Selecting Suitable Entry Orders

Determining which kind of order to use for an entry would depend on the nature of the model that generates the entry signals, and the market logic that underpins it:

·         A limit order can be used to enter at or near the retracement level and when you are expecting the market to bounce from that retracement level.

·         If you require some kind of confirmation before entering the market, a stop order might be a good choice.

·         A market order is suitable when the timing provided by the system is critical.

Two types of orders – entry at open or at close, and entry on stop – appear through out the study of various patterns in this post

Strategies Used in Exit

Money Management Exit

A money management exit is usually implemented using a stop order. Such a stop closes out at a specified price below (if long), or above (if short) the price at which the trade was entered.

Trailing Exits

Typically, a trailing exit is implemented with a so called trailing stop. The purpose behind this type of exit is to look in some of the profits from a trade. As the market moves further in favour of the trade, the trailing stop can be moved up if you are going long – or down, if in a short position – which is why it is called a trailing stop.

Profit Target Exits

A profit target exit is generally implemented with a limit order placed to exit the position when the market has moved by a specified amount in favour of the trade. For example, if a profit target of Rs 1,000 is set on a long trade on the Nifty, a sell at limit order has been placed.

Time Based Exits 

Time-based exits involve getting out of the market on a market order after having held the trade for a fixed period of time, usually at the time of the market close the same day, or on next day’s open, or after two days at the market close, etc.

Finally, all these exit strategies are for you to decide based on your trading patterns. For those who do only intraday trade, some of these strategies might be little tedious to implement as the movement involved with intraday trade is very fast and one needs to take quick decisions based on his or her individual trades. However, even on intraday trade these basics can work out to be the best keeping in mind and applying at the right time.
Talking on a personal level, I myself do intraday trading most of the times and find it little difficult in times especially when the market movement is too fast. At this time based on individual trading experiences applying what suits best for trade is advisable.

Remember, your ultimate goal is to come out as a Winner!

Entries and Exits

In this post we will examine various entry and exit methods used in trading.

Types of Entry Orders

Stop Orders

A stop order is an order to buy or sell a security or script once the price of the security or script reaches a specified price, known as the stop price. When the specified price is reached, the stop order becomes a market order.
a stop order enters a market that is already moving in the direction of the trade. A buy or sell is triggered when the market rises above a buy stop, or falls below a sell stop order.

Importance: A stop order can confirm that the market is moving in a favourable direction at the time of entry. If a particular stop order entry happens to be a good one, movement will cause the trade to quickly become profitable.

A highly unpleasant situation can arise when the entry order gets past the stop and the market then begins to reverse! Because an order is entered on a stop, market entry occurs at a poor price.

Consider another case wherein prices begin to move rapidly in favour of a trade. Buying and selling in to such movement is like jumping on to a fast moving train and is likely to result in large amounts of slippage; the faster the move, the greater the slippage. Slippage is the difference between the price at which the stop is set and the price at which the order is actually filled. Slippage is plainly undesirable as it eats into the profit generated by a trade.

Limit Orders

A limit order is an order to buy or to sell at a specified, or better, price. For a buy limit order to be filled the market must move below the limit price; for a sell order, the market must move above the limit price.

Importance 

The advantage of a limit order is that there is no slippage, and entry takes at a favourable and known price.
Consider this; the market never trades below X-1 points and moves in the desired direction considerably, whereas your limit order to buy is a X points.

Market Orders

A market order is a simple order to buy or sell at the current market price.

Importance

Once placed, a market order is the fastest to get executed. Another advantage is guaranteed execution; after a market order has been placed, entry into the trade will definitely take place.

The problem with the market order is that of possible slippage. However, in contrast to a stop order, slippage can go either way – sometimes in the trade’s favour, sometimes against it, depending on the market movement.

Short – term Price Patterns

Short – term Price Patterns

A short-term price pattern is an analysis of recent price action in terms of:

1.      Previous closes;

2.      Previous opens;

3.      Range size; and

4.      Moves off the open.

Price patterns attempt to qualify market action so as to test for a significant directional movement. Price patterns allow us to take large amounts of information about the market and condense it into workable units. Market action can thus be tested. The tendencies found within the testing period can then be used as a partial basis for taking real action in the market.

Many people reject the notion that market activity is repeatable or ordered, because they feel that patterns occur purely randomly. They believe that present trading conditions are much too unlike anything that happened in the past to make any type of valid comparison. The market has no memory and every situation is unique. There is a fallacy in this way of thinking. Every day and every market situation is indeed unique, however, there are common patterns which may be generalised, just as every person is unique, however, and generalities exist for all human. Everyone may not have the same likes and dislikes, but everyone has likes and dislikes.

Just like everyone has unique brain powers, however, we generalise them as A, A+ & B, B+ etc.
This example can be understood more deeply on my other blog which is all about individual soul, how they are all unique and how they have been provided by unlimited powers, how they can accomplish anything they want in life and how they can create all their dreams into physical reality through proper manifestations of their desires.

If you find this above paragraph interesting then visit the blog www.deep-mindcontrol.blogspot.com  to check it yourself and start applying it to your trading as well... To give you a clue, I do follow the same.
All right, coming back to price patterns again, price patterns evolve through the engine of greed and fear. The crowd’s emotions act in a predictable manner and are captured as chart patterns. This herd behaviour translates into directional movement that, in turn, translates into common, repeated and predictable elements.
Price patterns provide a complete, powerful method to locate opportunity regardless of market conditions. Since markets can not move upward to infinity, or downward below zero, well-marked patterns evolve within each time frame. An intelligent trader needs to recognize the various separate stages of the market’s evolution, learn the well-marked pattern cycle, and develop and discover the hidden language of price patterns.

