We all know -Saint is transforming himself as TRAINER , so let me go through his view practical aspect of TA. HIS ASPECT STARTS WITH KISS
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1] A BACK UP ON TRADE SET UP
2] A BACK UP ON KNOWLEDGE
A) CHARTS ON VARIOUS TIMEFRAME-5min,15min/1hr/day/week/month
B) VARIOUS TYPE OF TIMEFRAME BASED TRADER-intraday ,small time EOD,position
C) candlestick,line chart
3] TREND - DEFINED , TREND CHANGE
4] MAJOR TREND VS NEAR TERM TREND-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.
5] SUPPORT /RESISTANCE AND PIVOT
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.
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 dntrendline 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.
The market moves in trends.We have an uptrend,downtrend and sideways trend.
=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).
=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.
=And about Supports,Resistances and Trendlines.
Now,before we go ahead with Gaps,and Chart patterns,etc.........let us take a breather.
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.
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!
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.
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.
As for the 2nd part of your question.........yes,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.
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.
.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.
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.
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set up :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 triggered.
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.
ctually Pivot is widely used concept in day trading. It involves calculating the Pivot, Resistance level R1,R2 and Support Level S1,S2. It is different from what we are trying to do in our Expert Advisor
Pivots are points where the trend is changing. In our case what we are trying to do is identify the peaks and bottoms in the trend (or the Pivots). Based on these Pivots we are trying to identify starting of an intermediate UP TREND.
The idea is like this. When the Trend is up it make peaks are which are higher the previous ones. Also the bottoms / Troughs are higher than the previous ones. In other words the trend make Higher Highs (HH) and Higher Lows (HL).
In the same manner in a down Trend the peaks and troughs are Lower than the previous ones. That is the Trend makes Lower Highs (LH) and Lower Lows (LL).
So far so good .. How does this help?
Normally in after a Downtrend we get a series of LH and LL. Then the Trend may consolidate and an Up trend may start which should provide a series of HH and HL.
So the point when the trend makes HH after a LH provides an indication the Trend MAY change. It is an alert only and not an indication to Buy. The trend change has to be CONFIRMED with other factors like volume, Resistance etc.
The same approach can be used to locate Up Trend, which resumes after a brief consolidation.
What our Expert Advisor does is to marks the HH, HL, LH and LL. It also marks the Alert points. Of course it is not perfect, but found it useful in most cases. the last leg of the ZigZag Indicator is Dynamic which I had mentioned in one of the posts.
Also I had mentioned about the the percentage. I found 2% to be working well in most cases, 4% is better for some the large movement stocks and 5% seems to be okay for weekly charts.
In fact I was trying to make the expert in such a way that we can enter the percentage. It involved creating a custom ZigZag indicator with input function.
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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.
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
1.Double Top :This pattern can happen on any time frame.........this halts the uptrend and starts a downtrend in that stock or index.
-Also called as M Top,coz it resembles an "M".
-If double tops are bearish,triple tops are even more so.
-Volume is higher on the first peak,and lesser inthe 2nd peak,and starts picking up on breakdown from the 2nd peak.
-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.
-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.
2.Double Bottom:Same as above,it halts a downtrend,and starts an uptrend in that stock or index.
-also called as "W"bottom.
REVERSAL PATTERNS (CONT.)
3. Head and Shoulders Pattern
---Bearish,reversal pattern signalling the end of the current uptrend.
---Basically looks like the silhouette of a human left shoulder,head and the right shoulder.
---Like 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.
---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
-Reverse of the above.
-reversal pattern that ends a downtrend.
-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 as Rahul pointed out a key difference,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.
REVERSAL PATTERNS(CONT.)
5.CUP WITH HANDLE FORMATION
-also a reversal pattern,but more obvious at the bottom rather than at the top.
-basically looks like a coffee cup with a handle.
-There is a basing stage,accumulation phase(cup),then a breakout,followed by a pullback,forming what looks like a handle.
-Breaking out of the top of the cup is confirmation of a change in trend.
-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.
-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
-Occurs at the top,rest all reverse of the above.
