Teach A Man To Fish And.........

As the famous Chinese Proverb goes, "Give a man a fish , you feed him for a day.
Teach a man to fish, and you feed him for a lifetime."
This thread is a result of multiple emails from fellow members with a desire to learn
how to trade, rather than to just take the calls here and there. This thread may not
catch the interest of many, as the "many" are always interested in the 'fish' rather
than learning how to. But this thread is intended for the few........the few that want
to learn, or at least make a beginning to learn how to trade, the few that do not wish
to bow to any other individual or organiztion as authority when it comes to decision
making but instead wish to come to these decisions by himself/herself.
This thread will be of no help to those who make trading decisions based on the
fundamentals. This thread will be of no help to the many that wish to know what this
company did or what was the news when a stock broke out. This thread will be of no
use to a few members here, all brilliant traders, all great minds--Amit, Jaideep, Ajay,
Vinay (JoyVerma), Joy_Mitali, Vince, Karthik, Ivan among others for there is nothing
new that this thread has to offer to them, that they do not already know and are
implementing day after day, trade after trade.
This thread is for the newcomer to charts and who has that desire to learn. It is for
the student of the market by a student of the market. I am no master, no teacher,
no expert, all words that I abhor........this thread is to my friends who want to learn,
from a friend who is just sharing what little he knows.
Vomiting out all that one knows is difficult, vomiting in sequence will take some
doing..........due to a whole load of time constraints, I'll do my best to post at least
something every evening, but no guarantees. All I can say is that I''do my best!
Before we get started, please have a back up in anything and everything related to
trading. If you trade online, at least two computers, two internet access, cable and
dsl, in India, think you guys better have an Inverter as well. All this of course for the
Intraday traders. Of course, your broker's phone no. must be easily accessible as
well if you have to take that route. Basically a back up in everything.
Of course, your charts as well, the greatest weapon of the trader!!
Okay, let's get started...........
Just have a look at the attachment.....looks like a familiar story for many of us. The
successful trader does exactly the opposite as stated below.......He has something
that gives him an edge over the others. He has that something that tells him when
to get in, when to stay out, and when to accept a mistake........He has his charts and
the knowledge of how to use it.
What are these charts? A chart of Reliance is not the chart of the company, but the
chart of the investor and trader emotions in that company. A chart tells us about the
whole play of fear and greed, again and again, all over again. The chart of a
particular time frame is therefore a study of fear and greed in the particular company
or market in that time frame.
Various types of traders based on their time frame:
Day Trader :He trades intraday. He buy and sells, shorts and covers within that
day. He closes all positions by the end of the day. He takes no risks overnight. He
basically uses the 5 and 10 min charts for his trading with the 15min and the 60 min
charts as backdrop.
Swing Trader :A trader who trades the daily charts, fine tuning his entry using the
60min charts. His trades last 2-5 days.
Position Trader :Nearly equivalent to investing, but nearly can be an important
distinction. He trades the weekly charts which means he holds trades from weeks to
months.

Most important thing that we all have to remember, Trading is very simple. Our
minds being complicated is the reason why we try to over complicate a simple thing.
So as in anything simple, we try to leave it as simple as we can.
There are various types of charts :
Line Charts,
Bar Charts,
Japanese Candlesticks Charts. . . . . . . . . .
Basically your preference, whatever you are most comfortable with. I personally use
the Candlestick charts, because it makes it more visually obvious to me. I have to
strain to see the same in a bar chart. But basically upto you. . . .
Whether we take a bar chart or a candlestick chart, each bar/ candle tells us of the
Open, Close, High and Low of that particular time frame. Therefore, in a daily chart,
the high is the high of the day. The close being the close of that day. But in a 15min
chart, each bar represents the trade in a 15 minute time frame, therefore the high of
that bar is of course the 15minute high. . . so on so forth.
We have three trends :
UPTREND, DOWNTREND, SIDEWAYS TREND
UPTREND :An uptrend on a chart of any time frame is nothing but a series of higher
highs and higher lows.
DOWNTREND:A downtrend on a chart of any time frame is nothing but a series of
lower highs and lower lows.
SIDEWAYS TREND :A sideways trend is nothing but relatively equal highs and
lows.
TRENDLINE:
An UPTRENDLINE is nothing but a line that connects two or more LOWS, in a chart
in an uptrend. The more points that meet up to this line, the stronger this line is.
This trendline acts as support, as prices blast off, then pullback to this line before
taking off again. Therefore, in an UPTRENDLINE, the 2nd point is always higher than
the 1st point, and the 3rd higher than the 2nd.
A DOWNTRENDLINE is nothing but a line that connects two or more highs in a
downtrend. Once again, the more number of points that connect, the stronger the
line is. This downtrendline acts as resistance. Each down move is followed by a
pullback rally to this trendline which acts as resistance only to be met with more
selling and lower prices. In DOWNTRENDLINE, the 2nd point is always lower than the
1st, and the 3rd lower than the 2nd.
A break in the UPTRENDLINE signals a possible change in trend. So too with the
break in the DOWNTRENDLINE.
Just have a look at the attachments below. . . . . nothing like a picture to make
things look better.
Trendline on arithmetic or semi-logarithmic
There are two types of scales :a) arithmetic b) semi-logarithmic
An arithmetic scale displays the price levels evenly in rupee terms as they move up.
So therefore, a Rs10 move from 10-20, or from 100-110, or from 500-510 will look
the same as they are all a difference of Rs10.
A semi-log scale displays price levels in percentage terms as they move up. A move
from Rs10 to Rs20 is a 100% gain will look larger than a move from Rs 100-110 is a
10% gain, or a move from Rs500-510 which is only a 2% gain.
I use the semi-log scale. . . . . . try it out, the rise looks smoother and the trendlines
fit all the way. Which also means that a break in trendline is cause for some action.
On Metastock, go to the Y-AXIS of your charts. Right click it. Go to Y AXIS
Properties. Tick the Semi-Log scale. Click apply. That's it.
How to draw trendlines
For a given time period, is it a rule that you have only one trendline? Basically what
are the rules of drawing a trend lines? Is there any rule on how to draw a trendline
or we look in the charts and connect multiple highs/lows to form the trendlines?
Chart below explains itself
TRENDS
We had discussed yesterday that trend has three directions, that is : Uptrend,
Downtrend, Sideways Trend.
An example I had given many times just has to be repeated here. . . . . . . . Look at
your right hand with the palm facing you. First we have the little finger. The Ring
Finger takes out the high of the little finger and therefore makes a higher high and
low as compared to the little finger. The middle finger makes a higher high and
higher low as compared to the ring finger. We have therefore an uptrend. The index
finger makes a lower high and a lower low as compared to the middle finger. The
thumb makes a lower high and low as compared to the index finger. We have
therefore a downtrend.
Just as trend can be classified according to the direction, so too can we categorise
trends into 3 categories
MAJOR , INTERMEDIATE and NEAR TERM TRENDS.
Simply put, major trends last for greater than 6 months. Intermediate trends last
between 3 weeks to 6 months. Near term trends last from a few days to 3weeks.
From a charts perspective, the major trend is seen by looking at the monthly charts.
The intermediate trend from the weekly charts, and the near term trend from the
daily charts.
What is seen as a downtrend on the daily charts may be nothing but a pullback on
the weekly charts, and is not even evident on the monthly charts. What is seen as a
downtrend on the weekly charts and a catatrophic crash on the daily may be nothing
but a monthly pullback.
It is important as traders to know these different time frames and trade accordingly.
The practical aspects of profitting from this knowledge, we can come to later.
For now, we don't know much. . . . . . but a step at a time for now. We have our
charts. All we know is that in any chart of any time frame, we can have only 3
possibilities in direction, and only 3 possibilities in categorisation. The eye can only
see what the brain knows. . . . . . . . these early days are to be spent in teaching the
brain so that the eye sees the pattern from a mile. Pour over your charts and train
yourself in detecting which trend the stock is in currently. It is a first step but an
important first step.

TRENDS

As per time frames, we can classify Trends into:

A. SECULAR TRENDS
B. PRIMARY TREND
C. INTERMEDIATE TREND
D. SHORT TERM TRENDS
A. SECULAR TRENDS
Every short term trend has within it one to several intraday uptrends and
downtrends. Every intermediate trend has within it one to several short term
uptrends and downtrends. Every primary trend has within it one to several
intermediate uptrends and downtrends. So too, every secular trend has within it one
to several primary uptrends and downtrends.
What we mean by Bull market is a market in a primary uptrend. What we mean by a
Bear Market is a market in a primary dntrend.
A SECULAR BULL MARKET has primary uptrends (Bull mkts) greater in magnitude
and duration as compared to its primary dntrends (Bear mkts). Expect the bull
markets to unfold longer than the bear markets in a secular bull move.
Vice versa for the SECULAR BEAR MKT. A secular bear market has primary dntrends
greater in magnitude and duration as compared to its primary uptrends. Expect the
bear markets to take longer to unfold than the bull markets in a secular bear move.
A Secular trend usually lasts about 10-25 years.
SENSEX an example of a Secular Bull Market. NIKKEI a Secular Bear. Charts below
From the chart I see that support is taken at a higher point from 1994-2003 before
sensex took off in 2003. The low of 1993 was never tested.
Is it possible to say that unless we test that low and breach with high volumes, we
are not yet in primary bear dntrend? You have put benchmark at the supportline in
accordance with the theory. But in practice sometimes indices may bounce back from
the lowest point formed after the first high of the consolidation period( in yellow
background)
These are long term charts and we are looking more at the secular trend of SENSEX.
What we call as bear market in common parlance is a primary dntrend and not a
secular dntrend.
So, a break of 8799, and we classify this move as a primary dntrend. . . . . . . and as
for this Secular Bull to become a Bear, we are far from that scenario.
As it stands now, we are in a SECULAR BULL MARKET, in a PRIMARY BULL MKT.
Breaking 8799, we go into a PRIMARY BEAR MKT, but still very much in a SECULAR
BULL MKT.
And for a long term trader or investor, there can be nothing sweeter in a secular bull
mkt than taking profits, watching the mkts get into a primary bear mkt, and buying
more at the lows.

PRIMARY TRENDS :
The Primary Trends are what we in common parlance state as "Bull market" or "Bear
Market". Just as a Secular Uptrend is made up of several primary uptrends and
downtrends, the Primary Uptrend is made up of several intermediate uptrends and
downtrends. Vice versa for the Primary Downtrend.
As we had discussed before, a Primary Uptrend is of greater magnitude and duration
if in the broader picture, we are also in a Secular Uptrend. A Primary Dntrend would
be of shorter magnitude and duration if it happens in a Secular Uptrend.
So too, in a Secular Downtrend, the Primary Dntrends are of greater magnitude and
duration as compared to the Primary Uptrends.
Just take a look at the two charts of the Nikkei and Sensex in the above to get things
clear.
A Primary Trend lasts anywhere between 9mths and 2 1/2 yrs.

INTERMEDIATE TRENDS :
So too, an intermediate uptrend is made up of several short term trends. Again, if
we are in a Primary Uptrend, the Intermediate Uptrends are of greater magnitude
and duration as compared to the Intermediate Dntrends.
Vice versa in a Primary Dntrend.
An intermediate trend can last anywhere between 6weeks to 9mths.
At what stage in a intermediate downtrend do we say that we are in a bear market?
How do we make out the difference between a major trend move and an
intermediate trend move?
Okay in continuation. . . . . . . . . . we now know what a secular, primary trends and
intermed trends are. We know that each larger time frame has within it smaller time
frames of trends. Now, to your question. . . . . . . . . we have an intermed uptrend,
followed by an intermed downtrend, followed by an intermed uptrend, so on so forth.
Few rules:
1. After an intermediate uptrend, the correction should be only 33-66% of that
cycle (One intermed cycle = one intermed uptrend and one intermed
dntrend).
2. Greater the retracement, the increased likelihood that the primary trend has
reversed to the down.
3. Substantial increase in volume during the price decline
We can discuss Support and Resistance tomorrow.

TREND :PIVOTS
Okay, now that we know that a higher high is when the previous bar's high is
crossed, and a higher low is when the low is higher than the previous bar's low, and
that a series of higher highs and lows make an uptrend. . . . . . . . we retrace a bit
and change things around a bit.
Just higher highs and lows alone do not make an uptrend. Yes we have an up-move
but an up-move doesn't mean we are in an uptrend. Higher highs and lows form a
rally. Lower highs and lows form a decline.
We can have declines in an uptrend. We can have rallies in a downtrend. So now that
we know that a series of higher highs is called a RALLY, how then do we define an
Uptrend? An UPTREND on a particular time frame is a series of higher pivot lows on
that time frame. What then is a downtrend? Nothing but a series of lower pivot
highs.
So what then is a Pivot? Okay, we are back to the "Hand" example. Whisk out your
right hand again, once again with your right palm facing you. We have our little
finger. The ring finger makes a higher high and low as compared to the little finger.
The middle finger is higher high and low as compared to the ring finger. We
therefore have a RALLY. The index finger makes lower highs and lows as compared
to the middle finger. The thumb makes lower highs and lows as compared to the
index finger. We therefore have a DECLINE. The middle finger with two lower highs
on both sides(ring and index)now forms a PIVOT.
Imagine we have Area A. Rally starts from Area A which is followed by a decline to
an area that is higher than Area A. We call this new area where the stock has
declined to as Area B. So on so forth. . Therefore Area B is higher than Area A, Area
C is higher than Area B, so on so forth. We have therefore what is called an uptrend.
These areas are pivotal areas where the stock stops its decline and rallies upwards.
We refer to these turning points as pivots.
Therefore, in the above example, as each pivot is after a decline, and the pivot is the
low after which the stock takes off again, we call them PIVOT LOWS.
Right the opposite in a downtrend. The stock declines from an area and then rallies
to an area lower than the first, so on so forth. In this case every pivot is after a rally,
and the pivot is that area after which the stock declines further to new lows.
As this pivot tells us of that high after which things go back to its declining ways, we
call that a PIVOT HIGH.
So, in an uptrend, we have HIGHER PIVOT LOWS. How did we come to that?
Each pivot low is higher than the previous pivot low. Therefore we call it higher pivot
lows.
In a downtrend, we have LOWER PIVOT HIGHS. How did we come to that? Each
pivot high is lower than the previous pivot high. Therefore we call it lower pivot
highs.

In a sideways trend, we have nearly equal pivot highs and lows.

