Wednesday, September 21, 2011

Nifty at resistance

The Nifty is back again at 5150, which is the resistance for the Index over the past one month. If the Index clears this resistance to close above it, we also have confirmation of a bullish head and shoulder pattern which then gives a target of - hold your breath -5600. Markets can do whatever they want.

Position Sizing: Money in trading comes from management of risk which covers stop losses, quantitiy, pyramiding, trailing stops and profit targets. The quantity and pyramiding can be taken as Position Sizing.
We have been discussing the bullish head and shoulder pattern for some days. Here is a complete trading plan to manage the H&S trade.

1. Trade in October Nifty futures/ October Nifty 5000 calls
2. Determine the quantity that you plan to trade in. It should be possible to trade one third quantity at any time.
3. On a breakout above 5165, take a position for one third the quantity. Your stop will be Tuesday's low, i.e. 5050.
4. The possible loss as per 3 above is 115 points. Calculate the money loss. If you have taken 50 Nifty (this is 1/3rd) then the money loss will be 50 * 115 = 5750 Rupees. This loss should not be more than 1% of your trading capital. If it exceeds 1% then go back to 2 and recalculate the quantity.
5. Add one third of the quantity on a close above 5165. the close should be in the top 20% of the day's range. Add the quantity just before the close.
6. Your stop for the second lot in 5 above will be the low of the day in which you added the quantity.
7. Buy the balance one third once the Nifty crosses 5250 and pulls back. Stop will be low of the pullback.
8. Exit the first lot when the Nifty crosses 5300. Exit the second lot with a parabolic SAR stop. Exit the third lot at the 5600 target or a 3 day trailing stop of lows once the Nifty crosses 5500.

Okay, this is as good a plan as any to trade a chart pattern. The entire focus is on managing your risk. I gave this as an example, although it is perfectly valid. Traders can modify the plan, change it to their needs or simply discard the idea - your choice.


rohit said...

Sir how can the dollar and asset markets rally at the same time. i.e. if you expect the dollar to rally?? How much is the possibility that the Fed gives some extraordinary stimulus and the mkts just shoot of, never going back to 4720 levels? Because upside from these levels is around 200 points and downside can be 500-600 points if we follow the theory of re-testing lows, then whats the point in going long, if we will evntually go to 4600 or 4500 or 4300 whatever the downside maybe we dont know. What I mean is, is it gauranteed that we will eventually retest lows or it can happen like may 2009 after Fed meeting?

rohit said...

Also will this upmove be sharp and one sided in straight line or we will go up and down and reach there.

Rigel Capital said...

Thank You Mr. Sudarshan.

smit said...

sir what about trader playing with one lot only.

jigs said...

Sir thank you so much for sharing such a valuable trading plan.
Fed meeting
The day of the decision has been positive 5 out of 7 times, while the day after was positive only 2 out of the 10.

rohit said...

That is the reason I am getting the feeling that the long pending correction in Gold and Oil will come along with some downside in stock markets, wherin the dollar will move up and other assets will correct "In the short term" and then we might have the actual Qe whcih may lead to the bull in Gold and Silver and not stocks, the next big thing is gold and silver and not stocks and other commodities, although they may not fall much because of liquidity floating. So better to stay on sidelines for sometime than go long is my view. Better to short at 5330-5500, than go long now.

rohit said...

In your words today we are in no trade zone, either we trade on crossing 5170 or below 5109. Sir when are you coming back on et now.

avv said...

Very useful post. I have a question with stop loss setting. The average true range on nifty (14days) is about 115. In that circumstances won't the chances of one getting stopped out with 5050 stop loss almost guaranteed? Does stop loss has to be multiple of ATR to avoid getting stopped due to noise?