Day Trading With The Trend Or The Importance Of The Opening Price

Traders have their own opinions about trading with or against the trend. Most of them will try to catch the tops or bottoms.

The rest will try to flow with the trend.

Although many traders are more than happy to dole out this advice i.e. trade with the trend, most of them (including me) have their own versions or definitions of the so-called trend. After all, what exactly is a trend and how do you determine it at any given point of time?

I have read in a few forums where traders chime in regularly that it is easy to determine the current trend of the market. According to these self-proclaimed experts, if the price or the candlestick chart is moving downwards from the left to the right, then the trend is down.

Likewise, if the candlestick chart showing the price is moving upwards from the left to the right, then the trend is upwards.

Do bear in mind that this is just a mundane explanation which may or may not help you in the long term.

If someone asks me about the trend, I just look at the current price of the instrument and compare it with the daily opening price of the same instrument. If the current price is above the open price, then the instrument has an upward trend.

If the current price is below the daily opening price, then the instrument has a downward trend.

Bear in mind that I took the daily opening price as the reference point because I am primarily a day trader. You can take the weekly, monthly or even the yearly opening price as the reference point in order to come to your respective outlooks about the instrument.

Upon closer inspection of the stock market prices, you can jump to a sane conclusion. Every day, there is an open price. As time progresses, the price will begin to float away from the opening price.

In other words, the price will either moves upward or downward throughout the day.

On trend-less / choppy days, the price will keep on making newer highs and lows throughout the trading period.

The beauty about taking into account of the opening price as the reference point is simple. This is the only price that remains the same throughout the trading period. However, the high / low / close price can keep on varying throughout the day.

Trying to take trading decisions based on these variables (high /low /close) will put your trading career in jeopardy. Focus on the factor that is constant every day. That is the opening price.

Once the market starts, they cant change the opening price. But the high / low and the closing prices will keep on changing.

Just take some time to think through all these. I am just trying to condense the intricacies of the stock market into simple and understandable terms.

Take any chart depicting any time period. Take a look at each one of the candlesticks. In every candlestick, the close price will be either above or below the opening price.

Yeah, on some days, the close price might be nearby to the open price. We call such days as choppy or trend-less.

My question to fellow traders is this – cant you use this point (the open price stays the same throughout the respective trading period) to make profits in the stock market?

Every day, the market shows the traders where to go long or to go short.

Go long above the open. Go short below the open. It cannot get simpler than this.

Once you begin to do this, trading becomes easy and less of a stressful activity.

Just think about it and let me know in the comments.

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Day Trading Lessons

This is an uncompleted work-in-progress article. I plan to add / subtract information from it as and when possible. I have given these points based on my experiences; readers may / may not agree with them. Furthermore, I encourage them to post their views over here as comments.

It is my intention to outline certain striking aspects regarding day trading in this section. It may remind me of my mistakes and it can also act as an effective guide to the novice traders who are prone to make mistakes.

A) Day Trading Is Not Meant For Everyone

Allow me to start this short discussion with this simple aspect. Many “try” day trading because they “think” they can “succeed” in this venture. They may have heard about “some day-trader” who owns a dozen of sports cars and a string of women. A fair share of the trading community comprises of such people – who aspire to lead a quality lifestyle.

The reality is far from it. You commit a certain percentage of your hard-earned cash, to play with a certain stock or index contract. You “hope” the market can move as you envisage. However, please do consider the fact that the market may start moving in the other direction too. This can result in huge losses. Sheer capital evaporation can (a) cause depression (b) make you lose faith in your system (c) make you stop day trading all together!

It is understandable that you may lose considerable amounts of money especially during the start of your day trading career. Please do not start the venture with loads of cash. Be conservative. For instance, if you plan to day trade the futures contract, begin trading the mini nifty. The losses (as well as the earnings) will be minimal. Still no one will pay you 500/- for sitting on your ass! Also, it is imperative to concentrate entirely on day trading if you wish to succeed. I know some people who have a regular day job yet they are interested in trading the markets. Unless your regular job gives you lots of time and freedom, I will not recommend day trading for such entities.

(B) Avoid Tip Based Day Trading

This is one of the most over-looked aspects of day trading. This is especially relevant for the Indian markets. A good number of the day traders try to trade off the “tips” provided by self-professed gurus or their respective brokers. Always remember “tips” = “pits”. If the tip provider has confidence in his tips, he would surely try to trade off them rather than trying to make money by “helping” others. No self-respecting day-trader should ever follow such tips.

(C) Have A Strategy and Follow That Strategy (i.e. plan the trade and trade the plan)

Plenty of people enter this arena because they see day trading as method to make money easily. They feel that they can earn something by gambling. However, a good share of the trading community consists of people who do not follow any strategy. They think it is tough to contemplate on such aspects and try to take the easy way out – gamble, until they loose their hard earned savings entirely. This is especially relevant for the Indian traders; but I cannot blame them since the Indian markets have become highly predictable these days. Yes, you may make money on certain days but on the majority of the days, you will be left scratching your head over what went wrong and where ..

Secondly, learn to stick with your day trading plan whenever required. Nothing works perfectly under all conditions. There is no need to search for that holy grail because it simply does not exist. However, there are precise strategies that could help you make money on most of the days. Just because your strategy caused you to lose money today does not necessarily mean that you should ditch it or tweak it. Concentrate on increasing your winning trades rather than the actual money made everyday. Yes, money comes; but you shouldn’t be day trading entirely for the money. Learn why the prices move around and find the relationship in between the price, the time and the volume.

(D) Keep Your Day Trading Strategy Simple

While day trading, you primarily need to know three things and those are (1) when to stay on the sidelines (2) when to enter the trade and (3) when to exit the trade. Although it may sound very simple, the reality is far from it. Whatever your approach may be, please try not to complicate it. Learn to keep day trading simple and fun filled. With the right set of strategies, day trading is one of the most proficient businesses around.

(E) Never Invent Any Day Trading Strategy

A wise trader once admitted – most traders take a good system and destroy it by trying to make it into a perfect system. This is a realistic statement. Please do not invent anything new. The chances of it working as envisaged are slim. Developing a trading system based on the historical data of one or two years is foolhardy. Forums catering to Indian traders such as traderji.com / mudraa.com / inditraders.com all comprises of members who try to come up with augmented trading strategies. I always wonder why they do so. Take it from me – stick to the basis. Just repeat what other successful traders have done before you. If they could earn substantially, then you too can. This is one prime reason why I am fond of W D Gann’s trading methodologies.

(F) Never Try To Predict The Future Movements Of The Price

Quite often I come across certain elite group of traders who have this bad habit of predicting future price movements. They claim absurdity such as – If nifty spot touches 5xxx, it will fly / fall to 5xxx. Here is an interesting aspect to this entire “prediction” niche – to predict is for the fools; to react is for the kings. Only the fools will try to assume the price movements when the experts will be busy studying the price action and reacting to it. This is one reason why I do not post any “tips” in this blog. I do not want to be seen as the next intraday trading genius. The best traders always try to stay below the radar; they try to make money for themselves instead of providing “tips”. They do not have the time and patience to post on online forums catering to Indian traders – especially during the trading hours. So beware of such entities and stay away from them!

to be continued ..

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!

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