Basically didn't want to introduce the word "Pivots" very early on. . . . . . . but there
really is no other way to tell what a trend is all about. Will take some chewing, and
digesting. The only way is to look at the charts and start to make out all the pivot
highs and lows.
The below picture is a stock of AMZN (Amazon) trading in the NASDAQ. The
important thing is to know what we are talking about when we say pivot low and
pivot high, etc.
So let's go to the chart of AMZN. We have an uptrend on the daily charts of AMZN in
November, followed by a SIDEWAYS TREND from late November to late Dec 2006.
Why do we say that we are in a Sideways trend? As the eye says, so it is. We are in
an obvious trading range between the 47.68 to 49.5 area.
Then we have a break down on the last day of December followed by a weak rally
back into the trading range and then we have a decline taking out the previous pivot
low made in early Jan to new recent lows to the 43 area. We therefore say that we
are in a lower pivot low as compared to the previous pivot low. Then we have
another rally to the 45.93 area. This forms a pivot high that is lower than the
previous pivot high. Thus we have lower pivot highs and lower pivot lows. This series
of lower pivot highs and lows is called a DOWNTREND.
Let us take another example. . . . . . . . . . . This is a weekly chart of MER(Merrill
Lynch) trading on the NYSE.
Take a look at the picture given below.
It made a pivot low in August 2004 of 47.5, then we had a rally and a mild decline to
50. We have just made a higher pivot low. Is this an uptrend? Maybe. But we get to
confirm that this is a clear cut uptrend once the previous pivot high is taken out. The
rally towards the 60 takes out the previous pivot high. What do we have now? We
have a higher pivot high and a higher pivot low. We are in an UPTREND.
And then once again, from May 2005 till date, we have been making higher pivot
highs and higher pivot lows.
Query on Pivots
Every uptrend would be characterised by higher pivot lows and higher pivot highs,
and vice versa for the dntrends characterised by lower pivot highs and lows. . . . . . .
. to know that is important in detecting the trend. BUT, in an uptrend, focus on the
higher pivot lows and vice versa on lower pivot highs in the dntrend. . . . . Why?More
to do with where to place your stops and to know when this current trend is over.
So, basically every pivot low goes on to make a higher pivot high and then a higher
pivot low followed by a higher pivot high. As said before, this stock is in an uptrend.
When do we say that this particular up move is over. . . . . . . When a previous pivot
low is taken out.
Therefore, in an uptrend, train your eye to focus on the higher pivot lows. . . . . So
too in a dntrend, train your eye to focus on the lower pivot highs. A crack of a
previous pivot low on a weekly chart indicates that this up move is over. Vice versa.

SUPPORT AND RESISTANCE

SUPPORT is that area where buying interest exceeds selling interest, and therefore
a previous decline gets halted at this area and turns back up again. It is marked by
drawing a horizontal line connecting two or more bottoms.
RESISTANCE is that area where selling pressure exceeds buying interest. It is an
area where previous rallies get halted and turn down again. It is marked by drawing
a horizontal line connecting two or more tops.
Support and Resistance are not absolute points. They are areas.
When Support breaks to the downside, we call that a Down Side Breakout or
Breakdown. When Resistance breaks to the upside, we call that a Breakout.
When we get a breakdown below support, that area of support now becomes an area
of resistance. Have a look at the JNPR charts below. That area of support broke down
and that same area is now acting as Resistance.
A breakout above Resistance, and that same area of resistance now becomes a new
Support.

These are important areas for every trader, either as an entry point or an area to
take profits.
The below is another example. CSCO trading in a tight range. Then we have a
breakout above resistance. That area which was previously resistance now becomes
Support, as prices use that floor for the next rally.

Yet another example :GOOG (Google ) trading on the NASDAQ. Through November
to early Januray, we have higher pivot lows and highs (UPTREND). Then we have
that turn around in Mid-Jan. So long as GOOG did not break that previous pivot low
of around 422, It was still in an uptrend. Then we have that ugly bar on the daily
charts that broke previous pivot lows. Are we in a downtrend now? No.
But as far as we are concerned, the uptrend is over. Then we have a rally back to the
450 area in the later part of Jan. This is making a lower pivot high as compared to
the previous pivot high. Now are we in a dntrend? Looks more and more likely. But
not confirmed as yet. Then that gap down and lower prices taking out the previous
pivot low as well. Now we are in a confirmed Downtrend.

We had discussed regarding trendlines in the beginning. Basically same principles

applied here, the only difference being these are sloping lines as opposed to the
horizontal lines discussed earlier, but same principles.
At that time we had discussed about Uptrendlines and Downtrendlines. The
Uptrendline acts as Support each time prices decline and come towards it. So too the
downtrendlines act as resistance as prices rally to the trendlines and fall from it.
Example in the attachment below of DELL. Prices hit the downtrendline and resume
its decline. Therefore the downtrendline acts as Resistance.
So too with an uptrend. . . . . . . . . .
And as was discussed regarding the breakout over resistance and breakdown below
support, the same applies here. We have an uptrendline, we have prices taking
support at this trendline. And as the trendline breaks, we say that the uptrend is in
question.

A break in an Uptrendline is not a Downtrend. . . . . . . . . it merely tells us that this

uptrend that we have been trading and making profits from is now in question. So
too with the Downtrendline. A breakout above the downtrendline does not mean that
the stock is now in an uptrend, it merely means that the downtrend is now in
question.
To assess uptrends and downtrends, we are back to pivot highs and pivot lows as
has been discussed.
Okay, so far we , as beginners in the market interested in trading trends, . . . we
have taken that first step. So far, we know nothing much. We do not know of any
complicated indicator, or any stylish chart pattern. We have no idea of Elliot's, or
Gann, or Fibonacci. We know only that :
Î The market moves in trends. We have an uptrend, downtrend and sideways
trend.
Î That there are different categories to Trends. We call it Major (when we are
talking long term and of the monthly charts), Intermediate(off the weekly),
and near term or short term(off the daily).
Î We know that a series of higher highs and lows is termed a rally. That a
series of lower lows and highs is termed a decline, that a series of higher
pivot lows and highs is called an Uptrend, and a series of lower pivot highs is
called a downtrend.
Î And about Supports, Resistances and Trendlines.
Now, before we go ahead with Gaps, and Chart patterns, etc. . . . . . . . . let us take
a breather. We are not doing this to learn something academically. We are not
learning this so that we can regurgitate this knowledge to our neighbours and family,
and feel good about ourselves. We are not learning this so that we can go to CNBC,
wear a suit and a boot to match, and mouth off some technical jargon so that we can
make our money selling some newsletter.
We learn this so that we can directly use this knowledge to make profits off the
market.

So everything has to be applied and practical, and if it can't, and is of no use to

profitting in the markets, then we have no use for it.
And therefore the question is :With only this much of knowledge, can we apply this
to Trading in the markets?
The answer is YES. . . . . . . . . .

TRADING with TRENDS, PIVOTS and Support/ Resistance

BUYING DECLINES & SHORTING RALLIES :
Let's make this as simple as we can. . . . . . . We know what an uptrend is, a series
of higher pivot highs and lows. Vice versa in a dntrend. Now, for some rules…. we
only BUY in an uptrend. So long the uptrend is held, we do NOT think of shorting.
Yes, one could always do a sniper attack on an intraday basis or at max, on an
overnight basis. That is one's decision to make.
The most often repeated line "The trend is your Friend", means we never cross the
trend. The trend is UP, therefore we buy declines. When the trend is DOWN, we
short rallies. If you can't short for whatever reason, then a downtrend is reason to
stay out till we get a change in trend to the Upside.
Therefore, it is very important to be able to detect the change in trends in the first
place. Therefore, our minds must work like this. . . . .
Î All the analysts on TV, magazines are saying that the markets are way too
over heated, overvalued, over. . . . . . . etc, etc. Is this the time to buy some
puts or short the NIFTY FUTS?
Î Look at the charts. Take the weekly charts. Why, the weekly? Because we are
looking at intermediate to long term. Are we making higher pivot highs and
lows? If the answer is YES, then we are in an UPTREND. And in an UPTREND,
we think "BUY DECLINES". That's it!!We let people play God, but we stick to
our plan.
Î If the answer is NO, the previous pivot low just got cracked to the downside,
we are thinking of getting out of our longs in that particular stock or index.
Now we are thinking, "SHORT RALLIES"
In a downtrend, every rally is a shorting opportunity. In an Uptrend, every
decline is a buying opportunity.
The market changes from Uptrends to Downtrends, again and again. . . . . . . we
are not here to predict tops and bottoms. We are not here to anticipate anything.
We are here to follow the trend. And as uptrends change to the down, we change
from BUYING DECLINES to SHORTING RALLIES.
Forgive me for repeating this many times. . . . . . . but in trading, basics is
everything and the rest just icing on the cake. The rest of what we will learn in
future increase our odds. . . . . . . but these basics are the Gospel Truth of
Trading.
Question & Answers :-
1. When we talk about an uptrend we buy on small corrections. but in a
downtrend every rally is a shorting opporunity. Explain the process of
shorting.
Every rally in a downtrend is a shorting opportunity, meaning we sell first and
buy back later. The reverse of buying. When we get a downtrend, we look to
short or we stay out of the fall. Of course, there's all those restrictions of not
being able to short except in futures, etc. . . . . . . . . . the whole idea is that
we do NOT buy in a downtrend. We look to either short or stay out. Only
when the trend has given a move to the UP, do we think of buying.
It is a rule that you do NOT break. . . . . . . therefore the importance of first
being able to detect the trends and the chnage from one trend to another.
And then following the discipline. However juicy a stock is, and whoever tells
you, that a stock is undervalued, fundamentally great, and the CEO is the
brother-in-law of. . . . . you, being a Trend Tech trader, will listen to all he's
got to say, then pull out your charts, realise that maybe he is right, maybe he
is wrong, but your charts tell you that this stock is not yet in an uptrend, and
that is that. You DO NOT BUY, as you do not buy in a downtrend.
 2. There is uptrend on the weekly chart and there is a minor correction coming
in and a chance to buy at declines. But what if that particular decline itself
ends in a lower pivot low than the previous one. What should be the trading
stratergy?
es, a risk that all traders take and may not exactly work out. Therefore the
stop. However great the probability of success in any trade, we still have
stops at important pivotal areas. We are only too happy with success, but if
that is not to be, we do not mind the small losses either.
Another clarification, a stock put in lower pivot highs and lows. It is clearly in
a downtrend. Then it put in an impressive rally from the bottom. Are we in an
uptrend? NO, not yet at least. Then the stock retreats and puts in a higher
pivot low as compared to the previous pivot. Now, looks more and more like a
change in trend. Then it confirms the trend change by making a higher pivot
high as well. The stock is now clearly in an uptrend. Now your brain says, BUY
DECLINES. And true enough you get that decline. You bought in . . . . . . and
horrors of horrors, the stock went on declining to lower pivot low than the
previous low. Your stop at the level of the previous pivot is triggerred. You
are out, and looking elsewhere for another trade.
You take your stops and get out of that trade. As far as this stk is concerned,
it continues its downtrend. And, as always, in a downtrend, WE DO NOT BUY.
We keep it on our watchlist. We track it, we stalk it, but we do not buy. Till
we get a trend change that is.
So when we stalk a stock that is moving up from a down trend we do not take
position. We wait for it to rise, retreat and then we buy if it takes a turn
around higher than the previous pivot low. Am I following it so far.
3. When a trend is rising and it turns around for a very very minor correction will
it still be called a pivot or how much fall is required.
THE BUY SET-UP
Okay, now that we know what an Uptrend is, and that come what may, we will stick
to our rules, which is: First detect the change in trend which requires a higher pivot
high and low, then once we are in an uptrend, we BUY DECLINES.
Now comes our next point of worry. . . . . . . . yes we got our uptrend, and now the
declines. But when do we buy? Do we buy on the first day?Is there anything else we
are looking for before we come to that decision?
Have a look at the chart of EDUCOMP below. We have a decline after that big bar.
Bearish candle No 1, we do nothing. We wait. Bearish candle No 2, we do nothing.
Bearish candle no 3, things looking more and more juicy. Then we get that bullish
candle. That first bullish candle is still making lower highs and lows, but is giving us
an indication that bulls are gaining in strength. Now we are ready to strike, and yet,
we do not move. We now look to buy, we do not buy as yet. We buy when the next
candle takes out the previous candle's highs.
We are in the trade. Our stop is the low of that pivot ie 254-2(to give it some
room)=252

In EDUCOMP, we are getting our next buy set up as of now. We have three bearish
candles and then that bullish candle so far reflecting a change in sentiment and
therefore a possible change in direction. And like before, a buy set up means we look
to buy, we do not buy as yet. When the next candle takes out this week's high, then
the trade is triggerred.

You have mentioned that we must look at the weekly charts to see if the stock is in
the uptrend & then look at the daily charts.
In the example that for "Educomp", there are 3 bearish candles & then 2 bullish
candles. According to you, we should buy the share when the 2nd bullish candle
takes out the previous candle's highs.
Isn't this too early to buy since there is no confirmation of the weekly uptrend
In an intermediate uptrend, one looks at weekly charts stalking for an entry into the
particular stock. We have that pullback to support and a higher pivot low on the
daily. We move to enter with a stop below the pivot low made on April 26th.
And we would get stopped out on May 22nd as in most of the counters held on that
day.

As in any trend, a trend is not broken with a pullback. And as in all intermediate
uptrends, we buy that pullback. Now that it went on to make a lower pivot high and
confirming it with a lower pivot low, We would say that we are in an intermediate
dntrend.

In hindsight, in retrospect, that trade was too early. . . . . . . but hindsight and
retrospect being key words. As we wouldn't have had that information then, we buy
thinking that we're headed to new highs, with our stops in place.
EDUCOMP is now in an intermed downtrend, but the gradient of its downtrend makes
it attractive when things go up again. So, it's one for your watchlist, my friend.
Query on Tisco
TISCO is still in a long term uptrend, but still in an intermed dntrend. . . . . . more
has to happen before we get truly bullish again. Once again, we are talking abt
traders, not investors.
This retracement puts a doubt in the head if this truly can be classified as an
intermediate dntrend. . . . . . we will know in due course of time. A rally is in the
offing, but I truly doubt if TISCO is going to take out highs and form new highs in the
upcoming rally.
So therefore, if you are planning an intermed trade long, stay clear now. Short term
is another matter.

Query on Bombay Dying

If you look at the charts of Bombay Dyeing & Bajaj Hindustan, on the daily charts,
both are showing an uptrend. But, if you look at the weekly charts, then the previous
pivots have not been taken out
So, as a "Short term" trader, what should one do. Buy now or wait for the weekly
trend to get confirmed.
Always better to have both the weekly and daily in line before attempting to go long.
No problems actually if you are an adept hand at this. . . . . . . . else, stay clear of
this rally till the intermediate trends give you a signal to go long.
Just a few charts. . . . . . . . . .
Below is the chart of POLYPLEX CORP just denoting how the trendlines are drawn.
The Uptrendlines therefore act as Support, once cracked to the downside, notice how
the Downtrendlines act as resistance.

In what way does this knowledge help us in our trading? We detect a change in
downtrend, and we enter the stock, once again using all that we have learnt so far.
The trendlines allow us to stay in that trade as long as the trendlines hold.

The moment we get a close below the Uptrendline, we are out. If you are looking to
short, wait for a feeble rally towards the former uptrendline. That's an area to short.
Vice versa for the downtrendlines. . . . . . . Have a look at the 2nd chart of
POLYPLEX, self explanatory.

Another thing that one has to keep watch for is the gradient of the pullback. Take a
look at the chart of BEML. All are pullbacks before the stock moved on to new highs.
But look at the angle of the present pullback. Not saying that BEML will not see new
highs, but that BEML will take more doing unlike before to see new highs again.
All the other pullbacks, BUY the declines. But pullbacks like these, best to stay away
until it does something that will make us interested again.

Question :- Some charts are so messy we cannot get any clear pattern. For eg. plz
have a look at the chart of Bank of India.
 In the chart the stock makes higher lows which might be an uptrend but again it
makes lower highs which can be a downtrend. What kind of trend is this? i think as
long as it will not break the support its in an uptrend. Am i correct? Anyway is it
advisable for an investor to enter that stock which is forming lower and lower highs.
As for BANK OF INDIA, you are right. There really is no clearly discernable trend on
the daily charts. In sideways trend. For a clearer perspective, open up your weekly
charts of BOI. We are still in an uptrend, still higher pivot highs and lows. The week
ending Feb 10th, we got a pivot low there at 118. So far that is our previous pivot
low. That would be where our stop would be if you are in this trade. (Always, give it
some room, so the stop is at 118-1=117). A break of 117, and this uptrend is in
question. So long as this area holds, BOI is still in an uptrend. Now, as for new
entries into BOI is another matter. Watch for a pullback or more sideways pattern to
enter. Look out for that trendline. If that trendline holds, good area to buy. Cracking
that trebdline to the down, and again, this uptrend on the weekly charts is in
question.

Next query is on Andhra Bank. Plz see the chart.

It was in a downtrend since late july and recently there is a small rally but it did not
still cross the downtrendline No. 1 ( the one in red which is drawn from the high of
july to the high of January), but if we consider another downtrendline No. 2( the one
in black from the high of Jan to the high of late Feb) then there is a breakout above
the downtrendline. Now which trendline should an investor consider. Or should the
investor take into consideration another trendline (in red) which is below trendline
No. 2 considering the fact that 'more the points which connect a trendline the more
stronger the trendline' as u said in a previous post.
Being an investor, you are looking at medium to long time frame. For a clearer
perspective, always look at your weekly charts. We have lower pivot highs and lows,
basically still a downtrend on the weekly. Trendline 1 as drawn by yourself is more or
less correct. Not Trendline 2. . . . . . . . . . . . the more points, meaning the more
pivot highs that it connects in a downtrendline the stronger that trendline becomes.
Trendline 2 is connecting all the highs, not the pivot highs, so inaccurate from a
daily/weekly chart perspective. But for an intraday to few days perspective, not
wrong. That trendline can be traded. . . . . . a break above that trendline is a buy.
But that doesn't mean we are in an uptrend. Just good for 1-2 days sniper attack on
the intradays.
We basically need a breakout over 106 to say that we are headed back into an
uptrend. For now, it's downtrend on the daily/weekly And Bank.
106 is the break over the trendline which gives us an indication that things are
moving to the up. The previous pivot high is 110 and over that is confirmation that
we are in an uptrend.
Discussion :- As you have explained in your earlier posts, we should follow the
trendline. We will be able to spot the change of direction in trendline after market
hours. While one is buying a stock which is in uptrend, even when we buy it after
delaying it by a day, we will still be able to ride the trend and be able to make some
money(our ultimate aim). But how to judge the downtrend of the stock during
market hours? Why I am asking this is when we analyse the charts after market
hours and come to the conclusion that the particular stock is in downtrend, we will
not be able to sell it. By next day, it may have fallen further and we may have lost
some more money. Please explain the methods one can adopt during market hours
to judge downtrend so that we can limit our loss or sell it while we have considerable
profit?
If the stock goes below the previous pivot low in any day then we should be out of
the stock. We can always buy again when we see an uptrend.
According to me if a stock goes below the previos pivot low in any day then it will not
be an immediate sell signal. It will come on our watch radar but we would not sell it.
A down trend would only be confirmed when it makes another pivot low. According
to me confirmation of down trend is important. Ofcourse if the S/L is triggered before
hand it would be a different issue.
I thought the previous pivot low will be our stop loss. if thats not the case is there
any other method to calculate stop loss.
In an uptrend the trend line itself will act as support and to make a lower pivot low it
will have to break the trend line and hence it will be a sell signal. But also what i
understood is that to confirm a downtrend we should have another pivot low. So
what do we do.
It is true that when any stock breaks down below its uptrendline We cannot say
surely whether this downtrend would continue or it will bounce back again. But one
thing is sure is it is out of trend. Is it right to stay in such stock when we dont know
the trend even if we know the downtrend is not confirmed.
If you have been playing that trendline, let us say, you've been buying each time the
stock pulls back to the trendline and your idea was to stay in that stock so long that
uptrendline holds. So far so good as long as the uptrendline holds.
A crack in the intradays to the downside does not qualify as a break in that trendline
till we get a close below that trendline. . . . . . . . . . . but I agree with you, what
would you do, while watching that stock intraday, it cracked to the down. It may or
may not close below the trendline, but what would you do in such a case? Stick with
the plan. . . . . . . your idea is to get out on a break of trendline. Get out if it breaks.
If by the end of day, the stock does not close below the trendline, no problem, that
means the trendlines are still valid and you look to reenter.
We get a downtrend once the previous pivot low is taken out and then we get a
confirmation with a lower pivot high, and yes, as you mentioned goes on to take out
that previous pivot low yet again.
But the trade that we are in currently is because of its uptrend. So long we make
higher pivot lows and highs we are looking good. A question on its uptrend and we
are out. . . . . . . . . . . do not wait for a confirmation of downtrend. If the stock
makes new highs, and then goes sideways, and that all important previous pivot low
is not taken out, we are still in the trade. But that previous pivot low being taken out
is an indication of a change in the present uptrend, and although we do not have
confirmation of downtrend yet, we are out and looking elsewhere for more uptrends
to capitalise on.
Many methods actually to calculate stop loss, and we'll cover them in due time, but
yes, your understanding so far about the prev pivot low being the stop loss is
correct.
We are in a uptrend and i am in the trade. Do I get out once the up trend line is
broken or if it makes a lower pivot low. does this depend on our trading strategy.
Cause if we wait it to make a lower pivot low or even go down as far the previos
pivot we have lost our profits if we had entered the trade when it started moving up
from the previos pivot low. Or is this the trade off we have to take in the market.
As you rightly pointed out, depends on your strategy. If you've been playing the
uptrendline all along, you are not about to tolerate any break in the uptrendlines.
One crack and you are out. . . . . . . . on the other hand, if you are willing to give it
some room, wait for the break of the previous pivot low as that gives you a clearer
idea of a change in trend.
Which one do you do?I personally would get out half my position on a trendline
break, leaving my stops for the back half a bit below the previous pivot low. If taken
out, I am out.
Just have a look at Satyam below. . . . . I had been playing the trendlines all along.
Had been in it from late Sept till date. That ugly move last Friday took out half my
position, but still in back half as the previous pivot lows were not cracked yet. If you
got out full on Friday, you would not have been wrong either.

Trendline break and previous pivot low are two things we used intermittently. I
assume that both are one and same.
Whenever the previous pivot low is broken then Uptrend is in question So we get out
of the trade.
Here in this context what is trendline break, is it small crack in the uptrend move, I
mean is it a decline or anything else. When I looked at the weekly charts on Satyam
(7th Apr) it is small decline. Saint, pls add If I am missing out anything
When you get out of a trade is entirely up to you. . . . . . . the fact that this stock put
in an accelerated up move, take out your trendlines and draw it. Why?Because we
don't want to give back too much when the pullback starts.
We therefore already have a bearish divergences on the RSI and TRIX. What do we
do?We get cautious, we get our hands ready on the trigger, but we DO NOT do
anything. We wait, and wait. . . . . till we get a break in trendline. Then, we are out.
We are always READY to pull the trigger, the Bearish divergences tellus GET SET,
and the trendline break tells us GO!!
Now, if your mindset is very long term, and these pullbacks mean nothing to you,
then take some profits off the table in a trendline break. But hold the rest till we get
a break in the previous pivot low on the weekly charts ie 720. If it does not break
720, the uptrend is still on and you will see higher highs and lows.
So, that decision depends on the type of trader that you are.

Also if we are in a down trend and it breaks above the trend line and moves up. Do
we enter now and we let it make a higher pivot low. cause the higher pivot low might
be very high and we loose out on profits. Also how much of a correction would u call
a pivot. Could you please attach a file of the smallest correction you would consider a
pivot.
Buy the break above the dntrendline, but buy half. Why?Quite a lot of false
breakouts. So buy half and then add the other half when we get a pullback forming a
higher pivot low.

For me i have seen that many times i have entered when a share has made a higher
pivot low and then it moves up a bit and then makes a lower pivot low. is this
common or am i not entering right. this could also be because at this time i am not
using any indicator and only using trend line and once we use 1-2 indicators along
with trend lines entries are more confirmed.
A higher pivot low doesn't mean we are going to see new highs. It could just turn
around and continue its downtrend. Therefore the importance of stops.
And yes, as we put trendlines+support/res to moving averages, and patterns, and
afew indicators and volume, . . . . . . . . . then we get to drop a few of those that you
might have taken now.
But whatever you do, however much you learn, it's important to keep things as
simple as possible.
To identify a pivot high, should both the below statements be true or only the 1st
one needs to be true
1. high should be higher than the highs of the bars on either side
2. Low should be higher than the lows of the bars on either side
Same for Pivot low
Also If pivot highs and lows are repeating quite often, does this mean that the script
is not in a significant trend.
A pivot is not exactly a point, and therefore it need not be one single bar with lower
high bars on either side to qualify it as a pivot high. It could be 2-3 bars . Basically,
whether pivot high or pivot low, don't go in for an exact academic definition. Go with
the eye.
Taking that above chart of Piramyd Retail, we have pivot lows on Jan27th, Feb28th,
and Mar24th. Notice that each pivot low is lower than the previous one. We call that
a downtrend. So too with the uptrend.
Importantly, go with the eye. And what is not obvious to the eye is not worth it to
put your money into.
I am tearing my hair apart to understand this chart. Please have a look at the
attached weekly chart of ITD Cementation. Clearly in the last three days there is a
Pivot Low on 16th June. The daily charts show this is in a rally for the past four days.
The downtrend is in question but we do not have a confirmation of the uptrend. How
long do we wait till we make our move? As far as I understand from your previous
posts, we only flag this stock onto our watch list.
We wait till it makes a higher pivot low and higher pivot high. Lets say in the daily
charts it makes a pivot low in the area above the current pivot low 522. 70. Things
are better and better. But the previous pivot high is in the range of 900. Do we have
to wait until this pivot high is taken out? What if the rally does'nt stop? Don't we
loose out if we do not buy it early? Sorry for so many questions but hope you get my
point.
Few things before we get to answering doubts. . . . . . . NEVER TEAR YOUR HAIR
OUT, whatever happens in the market or in Life. As the years progress, and hairlines
recede and a bald pate awaits you. . . . . . you gonna regret tearing out your hair
once upon a time. :)
Second point :If you are an investor into ITD, another issue, but if you are trading it
ona short to medium time frame, I'd skip this one looking at the low volumes.
But let us take ITD as an example for learning purposes. . . . Yes we have a
downtrend in ITD on the weekly charts. Why do we say that? We have taken out the
previous pivot low on the weekly charts and we are definitely on the down in the
intermed time frames, and threatening to do the same on the longer time frames as
well. As it stands now, we are in a downtrend. . . . . . . . once we get to that point
when we clearly state that we are no more in an uptrend and quite obviously in a
downtrend, we think of shorting every rally, and in this case as we cannot short, we
merely step aside and wait. . . . . . . Yes we got that pivot low on the week ending on
16th of June , and then we got that rally. What do we do here? Nothing. Stand aside
and wait for an uptrend.
How do we know that the pivot low made on the above mentioned week is not the
bottom after which we are moving up?Simple answer. . . . . . . we don't. And when
we don't know something, or there just is not enough data to tell us that the trend
has changed, we do not put our funds into that trade, we just stand aside.
So far, every rally is a selling opportunity. . . . . . . we haven't come to that point
when trends have changed and every dip is a buying opportunity.
Now, at what point do we buy?Let us say that we are going to turn up from here and
move upwards, do we buy. We have a higher pivot low on the daily, so why not?The
answer to that one is: Depends on the time frame that you are trading. If you are in
a trade for few days, then maybe. But there just is nothing like trading with the
weekly charts supporting you as well. So do nothing. . . . . . . . wait for the weekly
charts to give you that higher pivot low before committing funds. At present, this
rally is only just that. . . . . . a rally in a downtrend.
Now let us presume that we get that higher pivot low on the weekly charts, do we
wait for the higher pivot highs to be taken out before entering. . . . . Definitely not.
Get to get ready mode once you get a higher pivot low(you could also buy here if we
get a neat long basal pattern with a higher pivot low). If ITD forms a sideways base
and a higher pivot low from here, you could buy here and addover 760 which is the
prev lower pivot high.
I had a question related to his query. Will be take the 900 mark as a pivot high as
what I have learned so far and read in dow theory and by martin pring is that a pivot
is made if a it retraces 33%, 50% or 66%. Now if we take other theories as well 12.
5% is minimum retracement levels we take. In this case if take the high of 19th
april, the move around 24th may was a mere sidway movement and not a
retracement to qualify as a new pivot point.
Attached below is a simple chart of ITD, and where to buy and sell.
Keep things simple and trade what is obvious to the eye. . . . . . . Pivots are just
that-turning points. The amount of retracement however tells us about the strength
or weakness of the preexisting trend, which we can get into shortly.
Many a times, if you keep referring to the daily charts, you tend to miss the big
rallies. And many a times, if you refer to the weekly charts, you lose a lot of your
profits (if there is a downtrend in the daily charts).
Always best to let the weekly and daily confirm each other before an entry. Our
objective is to grab the meat out of the trend. So, let the daily rally, stay out of it,
then let it pullback, and then if we form a higher pivot low on the weekly, grab it.
Yes, you would miss out on the first rally. . . . . . . . you would also lose some profits
at the top. But there is lots of money to be made from the meat in between. . . . and
lots of restful sleep at nights knowing that the charts do not conflict with one
another.

