Technical Trading - Practicing the Theory

[munchikana]

Now let's discuss a little money management. There are different theories to practice money management. More or less every theory says to have a spread in the investment at 10% of the equity in each security means 10 securities with 2% stop on the investment and thus say 20% of the equity as the maximum amount that can be risked in the markets. But my question is say for example if I get stopped in all my trades and lost 20% of my equity, does it mean I should quit the markets? I'm a disciplined trader, still got stopped and lost 20% of my equity. If I have to quit the markets just for this reason, then I don't even like to enter the markets. So what I suggest here is you take an exposure only to 10% of your equity and be with only one stock. And trade the moves, as per your theory. Whatever be the theory, any system gives entry only at the threshold points of Long or Short with a little stop value. Once you initiate the trade never give up. Take both long and short trades in that security depending on which side of the threshold it is. As the entry is finer, the chances for you getting stopped several times are very bleak. So, please keep in mind. Never change your rule of trade which stopped you, just for the reason that it stopped you several times. Recognise one thing. If your mechanism, which is tested, is stopping you many number of times, it means that the stock is struggling to decide on the direction. So, after the direction is decided, the moves in your favour will be wild and more rewarding. So, never give up the tested rule and never give up the security in which you got stopped. And even to initiate trades one clue what i give here is to wait for any pattern to form or any good behaviour of the bars to form once your rule tells you to initiate the trade. If you wait for these signals and initiate trades, even the chances to get stopped will be reduced to lessthan 10%. And friends all this is for those who have a tested trade system and who trade in a liquid security.

And friends, enough for now. Excuse me for not discussing trade design now. Wel will discuss it in the next post.

Thanks and happy practicing technicals

AJAY

Hi Ajay,
Just one doubt. Will this method of trading work in a side ways moving scrip/market? No doubt it will work in trending market. But what about non trending market? Will there be whipsaws because stop loss in a non trending market will be too close to have comfort?

 

[AJAY]

Dear Munchikana,
thanks for coming up with doubts. The answer for your question generally comes by the trade mechanism what anyone adopts. And like any theory which is subjective, TA has also got more exemptions than rules when it comes to application part. So, every scenario is first to be absorbed in the trading mechanism choosen for practice. Then the travel will go smooth, as we already know where that road leads to.

If still it is not clear, you may mention any of your experiences and we can discuss on that.

Thnaks

AJAY

 

[Ferdous]

Dear Ajay,

Many thanks for your thoughtful discussion. How you can tell such complex matter in so simple manner?

Eagerly waiting for your next post.

Regards

Ferdous

 

[AJAY]

Dear Friends,

In the previous posts we discussed on the issues like trading is like any other profession(either full time or part time). And before going for trading, we should understand which type of trader we are and also some money management issues and developing the ability to trade on both the sides-long and short.

We are due to discuss which mechanism suits to one particular individual, depending on the lifestyle and psychology of that particular individual.

Let's start with one who is a long term investor/ trader. Here the word longterm again is subjective. What is a long term?

Let's not discuss this much. We'll go by the general definition what the whole world follows- say more than 200 time periods holding is long term holding. Please make a note of it friends, I'm mentioning it 200 periods, not 200 days. For the one who looks into End Of Day charts, the long term can be 200+ days. But for a person who looks into one minute charts, the longterm will be one or two days.

Here long term investors are two types in the market. One is the one who invests with a view to keep it long term- whom I call a real long term investor.

The other one is the one who makes himself/ herself a compulsive long term investor. This is the one who cannot stop his/her trade and who converts a lesser periodicity trade to long term, waiting for the move to happen in his/her favour. This is one of the most serious issues to be addressed to. The inability to stop a trade is the biggest enemy for that traders. So, never
become a compulsive long term trader, just by justifying your actions by bringing in some other inferences which were not present when you designed the trade.

Friends, here stops are of two types - One which every one knows - the price stop. The other one is less known which is called a time stop. While designing the trade it self, your mechanism should be able to tell you before what time your move should happen, failing which you should exit the trade. This helps you in keeping your money in performing assets. Being liquid is always better than being invested in a non-performing asset, as your risks are zero in being liquid.

Friends, what are the views here I'm mentioning are purely my personal, when it comes to trading mechanism. They may differ from your views. And discussions are most welcome.

