Thursday, July 9, 2009

Early morning answers

My earlier post for today was breaking the markets neck

Here are some replies to questions raised in comments:

TOOCOOL7610 asks:
i read ur blog entry dated june 3rd{enter a trading range} there u have mentioned that any oscilator like , rsi, cci,stochastics, can be used to trade ranges on intra charts but one confusion is with which settings we shud use cci, and stochastics??? default?? as each day is a new day in markets and each day volatility is different in markets 2nd question is that to trade nifty futures i use nifty cash carts as i dont have access to future charts is it fine to trade range trading on cash chart???

My Notes: Ideally, oscillator settings should be half of the cycle length applicable for the instrument. But, most traders do not have access to this analysis. In that case, just use the defaults, it will give you a sense of 'overbought' and 'oversold' in trading ranges. For the Nifty trader, access to Nifty futures charts is essential. These charts are available free on yahoo.com finance site.
(For Nifty futures, cycle lengths currently are: 5 minute cycle : 93, 15 minute cycle 76, and 60 minutes: 76 and 131. These cycle lengths may be different depending on the software rthat you use, but not too different)
TOOCOOL7610 asks again: how to identify trading range and is it best to identify with 60 min chart?? you have mentioned a trading range breakout ie 4400 -4250 but recent high and low in which nifty was tradin was 4440 and 4250 but you saying it as 4400 and 4250

My Notes: Visually, you can identify the range when you start seeing a line on the charts. It takes practice. With indicators, an ADX reading below 20 with the ADX falling, suggests a trading range. An earlier post explains how I identify support and resistance. Read it here.

Continuing the indicator theme,
Men asks: For RSI, what is the value you use? Secondly does this value remain the same for the Nifty and other stocks which have a beta from 0.85 to >1 and is it the same for different time frames( intraday and positional)?

My Notes: I use the default RSI for all my visual analysis. This is 14, in all time frames, for all stocks. Andrew Cardwell has done a lot of work on the RSI and he says 14 is good enough. You may like to do a google search and get more information on Cardwell's ideas. But, if we use the RSI in a mechanical system, then the RSI value will be determined by system testing.

wildeazoscar asks: "am getting an EOD ADX(14) reading of 18.75, which is just above the +ve DI(14) at 17.61 and below -ve DI at 24.12Now, is it the inception of a new trend?"

My Notes: I think the key to identifying a new trend with the ADX is (a) see the ADX falling, preferably below 20, then (b) See the ADX begin to rise. I only use the ADX and ignore the +DI and -DI. This is a matter of choice, since I try to identify the direction of the trend visually by seeing a chart.

There is one more question: "would not it be better to assume a new trend once NIFTY breaks down from the rally from 3600 towards the neckline and ADX rises above 30?As far as my knowledge goes, one does not trade reversals all out, but as soon as the reversal is confirmed and trend sets in, one trades in heavier volumes."

My Notes: If you are a position trader, then the correct, conservative approach is to wait for the neckline to be broken on a closing basis. You can take short positions on a breakdown, or on a rally to the neckline or both. This is a sensible comment. There is a saying : "there are old traders and bold traders but no old bold traders" . So, being a conservative trader makes a lot of sense. Thanks for pointing this out. But do not wait for the ADX to touch 30. Because of the peculiarities of indicator calculation, sometimes it comes too late.

1 comment:

Ravi said...

Hi Mr.Sudarshan,
Your blog is very informative, thanks for the regular posts.
I'm a novice trader & investor and have been following your advise for a while now, very successfully. Could you please suggest a course or a guide on technicals which could educate me further.
Best Regards,
Ravi.