Chart Patterns
Again and again, certain patterns seem to develop on our charts. And we realise that
the probability of reversal or continuation is greater with certain patterns. Not saying
that the reverse cannot take place. Anything is possible and therefore we have our
stops. . . . . . . . . . . but these patterns usually either reverse or continue trends.
Knowing abt chart patterns is one more weapon in our arsenal.

Two types:
a)Reversal Patterns:These patterns reverse trends. Eg. Double Top, Double
Bottom, Head and Shoulders, Cup n Handle.
b)Continuation patterns:These indicate a possble contination in trends. Eg.
Triangles, Bull flag, Bear flag, Pennant

REVERSAL PATTERNS
Double Top :This pattern can happen on any time frame. . . . . . . . . this halts
the uptrend and starts a downtrend in that stock or index.
Î Also called as M Top, coz it resembles an "M".
Î If double tops are bearish, triple tops are even more so.
Î Volume is higher on the first peak, and lesser inthe 2nd peak, and starts
picking up on breakdown from the 2nd peak.
Î There has to be a distance between one top and the other to qualify as a
Double Top. Needs at least 3 month difference if you are looking athe daily
charts.
Î Now take the trough between the two peaks. . . . . . . breaking that level is
confirmation of a change in trend to the downside.
So, summarising, let us say we are looking at the daily charts of any stock. We
need to have a top put in, let us say January, and then another top at the same
area, let us say in April. The rally to the first top came in good volumes, and then
a pullback on low volumes. The rally to the second top came in relatively low
volumes and then the declines coming in relatively stronger volume. It may be a
double top, but you cannot call it one till the trough between the two tops is
taken out. Then we can call it a double top. Also called as M-TOP.
How does knowing this help us in our trading?
We have a great uptrend on good volume and a pullback on lesser volumes. . . . .
so far so good. Now the 2nd peak formation starts to form with much lesser
volume as compared to the 1st peak, and then a breakdown on high volume. . . .
. . . . this gives us an indication to exit our longs if we are short term players as
trendlines get broken to the downside. But without confirmation, we are officially
in nothing more than a sideways trend with possible fall downwards. Now the
 trough gets broken and usually the stock retraces back. . . . . . . . We are now
officially in a downtrend. The time to short has arrived. Short a half at the
retracement, and short the other half below the low of the bar that closed below
the trough line.
Target :The distance between the peak of the "M" to the trough of the "M". . . . .
.add that to the low of the bar that broke the trough line. That's our target point.

Double Bottom:Same as above, it halts a downtrend, and starts an uptrend

in that stock or index.
Î also called as "W"bottom.
Î Trading strategy and measuring techniques are just the opposite to the
above.
What would be the time duration be for a weekly chart. Is 3 months a minimum
requirement or can it vary to lesser time period.
Actually no hard and fast rule. . . . . . some books tell you that a month apart still
qualifies. Yes , on a weekly or monthly charts that would be maybe years apart. Also,
you get these patterns on an intraday basis as well.
Importantly, one can only say that a pattern is a Double Top for sure once the
trough gets taken out. Till then you would say that we are in a pullback or sideways
pattern.

Another fact, forgot to mention yesterday. . . . . The longer the period between
the peaks and the greater the height, expect the reversal to be greater.
But you know that high that you see in the daily charts and then a pullback and then
back to former highs in the next few days. . . . . . . . . that is what is NOT a double
top. There must be considerable period between the peaks. If you are looking at the
hourly, then you must have at least more than 30 bars bet the 2 peaks.

Head and Shoulders Pattern

Î Bearish, reversal pattern signalling the end of the current uptrend.
Î Basically looks like the silhouette of a human left shoulder, head and the right
shoulder.
Î ike the Double Top, strong volume push prices upwards forming the "left
shoulder". The pullback is on lesser volume, then another strong rally on good
volume, forming the "head". . . . . . but this time, the volume causing this
rally although forming higher prices, is now on relatively lower volume as
compared to the vol. in the rally causing the left shoulder. . . . . as the stock
pulls back to the neckline, and starts rallying again to form the rt. shoulder,
now volume is very noticeably lighter.
Î The break of the neckline confirms the H & S pattern(Neckline is the line
connecting the two troughs on either side of the head). Volume expansion is
noticed as the pattern confirmation takes place. . . . . . . and the stock or
index is now in adown trend. (Reverse happens now. . . . . . vol. expands on
the down fall and decreases on a return move up).
Trading-Wise:ENTRY:The first down day below the neckline confirms the pattern. . .
. . . . short as the neckline breaks or enter short on a weak rally back to the area of
the neckline. This line that was formerly strong support now acts as a stiff
resistance. Short half on that return move, and the other half below the low of the
confirmatory bar.
TARGET:First target would be. . . . . . . calculate the difference from the head to
neckline. Add that to the low of the bar that confirmed the pattern.
STOP:The high of the right shoulder.
One Important Condition:Once the neckline gets broken, expect a return move. . . . .
. but at all costs the price should not re-break the neckline upwards. If this happens,
it is called a FAILED H&S PATTERN. Like a failed breakdown, this acts as a bear trap.
. . . . and is bullish. So get out if that neckline gets broken back upwards. . .

4. INVERSE H&S PATTERN

Î -Reverse of the above.
Î -reversal pattern that ends a downtrend.
Î -Tradewise, all reverse of above.
VOLUME and the H & S
Volume plays an important role in us calling a particular pattern a H&S. Let us go
through the Volume bit.
When the left shoulder is made, in both the h&s and inverted h&s, expect strong
volumes. When the head is made, it is on (usually) decreased volumes as compared
to the left shoulder. But the rt shoulder on a h&s is on usually lower volumes.
Volumes increase wnen necklines break, and patterns get confirmed. And as all
breakdown patterns, a break below support is accompanied by strong vols. , and
then the return rally to what is now resistance is on low volumes, followed by strong
vols again, bringing the stk to newer lows.
But, in the Inverted H & S, once again, we have strong volumes in the forming of the
lt shoulder. Again, we have decreased volumes in the forming of the Head. But,
here, we have increased volumes taking prices back to the neckline, then a dip in
volume as the stk tries to make the rt shoulder, and then a burst in volume taking it
through the neckline.
Summarising, H&S=Lt shoulder-Strong vols
Head-Lighter volumes
Rt shoulder-Same as or lighter than the head.
*Increase in volumes as neckline breaks to the downside.
Inverted H&S=Lt shoulder-Strong vols
Head-Lighter vols
*Increase in volumes, sometimes higher than before the formation of lt shdr
Rt shoulder-Dip in vols from the rally
*Once again, an increase in volumes breaking the stk out over the neckline.
An important thing to remember is that markets or stocks do not need strong
volumes for the breakdown from the h&s as it basically falls with its own weight, but
you need strong volumes for a breakout from an Inverted h&s.

5. CUP WITH HANDLE FORMATION

 Î also a reversal pattern, but more obvious at the bottom rather than at the
top.
Î basically looks like a coffee cup with a handle.
Î There is a basing stage, accumulation phase(cup), then a breakout, followed
by a pullback, forming what looks like a handle.
Î Breaking out of the top of the cup is confirmation of a change in trend.
Î Few criteria: The cup should be more rounded than a "V". The handle should
be in the top part of the cup, not too deep. Cup pattern should take at least
7weeks to form. Volumes should contract in the handle and expand on b/out.
Î From a trade perspective, the buy is at the area where the top of the cup is
taken out. Stop: At the low of the handle. Target: Measure the distance to the
low of the cup. Add that to the breakout area.

6. REVERSE CUP N HANDLE

Î Occurs at the top, rest all reverse of the above.

7. BROADENING FORMATION
Î When the trendlines, from left to right, converge. . . . . it's called a triangle.
When the trendlines start from a point and diverge as we go from left to right
of the chart, that's called a Broadening Formation.
Î One more interesting feature: In a triangle, volume decreases within the
pattern. In a Broadening Formation, volume expands along with wider price
swings.
Î This is a BEARISH pattern.
Î Due to its divergence, the stock makes a high and a low, then high2 will take
out previous pivot high, then prices fall to low2, which takes out the previous
pivot low. Then prices move upwards to form high3, which is higher than
high2 or high1 (not necessary, can even be same height at times).
Î Three successive higher peaks, and two declining lower troughs complete this
pattern. Confirmation is when the low 2 is taken out as prices start making
new lows.
An example of a Double Top in Punjab Tractors in 1999.
Once that trough breaks to new lows, an important area of support has given way.
Once we get a break-down, this pattern that was so far a suspected DT, a probable
DT, is now a confirmed DT.
Notice that pullback rally not able to take out that line of previous support. Now that
line , or rather area becomes an area of resistance. This pullback rally to this area
becomes a place where you could add to your positions
Below is an example of another H&S pattern, this one in RANBAXY Monthly charts.
Self explanatory.
Have a look at the Volumes in the Left shoulder, then the Head, and Rt shoulder, all
in decreasing fashion. Then the increase in volumes in the breakdown from the
neckline.

At present we are shooting past the neckline, but you have to wait and see how this
month pans out, if we close this month end at 440-450 area or below, we might see
a continuation in downtrend.