The mechanism should be in such a way that the profits for the longterm trader should be more than that of the short term players. So is the initial stop value. But chances to get stopped should be very less, means a mechanism with lesser whipsaws.

So, once you decide to be a long term player, the better mechanism should be trading on extended moves. Never try to initiate the long term entry basing on short period indicators. Remember your move will start only when the move in the stock becomes extended and established.

And freiends, here we will try to visualise two scenarios. The first one is that the market is in favour of your trade, where no discussion is required.
The second one is move against your trade. In case an extended move
fails, then try to visualise what must have happened. In the failure of a bullish extended move, we can presume a complete sell of has taken place in the extended zones. So the stock will travel southwards. In such cases look for the price and volume behaviour of the stock. Try catching the higher periodicities chart price-volume behaviour. Say e.g., you are looking at daily charts, then convert it to weekly chart and try understanding what must have happened in the extended zones. Here definitely you will get a clue whether in the form of a sell off bar or a pattern or a trendline break etc. The patterns and trend line penetrations can be seen even on your original periodicity charts. Once it is understood that sell off has taken place, generally by that time your trade could be stopped. So nothing to worry for being stopped in long trade in a security which is falling.

Here comes the question whether you should sell short. Infact it is wise to short sell a security, when the extended bullish move fails. Say you are
not interested in shorts, then try protecting yourself atleast by buying deep out of money put options. So while taking entry into the security at extended bull move, at the same time spend a little money on put options, provided every thing fits into your money management. These puts will help you in shielding yourself in stops.

If you say you know nothing about options and their trading mechanism, try catching up some notes on options. Please don't say that you don't know it. Try catching the knowledge. We don't know in this war which weapon we should use to protect ourselves. And luckily it is not a rocket science.

Friends, for the compulsive longterm investors, there is no answer from me except changing your attitude. Never convert a short term loss to a long term loss which is naturally very big in size like how a long term profit is bigger than the short term profit. So, just stop your trade which is designed for a short term trade and which goes against you.

Friends! enough for now. We will discuss the trade continuation mechanism in the longterm trades in the next post.

Thanks and happy technical trading

AJAY

 

[sivavkm]

If you say you know nothing about options and their trading mechanism, try catching up some notes on options. Please don't say that you don't know it. Try catching the knowledge. We don't know in this war which weapon we should use to protect ourselves. And luckily it is not a rocket science.

Thanks Ajay, i will start learning more weapons.

Please keep going..

Regards
Siva

 

[AJAY]

Friends,
In continuation to my latest post, I 'd like to give you an example for long term entry signals. But friends right now I'm putting only 15 min. chart of Reliance Inds. Pl. ignore the chart periodicity and focus on the mechanism. Consider initiating Option Trades when the move fails or while initiating the trade. Catch you up sometime later with other periodicity like Hourly, Daily charts, if it is required.

Please pick up the chart window from this link

http://rapidshare.de/files/27450825/reliance.jpg.html

Post your queries. They are most welcome.

Thanks and happy Technical Trading


AJAY

 

[aca_trader]

Friends,
In continuation to my latest post, I 'd like to give you an example for long term entry signals. But friends right now I'm putting only 15 min. chart of Reliance Inds. Pl. ignore the chart periodicity and focus on the mechanism. Consider initiating Option Trades when the move fails or while initiating the trade. Catch you up sometime later with other periodicity like Hourly, Daily charts, if it is required.

Please pick up the chart window from this link

http://rapidshare.de/files/27450825/reliance.jpg.html

Post your queries. They are most welcome.

Thanks and happy Technical Trading


AJAY

Ajay,

Can you please explain the following? :

1. Why it has been said that for the long term the move started only after price crossed 930?? Is it for the reason that a pivot was made on this point which exceeded the pivots made during the downtrend rallies? Similarly, How the conclusion after end of move at 1065 and not at 1100 has been decided? Was it implied that the move ends after it crosses 1065 after touching 1100?

2. For the downtrend move, a long term entry (on short side) has been suggested when price moves below 1040. Is it based upon the chart pattern of double top when the price moves below the valley of two tops?

3. Can you please suggest some option strategies to be followed during both the up- and down- moves probably with the help of real life charts.

