Saturday, 21 February 2015

Trade Your Conviction

To Karthikeyan Subramanian,

It is regarding your query that you yesterday asked after reading my post on Range & DP's.  Here I try to illustrate more with the example what I really wanted to explain.  I hope you get your answer.

Trade your conviction, trade what you know, trade the level that you are confident about.
How?

Look at the chart below of 02/12/2014. Look closely on what happens at the bottom.  How did the price action behave there?


Below is the chart and my findings about it.  I could find the levels 8555 and 8545 significant.  As I have explained it in the chart, I feel these levels will hold the next time price retests them.  That is my conviction from reading the price action, i.e. these levels will HOLD.


Now I just sit tight and wait for the prices to reach those levels and prove that my conviction was right. My conviction was that it would hold.  If it really holds, I will wait for some kind of BOF type pattern or even a TST to go long if other factors support it.  If prices prove that my conviction was wrong, it would break that level.  Even in that case I can look for BPB type of entry to go short, believing that the strong support level got broken and I should go in the breakout direction.

Now look really what happened on 3rd December, how price action respected these levels and bounced off from these levels.


That is it.  Trade what you see, what you believe.

Friday, 20 February 2015

Range & DP's

RANGE

I assume the prices move in a range all the time.  Trend is nothing but a series of range breakouts.
There will always be a range above the current range if prices are really going upward and there will always be a range below the current range if prices are really going downward.

Prices may remain in a narrow range or a wide range for some time and may not trend.  If the range is tradeable, prefer to buy the range low and sell the range high.

DP's (decision points) are price levels where day traders are expected to act.  Usually these DP's act as a range extreme in day trading.

Sometimes the range establishes itself at or around DP.  If so, it will provide a good trade opportunity at that area.

The range can be traded at the range extreme after a test (TST), on breakout pullback (BPB), on breakout failure (BOF), or after a failure to continue (FTC) kind of setup.

Many a times BOF of one range extreme can lead to successful BO of other range extreme.



Prefer to trade in the direction of underlying trend or bias.  If the current trend or bias is down where prices are breaking the DPs or range on downside, prefer to trade the sell signals at range extremes or DP's rather than buy signals.
In the example below, the presumed trend is down.  In that case, the most preferred sell signal will be the A at upper range extreme and the second most preferred will be the B at lower range extreme.  If market condition is suitable to take a counter trend buy signal, I would prefer to go with the D at upper range extreme and probably avoid the C.  However, sometimes trading the C is a good idea if the market is poised for a reversal.  I will try to write more about Reversals in the next post.



Similarly, in case of uptrend, the preferred one will be the A and then B.  D will be the only sell signal that I will take.



Like this,



Only ranges and DP's cannot be traded in isolation with the patterns.  Let the other factors like Space, Order Flow, Critical Mass, Trend Strength, Risk Vs Reward  be your guide.

Friday, 13 February 2015

Trend

TREND

A trend defines a direction in price movement.  A rising trend (uptrend) is formed when prices reach higher peaks and higher troughs.  A decreasing trend (downtrend) is formed when prices reach lower peaks and lower troughs.  A sideways trend (flat trend) occurs when prices tend to trade in a specific range.  A flat trend is also called a consolidation or congestion area.

A trend should be identified as early as possible and it remains valid as long as it could be identified and still be playable.

Prices tend to switch from trending to ranging behavior.  Rarely they remain to act in only one of those two ways for an extended period of time. 

Trend Strength

There are three  main indicators of the strength of a trend:
  1. Movement in the direction of the underlying trend.
  2. Correction or consolidation before the primary trend resumes.
  3. Role of Support and Resistance.

Trend Movement
The magnitude of the move above the previous base indicates buyers' enthusiasm. The more bullish buyers are, the further they will be willing to venture above the safety net of the previous correction or consolidation.




















Correction or Consolidation
Short corrections and narrow consolidations also reflect trend strength. A short correction indicates that buyers have overwhelmed sellers or simply that sellers are disinterested. In either case this is a positive sign for the underlying trend.














Role of Support and Resistance
When price breaks above its preceding high, resistance at the earlier high becomes support for the new breakout, with buyers likely to accumulate should price retrace near the breakout level. The new support level will be relatively weak compared to support at the previous low; so when the new level holds it indicates a strong up-trend.

If initial support does not hold at the first attempt, buyers and sellers may be more evenly matched and the up-trend is likely to be slower and more uncertain. If price later respects the initial support level, that is a sign that trend strength may be increasing.

















Extension and Dips
Sometimes measuring the extension and dips and comparing them with the earlier ones can be helpful to gauge the trend strength.

Extension is a distance between one swing high and the previous swing high in an uptrend and vice versa.  Compare it with previous extension.  If it is more, then trend is accelerating.

Measure the dips (pullback), how deep they are.  Compare them.  Deeper pullbacks denote less strength.





















Thursday, 12 February 2015

Breakouts

Breakouts

Remember,
  1. Most of the attempts to do a breakout fail.  There will be a very few successful breakouts.
  2. A trend will often begin from a breakout of a support or resistance level.
  3. Speed of action (urgency to act) and conviction for the real breakout are vital when the breakout happens.
  4. A breakout in the direction of the prior trend serves as a confirmation that this trend is still valid, while a breakout in the opposite direction of the prior trend implies that this trend is probably reversing.
  5. Prefer trading the with-trend breakout rather than the counter-trend breakout, and enter in the direction of the breakout if there was a pullback after the breakout.
  6. Breakout test (or pullback) is very important because it provides a reliable entry signal when the test is successful and the trend resumes.  
  7. Usually high volume tends to improve the chance of a pullback occurring after the successful breakout.  If a breakout is accompanied by noteworthy high volume, there is a good chance for a pullback to happen.
  8. If prices just pause for a bit rather than pull back after the breakout, there is a high likelihood of prices continue moving in the direction of breakout after the pause.


Sunday, 8 February 2015

Support and Resistance

As a day trader to remain competitive, I feel I need to first understand the market structure and dynamics well, as well as I need to learn how to be flexible to adjust to the shifting market conditions.  Understanding the concepts like Support and Resistance, Trend, Breakout, Breakout Failure, Trend Reversal, Range, etc. would help understand market structure and dynamics better.

Today I am going to start with recording my notes/beliefs regarding Support and Resistance levels, in general.

SUPPORT AND RESISTANCE

Support level on the chart indicates demand and Resistance indicates supply.

To recognize a support or resistance level, look for a significant trough or peak on the chart or a certain level where prices repeatedly halted the movement and reversed.

Remember,
In an up-trending market, resistance levels will often break and in a down-trending market support levels will often break.

Most often price reversals don’t occur at exactly the same, precise levels, but rather in areas.  These areas may be called as a support/resistance zone.

Resistance can become support and vice versa.

Prices tend to enter support/resistance areas and halt their momentum, occasionally even at a single level.  Most often they will not breakout through the horizontal support/resistance area, but in some cases a breakout will occur, which usually dramatically shifts the current market situation.

To assess whether a support/resistance level is still valid is if the price gets accepted below or above the respective level. If prices almost instantly pull back, then most likely the market is just testing this level and it is still credible.

The longer a support/resistance level holds and the more the failed attempts to break it, the stronger the move will be after the breakout finally occurs.

If the price keeps testing a particular level more and more times, it tends to become weaker and eventually it will be broken.