We have so far, as beginners to charts, looked into what a trend is. Are we in an
Uptrend, Downtrend or Sideways Trend?We have looked into some terminologies. . .
. . . . . . . lower highs and lows are called Declines. Lower highs and lows by
themselves do not constitute a downtrend. Lower pivot highs and lows. we call it a
downtrend. Higher highs and lows make up a rally. Higher pivot highs and lows make
up an Uptrend.
We have seen some basics on Trendlines, Supports and Resistance. We realise that a
break in an Uptrendline does not mean we are in a downtrend. A break in that
Uptrendline merely means that the ongoing uptrend is in question. Breaking a
previous pivot low, and then we say we are in a downtrend.
We have seen the basic Buy Setup, which is nothing so far. There are a few things to
add to that as we go ahead.
Now we have started Chart Patterns. . . . . . . . . . . . now the question that may arise
is : Do we really need to know this at all? Can't we make beautiful profits even
without knowing zilch on Chart Patterns? Well, the answer is a Yes and a No on both.
Our motive as traders trading the trend is to make profits as long as that trend is on,
and to detect a change in trend and exit when that is seen. We therefore need not
have the art of prediction. We identify a change in trend, latch on to that stk with a
good entry, and hold till that trend changes. We therefore follow trends, and not
predict them.
So, although you have many books that will tell you on what a first target is(no harm
in getting out as prescribed), but the trader trading trends stays in as long as the
trend is up unless something else is the bother.
Most importantly abt knowing Chart Patterns, it gives one an idea as to what the
general population of tech guys are thinking. We have an ascending triangle. So
everyone is expecting a breakout. Well, so are we. But if we get a breakdown, we
take our stops and reverse strategy fast leaving those who don't do it in a Pray-
Wish-Hope Mode and finally selling off at much lower prices fuelling the move down
further putting a huge smile on our faces.
So know the patterns, so that we can all see what everyone is looking at. So that we
can trade along with everyone else, or against them. But your basics are the most
important. Trade the Trend and out when previous Pivots crack.
Normally we take the weekly charts if we want to trade for the medium term(3-6
months). but if i want to trade only for very short term i. e 1 week or max 10 days
then can we take the daily charts? if we take daily charts then, how many days of
data should we consider. is three months of data enough?
Even for short term trading, a weekly chart is important. Let us say you intend to get
in to a position as a swing trade, maybe 5-7 days. First look at the weekly charts, it
MUST be in an uptrend. Now that we have a weekly that is in an uptrend, we now
intend to buy. A weekly in a downtrend, we DO NOT buy however great looking the
daily chart is, however great the news is, we DO NOT buy.
Have a look at the chart of IND SWIFT below. We have a weekly in a dntrend,
making lower pivot highs and lows, DO NOT BUY. Buy only when the weekly gives
you a clear cut change in trend, and then buy declines using the daily charts.
Basically, in a nutshell, for starters, keep away from trades where the daily is setting
up, and the weekly is still in a dntrend. The desire to predict and get in at lower
prices will cost you dear. Get into another stock where we have a weekly in an
uptrend, and then buy declines.
The above is an important lesson, especially for newbie traders. When weekly is in a
downtrend, and daily starts moving up, we think that this bottom is the absolute
bottom and weekly charts will also start to move up. Very wrong thinking. . . . . . as
you have said before, catching a falling knife can be one very painful experience.
Best to enter stk that is making higher pivots and buy pullbacks.
Is Chart Patterns Necessary
Learn the patterns as well. . . . . . . learn them because everyone else is looking at
them, and to know the strengths and weaknesses of your rivals is going to be
important for you.
Now let us say that you do not want to have anything to do with patterns. . . . . . .
no problems with that as well. Example, we have a pullback that is overdone and
comes to support and then rallies off to the same previous high and then back to the
same level of support. The conventional tech analyst calls it a Double Top, but you
are least concerned. You instead draw your resistance and support lines. . . . . . . .
and wait. A breakout over resistance and you will be in it LONG, a breakdown below
support and you will be looking to SHORT.
So, are you really bothered about a Double Top or Bottom? Not required if you are a
trend trader.
Another chart pattern, we have a huge move up on high volumes and then a
pullback to an area of support, and then a rally on decreasing volumes to a new
high, and then back to the support area, and another rally of lesser vols and then
back to that area of support again.
What would you do? You would draw your lines of support, a breakdown from there,
and you are in SHORT. Do you need to know that this was actually a HEAD AND
SHOULDERS pattern?Obviously not. You, being a trend trader, if you were in long
would have been unhappy that new highs were coming in decreasing vols and then
the 2nd pullback to support would have already put the entire uptrend in question,
and will be looking to exit. . . . . . So therefore, can you as a trend trader manage to
make huge profits in the markets, without knowing abt the Head and Shoulders
pattern? Surely. . . . . . . . . Just drawing trendlines, Supports and Resistances would
do the trick.
That is as far as Reversal Patterns go. . . . . . . . . but you may need to know
something abt the continuation patterns though. Why?It gives you an idea that the
trend that you are in so far is doing great. . . . . . . . You got a nice move up, and
then sideways pattern. If you didn't know that it was an ascending triangle in
progress, you could still draw a resistance line and buy the breakout. But knowing
that an ascending triangle USUALLY is a continuation pattern before a strong move
up, gives one the courage to hold on to that trade.
In summary, is learning chart patterns vital for the survival of a trend trader? No,
not at all. . . . . . . . . can come in useful, but not vital. . . . . . . . . if you feel you can
manage without it in your style of trading, by all means do so. No compromises on
the Basics we learnt in the beginning. But on Chart Patterns, your call. Skip it if you
don't need it.
We see charts on the weekly we see a uptrend. . . a higher pivot high and low and
we can enter other indicators also permiting or we may just follow the trend.
Now what happens if we see a chart which is in uptrend and in which the chart keeps
going up. Is there any method to enter or we wait for a pull back. I was seeing the
charts of Seamrin. 526807. On the weekly its on a uptrend but the entire week on
the daily it was on uppercircuit. Now it may do that on the 2nd week too
So we wont enter now. We will wait for a pull back preferably to 135 levels where it
made a window and also started moving up from a sideways trend.
Now another part would be if after moving up for another week it again moves
sideways and then moves up. Would u buy or leave this counter if no pull back
SEA MARINE -We got a breakout on the daily charts on the 21st of April. Textbook
entry, wait for a pullback or buy over the previous day's high. In this case , buy on
the 24th of April over the previous day's high. What I would have done: I would have
bought over the previous day's high (half) and would have liked to add the other half
in a pullback. In this case the pullback never happened, and I suppose I would be
sitting with half a position.
And as for the second question, if this pulls back on the daily charts, it's a buying
opportunity. If it goes sideways, it is a buying opportunity. Of course if it makes a
mild pullback on the weekly, it's a buying opportunity.
We have to keep a trac of what's the stock doing on the weekly charts(the higher
time frame model) and suppose the daily chart is in uptrend(in respect to higher
peaks and troughs). . and then crosses below. . its recent pivot low. . and makes a
lower pivot high. . it can be said the stock has turned its trend(on the daily time
frame). . now at the same time. . the weekly indicator. . does not show the same
weekness. . coz any change in trend. . will first b visible on daily charts. . as in this
case n then on weekly charts. . now my question is how can we distinguish whether
it is just a temperory pulldown. . on weekly charts or start of a trend reversal on a
weekly chart. . (from bullish to brearish). . as the first signs of weakness can only b
visible on the smaller time frame then go on to the bigger ones. . and is there any
way we can find out that this. . reversal on smaller time frame is indeed a trend
reversal on the bigger.
Simply, we don't. . . . . . . . we really cannot say for sure that this correction is going
to be that one that will see a correction in the weekly charts as well.
But we have some ways to anticipate it. . . . . . . . . few reasons to get nervous on
the NIFTY over the last few weeks. We have a way overbought Stochastics , the last
time we saw Oversold was in October last year. We have a negative divergence on
the TRIX and the RSI. We know that an important correction is coming, but as trend
followers should NOT predict a move. . . . . . . opening the weekly charts, we have a
way overbought Stochs and negative divergence on the RSI. Again, we know that a
correction is in the offing, but we ride the trend till we see a break in it. So far, no
break, we are fine. . . . . . .
Now, we get this important break and a finish at the end of the day (monday) below
our all important trendline. This intermediate uptrend that we have been playing
from October till now is over. Nothing to do with long time frames, they are still very
bullish.
As far as we are concerned, we are out of all longs, and now look to short every rally
till once again things change to the up. The rally yesterday means nothing, except
some intraday gains, and then today another big fall of 826 pts. Looking at the
weekly charts, nothing but a pullback. . . . . but trendlines and a few indicators and a
topping tail on the weekly gets the intermediate frame trader to get out early.
And as trend followers, we are not concerned to get out at an absolute top or
bottom. We just want to get as much meat as possible in the middle.
Basically, important to integrate both the time frames. . . . . . . . . it will all come as
you pour over thousands of charts.
Why? is there a reason a trend line acts as a support (what is the underlying logic
behind it) or cause we see it in so many charts we take the number of repitations as
a proof and follow it.
My mind does not work in the "why something happens" mode, and therefore I may
not be the best to answer it. . . . . . . . but I wonder if these patterns and lines
develop because we are all looking at the same thing and drawing the same lines:)
It could be as simple as fear and greed. Countries may be different, the year may be
different, but human emotions don't change much, I guess. And it gets reflected on
our charts.
A chart is never the mapping of what that particular company is about, but of the
emotions of hope and expectations, fear and greed, of the investors in that
company. The chart tells us of human emotions, and therefore, as astute traders, we
buy into fear and sell into greed, and enjoy the profits made in the difference.
And therefore trendlines, patterns and all the paraphrenalia is learnt to come to that
very important point. . . . . . . to assess when fear has truly set in, and is time to buy
once we get a signal, or when greed has got a bit out of whack, and is probably time
to exit.
Is it necessary that any breakout above or below a trendline should be accompanied
with good volumes.
I am looking into charts of various companies but i am unable to find any charts
which show an uptrend. But today i found one "Sanghvi Movers".
this stock has broken its uptrendline and is again trying to reenter the uptrendline.
Please see the chart. If this stock rises above the trendline, should this be
accompanied by heavy volumes. What if it doesnt??Should that be regarded as a
false breakout. Is there any way by which i can tell whether a breakout is false or
not.
Yes, a breakout needs high volumes to sustain it, else as you correctly pointed out, it
will end up as a false b/o. But a breakdown can happen without good volumes as
markets fall with their own weights.
SANGHVI MOVERS : Not really a good example to study on due to its very low
volumes. But in general, yes, that trendline(up) once cracked, that very trendline
that was previously support now becomes resistance. And like all resistance we need
the breakout over resistance accompanied by good vols.
Chart Patterns
We have so far done trends, pivots, trendlines, supports and resistances among
others, and a few important patterns. . . . . . . . . . Due to the variety of time
constraints, please go to http://www. stockcharts. com/education. . . ternsNode.
html.
I believe the above website puts it down to its simplest. Very easily understood, and
as far as patterns are concerned, all that is required.
Okay, now that we have gone through trendlines, etc, and I do hope that those
interested went through the education on Chart Patterns at Stockcharts. com.
As said before we are in this business to make profits. We are not in this business to
become "experts" so that we can stop trading and start some newsletter service, etc.
We learn this so that it can help us trade the markets. . . . . . . . . we learn so that
we can pull profits out of the markets whatever the market is doing.
So, therefore, let us go straight to trading these patterns, with the assumption that
those interested have gone through the theory at stockcharts.com or whichever TA
book that you have.

TRADING THE RISING WEDGE:

The rising wedge is a bearish pattern that begins wide at the bottom and contracts as
prices move higher and the trading range narrows. Rising wedges definitely slope up and
have a bearish bias.

Even though this article will focus on the rising wedge as a reversal pattern, the pattern
can also fit into the continuation category. As a continuation pattern, the rising wedge
will still slope up, but the slope will be against the prevailing downtrend. As a reversal
pattern, the rising wedge will slope up and with the prevailing trend. Regardless of the
type (reversal or continuation), rising wedges are bearish.

1. Prior Trend: In order to qualify as a reversal pattern, there must be a prior trend
to reverse. The rising wedge usually forms over a 3-6 month period and can mark
an intermediate or long-term trend reversal. Sometimes the current trend is totally
contained within the rising wedge; other times the pattern will form after an
extended advance.
2. Upper Resistance Line: It takes at least two reaction highs to form the upper
resistance line, ideally three. Each reaction high should be higher than the
previous high.
3. Lower Support Line: At least two reaction lows are required to form the lower
support line. Each reaction low should be higher than the previous low.
4. Contraction: The upper resistance line and lower support line converge as the
 pattern matures. The advances from the reaction lows (lower support line) become
shorter and shorter, which makes the rallies unconvincing. This creates an upper
resistance line that fails to keep pace with the slope of the lower support line and
indicates a supply overhang as prices increase.
5. Support Break: Bearish confirmation of the pattern does not come until the
support line is broken in a convincing fashion. It is sometimes prudent to wait for
a break of the previous reaction low. Once support is broken, there can sometimes
be a reaction rally to test the newfound resistance level.
6. Volume: Ideally, volume will decline as prices rise and the wedge evolves. An
expansion of volume on the support line break can taken as bearish confirmation.

The rising wedge can be one of the most difficult chart patterns to accurately recognize
and trade. While it is a consolidation formation, the loss of upside momentum on each
successive high gives the pattern its bearish bias. However, the series of higher highs and
higher lows keeps the trend inherently bullish. The final break of support indicates that
the forces of supply have finally won out and lower prices are likely. There are no
measuring techniques to estimate the decline – other aspects of technical analysis should
be employed to forecast price targets.
ANN provides a good example of the rising wedge as a reversal pattern that forms in the
face of weakening momentum and money flow.

Î Prior Trend: From a low around 10 in Oct-98, ANN surpassed 23 in less than 7
months. The final leg up was a sharp advance from below 15 in Feb. to 23.5 in
mid-April.
Î Upper Resistance Line: The upper resistance line formed with three successively
higher peaks.
Î Lower Support Line: The lower support line formed with three successive higher
lows.
Î Contraction: The upper resistance line and lower support line converged as the
pattern matured. A visual assessment confirms that the slope of the lower support
line is steeper than that of the upper resistance line. Less slope in the upper
resistance line indicates that momentum is waning as the stock makes new highs.
Î Support Break: The stock hugged the support line for over a week before finally
breaking with a sharp decline. The previous reaction low was broken a few days
later with long black candlestick (red arrow).
Î Volume: Chaikin Money Flow turned negative in late April and was well below -
10% when the support line was broken. There was an expansion of volume when
the previous reaction low was broken.

Support from the April reaction low around 20 turned into resistance and the stock tested
this level in early July before declining further.
The RISING WEDGE is a reversal pattern, as always the word "usually" comes into
play.
Nice one that took place in ARVIND MILLS. . . . . . see the chart below. Self
explanatory. We got higher pivot lows as ARV MILLS made new highs through 2003
and 2004. But newer highs in November 2004 and later was accompanied by lower
volumes. This rising wedge took nearly a year in the making. . . . . . The week
ending Oct 14th , and we got our breakdown bar (indicated in the chart with a red
arrow).

Look to short below the breakdown bar with your stops at where the green arrow is
placed. Once it cracks, keep moving the stop down to the previous pivot high, so on
so forth.

SUMMARY:
We have, at various times and places during this thread, done the below:
a. Trends-Secular, Primary, Intermediate, Short Term Trend
b. Pivots
Knowing just these two tell us where we are on that particular chart. As we
had discussed many a time before, first we need to know that a secular
uptrend is made up of several primary uptrends and downtrends. Each
primary uptrend is made up of several intermediate uptrends and
downtrends. And each intermed uptrend is made up of several to many short
term uptrends and downtrends. Of course, each short term uptrend is made
up of several to many intraday uptrends and downtrends.
 An uptrend is made up of higher pivot highs and lows, each pullback within
that uptrend is called a decline. A downtrend is made up of lower pivot highs
and lows. A move up within a downtrend is called a rally.
Why do we know these things? As we had discussed before we need to know
that a chart is in an uptrend, because then and only then are we interested in
going long. We buy in an uptrend. We could buy the breakout from a
sideways consolidation phase, we could buy the declines within an uptrend. . .
. . . . . but in an uptrend, in anticipation of a certain level, we NEVER NEVER
SHORT. The mind must be educated to understand that one does not short in
an uptrend.
We short in a downtrend (plz, I know that certain things are not possible in
the Indian mkts, obviously one can do only what one is allowed to do. One
could short using derivatives, or stay out and wait for an uptrend). In a
downtrend, we get a sideways consolidation phase, we short the breakdown.
We could also short a rally within that downtrend. When we get a rally in a
downtrend, we could capitalise on that move on a smaller time frame by
going long. But in that larger time frame, we are looking to SHORT. We are
not looking to guess bottoms, we are not looking to anticipate certain areas
from where we are going to bounce upwards, we SHORT every rally ina
downtrend till that downtrend no more is one and we get a Trend Reversal to
the Upside.
c. Trendlines
Do we only get out of a long position once pivots are broken and the
downtrend is confirmed? Nope. . . . . . . . . . . we draw trendlines using the
semi-log. A trendline break and we are out half, and a pivot crack, and we are
out totally. How to draw the various trendlines has been discussed in various
posts in this thread, please do go over it.
d. Chart Patterns:
Alright, we know about trendlines, pivots and trends, is that not enough to
know? Isn't this knowledge enough to plunder profits from this markets? YES,
and a vehement YES. . . . . . . . . . . . . . But learning some chart patterns can
do no harm. In fact, a continuation pattern gives us a good place of entry,
and gives us a potential target area. So too with a Reversal pattern, we get
an entry and a potential target area. So, do we need to learn Chart Patterns?
Well, many just follow pivots and trends, and do not require Chart Patterns,
that's basically your call to make.
Our objective as a trend trader is to latch on to a Trend Reversal, and use our
knowledge to stay with the trend as much as possible. But the question that
hits our head is:Right, we know all this stuff, and now we know that we will
buy half on a higher pivot low, and add the other half over the previous pivot
high. . . . . . . . . but what about stops? Where do we take our profits? Do we
take profits at all? Then, of course, how many shares do we buy?Etc, Etc. . . .

Stops :
Whenever there is a trade that we get into, we put in a stop. The stop is that area
where we say, "Enough is enough!"The stop is not put in after one has lost 80% of
our portfolio and one has given up with life. I see it quite often here where one gets
in on a tip because someone says so, and then take a huge loss and then say that
the trade was stopped. . . . . . . . . . . A stop is a predetermined level, put in BEFORE
the trade is got into, the word BEFORE being an important word. I hope I do not
sound lunatic when I say this:
BEFORE the trade, BEFORE the trade, BEFORE the trade, BEFORE the trade, BEFORE.
That stop that one has determined BEFORE the trade can be a mental stop. A mental
stop is one that is not exactly broadcasted to the broker, etc. . . . . . . . . it's a
technical level the break of which one does not stay in the trade any longer. Now,
the irony of this mental stop is this:Please DO NOT keep the mental stop in the mind.
WRITE DOWN the stop. . . . . . . . . If one entered SATYAM at 650, with a stop at
620, and a potential target of 750, write it down.
SATYAM, entry-650, stop-620, tgt-750, rew:risk=3. 33:1, etc etc
If SATYAM hits 620, that is it, one is out of that trade. One either looks elsewhere, or
plans a reentry into Satyam, . . . . . . . . . but what one never, ever, ever, ever, ever,
ever, ever does is to let the stops get blown through, then hold it, pray to God, run
to the nearest temple, church or mosque, pray even harder, and then try to strike a
bargain with God if HE manages to pull the stock back up, beat the chest, shout at
one's wife, have sleepless nights, all the while allowing it to slide, all because one
wants the stock to get back to breakeven.
Trading is a profession. It's a business. It is not a place where one hopes to strike
lucky, you could , maybe once, maybe twice. . . . . . . but the person who does not
have a strategy , a plan , will in the long run come to ruin. As the famous saying
goes, "Plan your Trades and Trade your Plan. "
A predetermined written down stop is vital for long term success, it is vital for our
mental balance, and only a disciplined trader adhering to his/her plan can see the
multiplication of wealth, and a regular flow of profits.
Once again, to re-stress. . . . . . a stop is planned and written down BEFORE the
trade!!!!!!!
I apologise for sounding like a broken down tape recorder on this one. . . . . . . but I
do hope that as a beginner to trading, one does realise its importance.

