Wednesday, October 6, 2010

Secondary Reactions

The priamry trend is up. There is no confusion about it. Traders have two methods of riding this trend: (a) Buy when this trend was detected and wait till the end of the bull market becomes visible. (b) Buy when a secondary correction is complete,  ride the up move, then exit when the next secondary correction is starting. This is the way of the trader.

While it is easy to identify the primary, the secondary corrections are much more difficult to detect. What may appear to be the start of the correction could turn out to be a minor dip. If the trader decides to ignore these corrections and simply ride the bull market, he may find that a correction which was ignored was actually the beginning of a bear market!

Secondary reactions or corrections are the difficult part of trading. Richard Russel writes "Coming with little warning, they serve to correct the primary swings, as well as to dampen the enthusiasm of the amateur trader. They are caused by over-speculation and technical weakness in the price structure. "

Russell gives out "The danger signals of a coming secondary reaction".

1. Volume becomes excessive with little or no movement in the Index
2. One sector declines pesistently while another sector advances.
3. Following a decline, one or more sector Indices fail to make new highs.
4. One Sector makes a new high, while other sectors refuse to confirm.
5. The Index remains in a line (about a 5% range) for two weeks or more, then break it on the downside.

My Notes: The Market has not shown any of these patterns, so far. But, it is wise to keep such patterns in mind. 

3 comments:

stoxtrends said...

"What may appear to be the start of the correction could turn out to be a minor dip. If the trader decides to ignore these corrections and simply ride the bull market, he may find that a correction which was ignored was actually the beginning of a bear market!"

this is the thing keeps on ringing in the minds of stock traders

regards
rajaman i

LIC Agent Noida said...

Sir, I am shorting NIFTY since 5900 but along with this i am taking some points daily shorting Calls also. today NIFTY is(FUT) 6220 i have lost Rs. 6000 with Brokrage means 120 pints(so many small small stop losses tgiggered and i again took short position) but what i am trying in to have a position from TOP so that i can ride that till the end of the deep correction.. am i right? is this can be a winning stratagy?

HIGH said...

Dear Mr. Sukhani,

I have observed that when the market enters a range, the main trading chart (say 10, 15, 20 min) begin to "fail"... The Risk Reward Ratios seem to shrink...

So your hypothesis of toggling time frames is not only proved but also the only way to trade...

This also (again proves what Maggee and Robert Edwards said about "Selection of Stocks to Chart..." using smooth charts... not ones with jagged edges)


Using the reverse logic...


Q.E.D.


(BY saying any "freely" traded security... I emphasize freely traded because without volume, I do not even bother looking at the charts.... So I specify that an Axis Bank Futures should not be worth my while because it can't be compared to an SBI... Similarly one can't compare an HPCL Stk Fut to a RIL...)