January 2011 Summary

The year has started off on a pretty good note for me. Though there were no very hugely profitable trades, there were a lot of things to be learnt.
This line from a Pink Floyd song comes into my mind, "Steps taken forwards but sleep walking back again."
There were numerous trades in which I got a slightly later entry. On day one or two of entering the trade, I used to have pretty good profits. But the very next day, the stock would recover taking out my SLO, and leaving me with very small profits in the end.

The Nifty opened somewhere in 6100 levels, and as on Friday, 30th  Jan, has managed to close at 5512, down nearly 10%. Thanks to the FITs(Foreign Institutional Traders), the selloff was severe, rapid and unchallenged. Technically we are now into a bear market (below the 200 DMA line), with more and more of stocks waiting to be pulled down into bear territory. Need to wait and see how it all progress for the next few days.

When I look at the charts of Nifty, I get this strong feeling that Support and Resistance levels don't have much of a relevance when FITs are trading. They can break through any resistance and break down any support at will.

As an investor, I'm slightly worried about the nature of my long term investments. But, as a trader, I don't really care, as long as the markets don't get caught in a trading range.

Anyway, here are some things that I learnt, which can be useful for others.

1. I was usually getting stuck on the wrong side of the trend, or getting into a trade when the trend was already weak. I found INDIAVIX to be very useful in identifying the possible future trend. An article on Using VIX proved really useful in knowing how to use VIX to your advantage.

2. A real tight entry and exit can be got using the charts in 5 min and 30 min time frames. I found that 200 EMA line is a place for frequent reversals. So once I get a result from a scan, I try to take an entry based on the 200 EMA line in 5 min view. And keep my SLOs just higher than the 200 EMA line in the 5 min view.

3. Using scans and sticking to the results for trading is a good thing to do. Just forcing trades is definitely  not a good idea.

I guess that's it from me for now. Happy trading.

Bulls, Bears and the Nifty

The year seems to have started on an ominous note. A colleague of mine remarked the other day,"In 2008, there was a fall of 100 points in the Nifty on January 11th. A week later there was a big fall of more than 250 points. And then, the rest is history".

Is history repeating itself? We'll have to wait and see. But the signs look very ominous. Look at the graphic below.

Ok, this doesn't show a good picture of the Nifty constituents. Nearly half of the stocks have gone into the bear territory. And some of them are perilously close to being pulled down by the bears.
The index heavyweights, the likes of Reliance, LT, SBI, HDFC Bank are already deep down in bear territory. The other heavyweights, the likes of Infosys, Tata Motors, ICICI are also showing a negative bias off late.
Unless something drastic happens, its just a matter of time that we're into a bear market.

So now what's bull territory and bear territory ?
If any stock or composite(Nifty, Bank Nifty) is above the 200 DMA line, its in bull territory. Else, its in the bear territory.

Who are the bulls and bears?
In the animal farm called stock market, there are 4 types of animals.
1. Bulls : traders who are positive about a stock, push the prices higher by buying aggressively.
2. Bears: traders who are negative about a stock, push the prices lower by selling aggressively.
3. Chickens: traders who always live in fear, make small profits. And follow either the bulls or bears, depending on the market situation.
4. Pigs: traders who buy or sell without making any kind of research.

The bulls make money. The bears make money. The chickens also make some money. But its always the pigs who are getting slaughtered.

You know you are in a bull market when :
1. You can see more and more interviews of legendary bullish traders on business TV channels.
2. You have Diwali specials where Bollywood actresses are discussing stock market investments with these legendary traders on TV.

You know the bull market nearing an end when:
1. A big hyped IPO tanks on debut, sucking out all the liquidity from the markets.
2. A housing loan scam or some other scam of that sort erupts.
3. Indian markets tank 3% in 1 hour, because North Korea fires a few missiles into South Korea.

You know you are in a bear market when:
1. You can see more and more interviews of legendary bearish traders on the same business channels.
2. The pretty presenters on TV no more have a smile on their face.
3. The technical analysts coming on TV seem to look very serious and tense. Maybe their technical buy calls have been used as a short selling opportunity by professionals.
4. You no more get calls from your broker telling you to buy a stock.

But if you were a technical trader, you kind of know what's next when you see the charts. The picture says it all. Here, SBI is just an example. There are many stocks which have fared much worse.

Well, one can see the severity of the bearish phase.The uptrend was slow and gradual. But the downtrend has been quick, but very sharp, with heavy volumes.

And this kind of pattern can be seen on most index stocks already in the bear territory. More so with the banking stocks.






Now, for the bigger picture. Nifty itself is at the edge of the bull bear territory. Another 2% lower on a closing basis, and we're in a bear market technically.

Some things to look out for.
1. Brokerage firms desperately giving dubious research calls. Saying some company will give you 30%  returns within next 3 months.
2. Stock picks in leading newspapers giving vague technical jargon and giving a Buy call on some stocks.
3. Hearing analysts and market 'experts' say, "Sensex down due to profit booking" OR "Markets down due to RBI rate hike fears"

I'm not an expert. But I have learnt one thing in the last few months, "You can invest or trade only on the basis of price. Look at the charts before you buy or sell."

December 2010 Summary

December 2010 was an eventful month for the markets. Nifty reached a low twice in the 5700 levels, and somehow recovered well to close at 6100 levels on the last day of the year.

On the personal front,I celebrated my 30th birthday, which was an eventful non-event in itself.

My trading account nearly remained the same, as the profits of the month, more or less got nullified by the mistakes that I committed. It was not that there weren't opportunities, but  it's just that I got caught on the wrong side of the trend, or lacked in discipline.
The massive selloff by the FIIs before they went on their Christmas holidays, presented a lot of quick money making opportunities on the short side. But I missed them all, as I had got my strategy terribly wrong.

On the positive side, there are a lot of learnings that I hope to take forward in the months and years to come. I also spent some time reading from other people's blogs, which provided me with a lot of interesting thoughts.

Here's a list that I could think of. For future reference.

1. Trade with the trend, but not with the crowd. The crowd always piles in late, but the trend is always defined by professionals. And the professionals always profit from the people arriving late.

2. Discipline is a must. Keep SLOs even when the trade is going in your favor. A decently profitable trade turned out to be a moderately loss making one, for me and my friends as we had all not kept SLOs.

3. I feels it's not a good idea to talk much about my ongoing trades or give stock picks.
Why not take or give stock picks? explains just that.
This puts me in a dilemma," should I post my completed trades on this blog in future or not?"

3. A good stock scanner software is a must. This ensures focus, eliminates unwanted distractions and saves time that would have been lost in manually scanning for stocks.
After I installed one, I've been spending a lot less time in scanning for opportunities, and spending more time in analyzing the results thrown up by the scans.
One word of caution here, scans only give results based on the scan criteria that you select. Choosing the best  amongst them is your responsibility.
Swing trading stock scans gives a very good stock scanning algorithm. You might have to write the actual scans a lot more differently in the software that you use.

4. Trade only in the consistently well traded stocks. I had 2 bad experiences where I had to take a loss. In the first, the stock didn't move up or down for a long time, even though the charts suggested that it was heading for a fall. In the second, the stock just defied gravity, even when it was up against a very strong resistance around the 200 DMA line.

5. Avoid initiating new trades in the week of  F&O expiry. If you look at the 5 minute charts of almost all index stocks in the last half hour of trading in Google finance for expiry day(last Thursday of the month), of the last 3 months, you will know why.
If you have any open trades from the past week, manage them with utmost care.

6. In trading, there is a golden rule, "Cut your losses, but let your winners run". This is something that comes out of discipline and out of experience.
So far, I have been able to cut my losses, but I need to learn to be unemotional, and let my winners run. Trailing stop mechanism is a good way to take out all the emotions out of trading.

7. Coming to emotions, a great trader had once said,"All the candlesticks that you see on a chart are formed as a result of hope, fear, greed and despair". I think I displayed all of these in this month, with pretty bad consequences.

8. Time your entry into a particular stock. Too early, you get stopped out if a reversal doesn't occur before your SLO is hit. Too late, and you get stopped out in the pullback wave. This is true even if all your analysis is 100% right.

9. Use a checklist before you enter any trade. By the time you come to the last point on the checklist, you might have second thoughts on whether to really enter the trade or stay in cash.
I missed using one for some of my trades, and as a result ended up forcing a trade.

10. This is one point that I read in a blog and also observed in some of the trades that  I took up.
If you are selling, sell early in the day. If you are buying, buy late in the afternoon.
That's because amateurs control the opening, while the professionals control the closing.
But when there's a lot of activity in a particular stock due to some news, then this statement might not hold good. In such cases, stay away from the crowd. Don't buy/sell the breakout. Wait for a pullback.

Hope to get some good trades for the next month. That's all for now.

Wish you all a very happy and prosperous new year 2011. And happy trading!