Wednesday, November 6, 2013

Nifty: Trend or Mean Reversion

Please read a more detailed study of market forces, by Adam Grimes, available here.

Now, markets can be mean reverting or trend following. If we are in a trend, then corrections are low risk opportunities to reenter the trend. A breakout from resistance (in an uptrend) is a buying opportunity. If the market is in a mean reverting mode (absence of a trend) then sell at resistance and buy at support.

Traders understand this.

Traders should ask this question for the Nifty, which is the widely traded instrument in India.

If you feel that the Nifty is in an uptrend, then buy corrections, and, also buy breakouts. (I am following this advice, myself!)

If you feel that the Nifty is in a mean reversion mode, meaning that it comes back from resistance and goes up from support, then sell when prices reach resistance (as they did two days ago).

Let me share a secret with you. It does not matter which of the two views you have, you will make money neverthless.

But, you must have a view.

If you do not have a view, or keep on changing your thoughts (like a chameleon), then no matter what the markets do, you will not make any money.

No comments: