Day Trading Strategies – Trend and Counter-Trend Trading – Which One Should You Follow ?

I pen down this article while keeping in mind the average confused day trader – who is still searching for that holy grail which will enable him to fulfill his desires. These are lessons which I had learnt myself while day trading the Indian indices / currency markets. Certain “successful” traders may / may not like what I intent to list over here. But hey, this is a trading blog maintained by me and hence, I get to post anything related to day trading, right? 😛

Okay trader. So you have been searching high and low for that most effective day trading technique. Let me get this straight – stop sifting through the “junk” that is already present in the internet. You will come across various self-proclaimed day trading gurus. If someone says day trading is simple, I ask him / her another question – could you show me your yacht, please? Surely, if the candidate in question finds day trading to be simple, then he / she must be making quite lots of money doing what they are best at. Hence, purchasing a private plane or yacht should not be a problem for them. Therein lies the problem – as soon as they hear the query (show me your yacht), they scoot. It is easy to blabber things. However, getting things done and making home with profits is an entirely different niche. It requires experience and skill – something which you may / may not have.

Let me start off this discussion with counter-trend trading. If you watch the intraday chart of any liquid stock / index, you will find a common similarity. Every day, the stock / index will move certain points up or down i.e. it will create a high price and a low price. Once the high price or the low price is created, the contract can start moving away from the high / low point. For instance, today, the nifty futures June contract made a high of 5424.90 and a low price of 5361.10. The reader may notice that these points were touched just once; upon touching them, the contract began to move further away from these prices. What if we could know these reversal points in advance? Surely, we could have made quite heaps of money, right? We could have shorted easily in between 5420 and 5430 only to cover it in between 5360 and 5370. Again, we could have reversed the trade at these levels and await for the value of the contract to surge (which did occur). This is what the counter-trend traders do.

The trend traders – what are they up to? The trend followers do not look forward to price reversals. They merely trade with the trend. In other words, they sell when the market falls. They buy when the market surges to greater heights. When they achieve their profit targets, they close the trade and exit the session. Since the value of the contract dwindled today, these people would have shorted the contract and squared off the trade when the contract hit their target price.

Now that you are aware of the basics, let us continue more with this discussion.

Now comes the dilemma. Among these two methods, which one should you follow? Seasoned traders, with ample years of experience to back them up, will utilize trend / counter-trend trading for obtaining profits from the stock market. A beginner or an intermediate trader must concentrate on one of the above mentioned methods. Which one among these are the most effective?

Trading against the trend or counter-trend trading will enable you to make greater profits. You will be able to capture the entire range of the movement of the contract. However, there lies a small problem – how can an average retail trader determine the top or bottom levels of the market? If we take the above-mentioned day, the contract went on making lower lows during the entire session before reverting back to 5390 levels. So you will have to buy at multiple times while ‘assuming’ that the market has already bottomed out only to see the value of the contract dwindling repeatedly. Take the exact opposite scenario – there have been days when the contract went on breaking resistance points (i.e. making higher high prices) throughout the day. Imagine your dismay when your sell trigger gets stop lossed out and the contract surges to even greater heights.

So, my advice to fellow traders is – please stick with the trend. Follow what the rest are doing. When they are buying, you too should buy. When they sell, you too should sell. Bark with the big dogs. Never try to stand in front of a moving train. It is plain common sense if you ask me, because unless you have access to ample cash resources, you can never change the existing trend. Banks and other large financial institutions are able to do it because they have been doing this for many years – probably even before some of you were born. So, they have access to large cash reserves, which they duly utilize in every trading session to create the trend. Please formulate your day trading strategy to determine the trend and follow that predominant trend. Also, bear in mind that the trend may change anytime. Your trading method should have an effective mechanism to detect this change; so that you too can reverse the direction.

Here is an alternate explanation to why you must always follow the trend. There are three participants in every market. They are the bulls, the bears and the foxes. There are also the pigs, who get slaughtered in the midst of the commotion. The bulls will try to buy the contract in large quantities so as to increase its value. The bears will do the exact opposite; they will try to take the contract to even lower lows. There is this constant struggle in between the bears and the bulls in every market. In due course of time, the bears / bulls will hand over the charge to the bulls / bears. This is where a trend change occurs. How can an average retail trader such as yourself know when this ‘change of power’ is going to occur? These are decisions made behind closed doors and air-conditioned offices by the FIIs and the DIIs. Unless you, the average trader, have access to insider information, you will never know about this change in the trend. We must always be vigilant of the price action, keen like a fox and then we will understand this ‘change of power’ and hence, we can take additional precautions.

I decided to create this post because I see many retail traders always try to catch the tops / bottoms of the market. This is especially relevant in forums such as Mudraa,Traderji and ForexFactory which are dominated by members who think they can outsmart the market. And of course, every single day, I see them losing their temper because the market surged past their ‘initial tops’ or ‘initial bottoms’. The problem lies primarily in the fact that catching the tops and bottoms can give you immense profits. Most of you may have heard about the legend W.D.Gann; he always used to catch the tops / bottoms of the market and could successfully do so for many years. But unless you are the second incarnation of W.D.Gann, I would never bet on you.

My intention is to show the average retail trader the correct direction. The rest entirely lies upon your hands and brains. Day trading is not an easy manner to make money. The market is literally rigged to take your hard earned money from your hands. Staying ahead of the rest of the pack requires precise determination and ample efforts.

I would love to hear your comments on this article. 🙂

Intraday Trading Lessons Learnt From Last Friday (07/01/2011)

You might be aware of the situation that occurred in the Indian markets last Friday. The BSE Sensex went down by 490 points along with the NSE shedding a hefty 143 points. It is true that I could make some profits because I traded with SBIN on that day. However, my other predictions (for TATASTEEL and TATAMOTORS) did not occur as anticipated.

People would take this in different manners. Most of the traders would look at the bearish market and postulate – no wonder his predictions did not work out. Let us say that I am a fighter; I like to know why my predictions did not materialize.

See, as cited in my earlier posts, my trading strategies are different. It is hard to state it as “unique”. I follow certain principles which were found (and successfully tested) by W.D. Gann. In simple terms, his predictions were always accurate. However, it did not happen likewise last Friday. So, either one of us must be wrong – either him or me.

Dear sirs; I am just a novice trader who got lucky. I met the right kind of people who advised me to stick to the trading strategies adopted by Gann. In other words, I am myself responsible for my predictions.

There is a fundamental aspect which Gann always used to proclaim. And it is nothing but the fact that there exists a unique relationship in between the price and the time of an entity. During certain intervals of time, a particular price (let us consider it as A) will act as a major resistance. The same price point A will serve as a major support point in some other time intervals. I failed to acknowledge this basic principle. Hence, my predictions for those scrips turned out to be wrong.

After understanding my mistake, I began recalculating the levels. I will speak while taking into account TATAMOTORS. 1250 was a major support according to my original (and flawed) calculation. I realized that it was a major resistance point when we take Friday into consideration. If I had known this earlier, I could have shorted at that price point and thus could have made additional profits on that day. The situation was the same when I did the calculations with TATASTEEL too.

Moral of the story: By now you may have understood why my predictions did not become fruitful on that day. I am facing a major problem now – I am fully aware of the price points; but, I am unsure whether they are supports or resistances. As mentioned, I am still learning newer concepts regarding this trading system everyday.

Come Monday (10/01/2011), I will begin posting the intraday trading levels on real-time basis. Let us see how far the market can play about with me!

Daytrading With Camarilla Equations and Levels

When people begin day trading for the very first time in their lives, they are bound to lose money everyday. This stage actually acts as a filtration – some frown and leave the arena while the rest try to survive in this battle.

There is a stage when people begin that hunt for the so-called “holy grail”. They notice that everyday, the market will move certain levels. They will also come to the conclusion that there are certain “nefarious elements” within the market who control the movement of the prices. The intention of this section is not to dispute those aspects.

When I was first introduced to the Camarilla Equation, I was spell bound. Using yesterday’s high, low and closing price, we could determine the movement of the market (for the next day) – this is the entire idea behind the so-called equations. Once I came across these equations, I decided to check it out by myself the following day. I noticed that the scrips would follow the equations beautifully on certain days. On most of the other days, it would simply hover around these points and fall down drastically. Search around and you will come across hundreds of blog posts and forum threads highlighting the usefulness of the equation. But, is it worth it? I decided to give it a test run.

I did something simple – I decided to obtain the information from the horses mouth – aka I subscribed for one week trial offer from Surefirething. Why did I do so? There are various “variants” of the equations floating around. According to the official sources, we had to take into account the high, low, close as well as the opening price of the scrip. However, the versions available on the internet took only the previous day’s high, low and close prices. I wanted to know which one among these were the real deal. I thought the equations available freely on the inter-webs were not working as envisaged because we vomited the opening price while calculating the levels. The only way to find it out was to spend $99 for the trial service. And I did the same.

Now, I was fairly disappointed once I was admitted into the “members area” of the website. I started experimenting with the paid service to find out which one of the equations available for free were accurate. Of the four variants, only one gave the most accurate values. The rest of the versions of the equations displayed approximate values only. Secondly, the high / low breakout targets given by the website and the equations (which you will come across) are different. These were the only information which I was able to learn via the trial offer. No, I was not able to deduct the equations (for the high / low breakout targets) myself.

One thing is for certain – I wouldn’t be touching these equations with a ten foot pole for day trading purposes. Day trading is an art, something which cannot be expressed with a set of equations. There exists a unique relationship in between the price and the time. And this friendship in between the two keeps on changing as the day progresses.

I have come across several blog posts stating that banks and large financial institutions use these equations to day trade and make millions. The entire financial architecture of the globe would fail if it were true!

I hope this post is informative for those who are currently day trading with these equations. Lastly, I do not intent to ridicule their services. Feel free to trade with it and you will realize the truth for yourselves!

Regarding My Intra Day Trading Experiences

Ever since August 2010, I have been day trading on the National Stock Exchange of India. I use the services of Karvy Stock Broking along with their GoTX software platform to execute the trades.

I am still a learner and am experimenting with various strategies. All over the internet, we come across several posts highlighting the perils of day trading. However, if you ask me, with the right set of strategies we can literally start minting money. I am saying this out of my personal experiences.

There are certain pointers which I wish to jot down (and which I think will be beneficial to novice day traders).

1) There are people who make money and people who lose money day trading. This has been occurring ever since the inception of day trading techniques. Our intention must be to stay on the safer side – to make money.

2) Start day trading with a single scrip. I started off with SBIN (State Bank of India). Right now I trade exclusively with TATA Motors. In this journey I have come across many who try to trade with numerous scrips at the same time. According to me that is a fundamental mistake which novice traders make. If you have the right strategy, then you can mint money using the same scrip repeatedly – everyday!

3) The thing about day trading is to conserve your hard-earned savings. I have seen people investing 50,000 to 1,00,000 on the market to day trade – only to lose it at the end. Always remember that money exchanged within the stock exchange doesn’t evaporate. It just flows from one bank account to the other.

4) Develop your own strategies and try to stick with it. My trading system is entirely different from the usual arrangements that you may come across. For instance, I do not use any charting software suites. Charts are mere representations of numbers. Stock exchange is all about these numbers.

5) The market has a certain geometry which it follows duly every trading day. Some say that the market is random. And that we cannot predict anything off it. If you ask me, you must learn the geometry of the numbers to stay successful in the market.

More is yet to come in the subsequent days. Stay tuned as I will begin posting the daily intra day trading levels for TATA Motors.

%d bloggers like this: