Reported By:
| Edited By: Vijay L Bhambwani |Source: |Updated: Sep 15, 2017, 02:00 AM IST
In the first part of this series, we tackled the logistics and the mechanical aspects of online trading. In this concluding piece, we acquaint ourselves with the “nuts & bolts” of online trading. By the time you implement this part, you will have mastered the basic-to-intermediate aspects of high pressure trading, and can count on trading for a living. Some “practice” and “live and learn” lag time must be allowed for, though.
Inflection points - laser precision levels
We all know that profiting from trading means buying at the right prices and selling at the right prices. But are all price points created equal? The answer is an emphatic no. We created a setup where you tend to go long closer to a support level as specified in the Nifty hourly support table issued everyday. The resulting consistency in profits was far superior to the long positions initiated at random even in a raging bull market. Add the Fibonacci pivots and you know just exactly when a stock/ index/ commodity turns bullish during the day, what are your stop loss and profit-taking motive prices.
Pyramiding - a course in fuzzy logic
We are all geared to think that buying stocks at a hypothetical price of Rs100 means buying more at Rs90, even more at Rs80 and so on. We “pyramid” our positions - bigger quantities at declining prices. The object is to achieve a lower acquisition cost. This is a folly equal to financial hara-kiri (suicide) in day trading. You typically buy small at Rs 100 and buy bigger as prices climb higher. This is based on the logic that you bet more money on a winning horse, rather than pamper a loser of a stock with more of your monetary attention. Many beginners make the mistake of treating day trading at par with investing and end up losing dollops of cash. The difference is as stark as between chalk and cheese. When you are trading, you are not investing - you are merely betting on a share at a particular price. If you are long, you want prices to rise. Period. There should be no second thought and no long-term investment. Closing bell and your trade must be squared. End game.
A stitch in time
Online trading almost invariably implies day trading. Which means your idea of the long term is limited to the closing bell of the day. The way you look at things has to be compressed into shorter timeframes. What works in terms of charts, etc in swing trading will not work in day trading. Instead of daily/ weekly/ monthly charts, you will scan real-time, tick by tick, minute or half-hourly charts. More often than not, timeframes of over 30 minutes will mean lost opportunities. Slower moving oscillators should be jettisoned and focus should be on “faster” oscillators (Stochastic and Williams %R are good examples). In day trading, more than swing trading, greater emphasis must be on the price graphs themselves as oscillators are derived from the prices and not vice versa. Pay particular attention to signals like head & shoulders, triangles, channels and trendline breaks. Use the oscillators for confirmation rather than initiation of a trade.
Shaving
Ok, I am not referring to the Gillette type shaving, but a term that the pros use for day trading. This technique involves initiating a long trade at price X, with a pre-determined price called Y. Should you need to rethink the target objective, you will not stretch your entire position and wait for the new target to be achieved. You will “shave” - meaning sell progressively higher quantities as the price appreciates beyond the initial target objective. The logic behind this setup is simple. Whipsaws (false signals) tend to be more frequent on shorter duration charts as compared to longer duration charts. Online traders look at 5-minute charts and what fills up your screen on the Y axis, may be just Rs5 in monetary terms. Since you will be susceptible to false moves and routine volatility, you do not risk your entire profits and wait for the new target to be reached. This system ensures that a majority of your newfound gains are actually converted to cash.
Go with the flow
The rule of the (online) game is pretty cut and dried - an online trader tends to follow a market trend rather than create trends. If you have studied guerilla tactics, you know what I mean. You do not aim to own the skies, climbing a few hillocks will do as long as it happens consistently and with controlled risks. Online trading terminals flash the traded volumes and open interest on a real-time basis. If an upmove is occurring on lower volumes and falling open interest, remain assured, the ascent is on weak legs. Follow the big guns and bet your money only where big money is flowing in - high volumes and open interest.
Miscellaneous
A few words to round up this piece - trade highly liquid stocks where entry and exits are seamless. Poor liquidity counters tend to suffer from high impact costs and eat into your profits. In case you are going long, look for negative divergences beforehand. A practical example - when betting long on the Nifty, look for weakness in the CNX Midcap (barometer of retail risk appetite). If the mid-cap index is weak and the IT index is sluggish, too, avoid longs on the Nifty. The rally is on weak legs again. Avoid trading the last 10 minutes of the session as the volatility is almost the highest. Many day traders like yourself are closing their positions and balancing their books. It pays to retire a few minutes early. (Concluded)