7.BROADENING FORMATION
-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.
-One more interesting feature:In a triangle,volume decreases within the pattern.In a Broadening Formation,volume expands along with wider price swings.
-This is a BEARISH pattern.
-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).
-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.
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7.BROADENING FORMATION (NOT TRADABLE)
-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.
-One more interesting feature:In a triangle,volume decreases within the pattern.In a Broadening Formation,volume expands along with wider price swings.
-This is a BEARISH pattern.
-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).
-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.
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.
TRADING THE RISING WEDGE:
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.
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.
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.
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 theweekly 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.
...............these basics are enough to give you sweet profits.
But 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 ReversalPatterns 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.
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a great Q : have been using some of the indicators.. as you have mentioned but one thing comes worth noting is that if we are trading daily charts then.. 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 one.
Ans: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,we do 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 826pts.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.
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Q2:1) 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.
Q3 :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.
- Another thing i noticed was that the price was always bouncing back on intermediate trend line( acting as support) and the short trend line went above the price pattern and number of time acted as the resistance level. Is this also common to see.
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.
And ,Yes,to the second doubt.
Now booking profit is up to u. If u are a trend follower you would book part profits when trend line is violated. then u would exit the rest when the previous pivot low is also taken as that would mean uptrend is in question. Remember trend is valid till the proof of evidence proves otherwise(as Martin pring says)
your stop loss should not be below as once the price moves so much above you should have had trailing stop losses. and in any case if it was below then also if u are a trend follower you should exit by now.
Now candlestick would be a different understanding. it depends where the small black candle has formed. Has it formed within the body of the previous white candle. Above it. Below it. If it has formed within the body then it could be a Harami pattern. above would be a evening star. all these need confirmation the next day.
Also, a confirmation just shows that current trend has ended. It does not tell us if it will reverse, it could move sideways. It might be a small correction a large one. Magnitude cannot be judged. Hence, candlesticks are more beneficial if used with other indicators. A confirmation with trend line being violated, or any other indicator turning negative is more useful. Though u can use it individually too but a confirmation is a must.
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1] A BACK UP ON TRADE SET UP
2] A BACK UP ON KNOWLEDGE
A) CHARTS ON VARIOUS TIMEFRAME-5min,15min/1hr/day/week/month
B) VARIOUS TYPE OF TIMEFRAME BASED TRADER-intraday ,small time EOD,position
C) candlestick,line chart
3] TREND - DEFINED , TREND CHANGE
4] MAJOR TREND VS NEAR TERM TREND-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.
5] SUPPORT /RESISTANCE AND PIVOT
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.
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 dntrendline 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.
The market moves in trends.We have an uptrend,downtrend and sideways trend.
=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).
=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.
=And about Supports,Resistances and Trendlines.
Now,before we go ahead with Gaps,and Chart patterns,etc.........let us take a breather.
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.
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!
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.
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.
As for the 2nd part of your question.........yes,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.
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.
.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.
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.
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set up :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 triggered.
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.
ctually Pivot is widely used concept in day trading. It involves calculating the Pivot, Resistance level R1,R2 and Support Level S1,S2. It is different from what we are trying to do in our Expert Advisor
Pivots are points where the trend is changing. In our case what we are trying to do is identify the peaks and bottoms in the trend (or the Pivots). Based on these Pivots we are trying to identify starting of an intermediate UP TREND.
The idea is like this. When the Trend is up it make peaks are which are higher the previous ones. Also the bottoms / Troughs are higher than the previous ones. In other words the trend make Higher Highs (HH) and Higher Lows (HL).
In the same manner in a down Trend the peaks and troughs are Lower than the previous ones. That is the Trend makes Lower Highs (LH) and Lower Lows (LL).
So far so good .. How does this help?
Normally in after a Downtrend we get a series of LH and LL. Then the Trend may consolidate and an Up trend may start which should provide a series of HH and HL.
So the point when the trend makes HH after a LH provides an indication the Trend MAY change. It is an alert only and not an indication to Buy. The trend change has to be CONFIRMED with other factors like volume, Resistance etc.
