Why it is difficult to trade on tips given by others

RSI

Well-Known Member
#1
My interaction with another member in this forum in another thread made me to open this thread. Basically, to highlight the need for educating oneself in various aspects of trading (which many newbies do not even think about) and also to show why it is very difficult either to give tips or to receive tips. Also I want to highlight the perils of blindly acting on tips.
 

RSI

Well-Known Member
#2
I have given my views on DLF futures near month contract charts in next a few posts. That is basically addressed to that member with whom I had interaction as I stated above. To make him see some points which I wanted to highlight and also to compare my analysis with his analysis. But you can also go through it and make note of it. You can also post your views about these charts. If you disagree with my analysis or views, you are most welcome to post them here in this thread. I will be happy to learn from you. Had I posted all these posts in his thread, that would derail his thread. Therefore, I have opened this separate thread. Last but not least, I donot want to enter in to argument with tipsters in this forum. You can give as many tips as you want. All that I want to show the possible threats to the account of persons who act upon your tip. Or should I say acting without knowing the implication and nature of the tips given.
 

RSI

Well-Known Member
#3
I have attached herewith two charts of DLF futures near month contract. For the sake of easy reference, I have split the posts.

First one is weekly chart so as to give longer term perspective. See the weekly chart first



In the weekly chart you will notice that price has been moving down since the beginning of 2009 all the way up to March 2009 where it found support around Rs.120/- level. Notice that gap which happened during 2009 May (when UPA govt. was reelected). I have marked it in the chart. You may remember that BSE and NSE had hit up-circuit on that day during May 2009. You may also remember that gaps sometime serve as support (or resistance depending upon where they are located). Gaps denote excessive demand (or supply depending upon its location). But in case of DLF do you notice this demand being followed up? Notice that the candle which gapped up closed in the lower one third. That is clear selling. I have marked this candle with number 1. So smart money (or composite man as Wyckoffians would call it) has sold in to this demand. If they have sold it, then we can expect them to defend this resistance level in future. That is exactly what has happened. See eversince May 2009, price has not been able to move up in any meaningful manner creating meaningful profits for those who have entered long. This resistance level was successfully defended by the smart money at candle numbered 2. Donot be fooled by the slight upmove subsequent to candle number 2. That was on low volume only to suck early and over eager bulls and to force to cover weak shorts. That was just to clear all those buy stops from those who had shorted with stop just above the earlier resistance and also to suck those longs who have entered on the perceived breakout. They were sucked in nicely. How do you know? There are two evidences. Firstly, the slight upmove during October 2009 was on comparatively low volume and secondly it did not sustain for long. Price came back to the trading range very quickly and thereafter it fell to the level of gap created during May 2009. Candle numbered 3 clearly shows selling and candle numbered 4 shows how these people were sucked with loosing position by moving the price down rapidly. Look at the range of candle numbered 4. Anybody who had entered long on the perceived breakout and who had suffered loss had absolutely no chance of getting out (unless ofcourse if he is a seasoned trader and exited with stoploss). Those who wished and hoped that price will return to breakout level so that they can get out on break even were all left with loosing position fairly quickly. It is this sort of swift loosing moves that keeps the novices frozen and hesitant to cut down the losses by exiting with stop loss. But when the price moved down the gap level referred earlier (which had provided support once) offered support once again. You can see a trading range in the chart. I have marked this support level of the trading range with red horizontal line and resistance with blue horizontal line.

Down trend in simple term means lower highs and lower lows. I have marked the downtrend that ensued after this swift down move (with arrows and I have also marked lower highs and lower lows). Notice that this down trend is within a larger trading range. Price again approached this support level recently and this time also support held. True to the nature of trading range, volume went on decreasing right from its beginning up to the right hand side of the weekly chart. You must be aware of the perils of trading in a trading range. Price is now at the bottom 1/3rd of this trading range. Also pay attention to the range of candles in the last upmove (i.e. from June 2010 upmove). You can ignore the last candle in the weekly chart as the week has not been over yet.
So you have it. In the weekly chart, you can see a resistance and a support, which have been defended and these have resulted in a trading range. What do you feel? Is this trading range a distribution before next down move or an accumulation before making next upmove? Smart money (or composite man) uses trading range either to accumulate or to distribute. Trading has to be done in the direction of movement dictated by smart money. Lesser mortals like you and me can never ever afford to trade against smart money. Smart money buys the support and sells the resistance. But during the whole range it trades in such a manner that it accumulates (if it wants to move the price higher) or distributes (if it wants to move the price lower) depending upon what it wants to do in future. The purpose of trading range is to remove the potential supply from the weak hands when the real trend begins.
 

