Hello Friends,

As the famous Chinese Proverb goes, "Give a man a fish, you feed him for a day. Teach a man to fish and you feed him
for a lifetime."
This thread is a result of multiple emails from fellow members with a desire to learn how to trade, rather than to just take the calls here and
there. This thread may not catch the interest of many, as the "many" are always interested in the 'fish' rather than learning how to. But this
thread is intended for the few the few that want to learn or at least make a beginning to learn how to trade, the few that do not wish to
bow to any other individual or organization as authority when it comes to decision making but instead wish to come to these decisions by
himself/herself.
This thread will be of no help to those who make trading decisions based on fundamentals. This thread will be of no help to the many that
wish to know what this company did or what was the news when a stock broke out.
This thread is for the newcomer to charts and who has that desire to learn. It is for the student of the market by a student of the market. I
am no master, no teacher, no expert, all words that I abhor this thread is to my friends who want to learn from a friend who is just
sharing what little he knows.
Before we get started, please have a back up in anything and everything related to trading. If you trade online, at least two computers, two
internet access, cable and dsl. In India, think you guys better have an Inverter as well. All this of course for the Intraday traders. Of course,
your broker's phone no. must be easily accessible as well if you have to take that route. Basically a back up in everything.
Of course, your charts as well, the greatest weapon of the trader!!
Okay, let's get started
Just have a look at the attachment at the end looks like a familiar story for many of us. The successful trader does exactly the opposite
as stated below He has something that gives him an edge over the others. He has that something that tells him when to get in, when to
stay out and when to accept a mistake He has his charts and the knowledge of how to use it.
What are these charts? A chart of Reliance is not the chart of the company, but the chart of the investor and trader emotions in that
company. A chart tells us about the whole play of fear and greed, again and again, all over again. The chart of a particular time frame is
therefore a study of fear and greed in the particular company or market in that time frame.
Various types of traders based on their time frame
Day Trader: He trades intraday. He buy and sells, shorts and covers within that day. He closes all positions by the end of the day. He takes
no risks overnight. He basically uses the 5 and 10 min charts for his trading with the 15min and the 60 min charts as backdrop.
Swing Trader: A trader who trades the daily charts, fine tuning his entry using the 60min charts. His trades last 2 - 5 days.
Position Trader: Nearly equivalent to investing, but nearly can be an important distinction. He trades the weekly charts which means he
holds trades from weeks to months.

Most important thing that we all have to remember, Trading is very simple. Our minds being complicated is the reason why
we try to over complicate a simple thing. So as in anything simple, we try to leave it as simple as we can.

There are various types of charts

Line Charts
Bar Charts &
Japanese Candlesticks Charts
Basically your preference, whatever you are most comfortable with. I personally use the Candlestick charts because it makes it more
visually obvious to me. I have to strain to see the same in a bar chart. But basically upto you ...
Whether we take a bar chart or a candlestick chart, each bar/candle tells us of the Open, Close, High and Low of that particular time frame.
Therefore, in a daily chart, the high is the high of the day, the close being the close of that day. But in a 15 min chart, each bar represents
the trade in a 15 minute time frame, therefore the high of that bar is of course the 15minute high ... so on so forth.

We have three trends

UPTREND: An uptrend on a chart of any time frame is nothing but a series of higher highs and higher lows.
DOWNTREND: A downtrend on a chart of any time frame is nothing but a series of lower highs and lower lows.
SIDEWAYS TREND: A sideways trend is nothing but relatively equal highs and lows.
TRENDLINES
An UPTRENDLINE is nothing but a line that connects two or more LOWS, in a chart in an uptrend. The more points that meet up to this
line, the stronger this line is. This trendline acts as support, as prices blast off, then pullback to this line before taking off again. Therefore,
in an UPTRENDLINE, the 2nd point is always higher than the 1st point, and the 3rd higher than the 2nd.

A DOWNTRENDLINE is nothing but a line that connects two or more highs in a downtrend. Once again, the more number of points that
connect, the stronger the line is. This downtrendline acts as resistance. Each down move is followed by a pullback rally to this trendline
which acts as resistance only to be met with more selling and lower prices. In DOWNTRENDLINE, the 2nd point is always lower than the
1st, and the 3rd lower than the 2nd.
A break in the UPTRENDLINE signals a possible change in trend. So too with the break in the DOWNTRENDLINE.
Just have a look at the attachments below nothing like a picture to make things look better

UPTREND LINE

DOWNTREND STOCK

We had discussed yesterday that trend has three directions, that is: Uptrend, Downtrend, Sideways Trend.
An example I had given many times just has to be repeated here Look at your right hand with the palm facing you. First we have the
little finger. The Ring Finger takes out the high of the little finger and therefore makes a higher high and low as compared to the little
finger. The middle finger makes a higher high and higher low as compared to the ring finger. We have therefore an uptrend. The index
finger makes a lower high and a lower low as compared to the middle finger. The thumb makes a lower high and low as compared to the
index finger. We have therefore a downtrend.
Just as a trend can be classified according to the direction, so too can we categorise trends into 3 categories
1) MAJOR
2) INTERMEDIATE &
3) NEAR TERM TRENDS
Simply put, major trends last for greater than 6 months. Intermediate trends last between 3 weeks to 6 months. Near term trends last from
a few days to 3weeks.
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 catastrophic crash on the daily may be nothing but a monthly
pullback.

It is important as traders to know these different time frames and trade accordingly. The practical aspects of profiting from this knowledge,
we can come to later.
For now, we don't know much but a step at a time for now. We have our charts. All we know is that in any chart of any time frame, we
can have only 3 possibilities in direction, and only 3 possibilities in categorisation. The eye can only see what the brain knows these
early days are to be spent in teaching the brain so that the eye sees the pattern from a mile. Pour over your charts and train yourself in
detecting which trend the stock is in currently. It is a first step but an important first step.
Just a few charts
Below is the chart of POLYPLEX CORP just denoting how the trendlines are drawn.
The Uptrendlines therefore act as Support, once cracked to the downside, notice how the Downtrendlines act as resistance.
In what way does this knowledge help us in our trading? We detect a change in downtrend, and we enter the stock, once again using all
that we have learnt so far. The trendlines allow us to stay in that trade as long as the trendlines hold.
The moment we get a close below the Uptrendline, we are out. If you are looking to short, wait for a feeble rally towards the former
uptrendline. That's an area to short.
Vice versa for the downtrendlines Have a look at the 2nd chart of POLYPLEX, self explanatory.

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. Not saying that BEML will not see new highs, but that BEML
will take more doing unlike before to see new highs again.
All the other pullbacks, BUY the declines. But pullbacks like these, best to stay away until it does something that will make us interested
again.

TRENDS
PRIMARY TRENDS
The Primary Trends are what we in common parlance state as "Bull market" or "Bear Market". Just as a Secular Uptrend is made up of
several primary uptrends and downtrends, the Primary Uptrend is made up of several intermediate uptrends and downtrends. Vice versa
for the Primary Downtrend.
As we had discussed before, a Primary Uptrend is of greater magnitude and duration if in the broader picture, we are also in a Secular
Uptrend. A Primary Downtrend would be of shorter magnitude and duration if it happens in a Secular Uptrend.
So too, in a Secular Downtrend, the Primary Downtrends are of greater magnitude and duration as compared to the Primary Uptrends.
Just take a look at the two charts of the Nikkei and Sensex in the Trend Questions by Members page to get things clear.
A Primary Trend lasts anywhere between 9mths and 2 1/2 yrs.
INTERMEDIATE TRENDS
So too, an intermediate uptrend is made up of several short term trends. Again, if we are in a Primary Uptrend, the Intermediate Uptrends
are of greater magnitude and duration as compared to the Intermediate Downtrends.
Vice versa in a Primary Downtrend.
An intermediate trend can last anywhere between 6 weeks to 9 mths.