The same approach can be used to locate Up Trend, which resumes after a brief consolidation.
What our Expert Advisor does is to marks the HH, HL, LH and LL. It also marks the Alert points. Of course it is not perfect, but found it useful in most cases. the last leg of the ZigZag Indicator is Dynamic which I had mentioned in one of the posts.
Also I had mentioned about the the percentage. I found 2% to be working well in most cases, 4% is better for some the large movement stocks and 5% seems to be okay for weekly charts.
In fact I was trying to make the expert in such a way that we can enter the percentage. It involved creating a custom ZigZag indicator with input function.
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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.
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
1.Double Top :This pattern can happen on any time frame.........this halts the uptrend and starts a downtrend in that stock or index.
-Also called as M Top,coz it resembles an "M".
-If double tops are bearish,triple tops are even more so.
-Volume is higher on the first peak,and lesser inthe 2nd peak,and starts picking up on breakdown from the 2nd peak.
-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.
-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.
2.Double Bottom:Same as above,it halts a downtrend,and starts an uptrend in that stock or index.
-also called as "W"bottom.
REVERSAL PATTERNS (CONT.)
3. Head and Shoulders Pattern
---Bearish,reversal pattern signalling the end of the current uptrend.
---Basically looks like the silhouette of a human left shoulder,head and the right shoulder.
---Like 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.
---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
-Reverse of the above.
-reversal pattern that ends a downtrend.
-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 as Rahul pointed out a key difference,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.
REVERSAL PATTERNS(CONT.)
5.CUP WITH HANDLE FORMATION
-also a reversal pattern,but more obvious at the bottom rather than at the top.
-basically looks like a coffee cup with a handle.
-There is a basing stage,accumulation phase(cup),then a breakout,followed by a pullback,forming what looks like a handle.
-Breaking out of the top of the cup is confirmation of a change in trend.
-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.
-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
-Occurs at the top,rest all reverse of the above.
7.BROADENING FORMATION
-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.
-One more interesting feature:In a triangle,volume decreases within the pattern.In a Broadening Formation,volume expands along with wider price swings.
-This is a BEARISH pattern.
-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).
-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.
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7.BROADENING FORMATION (NOT TRADABLE)
-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.
-One more interesting feature:In a triangle,volume decreases within the pattern.In a Broadening Formation,volume expands along with wider price swings.
-This is a BEARISH pattern.
-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).
-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.
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.
TRADING THE RISING WEDGE:
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.
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.
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.
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 theweekly 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.
...............these basics are enough to give you sweet profits.
But 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 ReversalPatterns 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.
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a great Q : have been using some of the indicators.. as you have mentioned but one thing comes worth noting is that if we are trading daily charts then.. 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 one.
Ans: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,we do 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 826pts.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.
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Q2:1) 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.
Q3 :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.
- Another thing i noticed was that the price was always bouncing back on intermediate trend line( acting as support) and the short trend line went above the price pattern and number of time acted as the resistance level. Is this also common to see.
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.
And ,Yes,to the second doubt.
Now booking profit is up to u. If u are a trend follower you would book part profits when trend line is violated. then u would exit the rest when the previous pivot low is also taken as that would mean uptrend is in question. Remember trend is valid till the proof of evidence proves otherwise(as Martin pring says)
your stop loss should not be below as once the price moves so much above you should have had trailing stop losses. and in any case if it was below then also if u are a trend follower you should exit by now.
Now candlestick would be a different understanding. it depends where the small black candle has formed. Has it formed within the body of the previous white candle. Above it. Below it. If it has formed within the body then it could be a Harami pattern. above would be a evening star. all these need confirmation the next day.
Also, a confirmation just shows that current trend has ended. It does not tell us if it will reverse, it could move sideways. It might be a small correction a large one. Magnitude cannot be judged. Hence, candlesticks are more beneficial if used with other indicators. A confirmation with trend line being violated, or any other indicator turning negative is more useful. Though u can use it individually too but a confirmation is a must.
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ne 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.
