SH's trading the 'greater fool' zone

[NTrader42]

Excellent....manyyyyyyyyy..thanksssss....sh..
One doubt..if price candle goes outside envelope..then comes back but does not touch 15EMA..how do we handle such trade?

Hello Sanjay

Yes this scenario can happen, after booking profits at the envelop, we will have to re-enter if the price does not re-trace all the way to ema15, maybe we can use high/low of previous day etc. Lets request SH to guide us on how to handle this.

Also the trend can continue even without a small retrace. In the KF example given by SH we can see that the scrip kept falling for few candles even after breaching the envelop and then eventually went and touched the ema. The strategy SH has used in that case is to buy in tranches and not everything at once on the first touch and finally square off everything.

Besides these various scenarios between price and ema15, we also need to consider the impact on other rules, for e.g. how do we trade this along with the rule that define the behavior of the ema3 line.

I feel discussions like this, and inputs from SH will help us cover many if not all different cases. Requesting everyone to contribute in the process.

Thanks

 

[Tradewithhunter]

OK - one more example to show how this strategy can be used to make money in longs even in the worst performing stocks.

Posted below is Kingfisher daily charts, everyone knows how it has crashed from 70 to 20 within an year. However if you wanted to play longs in Kingfisher in last 1 year and make money .. where do you buy?

Answer is 'Buy when price gets to greater fool zone and book profits when 15 EMA reached'

I have plotted 15% around 17 SMA on Kingfisher futures daily charts. Green dots are where the stock could have been bought/accumulated for quick gains.

Red dots are where stock could have been shorted (its currently a good stock to shorts based on this strategy).

I hope these examples have helped you... post your own charts and I would like to see if you have understood the concept.

Cheers
SH

Hi Guys - When I posted the charts I said its a good stock to short as candle was above the envelope (KFA has been extremely bearish and finding price above the upper envelop is a golden chance to short again)

look at the charts now ... Kingfisher has fallen almost 10% in last 2 days ....

Cheers
SH

 

[sujittalukder]

Ton of thanks...

 

[trade4joisar]

Patni computers chart.

It is already fall in Market correction strategy i.e. has to touch 15 EMA now.

Today's CMP - 454
15 EMA 416

I have used 17 SMA envelope with 14% +/-

Your comments are welcome.

 

[FanaticTrader]

OK now ... how to create the 'greater fool's zone' for Indian markets?

What we need is an ability to draw up Moving Average envelopes around price charts. This is a normal indicator available on normal charting softwares and websites. I use Icharts.

Moving Average envelope is nothing but plotting an upper level and a lower level band around a particular moving average (much like bollinger bands). The zone falling within the envelop are called the 'traders zone' while zones outside the envelope is called 'Greater fool's zone'.

Different scrips and different timeframes require different width size of the envelope (defined as % points from the MA)

for example if we build a 10% envelope around 20 SMA on Reliance daily charts, it will plot levels 10% above and lower than 20 SMA on a daily basis. a contineous plotting will appear like a band (example chart attached).

Cardinal rules to build an effective envelope

Irrespective of which scrip or timeframe you want to build the envelope, you need to ensure:

1. The envelope has around 95% candles falling within the envelope &
2. approximately 5% candles outside of the envelope.

Above two conditions would define the width of the effective envelope.

How to trade 'greater fool's zone once we have built an effective envelope?

If we are in longs (for example based on 315 strategy), if we see the daily candle touching the upper band of the envelope (or going beyond it due to gap up) we can:

1. Hedge longs by buying some puts and wait for 15 EMA touch OR
2. Book longs completely and buy some calls in case the hysteria continues. We enter longs in futures again at 15 EMA touch
3. If the price we way outside the envelope, we exit long positions in futures/calls and open contrarion trades (open shorts or buy puts) and carry them as naked positions until 15 EMA is touched.

Visa versa for short positions.

I am attaching Nifty EOD charts, the effective envelope uses a 6% envelope against 17 SMA as it ensures only 5% candles are outside the envelope. We need atleast 250-300 candles to look back upon so I have chosed last 1 year chart.

I have also marked the 'greater fool's zone' where the trades as explained above could have been entered. (assume original positions based on 315)

Please review and let me know your thoughts. In coming days, I will post about other scrips and other timeframes except EOD.

http://img231.imageshack.us/img231/7496/niftyeod6envelope.jpg

Cheers
SH

Thanks for the wonderful S&R setup. I may have missed this point while reading but just wanted to know, what would be ideal SL (breach of low of candle making into band & high of candle making into band) ?

Rgds,
SH

 

[FanaticTrader]

Just an attempt to see if we can turn this into tracking on "Day-on-Day" follow up.

@ SH - No attempt to high-jack your thread Please feel free to delete in case you feel that my posts would prove any deviation from

Following is Reliance (Fut) chart with Band (17 SMA, 6%) and 15 EMA. Could this just raise to 800+ level (Currently 15 EMA stands at 803)?

Uploaded with ImageShack.us

 

[achopraa]

Just an attempt to see if we can turn this into tracking on "Day-on-Day" follow up.

@ SH - No attempt to high-jack your thread Please feel free to delete in case you feel that my posts would prove any deviation from

Following is Reliance (Fut) chart with Band (17 SMA, 6%) and 15 EMA. Could this just raise to 800+ level (Currently 15 EMA stands at 803)?

Uploaded with ImageShack.us

Hi,

I would say that make the settings as 17 & +/-8.5% . After the setup there should be 95% candles in the band and 5% outside whereas with the 6% settings, there is a lot of noise.

 

[ValueZone]

Patni computers chart.

It is already fall in Market correction strategy i.e. has to touch 15 EMA now.

Today's CMP - 454
15 EMA 416

I have used 17 SMA envelope with 14% +/-

Your comments are welcome.

It gave sell signal when it crossed the 400 level as per the envelope rules Now it is above 450.

Is it sell now only

 

[achopraa]

The intraday charts of any Time Frames are showing candles in the Fool's Zone.
Will be interesting to see how things take shape.

 

[galrani]

The intraday charts of any Time Frames are showing candles in the Fool's Zone.
Will be interesting to see how things take shape.

Todays Nifty upmove has taken it into fools zone and have entered into shorts.