STOPS :
There are many types of stops, . . . . . . . the ones that come to mind.
a. INITIAL STOP
As described many times, this is the stop that we put in before we even put in
that trade. This stop can be placed with your broker if in intradays, else, a
written down exact point after which no more nonsense is going to be taken
from this trade.
b. TRAILING STOPS
As the stock moves higher, we use trail stops. Again, there is software that
does it, of which I have no idea. There are very many methods that does it
using pivots, or moving averages, or two-three previous bars break method,
etc
Whatever the method used, the most important point is that once the trade
moves in the direction required, the stop has to move up to breakeven first,
and then upwards, till stopped.
c. TIME STOP :
 When the trade does not go your direction in that specified time, and money
could be deployed elsewhere, and the initial stop is also not taken out, one
employs the time stop or boredom stop.
So, that covers that. . . . . . . . . . . . . the moment we get into a trade, and
the trade never sees green, and hits our INITIAL stop, that's it. We are
stopped out. The trade goes in our direction. We apply TRAIL stops. After
getting into a trade, and nothing exactly happens, and that wasn't part of our
strategy, then we could employ a TIME stop.
Whether we take a TIME stop or not is our call to make. . . . . . . . . . . but no
compromises if the INITIAL stop is hit. We are out, and that's that.
Now, as discussed before, a stop is a predetermined point. Another issue, a fault by
many and is a crime punishable by the guillotine. . . . . . . . . . . . . . . . a stop once
placed has to be respected, once that point is reached, one cannot push back that
stop. Part of the trading discipline, part of the plan of attack, . . . . .
Below an article, by Traderji, where he talks abt Trailing Stops and the various
methods. . . . . I personally use the Chart Patterns and the Channel Breakout
methods. Different people have their different choices, and therefore their different
methods, but whatever the method, the stop is never pushed back, the stop is
always adhered to, the stop is trailed upwards in systematic fashion. . . .
Exiting a trade
How not to loose too much of your trading capital.
Upon entering the trade, if you place a sell stop below the market if you're long (buy
stop if you're short), you know right away how much money you will lose in any
given trade. You should never trade without employing stops. Thus, you should
never be in a trade and have a losing position and not know where your exit point is
going to be.
How to lock in larger than normal PROFITS in a winning trade.
You should always stay with your profitable trades as long as possible because the
trend is likely to continue and make your profits even larger.
This is easy to understand but not so easy to do when real money is involved. The
difficulty is that although your profit may become much larger if you stay with a
trade, it may also decrease and even disappear. Human nature is such that it values
a sure profit much more highly than the probability of a much higher profit. Thus,
traders are inclined to take their profits too soon which can be fatal to long-term
success because big profits are necessary to overcome the inevitable collection of
small losses.
There is a good way to let profits run while still guarding against the possibility that
prices will turn around and take away much of your accumulated profits before the
trend actually reverses. It is called a trailing stop. You include in your plan a method
for moving an exit point along some distance behind your trade. As long as the trend
keeps moving in your favor, you stay in the trade. If the market reverses direction
by the amount of your trailing stop, you exit the trade at that point.
A trailing stop moves to lock in profits as the trade moves in the traders favour, it
should never be moved backwards. There are many different ways to calculate a
trailing stop:
Volatility - the stop is calculated as a percentage of the average true range of x
periods.

Rupee Amount - A set amount determined before the trade is entered.

Channel breakout - exit a long position at the low of the last x bars.
Chart patterns - ie move the trailing stop behind each consolidation as it forms.
Fine, we now know the importance of having a stop, the types of stops, let us get
into where we should place our stops. . . . . . . . . . . . . . . as Traderji's post states,
there are a few ways of going about it. I basically use the Chart patterns way and
the Channel Breakout way.
As said yesterday, it's up to your comfort levels. . . . . . . . there are things that one
can learn from books, and then there are things that can't. One can learn about the
various methods, the type that you are most comfortable with, you got to choose. . .
Below is an example of a position trade . . . . . . . basically Reliance Inds was in a
sideways territory trading within an ascending triangle. We got a clean breakout
around the end of June, and then a pullback to support in July. We therefore enter
that trade with a stop loss at the previous pivot low. This becomes our INITIAL
STOP. If Rel Inds had dumped the moment we bought it and hit our Initial Stop,
that's it, we are out. We look elsewhere or if Rel Inds gives us a signal for a reentry.
In this case, that entry was great. The resistance that the roof of the asc triangle
provided became support. . . . . . . . . . . Right, now we take out the previous pivot
high of 520 as Rel Inds moves upwards. The moment we get a new high, raise the
stop to the previous pivot low which was 469. That move up made a new high of 585
and then pulled back to 526. Where is our stop now through all this activity, same
place of 469. Now we get another move up. The moment we make newer highs
above 585, we get to do what we enjoy most. . . . . . . . yep, now raise stops to 526.
so on so forth. . . . . . . . . the moment we take out a previous pivot high, raise the
stops to its former pivot low. We therefore use pivots as our stop areas. . . . . . . .
especially in position trading, this also allows us to stay in the trade as long as
possible. We are basically allowing the chart to do its thing, we stand aside and go
with the flow of the uptrend.
Now throughout RIL has been using that dark green trendline as its support. . . . . .
but around March2006, another development happens. We started going vertical, a
new trendline is drawn , the blue line, and then even more vertical, the orange line.
That break of the orange line was an area to get out of half the position. Meanwhile
through the entire move from March, we apply the Channel Breakout method(I
usually apply the stop to the low of 2bars ago on the weekly, and 3 bars ago if I am
trading the daily charts. ) In this case, RIL first broke through the trendline, and we
are out half, then followed by taking out the low of 2 weekly bars ago in the week
with May 11th.
That's it, we are out, this position trade is over. . . . . . . . . . in this case, RIL
continued its fall, and we can all feel good about ourselves, but there are times,
when we get out and RIL goes on to make new highs. Not a problem, part of trading.
At this point a question would be asked, at what place would you take profits? I
don't. I travel the whole distance at full position and keep raising stops till out. We
would not get out at the top, but we would take an important chunk out the trend. . .
. . . . . . In this case of RIL, merely playing the raising stops methods would have
given you a run from 480 to 1100 (that's abt 129% gain).
So basically I use the pivot method of trailing stops, if things get vertical then I
employ the Trendline break stop, and the low of the last 2 week bars method. . . . .

Right, let us take another chart. Attached below is a chart of ABB.

Same here, ABB breaking out of a triangle on the weekly charts in Feb 2003,
followed by a pullback in March 2003, to an area of support, giving us a great entry
point for an intermediate trade.
Once again, we have our Initial Stop in place, the moment ABB takes off, and makes
a new high over the previous pivot high, the stop is raised to the immediate previous
pivot low. . . . . . . so on so forth, the stops are trailed upwards. The beauty of the
trail stop is that we know that our entry point to where our current trail stop is, . . .
is money in our pocket. Every decline in an uptrend forming a higher pivot low is
looked on with excitement instead of viewing it as money lost. . . . . . . . . . . .
excitement because we get to raise our stop losses, and that means more money in
our pocket. We realise that there is no need to take out profits from the market at
all. . . . . . . . . the trail stops protect our profits.
Aug 03-Apr 04 :Yet again, ABB starts to make steeper trendlines. . . . . . . . we now
start to raise our stop loss to the low of 2 bars ago, all the while keeping a close
watch on the trendline. Our intention is to take out half on the break of the trendline
and another half once the low of 2 bars ago is taken out.
May 14th week in 2004:That bar breaks both the trendlines and the low of the bar of
2 weeks ago. . . . . . . . we are out of the trade.
Oct 2004:We get a chance for a reentry after months of sideways movement, with
ABB making a higher pivot low on the weekly. Again we get our initial stops in place.
Once again, the same process as above. And stops are raised with each new high to
a higher pivot low.
Jan 06 :From here ABB starts making steeper trendlines again. . . . . . once again we
are looking at the trendline carefully. We are looking at the low of 2 bars ago.
May 2006:We are stopped out of the trade, with both trendline break and the break
below the low of 2 bars ago.
Now we wait for an opportunity to reenter, and profit from yet another new
intermediate uptrend.

It's said that successful trades done without a proper trading plan are more
dangerous than the failed one.
In the example given, no Stop Loss Level was inbuilt into the trade and holding was
based upon conviction only. At that time, nobody would have any idea if the
drawdown would continue or would reverse. Luckily, the stock turned around and
proved to be a multi-bagger. Now it installs a believe in the trader that such trades
can be repeated again and that is where disaster starts to wait.
Loosing 50% on a trade and still holding on represents an emotion called Hope and is
very dangerous as traders have seen their entire capital being wiped out in
thousands of stocks only due to this single emotion.
A proper stop loss in case of any entry is better than letting oneself be prey of our
own emotions. ------ Ashish
Right, so we more or less know the importance of stops, we realise that having
predetermined stops is an absolute must. . . . . . . . . just as in any battle, not only
do we have our Entry strategies in place, we also have our Exit points in order. And
all of this . . . . . PREDETERMINED, and written down before the trade.
For those who see no reason for having any stops, good luck to you, my friend, . . . .
. . . . . for yours is the path of extreme pain and total ruin. Please do not go down
that path. If you already have been on that path to ruin once before, please do not
repeat it. If never been there, learn from the mistakes of others.
Some wise person once said (was it Einstein-tend to remember quotes and forget
who said what??!!). . . . . . "A fool never learns from his mistakes, a smart person
always learns from his mistakes, but a wise person learns from the mistakes of
others. "
Get your trading strategies in place and above all . . . . . . . . stop and money
management techniques. Money management is so important, even more than entry
and exit strategies. . . . . . . . it is money management that separates the men from
the boys, it is money management that is the Holy Grail in Trading. You have poor
strategies but good money management skills. . . . . . . you WILL survive, you may
not become a great trader, but you will still be around in a few years. On the other
hand, if you are great at entries, and exits, but know zilch about money
management. . . . . . . . . . . . you WILL come to your Doom sooner or later!!
Not trying to go all lunatic all over again. . . . . . . . . . . . but knowing money
management is so very important, so so important. So, let us get down to a bit of
Money Management in the next few posts. . . . .
This part you MUST absorb, no two ways about it. . . . . . . . those that have read
Elder would feel like taking a yawn on the next few posts. Do yawn, no harm though
in reading again. . . . . . . . but to those who have never heard of this strange 2
words called "Money Management", the next few posts are for you. . . . . . . . . . . . .
. . . . . . and like I said before, there are no two ways about it.
MONEY MANAGEMENT IS VITAL TO TRADING SURVIVAL, TRADING SUCCESS, AND
TRADING PROFITS. . . . . . . know them and open the treasures available. Know
them not, and that will be at your peril and doom.
Originally posted by Jaideep
Plenty has been said on this topic Usha, all very wise ones at that. Try & go through
the earlier posts. They will educate you no end on your exit strategy etc. Meanwhile,
I'll give you something to read on the topic & put you in the know of things. After all,
I'm no expert TA myself. . . .
A Stop-loss Order is an order placed with your broker to buy or sell once the stock
reaches a certain price. A stop-loss is designed to limit an investor's loss on a
security position. Setting a stop-loss order for 10% below the price at which you
bought the stock will limit your loss to 10%. For example, let's say you just
purchased SAIL at Rs. 50 per share. Right after buying the stock you enter a stop-
loss order for Rs. 45. This means that if the stock falls below
Rs. 45, your shares will then be sold at the prevailing market price.
Positives and Negatives
The advantage of a stop order is you don't have to monitor on a daily basis how a
stock is performing. This is especially when some other commitments prevents you
from monitoring your stocks for any period of time.
The disadvantage is that the stop price could be activated by a short-term fluctuation
in a stock's price. The key is picking a stop-loss percentage that allows a stock to
fluctuate day to day while preventing as much downside risk as possible. Setting a
5% stop loss on a stock that has a history of fluctuating 10% or more in a week is
not the best strategy: you'll most likely just lose money on the brokerage you'll pay
for execution of your orders.
There are no hard and fast rules for the level at which stops should be placed. This
totally depends on your individual investing style: an active trader might use 5%
while a long-term investor might choose 15% or more.
Another thing to keep in mind is that once your stop price is reached, your stop
order becomes a market order and the price at which you sell may be much different
from the stop price. This is especially true in a fast-moving market where stock
prices can change rapidly.
Not Just for Preventing Losses
Stop-loss orders are traditionally thought of as a way to prevent losses, thus the
name. Another use of this tool, though, is to lock in profits, in which case it is
sometimes referred to as a "trailing stop". Here, the stop-loss order is set at a
percentage level below not the price at which you bought it but the current market
price. The price of the stop loss adjusts as the stock price fluctuates. Remember, if a
stock goes up, what you have is an unrealized gain, which means you don't have the
cash in hand until you sell. Using a trailing stop allows you to let profits run while at
the same time guaranteeing at least some realized capital gain.
Continuing with our SAIL example from above, say you set a trailing stop order for
10% below the current price, and the stock skyrockets to Rs. 80 within a month.
Your trailing-stop order would then lock in at Rs. 72 per share (Rs. 80 - (10% x Rs.
80) = Rs. 72). This is the worst price you would receive, so even if the stock takes
an unexpected dip, you won't be in the red.
Advantages of the Stop-Loss Order
First of all, the beauty of the stop-loss order is that it costs nothing to implement.
Your regular brokerage is charged only once the stop-loss price has been reached
and the stock must be sold. It's like a free insurance policy!
Secondly, but most importantly, a stop loss allows decision making to be free from
any emotional influences. People tend to fall in love with stocks, believing that if they
give a stock another chance, it will come around. This causes procrastination and
delay, giving the stock yet another chance and then yet another. In the meantime,
the losses mount. . . .
No matter what type of investor you are, you should know why you own a stock. A
value investor's criteria will be different from that of a growth investor, which will be
different still from an active trader. Any one strategy may work, but only if you stick
to the strategy. This also means that if you are a hardcore buy-and-hold investor,
your stop-loss orders are next to useless.
The point here is to be confident in your strategy and carry through with your plan.
Stop-loss orders can help you stay on track without clouding your judgment with
emotion.

Finally, it's important to realize that stop-loss orders do not guarantee you'll make
money in the stock market; you still have to make intelligent investment decisions.
If you don't, you'll lose just as much money as you would without a stop loss, only at
a much slower rate.
Conclusion
A stop-loss order is such a simple little tool, yet so many investors fail to use it.
Whether to prevent excessive losses or to lock in profits, nearly all investing styles
can benefit from this trade. Think of a stop loss as an insurance policy: you hope you
never have to use it, but it's good to know you have the protection should you need
it.
Placing stop. do u exit on intra day fluctuation or if EOD is below your stop. Cause in
Intraday like u have mentioned it might just hit it the stop loss for a couple of
minutes and start moving up again and we miss the move. In EOD the stock might
go down much more than our stop loss price and our loss %age to our capital will go
wrong, So which is a better strategy or it depends to an individual
.
That's a common dilemma that we all face. . . . . . . . . . . . . however accurate your
stop is, and however much you give it room, it can still happen.
Now comes the problem, . . . . . . . . . . let us say we entered a stock at 50. The
previous pivot low was 45. You decided to give it some room to wiggle, your stop is
at 44. 5 or slightly lower. Great, so far so good, all systems go, everything in place.
Now the stock corrects almost after you buy it (common phenomenon, my friend,
happens to us all, can be rather irritating and frustraing, but that's part of the
game!!). . . . . . . . . . and it comes to 45, and falls through 44.5.
Now the dilemma is this. . . . . . . is this a false breakdown, or a shake-out bar, etc,
or is it a genuine move down. Now many people have different ways to deal with it.
Mine is simple. . . . . . I exit!!
Why ? Because this move could go down to 40, 35, etc and I would be left with a
huge loss in my account, left with a feeling of regret, and the would've-should've-
could've syndrome.
So, I am very rigid about the stop loss, . . . . . . . and am certainly out if it hits.
Would be waiting on the sidelines though for an opportunity to reenter.

MONEY MANAGEMENT :
Basically, we use money management rules to restrict how much the market can
take away from us. Certain rules that we follow with discipline. Rules that are written
and implemented trade after trade, again and again. Rules that help us to stay with
the trend and to let profits run as long as possible. Rules that trigger off small losses
as compared to the big profits.
Like a warrior, this is the Code that a trader swears by, and adheres to, come what
may.
If his stop is triggerred, he is out, he does not sit there reasoning that the economy
is growing 15%, and the fundamentals of this company is great, and that it is
expecting good earnings. . . . . . . . . . . . If the stop is hit, that's it. He/She's out of
that trade. All thought therefore goes into the trade BEFORE the trade. No more
thoughts after the trade has been set in motion.
The mind is set into "NOW" mode, no more planning , no more thinking. When the
stop is hit, the trader is out, . . . . . . . . . . . and that's that!
But, there is more to money management other than stops. . . . . . . . stops is an
aspect of it. But there is more. . . . .
But before getting into it, just noticed that there always is this great amount of
blabber about the number of wins a trader has had, etc etc. . . . . . . . . . . . . . . So
before getting into things, felt that we all should realise one thing. We are in this
business to make profits, we are NOT in this business to win. . . . . . . you can have a
Batting Avg of 95% and lose out when you look at profits and losses. You can have a
Batting Avg of 30% and come out with stupendous profits by the end of the month.
How is that possible? Well, presume you make an average of Rs200 per trade for 19
trades, and lose Rs 5000 in the 20th trade, well, you are sitting pretty with a 95%
batting avg and a loss at the end of the month.
Presuming that you have made losses in 14 trades, an average of Rs 400 per trade,
and we made Rs 10, 000 in the other 6 trades, well, we are sitting with a profit at
the end of the month although we have been wrong 70% of the time.
So, it's not about about the number of wins that one makes, it's all about making
profits. . . . . . . . . . . . and that verily is the heart and core of money
We look at a trade, yummy, yummy trade. . . . . . . . . . a beautiful clean sideways
pattern just itching to breakout. Our plan is to buy the breakout and ride the trend ,
trail stopping upwards at every pivot low. Cool. So far so good. We now need to
ascertain how many shares we plan to buy. For example, the stop is Rs 20 away
from our entry point. Right, do we buy 10 shares (which means we lose Rs 200 if
stopped), or do we buy a 100 shares(which means we lose Rs 2000 if stopped), or a
1000 shares (which means we lose Rs 20000 if stopped)?
The amount of money lost if stopped is the risk on this trade. Don't let it get past
2% of your equity. Which means, first calculation is: How much Capital do I have in
my trading Account? (trad acct only, not the worth of your house and car and
jewellery all put together).
Let us say that I have 10 lakhs in my trading account, that means the maximum risk
that I can take on any single trade is :2% of 10 lakhs = 20, 000.
Which is to say that if I enter into a trade, and the trade goes against me, I will lose
Rs 20000.
So whether you paid 2.5 lakhs for that stock or not, you are not risking 2.5 lakhs,
but Rs0000, as that is where your stop is.
Now must it definitely be 2% of the capital. . . . . . . . . . . not necessarily. Can be
anywhere between 0.5-2%, but no more than that. I personally use 0. 75% of my
capital as a stop loss, but that is something you have to tweak to your comfort
levels. But, to stress again, no more than 2%!
So, therefore, first I look at my trading capital at the end of the month. I then assess
how much my risk would be the next month. For example, let us say I have 10 lakhs
at the end of July. Let us say I take 1% loss in each trade. Therefore for the month
of August, I would be risking Rs 10,000 per trade (to reiterate, that means the
amount lost if stopped out).
Now I have my ups and downs in August, and landed up in August with an equity of
10.5 lakhs, now my risk in the month of September would be 1% of 10.
5lakhs=10,500 per trade.
So too, if my equity had dropped that month to 9. 5 lakhs, then my risk of 1% for
the following month would be 9,500 per trade. . . . . . . . . . . . . . so on so forth!!
Right, I now know my trading capital, the amount of percentage risk that I am
willing to take, and the amount of money risked for the following month at the end of
each month. . . . . . . . . now how do I calculate share size:
Share Size=(% risk x trading capital) divided by (entry-predetermined stoploss)
So, therefore, we look at our charts, we get our entry point let us say 200, and our
stop loss is at 175. Now presuming our capital is 10 lakhs, and our percentage risk
per trade is 1%.
Therefore, Share Size=(1% of 10lakhs )divided by (200-175)
=10, 000 divided by 25
=400
Therefore in the above example we would buy 400 shares with an entry at 200 with
a predetermined stop loss at 175 . The max. we should lose in this trade if stopped
would be Rs 10,000/=

We have therefore gone about the importance of stops, and how vital it is for trading
success. We have realised that we are going to be laughing our hearts out to the
bank, so long as we take small losses, and let our profits ride. In short we look to
make big gains, at the risk of many small losses.
We have also discussed that there are many methods of placing stops. . . . the
important thing is to have stops and the discipline to adhere to them. So like we
discussed, we place our stops just a bit below the previous pivot low, and trail stop
upwards.

We had discussed the other day that the maximum risk per trade is2% preferably
lower. And yes Pranay, . . . . . . . if you are comfortable with a risk of 1% as stated
in the other example, yes, that would be 1% per trade. And to go over it again,
presuming that my trading capital is 10 lakhs( yes by that, we mean the money that
you have set aside for your trading. If you do derivatives and equities, calculate
them separately. By trading capital, we are not talking net worth. . . . simply the
money put aside for trading). . . . . . . . . . . . . . . . . first we calculate how much we
are willing to risk.
Therefore, if we are willing to risk no more than 1% per trade, that would mean 1%
of 10lakhs, ie Rs 10,000/= per trade. And therefore if our stop loss is Rs 20 away
from our entry price, we can therefore buy 10,000 divided by
20=500 shares.
However juicy the charts look, if our stop is Rs 20 away, and our risk is 1% on 10
lakh portfolio, then that's that, 500 shares. . . . . . no more no less.
Now coming to Pranay's valid doubt. . . . . . . . . . . . for one trade, we plan to risk no
more than 1%. Therefore, for 25 trades, we would be risking 25% of our portfolio,
right? NO. . . . . . . . . . Therefore another condition that has to be met. Else, we
would be right about placing our stops and right even about share sizing, but a huge
market move taking all stocks down would trigger all our stops.
And with it, a sizeable chunk of our portfolio. . . . . . . . . . . .
Now we come to another major part of money management that must be looked
into. . . . . . . . . . . just as how crucial having a predetermined stop is and proper
share sizing, this part is vital for the survival of our trading account and therefore
our survival as traders.
If we were to risk 2% per trade and we get into 20 stocks, a move down would
trigger all the 20 stops, . . . . . . . . we have put proper stops, great. . . . . . . . . . . . .
. . . . we have taken small losses, great. . . . . and yet, our account is down 40%. If
our trading capital was 10 lakhs, well 4 lakhs has vanished into thin air!!This is
unacceptable. . . . . . . . and unpardonable as far as the trader is concerned.
We therefore have another set of percentages in place so that we are protected from
market movements. . . . . . . . . . now what that percentage is basically comes back
to the individual trader and his comfort levels. There are many absolute truths in the
world of trading, but no absolute methods, all relative to what our psyche allows us.
For example, I believe that a 2% risk is just too much to bear, I am on the other
hand comfortable with a risk of 0.5-0.75%. . . . . . so there are as many methods as
there are traders. Basically tweak to your individual comfort levels.
Now what are these percentage rules of max risk that I am speaking of?
1. In an intraday position, take no more total risk than 4% in that day. Which
means that I would take no more than 4 trades at the same time. Why?
Because I am risking 1% per trade, and if I take more than 4 trades, I would
be risking more than 4% in that day.
Therefore, I enter into TISCO with my stop loss at the previous pivot low at a
risk of 1%. Then, I see a great setup in RIL, same thing as above. Now I see
a great trade in ITC , I grabbed that as well. Then a beauty in ACC. Now I
have 4 trades running simultaneously, and I risking 4% as of now. I then see
a great play in SBI. . . . . . But my rules prevent me from taking that 5th
trade, however juicy that set up.
Now I get a great move in TISCO and ACC, and that gives me the opportunity
to raise my stops in the two to breakeven. Now I can take SBI if it still looks
great. . . . . . . . if it has already run off, well, nothing can be done about it.
Missed money better than lost money!!
Also make sure you have your max percent loss in a week after which you
wouldn't trade any more, and your max percent loss in a month after which
you are no more than a by stander. If I lose 10%, that 's it. . . . I am out for
the month. Many put that figure to 6%, or 8%. . . . . . . . . once again, your
comfort levels.
2. In a swing position that may last up to 4-5 days, once again similar rules
come into play. I basically take a max risk of 6%. . . . . . . now why these
figures, well, basically no real reason except years of toying around and
tweaking it to comfort levels. As said before you will have to do the same.
 So, here again, a risk of 1% per trade allows me to take 6 swings that week.
Every time I am able to raise my stop to break even, I am allowed another
trade. Else that's that. . . . . . .
3. In a position trade, that can take up to weeks to months, I tend to take a
max risk of 12%, meaning that if you are taking a 1%risk per trade, max
number of stocks that can be got into is 12. And then, once you get to
breakeven stop in a trade, you are allowed to get into a new position, or add
to the previous position.
If you are the type that can take on a bigger amount of risk, fine. . . . . . . . but
total portfolio risk no greater than 20%. Greater than that, think you would be
fishing for trouble. So careful on that one.
It is very important that these rules are in place. . . . . . . . . . . very, very
important!! The percentages you as the trader will have to work out. But you
MUST have a stop, you MUST adhere to them, you MUST have a risk per trade
and share size accordingly, and you MUST have a max risk that you are willing to
take, after which you are going to pull the plugs. And you MUST have a point
where a bad day or month is accepted as it is . . . . . . . . and all trading comes to
an end. If you are out on the 15th day of the month, that does not mean that
you sleep and watch TV for the rest of the month. . . . . . . You come to work as
in every other day, you paper trade, and you do it till the end of the month. Your
first trade would be the first day of next month.
Discipline is discipline, and rules are rules. . . . . . . . . . . . These are like
commandments in the Holy Scriptures of the Trader. Not observing them is
sacrilege, a blasphemy. They, once drawn up, MUST be followed at all cost.
Is it a cash available for trading in trade account or total portfoilo amount i. e. Cash
+ including unrealised value of shares. Because if I bought 10 shares worth 1 lakh
this month but not sold then the cash will drop.
So please guide me.
Yes, that would be the cash in your trading account and the value of the shares at
the end of that month.
There's still more that one has to learn about Money management. . . . . . I hope this
is at least a start.
And 2 posts that one has to go through, one from Credit Violet, and another from
Swing Trader. . . . . . .
http://www. traderji. com/945-post1. html
http://www. traderji. com/23951-post1. html
I sincerely hope that one realises the importance of money management . . . . . . .
all the above is nothing but a start. It is vital to position size properly, vital to have a
max risk, vital to have a point after which one pulls the plugs. . . . . . . . .
Very, very important. . . . . . . . . this is the Holy Grail of Trading, knowing which
you have an edge over your rival, not knowing which, it's only a matter of time
before the market swallows your account with glee. .
As we had discussed previously, a successful trader who trades the ongoing trend of
the market is he who is able to stick with the present moment, the "now". . . . . . . . .
it really does not matter what our intellect tells us where the market is going or not
going, the fact is that it really does not matter what we think about the market. . . . .
. . . The reality is the market move in itself.
Our job as a trader trading the trends of the market is merely to latch on to a trend
and stay out of the forecasting business. The problem with this latching on to the
trend business is that we don't get to go to a party and show off all our stock
knowledge, fundamental/technical skills. . . . . . . . In this business, we practically
shut our brains and follow the trend. So no glitz or glamour in this, . . . . . . . . . . . . .
nothing to really show off. But you do have banking personnel running after you with
ideas on where you should put your money that is growing slowly and steadily in
your account!
We therefore use price as everything, now some will tell you of the importance of
Price and Time, etc. . . . . . . . . . . as maintained before, Trading Truth has as many
paths to it as there are traders, and to each his own.
Now using price, trendlines to give us warning signals, and pivots that tell us to jump
ship when that trend of that time frame is over, and some traditional tech chart
patterns, our job is nearly almost over. Coupled with a few indicators, and certain
patterns to keep a look out for, we are about done. . . .
Keep things as simple as possible. . . . . . . I know that isn't a style statement these
days especially amongst tech traders. . . . . . . . do your experimentation, and once
you have things figured out, keep things very simple.

