Saturday, 9 December 2017

Three possible price movements at the level

Let's discuss something about likely price behavior whenever it approaches a good support/resistance level or a decision point and how we can improve our success rate while trading at such level.

Whenever price approaches a good level, be it decision point or support/resistance, traders will be ready to trade at that level.  Majority of the traders normally believe there are only two possibilities, i.e. prices will either break that level or fail to break the level and in that process give them a trading opportunity.  If the prices are able to break the level, they will trade in the direction of the breakout.  If the prices fail to break the level, they will fade the breakout.  However, in trading, traders often tend to neglect one more possibility and that is prices doing nothing at that level.

There are always 3 possible ways prices will react at the level.
1) Prices able to successfully break the level and move subsequently in the direction of the breakout.
2) Prices may or may not make an attempt to break the level and fail.  After the failure, prices reverse the direction.
3) Prices don't do anything at the level and just move around the level spending time there.

Have a look at the below picture to understand these three possibilities price action wise,

If a trader likes to trade only a breakout, he/she needs to accept the fact that blindly trading breakout of the level can give success only 33.33% of the time.  Same way if a trader is focusing only on trading breakout failures, the likely success percentage will be only 33.33%.  So it is possible that rest of 66.67% of the time, prices will likely do opposite of what a trader did.

Now, in order to improve the probability of success in trading, much better than 33.33%, no matter what we trade, breakout or breakout failure, we are required to explore other important aspects of trading.  There are certain methods/patterns/tactics that we can use for confirmation of breakout or breakout failure to improve the success and take better trading decisions.  We also need to work on proper risk management, position sizing etc to improve the win ratio.  For an example, a trader trading only breakout will make sure risk reward ratio is at least 1:3 or 1:4 every time he/she takes the trade.  If a trader is tilted more towards proper position sizing, he/she will enter at breakout with least minimum quantity and if the trade moves in favor quickly then only will add more position upon price confirmation.  A trader will also work on proper money management by risking only certain percentage of capital (0.5% or 1% of capital) for each trade.

Thus, it is very important that we successfully apply price reading skills, confirmation, proper risk management and position sizing to each trade and improve our chances of making money substantially.

Wednesday, 6 December 2017

Nifty Future 06122017

It was an RBI event day.  Prices traded in a narrow range in the morning session.  It was difficult to short on break of BRN/PDL ahead of the event.  But once the event was out, it was possible to short at the same location.

Tuesday, 5 December 2017

Nifty Future 05122017

It opened full gap down with trend.  The first down move towards BRN was quick and sharp, difficult to catch.  After that BOF of BRN was a good setup to go for long.  In afternoon it again made an attempt to break BRN and failed giving another opportunity to go for a long trade.

Sunday, 3 December 2017

Thursday, 30 November 2017

Expiry Day

On expiry days, Nifty option strikes of 50s and 100s tend to work as a very prominent decision point.  Nifty future price will do something at these strikes for sure.  It will either get accepted or rejected there and provide us good opportunity to trade.  Today's price action on expiry day in Nifty future explains this very well.  Have a look,

Tuesday, 28 November 2017

Nifty Future 28112017

It traded in barb wire around BRN for majority of the day.  Rejection after BOF from range high/PDH was very quick to short at top of range but at range low it did give BPB setup to short which moved nicely.

Thursday, 23 November 2017

Nifty Future 23112017

Trade setups as marked on chart
1) Direct BO of Range High:  It seemed prices consolidated enough, yesterday as well as today in morning session, so a direct BO trade was possible to go long above it.  Also prices refused to trade below PDC.
2) BOF of PDH/Range High:  Prices got immediately rejected from PDH even after a good BO from consolidation, so this BOF was a good setup to short.
3) BOF of PDL:  Normally, it is difficult to go for a reversal trade after a straight line fall of 80 points.  After such fall, one would expect some consolidation or continuation of down move rather than reversal.  However, there appeared good liquidity pool just below PDL which would provide confidence to go for the long.

In case you are wondering what is High Volume Node.  It is nothing but the volume value area.  Volume value area is the price area where maximum trading activity takes place during the day. Often this volume value areas work as a support/resistance because this is the area where markets found value earlier.  In Amibroker, you can find it here, Window>Charts>Basic Charts>Volume at Price Multi.

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