Nifty Futures Contract’s Value vs Nifty Spot Value

Ever since I began trading the nifty futures contract, I began to notice an anomaly. I am certain that many among you – at least the ones who follow a proper trading system may have noticed it already.

I wish to jot down some lines about the difference in value of the nifty spot and nifty contract. At times, the difference will be ten points. Sometimes, it becomes five or fifteen. I have often wondered who controls this difference of points. Yes, I have heard that the call / put options determine the differences. However, I feel that there is more to it than this simpleton explanation.

Why is this posing as a problem for traders such as me? I will explain it; I am someone who firmly believes that markets are not random occurrences. Yes, most of you have this notion. But, the markets are controlled by certain universal factors – similarities that can be found in anything and everything in our solar system.

Renowned traders as well as the novices may have heard about W.D.Gann. It was he who realized this unanimous nature of any traded commodity / stock / index. Based on certain tried and tested formulations, he came up with an innovative trading system. This, as we all are aware of, helped him to dominate the Wall Street for countless years.

I am someone who follows his principles. I will tell you why. At the time of this post, the value of the nifty futures contract is 5472.30, while that of nifty spot is 5464.95. Allow me to pose a question to the readers – 5472.30 to 5464.95 is a wide range. Can anyone tell me which is the most accurate point of interest in between these range of numbers? In other terms, which is the price point where you can see the value of the contract / nifty spot slowing down to catch a breather? The majority will respond – how is it even possible to predict such a value? Take it from me, fellow traders, that it is very much indeed possible to find that figure – it is none other than 5468.75.

You see 5468.75 is a major decisive point according to gann sciences. If the value of the entity being traded is below 5468.75, then it is a sign of bearishness. If the value is above 5468.75, then it shows that there is some bullishness to the entity. Now…I have already mentioned two values prior to posting this magical value (5468.75). They were 5472.30 (the value of the nifty futures contract) and 5464.95 (the value of the nifty spot).

If you were paying attention to these three values, you may have already noticed the anomaly. The contract is trading above 5468.75 while the nifty spot is trading below it. In other words, the contract is showing signs of bullishness while the nifty spot is displaying weakness. Which one will you follow?

If you ask me, this difference in value in between the spot and futures contract is the primary reason why we are seeing immense levels of volatility and sharp / rogue movements within the market. This occurs because the nifty spot value will try to respect 5468.75 value by staying below it. While the other counterpart will try to surge higher. A tug of war results and this causes an infertile environment to day-trade!

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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. 🙂

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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