Friday, November 9, 2012

Volatile Moves in a narrow range

Friday's price action tells us that there is a lot of intra day volatility inside a narrow range. The Nifty is locked in a range between 4940 and 5080 for past eight days. Inside this range, we see big moves on some days giving the impression of volatility. In reality, it is not volatile, but probably random moves inside an indecisive market.

What about my absence? I was in Ahmedabad for two days, on a private visit. I did my CNBC interview on Thursday morning from the city. I received a report from my office giving the basic features of market on Wednesday. Then, at 10:00 AM, the Nifty opened slightly lower. Udayan asked me for my Nifty strategy for the day. That one was easy. Obnly for the day trader - go short with a stop above 5080 and look for a 40 - 50 point downside reaching somewhere around 5000. The Market did almost exactly this.

Why was this easy? On the prior day, Nifty futures moved in a narrow range of 47 points. This was the narrowest in a month. Any break from this range should give some kind of a trading move. When the Nifty opened lower on Thursday, a down move to 5000 support was reasonable to expect.

Traders are well advised to study the process of contraction and expansion in the markets.

Now for responses to comments:

Gaurav asks: "So if we are of the view that India is going to underperfom in coming years...should we tarde other markets like DOW,HANSANG,FTSE etc...what are the advantages and challenges for tarding other markets specialy the FOREX."

My response: Diversifying into other markets will become essential for traders. Forex is an easy option, because you can trade the USD-INR in India, and, trade the many forex pairs on websites abroad. (http://www.interactivebrokers.in/ offers such facilities in Indian Rupees).

Sanjeev asks: "What are the basic principle/assumptions which determines sidewise market ?"

My response: This is a sensible question, but requires a more detailed answer. Basically, market often has periods when it does not exhibit any trend. Visually, on the chart, it becomes possible to define boundaries of support and resistance inside which prices appear to be locked. The Average True Range Indicator will fall to its lows, Bollinger bands will contract (come closer).

Nirav asks: "Can you tell me that what is the difference between Elliott Wave and Normal Wave Count which you normally prefered?"

My Notes; Some differences are:
1. Elliot Waves will always try to find some wave count or the other. Often, the market is not moving in a wave sequence. Momentum waves will identify wave counts only when they are visible.
2. There are possible many rules in Elliot Waves. In momentum waves, we have simple rules, easily understood.
3. Every technical trader can use momentum waves (because they are easy to use), but only specialized wave practioners can trade with Elliot Waves.

Friday, December 4, 2009

Thursday, November 19, 2009

Get high leverage with low risk

Traders make money from fluctuations in price levels. By using leverage, traders can maximize return on capital. Leverage involves using margin to make more money than you can with your own funds.

Margin trading provides high rewards when you are right, but may also cause huge losses if you are wrong.

Traders are then confronted with some confusion: Leverage or margin trading can enhance return but carries high risk. This becomes a difficult decision since traders should not go for any increase in risk, but should at all times try to leverage their money for more profits.How can these two opposing viewpoints be reconciled.

The Answer:

If margin trading can be used with an always known and strictly limited risk, it becomes High Leverage with Low risk. (HLLR).

The instruments of HLLR are Put and Call options.

Buyers of puts and calls gain an enormous amount of leverage while applying only a small amount of capital. They also have limited and well defined risk.

Advantages of Option buying:

You do not have to possess large amounts of capital. (Remember, all trading activities require that you should be well capitalized.)

As an option buyer you enjoy all the benefits of margin trading when your are right, without the risk associated with leverage, if you are wrong.

Total risk is always known and limited. The maximum risk is the cost of your option.

A Trading Plan:

Successful trading depends on knowledge, courage of conviction, the discipline to execute your plan, and hard work required to develop the knowledge, courage & discipline.

In trading options, you must have the financial and the psychological strength to face adverse situations when they arise. (This applies to all trading methods).