RSI

Well-Known Member
#4
Now to the daily chart. See it first.



Daily chart shows the last two swings in this trading range. I have marked them with arrows. First arrow shows the down move from resistance to support and the second arrow shows the upmove from support to resistance. I am not going to comment much on daily chart as it is self explanatory. But please note that the movements in shorter timeframe charts are controlled by larger timeframe charts. Intraday chart movements will be controlled by daily chart and that of daily chart will be controlled by the movements in higher timeframe charts (i.e. weekly and monthly charts) and so on. I stop here with my analysis. I might have missed some points, which you might have noticed. That shows that you are better than me. You will also notice that I have specifically restrained myself from saying possible future price movement of DLF chart and much less about any trade opportunities. I have left these to you for your analysis and discretion. Why I have opted for such a recourse will be clear to you when you read my next post.
 

RSI

Well-Known Member
#5
Now here are the points which you have to decide by yourself. What is action that you are going to take when you analyse the right edge of the chart? Answer to that question will depend upon (1) What is the timeframe of your trading? (2) What is your account size? (3) What are your risk parameters? (4) How much loss can you tolerate? (5) What is your temperament? (6) How soon or late do you expect your intended move will take? (7) What is your target? (8) How do you enter and where will you enter? (9) How will you exit, if you enter? I mean, when, how and where? These are only SOME of the questions that you need to answer.
 

RSI

Well-Known Member
#6
If someone says buy XYZ at Rs.xxxx for a target of Rs.xxxx, (that is the usual nature of tips in this forum and elsewhere) how can you decide on what basis that tipster is recommending it? Is it for scalping, is for swing trading, is it for day trading or is it for positional trading? I rarely see something called stoploss in these tips. But even if one mentions the stoploss, do you know on what basis that has been given? If the tip is for swing trade XYZ and if you opt for scalping, results could be horrible. Similarly, the tipster will be giving tips suitable to his trading style and parameters (if at all he trades). If the tipster is a day trader, he will be giving tips suitable to day trading and in accordance with his trading parameters. But your trading style, account size, risk tolerance and temperament is totally different from that of the tipster. How are you going to reconcile these differences, if you choose to act on tips? More importantly are you aware of these differences? By the way, if you know how to trade, do you really need these tips?
 

RSI

Well-Known Member
#7
That brings me to the next point. Education. Educating oneself before committing hard earned money. Knowing ones temperament and trading style thoroughly before committing serious amount of money in real trades. But I agree with those who say that real trade (i.e. putting money on real trades) is the only way to test and understand ones temperament and thought process. But my humble suggestion is while learning, put only a very small portion of money in your trading account online. Only when you find a successful method of trading suitable to you then only increase your stake. Otherwise you would loose all your hard earned money and you will join the majority, i.e. 90% losers camp. They are the persons who quit saying that trading is gambling.
I sincerely hope this series of posts are of some help.
Thanks and regards
R. S. Iyer
 
#9
That brings me to the next point. Education. Educating oneself before committing hard earned money. Knowing ones temperament and trading style thoroughly before committing serious amount of money in real trades. But I agree with those who say that real trade (i.e. putting money on real trades) is the only way to test and understand ones temperament and thought process. But my humble suggestion is while learning, put only a very small portion of money in your trading account online. Only when you find a successful method of trading suitable to you then only increase your stake. Otherwise you would loose all your hard earned money and you will join the majority, i.e. 90% losers camp. They are the persons who quit saying that trading is gambling.
I sincerely hope this series of posts are of some help.
Thanks and regards
R. S. Iyer
I completely agree with your views Mr.Iyer....but very less people think on such lines and make it synonymous to gambling.....