QUESTION
I have been following this thread since the beginning and as a beginner i have a learnt a lot. But I have difficulties in recognizing the trend.
Some charts are so messy, I cannot get any clear pattern.
1) For example, please have a look at the chart of Bank of India which is below
In the chart, the stock makes higher lows which might be an uptrend but again it makes lower highs which can be a downtrend. What kind
of trend is this? I think as long as it will not break the support, its in an uptrend. Am i correct? Anyway is it advisable for an investor to
enter that stock which is forming lower and lower highs.
2) Next query is on Andhra Bank. Please see the chart
It was in a downtrend since late July and recently there is a small rally but it did not still cross the downtrend line no. 1 ( the one in red
which is drawn from the high of July to the high of January)
But if we consider another downtrend line no. 2 ( the one in black from the high of Jan to the high of late Feb) then there is a breakout
above the downtrend line. Now which trendline should an investor consider. Or should the investor take into consideration another
trendline (in red) which is below trendline no. 2 considering the fact that 'more the points which connect a trendline the more stronger the
trendline' as u said in a previous post.

REPLY BY SAINT
As for BANK OF INDIA, you are right. There really is no clearly discernable trend on the daily charts. In sideways trend. For a clearer
perspective, open up your weekly charts of BOI. We are still in an uptrend, still higher pivot highs and lows. The week ending Feb 10th,
we got a pivot low there at 118.So far that is our previous pivot low. That would be where our stop would be if you are in this trade.
(Always, give it some room, so the stop is at 118-1=117). A break of 117 and this uptrend is in question. So long as this area holds, BOI is
still in an uptrend. Now, as for new entries into BOI is another matter, watch for a pullback or more sideways pattern to enter. Look out for
that trendline. If that trendline holds, good area to buy. Cracking that trendline to the down, and again, this uptrend on the weekly charts is
in question.

Being an investor, you are looking at medium to long time frame. For a clearer perspective, always look at your weekly charts. We have
lower pivot highs and lows ,basically still a downtrend on the weekly. Trendline 1 as drawn by you is more or less correct. Not Trendline 2
the more points, meaning the more pivot highs that it connects in a downtrend line the stronger that trendline becomes. Trendline 2 is
connecting all the highs, not the pivot highs, so inaccurate from a daily/weekly chart perspective. But for an intraday to few days
perspective, not wrong. That trendline can be traded a break above that trendline is a buy. But that doesn't mean we are in an uptrend.
Just good for 1 - 2 days sniper attack on the intradays.
We basically need a breakout over 106 to say that we are headed back into an uptrend. For now, it's downtrend on the daily/weekly And
Bank.
Great going, my friend. A questioning mind is a mind that is learning. Feel free to ask your doubts. Shall answer to the best of my capacity.

QUESTION
Anyway, in the case of Andhra Bank, u said it should cross 106, how could u calculate that figure? Is it a figure which the trendline meets
when extended towards the price axis. I thought it should break at least 110 which is the previous pivot high. Please correct me if I am
wrong.

REPLY BY SAINT
Yep, basically whenever that trendline breaks to the Up. If we are going to remain in this downtrend for more time, then that figure will
keep coming downwards.
106 is the break over the trendline which gives us an indication that things are moving to the up. Yes, right you are, the previous pivot high
is 110 and over that is confirmation that we are in an uptrend.

QUESTION
Yes, got it!! That means, if it goes above 106 then the uptrend is in question and it will be in our watchlist and we wait for it to cross 110 ,
which is when we will be sure of the uptrend and we are in trade.

REPLY BY SAINT
Yep, you got it but just a correction of language so that we are both on the same page.
A break above 106 and we have a possible uptrend, the previous downtrend is in question. A break over 110 is confirmation.

QUESTION

As you have explained in your earlier posts, we should follow the trendline. We will be able to spot the change of direction in trendline
after market hours. While one is buying a stock which is in uptrend, even when we buy it after delaying it by a day, we will still be able to
ride the trend and be able to make some money (our ultimate aim). But how to judge the downtrend of the stock during market hours?
Why I am asking this is when we analyse the charts after market hours and come to the conclusion that the particular stock is in
downtrend, we will not be able to sell it. By next day, it may have fallen further and we may have lost some more money. Please explain
the methods one can adopt during market hours to judge downtrend so that we can limit our loss or sell it while we have considerable
profit?

REPLY BY SAINT
If you have been playing that trendline, let us say, you've been buying each time the stock pulls back to the trendline and your idea was to
stay in that stock so long that uptrendline holds. So far so good as long as the uptrendline holds.
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 but I agree
with you, what would you do, while watching that stock intraday, it cracked to the down. It may or may not close below the trendline, but
what would you do in such a case? Stick with the plan your idea is to get out on a break of trendline. Get out if it breaks. If by the end
of day, the stock does not close below the trendline, no problem, that means the trendlines are still valid and you look to re-enter.

QUESTION
Please clear something for me. We are in a uptrend and i am in the trade. Do I get out once the up trend line is broken or if it makes a
lower pivot low. Does this depend on our trading strategy. Cause if we wait it to make a lower pivot low or even go down as far the
previous pivot we have lost our profits if we had entered the trade when it started moving up from the previous pivot low. Or is this the
trade off we have to take in the market

REPLY BY SAINT
As you rightly pointed out, depends on your strategy. 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.
Just have a look at Satyam below I had been playing the trendlines all along. Had been in it from late Sept till date. That ugly move last
Friday took out half my position, but still in back half as the previous pivot lows were not cracked yet. If you got out full on Friday, you
would not have been wrong either.

QUESTION
Also if we are in a down trend and it breaks above the trend line and moves up. Do we enter now and we let it make a higher pivot low.
Because the higher pivot low might be very high and we loose out on profits. Also, how much of a correction would u call a pivot. Could
you please attach a file of the smallest correction you would consider a pivot.

REPLY BY SAINT
Same as above. Buy the break above the down trendline, But buy half. Why? Quite a lot of false breakouts. So buy half and then add the
other half when we get a pullback forming a higher pivot low.

QUESTION
For drawing the trendlines, these are drawn on the arithmetic scale, or do you use the logarithmic? I have Metastock and I noticed the two.
So just wondering, which you use.

REPLY BY SAINT
There are two types of scales: a) Arithmetic b) Semi-logarithmic
An arithmetic scale displays the price levels evenly in rupee terms as they move up. So therefore, a Rs.10 move from 10-20 or from 100110 or from 500-510 will look the same as they are all a difference of Rs.10.
A semi-log scale displays price levels in percentage terms as they move up. A move from Rs.10 to Rs.20 is a 100% gain will look larger
than a move from Rs.100-110 is a 10% gain or a move from Rs.500-510 which is only a 2% gain.
I use the semi-log scale try it out, the rise looks smoother and the trendlines fit all the way. Which also means that a break in trendline
is cause for some action.
On Metastock, go to the Y-AXIS of your charts. Right click it. Go to Y AXIS Properties. Tick the Semi-Log scale. Click apply. That's it.

QUESTION
With my limited knowledge got from you I analysed the following stock of Morarka Finance and found it in an up trend mood and gaining
momentum. Am i correct? Please verify with the attached image and reply.