There is no pattern, relationship, or indicator that will always turn out right. The best we can do is to aim at a high degree of accuracy as a limit. All patterns will have their losing episodes. When these come about, the disciplined trader will take his or her loss in stride and exit the trade. There is, to my mind, no other way to trade if you want to be successful over the long term.

And always remember Murphy’s Law: “Anything that can go wrong will go wrong” 

Our job is to make sure that we get out of the best under both circumstances and come out as a Winner!

Understanding the Patterns – Price

Price Patterns


Technical analysis, by its very nature, deals not in certainties but in probabilities. The key to success in trading lies in focusing – more often than not on what has already happened in the market. Too often investors buy and sell a stock not knowing whether it is in an uptrend or in a downtrend, near a top or near a bottom, or at a resistance or support level. That is where price patterns come in picture. Knowing what to look for as prices change helps the investor make better informed buy and sell decisions.

The four basic price patterns are:

Rising prices (Upside)
Declining prices (Downside)
Sideways prices, and
Repeating cycles of rising and falling prices.

Contrary to popular belief, you do not need to know what the price will be in the future to make money. Your goal should rather be to improve the odds of making trades. The use of technical analysis will give you an edge; an edge that you would not have gained without technical analysis, even if your analysis is as simple as determined the long intermediate and short term trends of the security you are trading.

Volume and Price

Volume breathes differently than does price. Volume as a tool works well on daily charts but consistently damages intraday signals. It offers both early warnings and dead ends, often at the same time. Volume reflects crowd psychology that often makes little sense in the short term but turns highly predictable at key intersections of trend and time. A successful trader needs to have an intelligent interpretation of the herd mentality that drives price change, develop an understanding of volume’s impact on the chart, learn when to use it and how to ignore it when required.

Opportunity arises from recognition of key volume events and a correct interpretation of the crowd behaviour. You need to invoke both left and right brain functions to measure the complex struggle between greed and fear. However, keep in mind that profits depend on price change alone. The price itself offers the best indicator for price changes through out the pattern cycles. As price rises, it predicts that further gains will follow. As it falls, odds increase that it will fall even further.

Precisely, this is what we call the market sentiments. Most or so to say maximum times it happens that if some large volume is sold out than all the investors of that particular script or let’s say stock start to decrease their volume by selling the hold positions and it works the other way round the same way i.e. if a large volume is purchased than investors start to hold positions thinking that it might rise in near future.

Here one thing to keep in mind that news play a vital role, most of the times investors specially the ones who have entered the market recently start following the pattern based on media news without deep study about the script and fall in trap, whereas, successful traders have their plan handy at all times before entering a trade.
Remember, as I conclude my every post saying your ultimate goal is to come out as a Winner!
 

Understanding the Market Structure

Market Structure


Investors keen to outperform the market – that is, investors looking for returns higher than the market average – take to active trading, employing various methods and strategies.

Active trading, including day trading, is better understood by distinguishing it from buy-and-hold investing. In buy-and-hold investing, investors disregard day-to-day market fluctuations essentially for two reasons: one, they believe that effects of short-term movements are really minor and, two, because they believe that short-term movements are almost impossible to predict with any degree of precision.
Active traders, on the other hand, are a different breed. Active traders are driven by the urge to look for profit potential in the market’s temporary trends, which means trying to sense a trend as it begins, and to predict the direction in which it would head in the near future.

However, a larger number of trades does not necessarily translate into greater profits. Outperforming the market, which is what active trading is all about, is not to be mistaken for doing many trades; rather, the focus is on maximizing opportunities by employing a conscious strategy.

What are Technical Indicators

Technical indicators are the squiggly lines often found above, below and on top of the price information on a technical chart. Indicators that use the same scale as prices are typically plotted on top of the price bars and are therefore referred to as “Overlays”

A technical indicator is a series of data points that are derived by applying a formula to the price data of a security. Price data includes any combination of the open high, low or close price over a period of time. Some indicators use only the closing prices, while others also incorporate volume and open interest into their formula. The price data is entered into the formula and a data point is produced.

For example, the average of three closing prices is one data point [5,200 + 5,300 + 5,400)/3 = 5,300]. However, one data point does not offer much information and does not make an indicator. A series of data points over a period of time is required to create valid reference points to enable analysis. By creating a time series of data points, a comparison can be made between the present and past levels. For analysis purposes, technical indicators are usually shown in a graphical form above or below a security’s price chart. Once shown in graphical form, an indicator can then be compared with the corresponding price chart of the security. Sometimes indicators are plotted overlaid on the price plot for a more direct comparison.

Technical Indicator Offers

A technical indicator offers a different perspective from which to analyse the price action. Some, such as moving averages, are derived from simple formulas and the mechanics are relatively easy to understand. Others, such as stochastic, have complex formulas and require more study to fully understand.
Technical indicators on the other hand, prove disappointing. I have personally tried many different indicators in the resent past and each one, in turn, has proved more disappointing than the other. May be it’s my individual perception and results may differ person to person. Perhaps for those who trade much longer time frames – weeks, months or years – some of the indicators may help, but for short-term traders there is not much help from most of these technical indicators. And virtually all indicators are correct after the day is over.