Wednesday, June 24, 2009

Trading Scenarios

Almost all the reading that I do suggests that the Green Shoots coming in the USA may not be so 'green' after all. An oversold market led to a sharp rally, but the new up move cannot still be classified as a bull market.
What is the difference between an uptrend and a bull market?
Well, these are terms that I use for my understanding. In a bull market, buying can be done with the assumption of almost certain rewards in blue chips. If the timing is wrong, the investor may have to wait more, but at some point prices will cross their previous highs.
An uptrend is a momentum driven rally. So far it goes up, it goes up. If it stops going up, we have no way of saying when the next up move will come. It could be in a month, or after six months or an year.

Just as the continuation of the uptrend is not certain, continuation of a downtrend is also not certain. Therefore, buying on panic declines, sharp corrections will reward investors, because at such points, we may well be near the lows.

How do you determine if a buying opportunity has arisen? The question is: when is the correction deep enough to justify buying? The answer will be different for each investor / position trader. It also depends on your deep pockets and risk ability. Let us discuss some scenarios.
1. Stock specific. You wish to accumulate a stock, say Suzlon. At 105, you are not keen, but if it were to reach 80 or closeby, you will be a buyer.
2. Index levels. At 3800, you are comfortable accumulating stocks for trading. You understand there may be more pain left, so you invest 50% of your planned outlay, willing to buy should prices fall further. The additional buying will be done on base bulding in the index.
3. Momentum. You plan to begin buying once the RSI14 on the Nifty falls below 40, then rallies to cross 50. (In such cases, you need plan B to do something else if the RSI does not fall below 40).

The theme that really works wonders is Patience! Wait for the market to oblige you. It will do so, if you show your willingness to wait.

Swing Trading Short Positions
Bramesh said "Today we moved below 4200 but not able to sustained market again fooled the traders adn many are stuck with short positions"
Chandu says "Great analysis,But we may find support @4090.If we break 4200 tomorrow.May be we will go to 4100 and bounce back to 4500.And only close below 4100 will take us to 3800."

When you are in short term trading, the tactics are different. Scenario building is essential, as these commments show, but eventually we have to follow the market. Random noises in the market can spoil our scenarios, stop us out or worse put us against the trend. The link here has a comment by 'A Student for life....' which explains how we need to respond to market action. I recommend you read this excellent analysis.

The comments mentioned above also answer men's question :"After getting knocked down from 4700 you are now saying it is not a buy on declines, just think what if one shorted before the election, bot on declines as suggested earlier, and now after everything is over you are saying it is not a buy on declines? I am unable to understand, may be it is my limitation, could you please clarify, just where I am missing you"

I will add my view: When does a correction become a downtrend? For me, if it goes below 4200. Then, we wait for consolidation - signs that the down move is ending. I can buy whatever I want, provided I exit below 4200. That's how I will do this.
I did not understand the reference to 'shorted before the election' ? Why should we short before the election ?

Have Fun!


men said...

Mr. Sudarshan,
let me explain, this shorting before the election was DEFNITELY NOT YOUR IDEA, so hope I have made my position clear. As the market was pessimistic people would have shorted, in fact your IDEA JUST BEFORE THE ELECTIONS WORKED WONDERS, this is a well known fact and as far as I can remember you are the only one who got it RIGHT.
By the way I am happy you are responding to a lot of OUR SILLY QUERIES, which itself is great, not many really care about helping.
Kindly give us trades which you think one should take just before the budget and the likely action post budget for the above.
Thanks once again.

men said...

Mr. Sudarshan,
You have been very open in saying that "THE MARKET CAN DO ANYTHING", here most will be aware of that, moreover you are helping us out and that too for free, hope this puts to rest any problems caused if any.

gurvi said...

Excellent comments Sudarshan ji,

Can you also highlight your strategy for Budget as it is coming very near?


Anonymous said...

Sudarshan Ji,

Hello !! I am a great admirer of your thoughts on trading. Have a serious question regarding backtesting. This is a long post, request you to please read through.

After doing nearly 1000 hours of practise on nifty futures 5 min data, i built a system that suited my style. However, when I started practising, I always found that my actual performance is far different from that projected by theory. On investigating, i found that the high/low of bars being shown on my software (esignal) are not correct. Say on one occasion, the high of the bar being shown was 4271 but my Stop Loss buy trade at 4272 had been executed. Thus, my trade of 4272 was not reflecting on the charts. On contacting my software vendor,I was told that the data that comes from the exchange is not true real time data and is only periodic snapshots. So if there are two trades between those snapshots, one goes missing. According to the Director of this company (who is a frequent guest on CNBC), this is a known problem of all Indian exchanges.

I have been terrible depressed since i found this out because:
(a) This means that the data on which I practised bar by bar for over 1000 practise hours was not correct data and thus, my backtesting results are unreliable.
(b) As the backtesting results are unreliable (and will always be unreliable), I have no way of establishing confidence in my system and in fact, have no way of building a system at all.
(c) Given the above two, I am beginning to look like a fool in front of myself as it appears I have wasted over 1 year of my life learning how to trade and all the learning was futile as the results are unreliable being drawn from inaccurate data.

My question to you:
How have you developed your trading systems. Have you faced the same type of data problems where your trade which got executed does not reflect on the data fed by the exchange? How do you overcome this problem during backtesting? Please suggest on what I should do as I am on the verge on heart-break.

Looking forward to your reply.


rohit said...

Sudarshan ji,
According to technical analysis market test its low ,to confirm bottom,so 4096 low made after election is not yet tested,although yesterday market open around 4150 but gap was filled ,so i think market will dip near 4100 may be intraday in next few days? please give your opinion ,if this analysis is right or i am going in some other direction

Student Of Market said...

Dear Sir,

thank you for your kind remarks on my comment.

Most of whatever I have learned on TA has been from you - except for discipline which I have not learned so far (and you are not responsible for that)!!

Warm regards,

Student of Market

Vicky said...

My analysis suggests a possible up move for nifty in the near term.May be a rise of 200 to 300 points from the current level.

deepakmandhyan said...

Dear sir,
since a lot of days i am trying to find out how to subscribe you as i have been watching you on CNBC but how to get in touch do not know please reply. thanks