REPLY BY SAINT

Most importantly, pour through thousands of charts. A day comes when patterns jump out of charts and grab your attention.
On MORARKA FINANCE, first look at the weekly charts so as to get a proper perspective. Attached below the weekly charts. Basically
in sideways trend. Don't try to draw trendlines in a sideways trend-up or down. So far we are having equal pivot highs and lows from
March 2005 till date. It tried to put in a breakout in Sept 2005 only to be brought back to the sideways range.
Once it puts in an uptrend again, then you are back to drawing trendlines again.

QUESTION
Everything seems okay to me but trendline break and previous pivot low are two things we used intermittently. I assume that both are one
and same.
Whenever the previous pivot low is broken then Uptrend is in question, so do we get out of the trade.
Here in this context what is trendline break, is it small crack in the uptrend move, I mean is it a decline or anything else. When I looked at
the weekly charts on Satyam (7th Apr), its a small decline. Saint, please add If I am missing out anything.

REPLY BY SAINT
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 tell us 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.
But you must understand this, a break in the uptrendline is not a downtrend. It puts that run up in question.

QUESTION
Please tell me something to draw trendlines. At times, we see a tick the price action is or real body is very small but the fluctuation is very
large. So we draw the trendline near the opening closing or at the bottom of the tick. I was seeing Riddhi Siddhi. The price opened close
above 230 but the tick is till 210. So where should the trend line be for such fluctuations.

REPLY BY SAINT
Connect two or more lows, then extend that line, you will notice many times the price trying to break through the trendline but forming a
tail and still having its body within that trendline.
Go with the eye.........

QUESTION
Is there a reason why 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 repetitions 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?

REPLY BY SAINT
My mind does not work in the "why something happens" mode, and therefore I may not be the best to answer it but I wonder if these
patterns and lines develop because we are all looking at the same thing and drawing the same lines.
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, my friend....

QUESTION
Lets say we are in a trade at Rs.500. The stock rallies and then reaches 550. All this while creating higher tops higher lows. On the daily
chart however we see that there is a small black candle. Lets say this is because it closed at 550 yesterday and today has closed at 540.
What do we do now?
Weekly charts our pivot is at 500 and the stop is obviously at lower levels ... how do we confirm or in other words verify that this is not
the start of a downtrend.

REPLY BY RAHUL
(ACKNOWLEDGED BY SAINT)

Quote:

On the daily chart however we see that there is a small black candle. Lets say this is because it closed at 550 yesterday and today has closed
Hi sorry to answer this as u had posted it to Saint. First of all black candle is not formed cause the day close is below the previous day
close. A black candle forms if the close is below todays open itself.
Quote:

What do we do now? Weekly charts our pivot is at 500 and the stop is obviously at lower levels ... how do we confirm or in other words ver
this is not the start of a downtrend.

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.

QUESTION
Was going through the weekly charts of Tata Steel. And to my untrained eye, it seems like the long term trend in Tata Steel is still intact ...
the reason: the trend line drawn from 05/21/04 still holds and it looks like this line is a strong support.
It tried to breach this line on 08/27/04..and again on 11/04/05 and also a few days back and it looks this line is a strong support! However,
it is not in an uptrend ... lower pivots lower lows ... since the top 700+ ... so ideally what should i do now? My logic says buy 50% because
i am not sure this trend line will hold and also because it is not in an upward trend! Again saint please take your time.. Also please excuse
me if you find this question too easy or lame to be answered. I could not attach the graph coz I am not sure how to attach a graph from
adget n metastock..!

REPLY BY SAINT
I am sorry, my friend, but I wish I could see what you are looking at in the TISCO charts. As it is difficult to post what you see, have a
look at the attachment below. Hope it answers a few doubts ... TISCO is still in a long term uptrend, but still in an intermediate downtrend
more has to happen before we get truly bullish again. Once again, we are talking about traders, not investors.
This retracement puts a doubt in the head if this truly can be classified as an intermediate downtrend we will know in due course of

time. A rally is in the offing, but I truly doubt if TISCO is going to take out highs and form new highs in the upcoming rally.
So therefore, if you are planning an intermediate trade long, stay clear now. Short term is another matter.

QUESTION
If you look at the charts of Bombay Dyeing & Bajaj Hindustan, on the daily charts, both are showing an uptrend. But, if you look at the
weekly charts, then the previous pivots have not been taken out.
So, as a "Short term" trader, what should one do? Buy now or wait for the weekly trend to get confirmed. I am very confused!

REPLY BY SAINT
Always better to have both the weekly and daily in line before attempting to go long. No problems actually if you are an adept hand at this

 else, stay clear of this rally till the intermediate trends give you a signal to go long.
Just posting BOM DYE chart....

QUESTION
For a given time period, is it a rule that you have only one trendline? Basically what are the rules of drawing a trend lines? Is there any
rule on how to draw a trendline or we look in the charts and connect multiple highs/lows to form the trendlines?

REPLY BY SAINT
Think the below chart explains itself.......feel free to ask though if something is not clear.

QUESTION
At what stage in a intermediate downtrend do we say that we are in a bear market? How do we make out the difference between a major
trend move and an intermediate trend move?

REPLY BY SAINT
To answer your query, we need to go into the basics of Trends Let us get into it from the beginning. Then let's address your doubt.

TRENDS
As per time frames, we can classify Trends into

A) SECULAR TRENDS
B) PRIMARY TREND
C) INTERMEDIATE TREND
D) SHORT TERM TRENDS
A) SECULAR TRENDS
Every short term trend has within it one to several intraday uptrends and downtrends. Every intermediate trend has within it one to several
short term uptrends and downtrends. Every primary trend has within it one to several intermediate uptrends and downtrends. So too, every
secular trend has within it one to several primary uptrends and downtrends.
What we mean by Bull market is a market in a primary uptrend. What we mean by a Bear Market is a market in a primary downtrend.
A SECULAR BULL MARKET has primary uptrends (Bull mkts) greater in magnitude and duration as compared to its primary
downtrends (Bear mkts). Expect the bull markets to unfold longer than the bear markets in a secular bull move.
Vice versa for the SECULAR BEAR MKT.A secular bear market has primary downtrends greater in magnitude and duration as compared
to its primary uptrends.Expect the bear markets to take longer to unfold than the bull markets in a secular bear move.
A Secular trend usually lasts about 10-25 years.
Let us get into the others tomorrow maybe we can also have a look at some secular trends on charts.
Few examples of Secular Moves
SENSEX an example of a Secular Bull Market.NIKKEI a Secular Bear.Charts below

Okay, in continuation we now know what a secular, primary trends and intermed trends are. We know that each larger time frame has
within it smaller time frames of trends. Now,to your question we have an intermed uptrend followed by an intermed downtrend
followed by an intermed uptrend, so on so forth.
Few rules
1) After an intermediate uptrend, the correction should be only 33-66% of that cycle (One intermed cycle = one intermed uptrend and one
intermed downtrend).
-- Greater the retracement, the increased likelihood that the primary trend has reversed to the down.
2) Substantial increase in volume during the price decline
The above are the basics if you are playing with indicators as well, then all the negative divergences, moving average crossovers puts
you on Caution Mode.
Have a look at the chart below.......please do ask if anything is not clear.

QUESTION
From the chart, I see that support is taken at a higher point from 1994-2003 before sensex took off in 2003. The low of 1993 was never
tested.
Is it possible to say that unless we test that low and breach with high volumes, we are not yet in primary bear downtrend? You have put
benchmark at the support line in accordance with the theory. But in practice sometimes indices may bounce back from the lowest point
formed after the first high of the consolidation period (in yellow background)

REPLY BY SAINT

These are long term charts and we are looking more at the secular trend of SENSEX. What we call as bear market in common parlance is a
primary downtrend and not a secular downtrend.
So, a break of 8799,and we classify this move as a primary downtrend and as for this Secular Bull to become a Bear, we are far from
that scenario.
As it stands now, we are in a SECULAR BULL MARKET, in a PRIMARY BULL MKT. Breaking 8799, we go into a PRIMARY BEAR
MKT, but still very much in a SECULAR BULL MKT.
And for a long term trader or investor, there can be nothing sweeter in a secular bull mkt than taking profits, watching the mkts get into a
primary bear mkt, and buying more at the lows.

QUESTION
I do hope you are right about the intermediate downtrend. With all the divergence in ROC and TRIX in the monthly charts of nifty, I hope
we dont go into a primary bear trend. Enclosing the monthly chart. Would like to know your views...

REPLY BY SAINT
Just have a look at the chart above says everything.
Basically, this correction from the May top is too deep to be wished away as yet another intermediate downtrend. Calling it a primary
downtrend as markets plunged on May22 is being a bit premature. An intermediate downtrend is one till it isn't. But the next wave drop to
June 14th lows takes it down to more than 80% correction of the previous intermediate cycle.
My personal opinion is that this no more looks like an intermediate downtrend in a primary uptrend. I feel we are starting off the first leg
of a Primary Downtrend. We are still very much in a Secular Bull Market though
But as always, we can confirm that only once the market drops below 2595. We are at that spot of bother on the charts where the bullish
orientated trader sees things going to new highs and the bearish ones seeing new lows. It would be wrong to say that this is a Primary
Downtrend for sure till confirmation. To say that this is nothing but an intermediate downtrend would be dangerous and wrong that
statement in red should be modified to "This downtrend is nothing but an intermediate downtrend till we get a confirmation that this is
a primary downtrend. But the depth of this retracement is giving rise to the possibility that it's looking more and more like the first leg
of a Primary Downtrend"
And yes agreed on the indicators bit as well.

TREND: PIVOTS
Okay, now that we know that a higher high is when the previous bar's high is crossed and a higher low is when the low is higher than the
previous bar's low, and that a series of higher highs and lows make an uptrend we retrace a bit and change things around a bit.
Just higher highs and lows alone do not make an uptrend. Yes we have an up-move but an up-move doesn't mean we are in an uptrend.
Higher highs and lows form a rally. Lower highs and lows form a decline.
We can have declines in an uptrend. We can have rallies in a downtrend. So now that we know that a series of higher highs is called a
RALLY, How then do we define an Uptrend? An UPTREND on a particular time frame is a series of higher pivot highs and lows on that
time frame. What then is a downtrend? Nothing but a series of lower pivot highs.
So what then is a Pivot? Okay, we are back to the "Hand" example. Whisk out your right hand again, once again with your right palm
facing you. We have our little finger. The ring finger makes a higher high and low as compared to the little finger. The middle finger is
higher high and low as compared to the ring finger. We therefore have a RALLY. The index finger makes lower highs and lows as
compared to the middle finger. The thumb makes lower highs and lows as compared to the index finger. We therefore have a DECLINE.
The middle finger with two lower highs on both sides (ring and index now forms a PIVOT.
Imagine we have Area A. Rally starts from Area A which is followed by a decline to an area that is higher than Area A. We call this new
area where the stock has declined to as Area B. So on so forth. Therefore Area B is higher than Area A, Area C is higher than Area B, so
on so forth. We have therefore what is called an uptrend. These areas are pivotal areas where the stock stops its decline and rallies
upwards. We refer to these turning points as pivots.
Therefore, in the above example, as each pivot is after a decline, and the pivot is the low after which the stock takes off again, we call
them PIVOT LOWS.
Right the opposite in a downtrend. The stock declines from an area and then rallies to an area lower than the first, so on so forth. In this
case every pivot is after a rally, and the pivot is that area after which the stock declines further to new lows.
As this pivot tells us of that high after which things go back to its declining ways, we call that a PIVOT HIGH.
So, in an uptrend, we have HIGHER PIVOT LOWS. How did we come to that? Each pivot low is higher than the previous pivot low.
Therefore we call it higher pivot lows.
In a downtrend, we have LOWER PIVOT HIGHS. How did we come to that? Each pivot high is lower than the previous pivot high.
Therefore we call it lower pivot highs.
In a sideways trend, we have nearly equal pivot highs and lows.
Basically didn't want to introduce the word "Pivots" very early on but there really is no other way to tell what a trend is all about. Will
take some chewing and digesting. The only way is to look at the charts and start to make out all the pivot highs and lows.
The below attachment is a stock of AMZN (Amazon) trading in the NASDAQ. The important thing is to know what we are talking about
when we say pivot low and pivot high etc.
So let's go to the chart of AMZN. We have an uptrend on the daily charts of AMZN in November, followed by a SIDEWAYS TREND
from late November to late Dec 2006.Why do we say that we are in a Sideways trend? As the eye says, so it is. We are in an obvious
trading range between the 47.68 to 49.5 area.
Then we have a break down on the last day of December followed by a weak rally back into the trading range and then we have a decline
taking out the previous pivot low made in early Jan to new recent lows to the 43 area. We therefore say that we are in a lower pivot low as
compared to the previous pivot low. Then we have another rally to the 45.93 area. This forms a pivot high that is lower than the previous
pivot high. Thus we have lower pivot highs and lower pivot lows. This series of lower pivot highs and lows is called a DOWNTREND.

Let us take another example This is a weekly chart of MER (Merrill Lynch) trading on the NYSE.
Take a look at the attachment given below:
It made a pivot low in August 2004 of 47.5,then we had a rally and a mild decline to 50.We have just made a higher pivot low. Is this an
uptrend? Maybe. But we get to confirm that this is a clear cut uptrend once the previous pivot high is taken out. The rally towards the 60
takes out the previous pivot high. What do we have now? We have a higher pivot high and a higher pivot low. We are in an UPTREND.
And then once again, from May 2005 till date, we have been making higher pivot highs and higher pivot lows.

Yet another example: GOOG (Google) trading on the NASDAQ. Through November to early January, we have higher pivot lows and
highs (UPTREND).Then we have that turn around in Mid-Jan. So long as GOOG did not break that previous pivot low of around 422,It
was still in an uptrend. Then we have that ugly bar on the daily charts that broke previous pivot lows. Are we in a downtrend now? No.
But as far as we are concerned, the uptrend is over. Then we have a rally back to the 450 area in the later part of Jan. This is making a
lower pivot high as compared to the previous pivot high. Now are we in a downtrend? Looks more and more likely. But not confirmed as
yet. Then that gap down and lower prices taking out the previous pivot low as well. Now we are in a confirmed Downtrend.

For those not getting a picture of what this whole pivot thing is all about, just check out this diagram by Karthik regarding pivots.
Diagram self explanatory

QUESTION
For me, I have seen that many times i have entered when a share has made a higher pivot low and then it moves up a bit and then makes a
lower pivot low. Is this common or am I not entering right. This could also be because at this time I am not using any indicator and only
using trend line and once we use 1-2 indicators along with trend lines entries are more confirmed.

REPLY BY SAINT
A 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 / resistance to moving averages, and patterns, and a few 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.

