay with your time frame

My earlier post evoked a number of comments. many thanks for your thoughts. Since trading is more of an art it is possible for many of us to have different ideas to reach the same objective (profitable trading).

Once a pattern target is met, I believe it is wise to stay with the timeframe and wait for new patterns to emerge. While 'taking a rest' seems like a good idea, the hitting of a pattern target is not a stressful event that requires subsequent rest.

For the Nifty, the pattern that has triggered is visible: the Index has crossed 5100 which was a significant pivot high. New highs are bullish. Buying new highs also carries risk because a failure can mean the trader has bought at the top. But that is the way I trade: go with the trend. The trend is up, so look for opportunity to go long. Crossing a previous pivot high is such an opportunity.

Trading after a target is Hit

A target of 5070 came from an ascending triangle pattern in the Nifty which broke out at 4800. This target has been touched and crossed.

The long trade started at 4800 should be closed when the target was met. What should a trader do now, after he exits the position? This question arises because the pattern under trade is now complete so new patterns/trades will not come quickly.

Among the various suggestions that come to me:


1. Take a well deserved rest.

2. Start a search for new patterns, in different time frames.

3. Stay with your time frame , be alert to any new patterns that develop.

4. Switch to another trading method, i.e. from patterns move to moving average crossover or RSI levels.

What do readers say?

Reaching the pattern targets

An ascending triangle identified on the Nifty a few days ago has now touched 5000+, within distance of 5070 which is the target for the pattern. Once the target is met (if), Nifty chart will be open for development of new patterns.

But,

The fact that an ascending triangle developed at the bottom of a bear decline carries some significance. After all, an ascending triangle is a bullish reversal pattern. We can only guess on the nature of reversal - short term or long term? since the triangle developed on the daily chart it's targets were modest. Therefore, it should carry short term significance. We should continue to assume that the short term trend is up until proved otherwise.

What happened to the bearish wedge? This pattern is now in danger of changing it's shape if there is any more rally in Nifty prices. It could then become a regular up channel which would have a different meaning a altogether.

To sum up: the short term trend is up. A reversal pattern is required to change this trend.

Nifty patterns revisited

In an earlier post, I had pointed out two different patterns in the Nifty –First, an ascending triangle which was already confirmed, giving a target of 5070 approximately, and, second, a bearish rising wedge which was under construction.

 

After I wrote that post, the Nifty has continued to move up, which touching 4970, up from 4800 which was the breakout point. It is anybody’s guess if the targets for this pattern will be achieved. The stop for this trade is 4800 – breakeven. Short term traders cannot have such a wide stop, and, they must manage the trade with their risk management principles. I have closed the long trade at 4970 approximately. I am a short term trader, therefore, my risk profile is also designed to take minimum risk.

 

I am giving below the Nifty chart with both the patterns separately identified. Thanks to the sharp rally on Tuesday, the resistance line for the rising wedge has to be redrawn.