WIDE RANGE BAR :

When you get a Wide Range Bar, especially out of a basing consolidating sideways
move, get ready for a big move in that direction. Don't expect it to pullback and give
you an opportunity to cimb aboard. Sometimes it does, but in many times, it keeps
exploding higher.
What is a WRB? Don't complicate things by adding more critria than the simple fact,
a bar that makes a wide move in that time frame and closing at or near the high of
that bar/candle.
The beauty of a WRB. . . . . . . . . . if you get one, buy the pullback, with a stop
below the low of that very bar. Else, buy the high of that bar. If we get a WRB, and it
reverses, a WRB failure is an ominous sign of a big move down.
Another thing to look at:a WRB with accompanying increase in volume out of a
sideways base.
And look out for a WRB that can happen after a big rally. . . . . . . . could signify a
turnaround soon.
Another example :In this case, Dabur had a huge uptrend, and then we get a WRB.
A WRB after a long run up should send alarm bells off as this could mean a possible
turn around, an intermed top.
Another example of a trade that we had taken a year back, based on the power of
the WRB.
Another example of a WRB that sounded out a possible end to this move up. . . . . .
this time from Alstom Projects.

http://www. traderji. com/56164-post1. html

Referring to the attached chart, can you please explain me the following queries?:
I placed all those "black coloured" buy/stoploss according to your theory, which I
hope are correct. I've doubts in those "Rose" coloured buy/stoploss.
Question1: If you notice those rose coloured ones,
a) they are placed according to your same "theory".
b) they are only at pullbacks
c) but as we can see they are placed somewhat in the middle of the "up trend",
which leads to breaking out of the stop loss very very soon, although the
uptrend is intact.
d) so both rose and black coloured ones are from the same theory, buy rose is
wrong (I guess) and blacks are correct. WHY IS IT SO? (or) How should
one behave in those "rose" coloured pullbacks?
Question2:In case of "stoploss3" where should be the stoploss exactly:
a) below the low of red bar or
b) below the low of green bar?
Question 1:Great question once again. . . . . . . . . . the chart that you had posted is
that of the daily chart. The question you have to ask is: Which time frame is it that
you are playing? If your answer is : Short term, then, you are out at Rose Coloured
Buy 5, once SL5 is taken out, so on so forth. Now if your answer is :Intermediate
term, then the black coloured Buys and SL's are correct.
Only thing is the one marked as SL 6 in rose colour, instead that could also be a
black coloured SL(intermediate).
Now once you get the move on a weekly chart, every pullback is a buying
opportunity (black ones). Every time we take out the previous pivot high, keep
raising stop losses to the immediate previous pivot low. So on so forth. . . . . . . . If
you are playing the weekly charts, and the intermed time frame, forget the rose
coloured ones. What you are looking out for, licking your lips, are those black
coloured ones.
Ques 2: Below the low of the green bar.
1. Refer to "chart 1". With reference to your comments above : "Every
time we take out the previous pivot high, keep raising stop losses to
the immediate previous pivot low". . . . Why do we need to wait for the
pivot high to be taken out? Is it not enough if we find a "valid pivot"
(which ofcourse is according to your pivot theory)? Because we might
be missing "great" profits, if downtrend begins.
2. Refer to "chart 2". As you had told, the pivots formed should be used
for stop loss depending upon our time frame. But how to find out
whether the pivot formed is valid for "our time frame" and should we
move the SL or not?
My view is that, we need to come to the conclusion depending upon
the pullback of the uptrend The minimum criteria would be :
"pullback be 1/3rd of the uptrend". Hence, with reference to the
attached chart, for medium time frame traders, the stop loss should be
"black coloured" stop losses, and not red coloured stop losses, as the
stoplosses at red coloured pivots are at lower pullbacks. What is your
comments, Saint?
3. Disadvantage of being a short term trader: Again refer to the Chart 2.
Consider a short term trader, who has entered into the trade after the
first black coloured SL1 according to your theory [at the beginning of
the red coloured line]. Hence his stoploss will be red coloured SL1. . . .
then SL2. He is out at SL2 when its taken out. If you see his net profit,
its a small amount, compared to the up trendline between black
coloured stoplosses SL1 and SL2 [actually it will be more clear in some
live chart]. Do you think its a limitation of being a short term
trader?
 1. Praveen, trailing stops are always in an uptrend that pulls back and resumes
in its journey. . . . . . therefore the line above, every time we take out the
previous pivot high, keep raising stop losses to that immed prev pivot low. In
your chart 1, you have drawn two possibilities, the reversal and the
resumption. As all trailing stops are, they are meant for only in a resumption
of an uptrend.
Once again, we have the start of an uptrend and it gives us a decline , an
entry point. We enter with a stop below the previous pivot low. The moment
we take out the prev pivot high, raise it to the immed pivot low, and so on so
forth.
2. Right, and a few indicators can help us with that as well. And some
retracement concepts. We'll be going through them later. . . . . but right
about the above depending on the time frame
3. No, my friend. . . . . . when you trade a weekly chart, an intermediate trend,
you would be entering with a bigger stop(because that's where the previous
pivot low is), which means that you would be buying lesser no. of shares. In a
short term play, you would be buying more shares as your previous pivot low
and therefore your stop is relatively near.
Position sizing is therefore of paramount importance.
Shorter the time frame, may be more the noise. . . . . . . but small move,
large move is taken care of by position sizing.
Many are ways to trail stop, the one below is using pivots. Trail stops are after we
have made an entry, and the trend moves in our favour. We use trail stops to take
as much of the move as possible.
Looking at some patterns other than the traditional h&s , double top, triangles, etc. .
. . . . we had a brief look in at Wide Range Bars. A wide range bar could be the start
of a big move up or down. After a long uptrend or downtrend, a WRB could be the
signal of the end of the move as well.
This goes in hourly charts, or smaller time frames than that as well. . . . . .

Can't we move up the stop loss to the immediate stop loss (which is just forming
now, say 75% complete, which has not taken out the previous pivot high yet)
which is about to take out the previous pivot high?" Why do we need to wait for the
previous pivot high to be taken out?
I remember your words in this thread, while explaining when to enter the trade:". . .
after three bearish candle, we had one bullish candle and we need to enter that trade
once the previous candles high is taken out and the previous low will be our stop
loss. . . . ". Haven't we found out pivot low here?
The whole idea of waiting for the previous pivot high to be taken out is to allow the
charts to tell us what to do. We would not want our intellect and mind to participate
in this exercise. We want our eyes to see the very obvious resumption in trend, we
want our eyes to see the previous pivot highs being taken out, and we want it to get
as automatic as possible.
When we raise the stop loss on getting a bullish candle after many multiple bearish
candles, prematurely thinking the pivot has been formed, only to see more bearish
candles the next few days and taking us out of the trade, that wouldn't be too smart
on our part, would it. . . . . . . . . . . . . . . as said before anticipating a pivot can be
detrimental for that trade.
What we want is to get in and stay in for as long as we possibly can. . . . . . . . .
allow therefore the previous pivot high to be taken out and then only raise stops.
Been there, done that, my friend. . . . . . . therefore this friendly piece of advice.
As for the question on the Entry, shall clarify it later with some charts.
Gap Analysis
We'll be going over money management, few things, at a later date. . . . . . . for
Gaps related stuff, have a look at http://www. stockcharts. com/education. . .
pAnalysis. html

FAILURE PATTERNS :
Simply put, it is a pattern that heads in the reverse direction than what is expected.
We expect a neckline of a H&S breakdown to be a bearish sign. We expect a trough
break from a Double Top to head south. We expect a Rising Wedge after an uptrend
to break down. We expect an Ascending Triangle breakout to head north. We expect
a WRB breaking out of a consolidation to initiate a move to the up. We expect a WRB
bearish candle in an established downtrend to resume its downtrend and make
newer lows.
A failure pattern is something that acts opposite to that which is expected.
An ascending triangle breaks down, that is a pattern failure. An ascending triangle
breaks out, and then the next bar negates the breakout bar. That is pattern failure.
A wrb breakout from a consolidation that gets negated(negation meaning the low of
the breakout bar is taken out), that is pattern failure. A neckline breakdown in a h&s
pattern reverts and goes back into the neckline, and takes out the high of the rt
shoulder. . . . . . that is pattern failure. So on so forth.
These are beauties to trade especially if one could go both ways in a trade. . . . . . . .
. . . . beauties because when everybody is looking for a breakout after a
consolidation, so are we all. But a negation of the bar sends everyone into the hope,
pray mode. Negation of the breakout bar sends us into caution mode. We are out of
that trade if the low of the breakout bar is taken out. But as the majority hope and
pray for something to happen, convincing themselves on how great this company is,
etc etc and the super fundamentals, and growing economy, etc, etc. . . . . . . . we
reverse positions and benefit from the move down.
Failure patterns break the expected move. . . . . . . . . . they SHOCK the trader
trading the preceeding move.
Learn to identify them, and get out of a trade when you see them in action. . . . . .
and reverse the trade to great profits.
In the example below, we have BOM DYEING giving us a sideways consolidation on
the daily charts, before we get a WRB gap-up breakout that initiated a move
upwards. With every newer pivot high, we have been trail stopping upwards. Then
we get a nice breakout bar to new highs, and an immediate slap down negation the
very next bar.
We have a Breakout Bar Failure. . . . . . If you were in this trade, get out the
moment the low of the previous breakout bar is taken out. If you weren't in the
trade but looked on at this mouth watering prospect of neat move down(all this if
you could go short). . . . . . . . . short the low of the breakout bar failure, and enjoy
the ride!
If you are not into looking through each and every thread in this forum, and
accidentally chanced upon this one. . . . . . . . . do have a look at the
belowmentioned thread by Ivan. Read it, absorb it, assimilate it. . . . .
http://www. traderji. com/equities/810. . . s-masters. html
Another pattern that does the trick, more so in the Indian mkts , again and again is
the pattern described below. Trading failure patterns was oh!so sweet in the US
markets, trading trends is the key to the markets here. But as all speculation is, and
gets, . . . . . . sometimes things get a bit overdone.
Have a look at the pattern given here. . . . . . . . . . . very useful for the markets
here!

http://www. stockcharts. com/education. . . ysis/barr. html

Assessing the trend using pivots is everything, but an indicator or two can be of
great help. I was first introduced by Karthik (karthikmarar) to TRIX, and the
divergences that it has thrown up gives me that confirmation as an added signal.
Also have a look at ADX, +DI, -DI . . . . . . . . . again a great help for a Trend
follower.
And of course the Moving Average , RSI and the Stochastics. . . . . . . . . . all this info
is there on stockcharts. com/education, and all over the web. Added info on TRIX, go
to TRIX Tricks by Karthik.
And of course, this forum is full of individuals who seem to know every nuance of
every indicator.
But do remember:Price is important, pivots tell us everything, indicators are more of
an add-on (good to have some around that tell us that we are on the right path!)
This thread was started with a view to expose a beginner to few things that become
what is day to day bread and butter for a position trader.
We sometimes tend to over complicate our lives, and we tend to complicate our
trading as well. We get into severe question mode and then we get into an "analysis
paralysis", . . . . . . . we seem to be more interested in getting ourselves the latest
indicator and the latest software than we are in trading them. Not that they are not
required, but they are meant as a means to an end. That end being, trading the
markets and making profits from the trading.
This thread ends here. . . . . . . abruptly I must say, but has to end here. For the
beginner having a look at the markets, I hope that this thread has exposed to what
trendlines, trends, pivots, chart patterns, etc are all about. I sincerely hope that you
have a look at www. stockcharts. com/education . . . . . . . practically all that is
needed for profitting from just eyeballing charts is there.
But the secret of massive profits lies in great entries, great exits and Money
Management. . . . . . . . . . . in our search for the Holy Grail to Trading, we
sometimes fail to realise that there actually is none. That verily is the Holy Grail, I
guess. . . . . . . . but getting thorough in Risk management concepts is the nearest
one gets to it!!
This thread has been all about trend following, and as said before, not predicting
them. . . . . . . . . . our job is to just go with the flow, our learning just to assess the
direction of the flow. You'll be surprised at the massive profits that one can make in
just going with the flow of the markets.
So, my friends, do keep things simple, get your trends right, put your money
management stuff in place, . . . . . . and allow the market to do the rest!
As said many times before, Ride the Trend and Enjoy the Ride!
Wishing you all the very best in your path to Trading Mastery and Trading Brilliance.
May you all always be students of the market, hope you continue your learning, and
hope you all rake in the moolah!!
Wishing you all the health, happiness, peace and prosperity in your lives!
1. How to deal with a sudden long bar with huge volume? This becomes
important when the stock is not "popular", etc. For eg. please look at the
attached charts.
2. What I'm thinking is we can exit when it reaches one pre-determined target,
say 5%. This 5% I think is getting achieved very easily in such kind of charts.
For eg. the scripts in the charts achieved 5% the next day. I've noticed some
stocks which behaves as explained above.
3. Does that 5% look like gambling? After all money making is the motto of a
trader, right? I agree that this is possible only if we trade in low volumes.
This can be helpful for small traders, say who trades with Rs. 1 lakh. , etc
Trading the trend is a different kettle of fish. . . . . . . . . one tries to get in on trend
reversal, and if not at least on some sort of a pullback, and then hopes to ride the
trend as long as possible till the trend in that time frame reverses. Easier said than
done, but it can be done, and to great profits.
In the case of BLUE BIRD, we have a downtrend followed by a high volume Wide
range bar that looks like the start of a new uptrend. What we now look for is a
pullback to form higher pivot lows, and then to new highs. Your entry point would be
half or a third, in the pullback, and the rest once it makes new highs with a stop at
this pivot low.
Playing 5% and 10% can sometimes get tricky. . . . . . one then tends to limit one's
profits and when the fall comes, one ends up holding on to the losses. So careful on
that one, my friend.
Best to let the profits run, and trail stop it. . . . . for example, Praj Inds, in its
breakout from the sideways consolidation is now a 100% up. Let it run , go with the
trend till the trend takes you out. Have some trail stop in place, that's it.
And, no, making profits having a definite entry, exit, money management systems in
place is never gambling. . . . . . . . Gambling is anticipating a dntrend and going
short in a strong uptrend. Gambling is going long a Sugar Stock that is in a clear cut
dntrend quite sure that the price that one gets in is the absolute bottom of that
stock. Gambling is not knowing whether to buy 1000 shares or 500 shares, and
buying a 1000 shares without knowing why. . . . . . . . . . gambling is basically doing
anything without a set method to the madness. The repeated, methodical and
systematic onslaught of the markets . . . . . nah, that's never gambling. Pure
Trading.

One doubt here. Please refer to the attached charts. You'd told in the beginning of
this thread during the discussion on pivots, that one can buy a half(or what ever),
once the previous pivot high is taken and not before. But here you are referring that
we can buy in the pullback, where actually the higher pivot low formation is still in
progress. Aren't we run in to problem if the pivot low formation doesn't happen and
the downtrend continues? Can you please clarify it?
Nothing to clarify, my friend. . . . . . . . . correct in your understanding. Best to let
the market show the way before an entry. I tend to take a small quantity in the
pullback though, and pile on in the breakout, but keep all that for later.
For now, allow the stock to breakout and pullback, buy once previous pivot highs are
taken out with a stop at the recent pivot low. Calculate the share size and that's
that. Breakout trading can have a higher win/loss ration, but whiplashes are
frequent, and ouch!, can be painful. . . . . . but all part of the game!