QUESTION
Quick question on identifying a pivot. To identify a pivot high, should both the below statements be true or only the 1st one needs to be
true
1. High should be higher than the highs of the bars on either side
2. Low should be higher than the lows of the bars on either side
Same for Pivot low
Also does the extent of diff between the high/lows of the pivot bar and the adjoining bars have any significance
Also If pivot highs and lows are repeating quite often, does this mean that the script is not in a significant trend

REPLY BY SAINT
A pivot is not exactly a point, and therefore it need not be one single bar with lower high bars on either side to qualify it as a pivot high. It
could be 2-3 bars .Basically, whether pivot high or pivot low, don't go in for an exact academic definition. Go with the eye.
Taking the chart of Piramyd Retail, we have pivot lows on Jan27th, Feb28th, and Mar24th.Notice that each pivot low is lower than the
previous one. We call that a downtrend. So too with the uptrend.
Importantly, go with the eye. And what is not obvious to the eye is not worth it to put your money into.

QUESTION
In the above quote you say that a uptrend is caused by a series of higher pivot lows. Is it correct to say that in an uptrend we also have a
series of higher pivot highs? The same in converse for a downtrend?

REPLY BY SAINT
Every uptrend would be characterised by higher pivot lows and higher pivot highs, and vice versa for the downtrends characterised by
lower pivot highs and lows to know that is important in detecting the trend. BUT, in an uptrend, focus on the higher pivot lows and vice
versa on lower pivot highs in the downtrend.....Why? More to do with where to place your stops and to know when this current trend is
over. So, basically every pivot low goes on to make a higher pivot high and then a higher pivot low followed by a higher pivot high. As
said before, this stock is in an uptrend. When do we say that this particular up move is over When a previous pivot low is taken out.
Therefore, in an uptrend, train your eye to focus on the higher pivot lows.....So too in a downtrend, train your eye to focus on the lower
pivot highs. A crack of a previous pivot low on a weekly chart indicates that this up move is over. Vice versa in a downtrend

QUESTION
Please have a look at the attached weekly chart of ITD Cementation. Clearly in the last three days there is a Pivot Low on 16th June. The
daily charts show this is in a rally for the past four days. The downtrend is in question but we do not have a confirmation of the uptrend.
How long do we wait till we make our move? As far as I understand from your previous posts, we only flag this stock onto our watch list.
We wait till it makes a higher pivot low and higher pivot high. Lets say in the daily charts it makes a pivot low in the area above the
current pivot low 522.70. Things are better and better. But the previous pivot high is in the range of 900. Do we have to wait until this
pivot high is taken out? What if the rally doesnt stop? Don't we loose out if we do not buy it early? Sorry for so many questions but hope
you get my point.

REPLY BY SAINT
If you are an investor into ITD, another issue, but if you are trading it on a short to medium time frame, I'd skip this one looking at the low
volumes.
But let us take ITD as an example for learning purposes Yes we have a downtrend in ITD on the weekly charts. Why do we say that?
We have taken out the previous pivot low on the weekly charts and we are definitely on the down in the intermediate time frames, and
threatening to do the same on the longer time frames as well. As it stands now, we are in a downtrend once we get to that point when
we clearly state that we are no more in an uptrend and quite obviously in a downtrend, we think of shorting every rally, and in this case as
we cannot short, we merely step aside and wait Yes we got that pivot low on the week ending on 16th of June ,and then we got that
rally. What do we do here? Nothing. Stand aside and wait for an uptrend.
How do we know that the pivot low made on the above mentioned week is not the bottom after which we are moving up? Simple answer
we don't. And when we don't know something, or there just is not enough data to tell us that the trend has changed, we do not put our
funds into that trade, we just stand aside.
So far, every rally is a selling opportunity we haven't come to that point when trends have changed and every dip is a buying
opportunity.
Now, at what point do we buy? Let us say that we are going to turn up from here and move upwards, do we buy. We have a higher pivot
low on the daily, so why not? The answer to that one is: Depends on the time frame that you are trading. If you are in a trade for few days,
then maybe. But there just is nothing like trading with the weekly charts supporting you as well. So do nothing wait for the weekly
charts to give you that higher pivot low before committing funds. At present, this rally is only just that a rally in a downtrend.
Now let us presume that we get that higher pivot low on the weekly charts, do we wait for the higher pivot highs to be taken out before
entering Definitely not. Get to get ready mode once you get a higher pivot low(you could also buy here if we get a neat long basal
pattern with a higher pivot low). If ITD forms a sideways base and a higher pivot low from here, you could buy here and add over 760
which is the previous lower pivot high.

QUESTION
I had a question related to his query. Will we take the 900 mark as a pivot high as what I have learned so far and read in dow theory and by
martin Pring is that a pivot is made if a it retraces 33%, 50% or 66%. Now if we take other theories as well 12.5% is minimum retracement
levels we take. In this case if take the high of 19th April, the move around 24th may was a mere sideway movement and not a retracement
to qualify as a new pivot point.
Please comment on the same and correct me if i have misunderstood the concept of a pivot.

REPLY BY SAINT
Attached below is a simple chart of ITD, and where to buy and sell.

Keep things simple and trade what is obvious to the eye Pivots are just that-turning points. The amount of retracement however tells us
about the strength or weakness of the preexisting trend, which we can get into shortly.
Think the chart explains itself

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.
These are important areas for every trader, either as an entry point or an area to take profits.
There is more on Supports and Resistances. We'll go over them slowly and with examples but slow and steady for now.

The below is another example. CSCO trading in a tight range. Then we have a breakout above resistance. That area which was previously
resistance now becomes Support, as prices use that floor for the next rally.

We had discussed regarding trendlines in the beginning. Basically same principles applied here, the only difference being these are sloping
lines as opposed to the horizontal lines discussed yesterday, but same principles.
At that time we had discussed about Uptrendlines and Downtrendlines. The 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 downtrendline 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.
To assess uptrends and downtrends, we are back to pivot highs and pivot lows as has been discussed.

QUESTION
In the graph for CSCO, shouldnt the support be at 16.93 and not the 17.68 like u have shown there. Or is it 16.93 for the wave which
started a little before November and extended till December?

REPLY BY SAINT
Both levels of support that chart was posted to indicate that an area of resistance, once broken to the up, later became an area of
support. If the correction from the up broke through the 17.68 area, yes the next support would have been that 16.93 levels.
Every present support is a potential future resistance and vice versa......that was the only indication of that aforementioned chart.

TRADING with TRENDS, PIVOTS & SUPPORT / RESISTANCE

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 downtrend.
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
->All the analysts on TV, magazines are saying that the markets are way too over heated, overvalued, over etc, etc. Is this the time to
buy some puts or short the NIFTY FUTS?
==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!! We let people play God, but we stick to our plan.
==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.
Forgive me for repeating this many times but in trading, basics is everything and the rest just icing on the cake. The rest of what we
will learn in future increase our odds but these basics are the Gospel Truth of Trading.

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 triggerred.

A SUMMARY
We have, at various times and places during this thread, done the below:
a)Trends - Secular, Primary, Intermediate, Short Term Trend
b) Pivots
Knowing just these two tell us where we are on that particular chart. As we had discussed many a time before, first we need to know that a
secular uptrend is made up of several primary uptrends and downtrends. Each primary uptrend is made up of several intermediate uptrends
and downtrends. And each intermed uptrend is made up of several to many short term uptrends and downtrends. Of course, each short
term uptrend is made up of several to many intraday uptrends and downtrends.
An uptrend is made up of higher pivot highs and lows, each pullback within that uptrend is called a decline. A downtrend is made up of

lower pivot highs and lows. A move up within a downtrend is called a rally.
Why do we know these things? As we had discussed before we need to know that a chart is in an uptrend, because then and only then are
we interested in going long. We buy in an uptrend. We could buy the breakout from a sideways consolidation phase, we could buy the
declines within an uptrend but in an uptrend, in anticipation of a certain level, we NEVER NEVER SHORT. The mind must be
educated to understand that one does not short in an uptrend.
We short in a downtrend (plz, I know that certain things are not possible in the Indian mkts, obviously one can do only what one is
allowed to do. One 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.
c) Trendlines
Do we only get out of a long position once pivots are broken and the downtrend is confirmed? Nope we draw trendlines using the semilog. A trendline break and we are out half, and a pivot crack, and we are out totally. How to draw the various trendlines has been discussed
in various posts in this thread, please do go over it.
d) Chart Patterns
Alright, we know about trendlines, pivots and trends, is that not enough to know? Isn't this knowledge enough to plunder profits from this
markets? YES,and a vehement YES But learning some chart patterns can do no harm. In fact, a continuation pattern gives us a good
place of entry, and gives us a potential target area. So too with a Reversal pattern, we get an entry and a potential target area. So,do we
need to learn Chart Patterns? Well,many just follow pivots and trends, and do not require Chart Patterns, that's basically your call to make.
Our objective as a trend trader is to latch on to a Trend Reversal, and use our knowledge to stay with the trend as much as possible. But the
question that hits our head is: Right,we know all this stuff, and now we know that we will buy half on a higher pivot low, and add the other
half over the previous pivot high but what about stops? Where do we take our profits? Do we take profits at all? Then, of course, how
many shares do we buy? Etc, Etc

A great post by Traderji on Trading the Plan do read and assimilate the wisdom in the article below.
Fortunately, none of us serious trader types ever really gamble. We all take our trading very seriously, like a serious business person
should.
Many people have asked me over the years what it takes to be a successful trader. The answer is not clear but here are a few thoughts to
ponder and apply.
First, successful traders have a complete commitment to trading and do it full-time. If it is a hobby or a secondary pass-time, I know how
the bottom line will be - a big minus. Trading must be addressed as a profession because if you do not treat it as such, let me assure you,
those who do treat it this way will separate you from your money very quickly.
Secondly, successful traders fit their trading habits to their individual personality. If you are an impulsive individual, your style will reflect
more trading than a calculating individual who waits for all the indicators to fall into place. The personality factor more than any other
factor I know of, will determine success or failure. If you are an emotional person, admit that you are and structure your trading habits to
make emotions a positive influence, not a negative one. If you are either greedy or fearful, that will affect your decision making on a
position and without recognizing the governing emotion, your decisions will tend to be wrong. Whenever I am the most fearful of the
market, that emotion helps make me decide to go long and buy. I know that my emotions tend to make me fearful most of the time.
Whenever my fears become overwhelming, my discipline tells me to buy and discipline must win out or you are doomed to failure.
The work ethic can never be overstated. I watch the market all day long from the opening bell to the closing bell. I have kept diaries on
every day in the market for the last seven years, sometimes having over 40 entries in my diary per day. If I do not do my work my profit
suffers. There is no short cut in trading, the market will quickly find if you are lazy.
Planning is the objective part of trading. Start with the worst case scenario and work from there. You will never be more objective than
before you execute a trade. Once you are in a trade, emotions take over so the plan must be in place before the activity takes place.
Determine a plan that tells you when you are wrong and admit it. Get out, retreat, live to fight another day; these are cowardly approaches
but it will keep you from the traders obituary. Remember each rehabilitation takes a long time, but death is final.

Another gem from Traderji

How to exit a successful trade!
Do you stay with your profitable trades as long as possible because the trend is likely to continue and make your profits even larger?
This is easy to understand but not so easy to do when real money is involved. The difficulty is that although your profit may become much
larger if you stay with a trade, it may also decrease and even disappear. Human nature is such that it values a sure profit much more highly
than the probability of a much higher profit. Thus, traders are inclined to take their profits too soon. This can be fatal to long-term success
because big profits are necessary to overcome the inevitable collection of small losses.
There is a good way to let profits run while still guarding against the possibility that prices will turn around and take away much of your
accumulated profits before the trend actually reverses. It is called a trailing stop. You include in your plan a method for moving an exit
point along some distance behind your trade. As long as the trend keeps moving in your favor, you stay in the trade. If the market reverses
direction by the amount of your trailing stop, you exit the trade at that point. You would also offset your trade and reverse position if the
trend reversed.
One way to set a trailing stop is to protect a certain percentage of the accumulated profit. That will always insure that you keep some profit
on a good trade.

And another great one by Traderji

The key components of a successful trading plan are an edge, discipline, risk control, and money management.
Controlling your risk
Successful speculation is all about managing risk. A winning trader always knows how much they will lose, but rarely know how much
they will make. The key is to never let a single trade or single event (that may impact on multiple positions) have a major negative impact
on the trading account.
"Never, ever, trade without a stop-loss order. If you don't know what a stop-loss is, you should not be trading."
Money management
A basic investment tenet states there is a direct relationship between risk and return. Trading is no different - the greater the account value
risked on a single trade idea, the more volatile the total returns from the trading strategy will be.
A simple strategy is to never risk more than 2% of your trading account on a trade. Most professional money managers will risk a fraction
of 1% on a single trade.
"There are many bold traders, but there are very few old, bold traders".
The Difference between the professionals and the novices.
The "Professionals" fit the following profile:
they trade completely objectively using mathematical models to arrive at trading decisions, there is no emotion involved;
their ideas are well researched to ensure their strategy has a definable edge;
they follow trends in prices, by controlling their risk and allowing profits to accumulate;
they realise the market is not predictable, so employ techniques that will profit by recognising trends, rather than anticipating them.
The "novices" fit the following profile:
their trade strategies are usually based on esoteric analytical techniques that are highly subjective, making it difficult (if not impossible) to
determine the provision of an edge;
they have a pre-occupation with forecasting prices or dates on which trends in the markets will reverse (ie a belief that the markets are
predictable);
by design, their subjective strategies make a disciplined trading approach difficult as it is too easy to "bend the rules";
they pay little attention to risk control and money management.
One final quote:
"Winners hold their winning trades, losers hold their losing trades"
As we had discussed previously, a successful trader who trades the ongoing trend of the market is he who is able to stick with the present
moment, the "now" it really does not matter what our intellect tells us where the market is going or not going, the fact is that it really
does not matter what we think about the market The reality is the market move in itself.
Our job as a trader trading the trends of the market is merely to latch on to a trend and stay out of the forecasting business. The problem

with this latching on to the trend business is that we don't get to go to a party and show off all our stock knowledge, fundamental /
technical skills ... In this business, we practically shut our brains and follow the trend. So no glitz or glamour in this, nothing to really
show off. But you do have banking personnel running after you with ideas on where you should put your money that is growing slowly
and steadily in your account!
We therefore use price as everything, now some will tell you of the importance of Price and Time, etc as maintained before, Trading
Truth has as many paths to it as there are traders, and to each his own.
Now using price, trendlines to give us warning signals, and pivots that tell us to jump ship when that trend of that time frame is over, and
some traditional tech chart patterns, our job is nearly almost over. Coupled with a few indicators, and certain patterns to keep a look out
for, we are about done.
Keep things as simple as possible I know that isn't a style statement these days especially amongst tech traders do your
experimentation, and once you have things figured out, keep things very simple.

QUESTION
I have a few questions. When we talk about an uptrend we buy on small corrections. But in a downtrend, I did not understand when we say
every rally is a shorting opportunity. Can u explain the process of shorting.
Another question is we see a uptrend on the weekly chart and we enter. Now, we see a minor correction coming in and we think of buying
at declines. But, what if that particular downtrend itself ends in a lower pivot low than the previous one. What should our trading strategy
be. We will of course have a S/L in place but then it could again go up.

