Sunday, September 26, 2010

Trading a gap up day

Well, the post title says it all. The concepts are useful for day traders, but then again, trading concepts can be educative for all traders. So here I go.

Once a market opens gap up, there are three possibilities for the day's action: 1. The market continues to move higher. 2. The open is roughly the high of the day and the market then makes a bearish reversal and, 3. The market drifts throughout the day around the open.

Let us start with one number: the Average True Range for Nifty futures. Currently, this is 75. This means, on an average day, futures move 75 points between high and low. Once we have this number, our task becomes easier. With a gap open, we add 75 to Friday's close (6034) to get the likely high point, which is: 75+6034 = 6109. Remember this is the average, but that's what we have to work with.

If the gap open takes the open near 6109 then scenario 2 is likely. If the open is near Friday's high then scenario 1 is possible. If the open is somewhere in the middle of Friday's high and 6109 then scenario 3 is possible. All of this is anticipation. But doing mental scenarios makes life easy.


Publicum said...

Where can one find the Average True Range of the Nifty Cash on a daily basis? And, is it only applicable when there is a gap-up opening as today, or it's valid for all days?

Krishna said...

RIL is basically a commodity stock and its price movement normally is closely related to the trend of prices in crude oil.

Softness in RIL may be an indication that there is also softness in demand of crude oil and this wud mean that demand scenario in energy sector is not "That Good".

If by any chance demand in energy is not good then it simply means that Industry is not very optimistic in near future.

During any Industrial Boom, Energy demand normally will always remain HIGH and crude prices will trend upwards rather than being sideways or in down trend.

So who knows that softness in RIL is silently indicating that "ALL IS NOT WELL" !!

is recession raising its ugly head again silently....??!!

Just a Thought


Weblogs of Swargam said...

Dear Sudarshan,

Iam an avid reader of your blog and whenever I am in doubt, I will search your blog and find my answers. Its great!!! You are my coach.

I have one question for you. These days I'm testing some trading system ideas (so many) through a software backtesting. I use EOD for testing. I've found so many systems winning and losing money consistently. My question is - if a system succeed while testing on EOD chart, will it work on intraday trades?

Please share your thoughts on this.


rajv malik said...

power of options

today anyone who bought 6000 call in the morning @16 rupees saw it touching almost @1 rupee. however those who bought @1 rupee saw it closing @26 rupees.

in other words if you invested in 1000 call options of 6000 in the morning your rupees 16000 would have become rupees 1000 but if you held on till the last you would have ended selling it for 26,000 rupees making 10,000 rupees on your investment of 16000. however if you had picked up 1000 call options of 6000 @1 rupee you could have sold them by 26,000 rupees by the end of the session.

interestingly if you had played the market both ways by selling @ 16 rupees and buying @1 and then again buying @1 and selling @ 26, what you could achieve with say a total investment of 16,000 rupees. you could have made a whopping 40,000 if you could play the market both ways.

now comes the main point. how to learn to capture the both sided movements of the markets ? what system to adopt ? sukhani ji can your mechanical system, help in capturing such two way moves ?

Peter said...

Dear Sudarshan,

I am a big fan & follower of you and your approach to trading.

I've something to share with you. These days I am testing many ideas/strategies for trading by using backtesting feature available in a charting software. I'm quite new to testing trading strategies, but I'm a good programmer. One of my ideas is to develop & test a system based only on Support & Resistance, not any indicators. A rough coding of such a system shows profitability (not so great) on Nifty EOD charts. I've no intraday data available with me. Will such a system that showed profitability on EOD data works on intraday? Is a system based only on Support & Resistance good enough, as many indicators are just derivatives of price?

Your thoughts on this will be much appreciated.


tushki said...

sir please give me trading tips on Rcom and PNB