Some more points from discussion. This is a part of checklist.
* Use preferred indicator in
multiple TF. Trade has higher probability of success when indicator shows a valid signal in a higher TF.
* In trending market, use MA’s, MACD, ADX, Ichimoku.
* In sideways or a range bound market, use oscillators such as RSI or Stochastics.
* In a parabolic scenario, check for reversal basis Candlestick patterns, TD Sequential, Trendline break, divergence in momentum etc.
* Study possible entry and mark in advance key Support/Resistance levels and trend continuation.
* Use intermarket analysis. Bonds/Crude/Base Metals vs for further analysis to understand flow of funds.
* Additional analysis to gauge market direction and strength : PE Ratios, Volume, Market breadth, Put/Call Ratios and fundamental analysis.
Speaking to an acquaintance working for an FII based in Mumbai. Exchanged some notes (No discussion of trades - as that would be conflict of interest) Posting some tidbits of information on how FII's look to trade.
What indicators do professional technical traders use? Outside of MA's and Fibonacci, the most popular indicators for traders is RSI - Which is used by around 45% of traders. MACD is next around 20%, followed by Bollinger Bands used by around 10%.
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FII's desk trading basis technicals, do deep backtest of strategies going back several years to get a minute edge. First the testing goes back to a period of a decade, followed by another test (to validate the results) is applied to data of the last three years.
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Surprisingly, I understand that some conventional candlestick patterns used by retail traders are disregarded. One common example was a bullish engulfing candlestick pattern when the DMA was above 50MA. Unless this was accompanied by trading volume above 3rd quintiles, it was an avoid. Interestingly, a bullish engulfing pattern when DMA was below 50MA and had trading volume in the 3rd quintile, statistically provided higher return!!! (This could possibly be basis of heavy short covering!)
To improve upon such a trade, FII's do not look at one single pattern in a stock to take a position, but rather look across the market. When a group of 10 stocks or more to fulfill this criteria, it is consider as a valid trade. When this criteria is fulfilled across 20 stocks or more, the average return over a period of a week to a month was higher.