REPLY BY SAINT
Every rally in a downtrend is a shorting opportunity, meaning we sell first and buy back later. The reverse of buying. When we get a
downtrend, we look to short or we stay out of the fall. Of course ,there's all those restrictions of not being able to short except in futures,
etc the whole idea is that we do NOT buy in a downtrend. We look to either short or stay out. Only when the trend has given a move to
the UP, do we think of buying.
It is a rule that you do NOT break therefore the importance of first being able to detect the trends and the change 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
triggered. You are out, and looking elsewhere for another trade.
The answer to your last question: You take your stops and get out of that trade. As far as this stock is concerned, it continues its
downtrend. And as always, in a downtrend, WE DO NOT BUY. We keep it on our watchlist. We track it, we stalk it, but we do not buy.
Till we get a trend change that is.

QUESTION
Yes, I think I am clear about it. So when we stalk a stock that is moving up from a down trend we do not take position. We wait for it to
rise, retreat and then we buy if it takes a turn around higher than the previous pivot low. Am I following it so far?
Another question - when a trend is rising and it turns around for a very very minor correction will it still be called a pivot or how much fall
is required.

REPLY BY SAINT
Yes! absolutely. And yes to your 2nd question as well.

QUESTION
Normally we take the weekly charts if we want to trade for the medium term (3-6 months). But if I want to trade only for very short term,
i.e. 1 week or max 10 days then can we take the daily charts? If we take daily charts then, how many days of data should we consider? Is

three months of data enough?

REPLY BY SAINT
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 the weekly 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 downtrend, 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.

Just another chart

Basically, in a nutshell, for starters, keep away from trades where the daily is setting up, and the weekly is still in a downtrend. 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.

QUESTION
Just want to recap something we have learnt so far. We see charts on the weekly we see an uptrend ... a higher pivot high and low and we
can enter other indicators also permitting or we may just follow the trend.
Now what happens if we see a chart which is in uptrend and in which the chart keeps going up. Is there any method to enter or we wait for
a pull back. I was seeing the charts of Seamrin. 526807. On the weekly its on a uptrend but the entire week on the daily it was on upper
circuit. Now it may do that on the 2nd week too.
So we wont enter now. We will wait for a pull back preferably to 135 levels where it made a window and also started moving up from a
sideways trend.
Now another part would be if after moving up for another week it again moves sideways and then moves up. Would u buy or leave this
counter if no pull back.

REPLY BY SAINT
SEA MARINE - We got a breakout on the daily charts on the 21st of April. Textbook entry, wait for a pullback or buy over the previous
day's high. In this case, buy on the 24th of April over the previous day's high.
What I would have done: I would have bought over the previous day's high (half) and would have liked to add the other half in a pullback.
In this case the pullback never happened, and I suppose I would be sitting with half a position.
And as for the second question, if this pulls back on the daily charts, it's a buying opportunity. If it goes sideways, it is a buying
opportunity. Of course if it makes a mild pullback on the weekly, it's a buying opportunity.

QUESTION
I have been using some of the indicators ... as you have mentioned but one thing worth noting is, that if we are trading daily charts then ...
we have to keep a track 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
weakness ... coz any change in trend will first be visible on daily charts as in this case and then on weekly charts.
Now my question is how can we distinguish whether it is just a temporary pull down. On weekly charts or start of a trend reversal on a
weekly chart (from bullish to bearish) .. as the first signs of weakness can only be 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.

REPLY BY SAINT
As for an answer to your question, 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.

QUESTION
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 re-enter 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.

REPLY BY SAINT
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.

QUESTION
One question, since we know that the stock is in an uptrend and we are in trade, can we add to this position? I had read somewhere that
you should keep adding to your winning position. If yes, when do we add and in what proportion? My thought is that every higher pivot
low is an opportunity to add, am I right?

REPLY BY SAINT
Right on, my friend but how much each time, ahh, we are stepping slowly and steadily into money management proper.

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 about chart patterns is one more weapon in our arsenal.
Two types of Chart Patterns
a) Reversal Patterns: These patterns reverse trends -> Eg. Double Top, Double Bottom, Head and Shoulders, Cup n Handle.
b) Continuation patterns: These indicate a possible continuation 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 in the 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
a the daily charts.
-Now take the trough between the two peaks breaking that level is confirmation of a change in trend to the downside.
So, summarizing, 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
Trading strategy and measuring techniques are just the opposite to the above
3) Head and Shoulders Pattern
Bearish, reversal pattern signaling 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 right 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 a down 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 Head and Shoulders Pattern
- Reverse of the above
- Reversal pattern that ends a downtrend
- Tradewise, all reverse of above

Volume and 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 when necklines break, and patterns get confirmed. And as all breakdown patterns, a break below support
is accompanied by strong volumes and then the return rally to what is now resistance is on low volumes, followed by strong volumes
again, bringing the stock 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 right shoulder, and then a burst in volume taking it through the neckline.

Summarising H&S
Left shoulder : Strong volumes
Head
: Lighter volumes
Right shoulder : Same as or lighter than the head.
*** Increase in volumes as neckline breaks to the downside.
Summarising Inverted H&S
Left shoulder : Strong volumes
Head
: Lighter volumes
*** Increase in volumes, sometimes higher than before the formation of left shoulder
Right shoulder
: Dip in volumes 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.
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
Trading-Wise -> ENTRY
From a trade perspective, the buy is at the area where the top of the cup is taken out
TARGET
Measure the distance to the low of the cup.Add that to the breakout area
STOP
At the low of the handle
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 low 2, 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.

An example of a Double Top in Punjab Tractors in 1999

Once that trough breaks to new lows,an important area of support has given way. Once we get a break-down, this pattern that was so far a
suspected DT, a probable DT, is now a confirmed DT.
Notice that pullback rally not able to take out that line of previous support. Now that line ,or rather area becomes an area of resistance.
This pullback rally to this area becomes a place where you could add to your positions.

Below is an example of another H&S pattern,this one in RANBAXY Monthly charts. Self explanatory
Have a look at the Volumes in the Left shoulder, then the Head,and Right shoulder, all in decreasing fashion. Then the increase in volumes
in the breakdown from the neckline.
At present we are shooting past the neckline, but you have to wait and see how this month pans out, if we close this month end at 440-450
area or below, we might see a continuation in downtrend.

We have so far, as beginners to charts, looked into what a trend is. Are we in an Uptrend, Downtrend or Sideways Trend? We have
looked into some terminologies lower highs and lows are called Declines. Lower highs and lows by themselves do not constitute a
downtrend. Lower pivot highs and lows, we call it a downtrend. Higher highs and lows make up a rally. Higher pivot highs and lows
make up an Uptrend.
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.
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 stock 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 about 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.
As we had discussed, we have realised the great importance of the very basics. To assess the trend is sometimes easier than it looks, and to
act on it more difficult than it seems. But dealing with the mind is another different topic in itself and we shall come to it in due time.
We have so far done trends, pivots, trendlines, supports and resistances among others, and a few important patterns Due to the variety
of time constraints, please go to http://www.stockcharts.com/education...ternsNode.html
To be a trader pulling profits from the markets on a regular basis, one has to keep things simple I believe the above website puts it
down to its simplest. Very easily understood, and as far as patterns are concerned, all that is required. There are some amongst us, from an
older school of thought, who would still like to hold a book in our hands as we pour through the facts. Probably then you may have to go
hunting for the book Else these facts are enough.
After reading, we can always discuss charts and the doubts before proceeding to other things.....
Okay, now that we have gone through trendlines, etc, and I do hope that those interested went through the education on Chart Patterns at
Stockcharts.com.
As said before we are in this business to make profits. We are not in this business to become "experts" so that we can stop trading and start
some newsletter service, etc. We learn this so that it can help us trade the markets we learn so that we can pull profits out of the markets
whatever the market is doing.
So, therefore, let us go straight to trading these patterns, with the assumption that those interested have gone through the theory at
stockcharts.com or whichever TA book that you have.
8) 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.
http://www.stockcharts.com/education...singWedge.html