Thanks & Regards,
-Ashish

 

[AJAY]

Hi Ashish,
Thanks for coming up with doubts. Here according to a trade mechanism what I follow these are the moves to be encashed on Extended bullish and bearish conditions. And I never mentioned any indicators or formulae, in my discussions, to be adopted. I always suggested only the style to be adopted and not the indicator built. Unless the user knows how to handle it, any system cannot be handled properly. So only I am trying to give an insight into the practice to be adopted and not system to be followed. In that process I am trying to keep a few charts to express myself better. Hope you understand the style of adoption.

And with regard to the option trading strategies, at present I cannot make any posts ashish. My health is not permitting me to do even this posting. Still as I started it I am keeping the posts. Definitely sometime later I will discuss the option trading strategies- I promise.

Thanks and happy practicing TA

AJAY

 

[AJAY]

Friends,
Before discussing further on to the remaining aspects of Practicing Technicals with regard to Long Term Trading Strategies, to avoid confusion with reagrd to understanding what is an Extended Bullish Move, I'd like to give you a little view on "thinking out of box" strategies.

In fact friends any good system comes out of Experiments only, as you are all aware. Here I'd like to give you a little light on the Experiments front with the most commonly used indicators.

Say, take a 13 period EMA on the price chart and draw one more 13 period EMA to the earlier drawn 13-EMA which is drawn on the price chart. It means it is now you have 2 EMA's on the chart. One is for the Price and the other one is for that MA. It is nothing but 13 EMA for 13 EMA. Hope it is clear. Now draw RSI(14) to this 13 EMA which is drawn later. Look at RSI(14). How strangely it behaves. You will find RSI(14) reaching levels to 99.99 on tops and <1 on bottoms. Now start observing the trens on price chart. Observe how it behaves. You youeself can understand how to infer the move.

Thanks and Happy Practicing TA

AJAY

 

[AJAY]

Dear Friends,

Here we discuss a little about the Big Fish, the so called Sharks, in the markets - before going into discussion on trade continuation mechanism in LT trades.

I would like to give you a general scene first before going more deep into the subject of Sharks.

Say you are going by your Car on a road which is full of trafic. Naturally your travel will go with hick ups like traffic jam or very slow moving traffic etc. If given powers, would you make it traffic free or not, if you have to travel faster and better( A natural action by the security personnel of VVVIPs while they go by roads). So is the action of the big fish in the markets. To make their run smooth, they give false moves in the markets, get the people stopped even several times. Once the stops become more, the traders stop trading in that security for sometime. That is what the big fish want. Then the real move will be on which is traffic free for them to have a smooth ride. They call the entries and exits of the traders "noise". Once it becomes noise free their life becomes easier to run the stock smooth.

If you visualise, even accumulation/ distribution period is noise period. So only the experts trade and recommend the accumulation/ distribution break outs for the entries in that direction. And sometimes, before bigger moves, the a / d will be in a very wide range also.

Now coming to the point, the chances for the longterm traders to get caught in the traps of these sharks are very less. And the very reason for that is anybody's guess. The LT players won't create noise in the security . So generally they are not prey for the Big Fish.

Once we go to the other periodicity traders - especially practicing day traders-then we will discuss this mechanism in detail - about the sharks, their traps and their actions.

Yet sometimes even the LT traders also get caught. Generally these traps are on daily charts. The Sharks create a pattern and make a false break out- thereby making the LT players also Exit the security and then start making real move. This is a general scenario. And sometimes they make the most wellknown entries like 200 DMA crossover a failure or a Pivot Breakout a failure etc. by making LT players initiate the entries.

Here the traps are of two types. One is getting the traders fixed and the other one is getting the traders exited.

Depending on the chart pattern or crossover either the trader takes entry into it and get struck in the position - by not stopping the trade

OR

take his position out by stopping by looking into the chart signal. Once the LT traders get out, then the move in the original direction will be on. Generally LT players don't try to reenter like a day trader immediately after getting stopped-even again the move is on.

So friends, though you are a LT player, even you also can be a prey for the actions of the sharks. So, keep in mind to continue your trade, though you get stopped - once the move is again on in your direction. And by following the extended move trading which we discussed in our previous post,
chances for you to become prey even to such acts will be further minimised.

Thanks and Happy practicing TA

AJAY