I apologize for missing out on my blog posts for the past few days. The cold, chilly weather is to blame. Even my commentaries to our clients have been either missing or extremely truncated. The weather in North India has been unusual, with no sunshine for the last seven days. Hmm.... Global Warming ?
Meanwhile, there is a lot of reader comment which should be responded to. So here goes.
Reader Pradhan says "May I ask you how can one extend his profits on a trade which is going right in one's direction. My problem is I tend to book out early. I am not being greedy here but I want to know.
They say, if its been a good day, make it a great one!"
My Notes: One of the few sayings in the Market, which is absoultely correct is: "Cut your losses short and let your profits run". The problem lies in the mind of the trader. Suppose you run your profits and the market suddenly goes against you. Now, you end up with much lower gains as compared to what could have been. You start kicking yourself for being such a greedy pig and promise to take profits quickly. Now, trading is going on in the mind. Next time, you exit quickly, then watch the stock make the move of the year.
The solution does not lie in any 'magic' indicator. You put your stops and tighten them as the mrket moves in your favor. Essentially, you let the market take you out of a trade.
But, this rule may not apply to day traders who do not have the benefit of time. They should take profits at predetermined targets / time.
Nirav asks: "Is there any difference between trading methodology and trading style? And yes then please tell what are the difference between them? Because as you have said in this blog only that Swing Trading is style of trading so what is trading methodology?"
My Notes: The trading methodology is the basic structure that defines your trading. It could be systematic or subjective. Systematic traders follow rules to enter and exit trades. Subjective traders have well defined rules but also use their instinct to make trading decisions.
Trading styles define the way in which you trade. There are four main styles: scalping, day trading, swing trading and position trading. How you trade depends on your available time, the markets you choose to trade and your personality.
kk has this on the U.S. Markets "I THINK FOR THE LAST 10 YEARS ALSO DOW IS IN RANGE OF 14000 TO 6000 . AND WHO KNOWS AFTER 5-7 YEARS OF CONSOLIDATION IT ONCE AGAIN RESUMES A BULL MARKET ."
My Notes: Quite possible. The only way to find out is to let the market tell us what it wishes to do.
Reader Sahil on my suggestion to have a bias for the day trader, he says "my suggestion is never develope bias, a professional traders should only trade on charts"
My Notes: I think this view needs to be expanded. For example, if the share is in a bull trend, then the bias should be towards going long.
Kotesh has a plan to sell covered calls against positions in the futures markets. he wants my opinion on it. I do not think selling calls against futures positions is a good idea. Covered calls are and should be sold against equity owned by the trader.
PPtrader has an analysis on Aban "According to my reading ABAN has broken out on weekly timeframe.I am posting for the first time so i dont whether my observation is correct or not. Kindly comment."
My Notes: Aban has broken out of a weekly congestion, true. But just above current levels exists another resistance in the 1500 - 1650 range, so a new breakout is likely when it moves above this resistance.
Reader sam has two comments. First, the reader wants to know about automated trading. Second, quite correctly, sam says that it is tough to predict the market, so, "why not draw a line around a pivot point and trade in following way.
BUY ABOVE THt line if sustain and sell below if..."
My Notes: Automated trading refers to mechanical methods of generating buy / sell signals. Traders develop rules which are used to get trading signals. No human interference is accepted. The trades may be fed automatically in the exchange system or may be fed manually.
The ACD system written in the book 'The Logical Trader' defines such a system around a pivot point.
Reader Ravi has graciously shared his trading method with us. He writes "I've been using stockhastics, 20 dma, volume charts and MACD indicators to see stock moves. Stockhastics have very successfully indicated many a times overbought and oversold stocks, I was having trouble with predicting sideways consolidation then I added MACD to my watch and that helped me understand a sideways stock. The 20 dma also helped me in identifying buying opportunities.
Now I'm having trouble in finding out how to decide a stoploss and a definite target, are there any other indicators that I can use for this purpose? Searching had yielded no results.
And also I wanted to ask if you can suggest any other indicators that I can add to my watch."
My Notes: Stop loss and targets can be chart based or indicator driven. The best method is to use charts, identify piot points and keep your stops under / above these points. As the tops lp moving closer, there will cme a poin when the market wills top you out.
A number of indicators can be used as a stop loss, for example, moving averages applied to price can be a stop. To define a target with indicator, the averge true range is often used. Calculate the ATR when you enter the trade. The target is a multiple of the ATR added to your entry price. If you enter a long at 5100, and the ATR is 65, then using a 3 ATR target, your target will be 5100 + ( 3 * 65 ) = 5295. The advantage of ATR stops and targets is that it adjusts to volatility.