9) Wide Range Bar

When you get a Wide Range Bar ,especially out of a basing consolidating sideways move, get ready for a big move in that direction. Don't
expect it to pullback and give you an opportunity to climb aboard. Sometimes it does, but in many times, it keeps exploding higher.
What is a WRB? Don't complicate things by adding more criteria than the simple fact, a bar that makes a wide move in that time frame
and closing at or near the high of that bar/candle.
The beauty of a WRB if you get one, buy the pullback, with a stop below the low of that very bar. Else, buy the high of that bar. If we
get a WRB and it reverses, a WRB failure is an ominous sign of a big move down.
Another thing to look at: A WRB with accompanying increase in volume out of a sideways base
And look out for a WRB that can happen after a big rally could signify a turnaround soon
So, look out for the WRB!

Another example: In this case, Dabur had a huge uptrend, and then we get a WRB. A WRB after a long run up should send alarm bells off
as this could mean a possible turn around,an intermed top.
Dabur Charts attached below!

Another example of a trade that we had taken a year back, based on the power of the WRB.

Another example of a WRB that sounded out a possible end to this move up this time from Alstom Projects.

QUESTION
What would be the time duration be for a weekly chart. Is 3 months a minimum requirement or can it vary to lesser time period.
REPLY BY SAINT
Actually no hard and fast rule some books tell you that a month apart still qualifies. Yes, on a weekly or monthly charts that would be
maybe years apart. Also, you get these patterns on an intraday basis as well.
Importantly, one can only say that a pattern is a Double Top for sure once the trough gets taken out. Till then you would say that we are in
a pullback or sideways pattern.
Another fact, forgot to mention yesterday The longer the period between the peaks and the greater the height, expect the reversal to be
greater.
But you know that high that you see in the daily charts and then a pullback and then back to former highs in the next few days that is
what is NOT a double top. There must be considerable period between the peaks. If you are looking at the hourly, then you must have at
least more than 30 bars bet the 2 peaks
QUESTION
Everything u said about trends, support, resistance etc. was excellent and beautifully explained. You said that we only identify the trends
and get into a stock. We dont determine trends or direction of a stock, just ride the trend- that's all. Everything looked perfectly logical to
me until u started patterns.
If we take the example of a double top pattern, u said that if some criteria given there is fulfilled then the stock will dip down again. How
can we determine the direction of any stock? The stock may go up or down or sideways or whatever. I just wanted to know why a stock
will behave that particular way when certain patterns build up.
REPLY BY SAINT
Great going on your understanding on the basics as you go along, you will realise that unlike in school, 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 volumes 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 volumes 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 about the Head and Shoulders pattern? Surely Just drawing trendlines, Supports and Resistances would do the trick.

That is as far as Reversal Patterns go but you may need to know something about 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.

QUESTION
I think the chart of India cements has formed an inverted Head and shoulders pattern with an inclined neckline. I just wanted to know
whether it is really an Inverted H&S pattern or just my imagination.
The daily chart of India cement chart is attached.

REPLY BY SAINT
Nope, not your imagination Correct observation. Now we have a bullish pattern on the daily, and longer term in every other stock being
bearish. So even if you did get in at the neckline breakout, and are sitting with some profits, keep your stops at 155.
QUESTION
Am i seeing the formation of pennant in "i-Flex" (from 17/8/2006 on-wards) correctly. Please guide.
REPLY BY SAINT
Yes! Amaren, correct
To know more on pennants, http://www.stockcharts.com/education...agPennant.html

STOPS
Whenever there is a trade that we get into, we put in a stop. The stop is that area where we say, "Enough is enough!" The stop is not put in
after one has lost 80% of our portfolio and one has given up with life. I see it quite often here where one gets in on a tip because someone
says so, and then take a huge loss and then say that the trade was stopped A stop is a predetermined level, put in BEFORE the trade is
got into, the word BEFORE being an important word. I hope I do not sound lunatic when I say this:
BEFORE the trade, BEFORE the trade, BEFORE the trade, BEFORE the trade, BEFORE
That stop that one has determined BEFORE the trade can be a mental stop. A mental stop is one that is not exactly broadcasted to the
broker, etc it's a technical level the break of which one does not stay in the trade any longer. Now, the irony of this mental stop is this:
Please DO NOT keep the mental stop in the mind. WRITE DOWN the stop If one entered SATYAM at 650, with a stop at 620,and a
potential target of 750,write it down.
SATYAM, entry-650, stop-620, tgt-750, rew:risk=3.33:1,etc etc
If SATYAM hits 620,that is it, one is out of that trade. One either looks elsewhere, or plans a reentry into Satyam, but what one never,
ever, ever ever, ever, ever, ever does is to let the stops get blown through, then hold it, pray to God, run to the nearest temple, church or
mosque, pray even harder, and then try to strike a bargain with God if HE manages to pull the stock back up, beat the chest, shout at one's
wife, have sleepless nights, all the while allowing it to slide, all because one wants the stock to get back to breakeven.
Trading is a profession. It's a business. It is not a place where one hopes to strike lucky, you could, maybe once, maybe twice but the
person who does not have a strategy ,a plan ,will in the long run come to ruin. As the famous saying goes, "Plan your Trades and Trade
your Plan."
A predetermined written down stop is vital for long term success, it is vital for our mental balance, and only a disciplined trader adhering
to his/her plan can see the multiplication of wealth, and a regular flow of profits.
Once again, to re-stress a stop is planned and written down BEFORE the trade!!!!!!!
I apologise for sounding like a broken down tape recorder on this one but I do hope that as a beginner to trading, one does realise its
importance.

There are many types of stops the ones that come to mind
(A) INITIAL STOP
As described many times, this is the stop that we put in before we even put in that trade. This stop can be placed with your broker if in
intradays, else, a written down exact point after which no more nonsense is going to be taken from this trade.
(B) TRAILING STOPS
As the stock moves higher, we use trail stops. Again, there is software that does it, of which I have no idea. There are very many methods
that does it using pivots, or moving averages, or two-three previous bars break method, etc
Whatever the method used, the most important point is that once the trade moves in the direction required, the stop has to move up to
breakeven first, and then upwards, till stopped.
C) TIME STOP
When the trade does not go your direction in that specified time, and money could be deployed elsewhere, and the initial stop is also not
taken out, one employs the time stop or boredom stop.
So, that covers that the moment we get into a trade, and the trade never sees green, and hits our INITIAL stop, that's it. We are stopped

out. The trade goes in our direction. We apply TRAIL stops. After getting into a trade, and nothing exactly happens, and that wasn't part of
our strategy, then we could employ a TIME stop.
Whether we take a TIME stop or not is our call to make but no compromises if the INITIAL stop is hit. We are out, and that's that.
Now, as discussed before, a stop is a predetermined point. Another issue, a fault by many and is a crime punishable by the guillotine a
stop once placed has to be respected, once that point is reached, one cannot push back that stop. Part of the trading discipline, part of the
plan of attack.

Below an article, by Traderji, where he talks about Trailing Stops and the various methods
I personally use the Chart Patterns and the Channel Breakout methods. Different people have their different choices, and therefore their
different methods, but whatever the method, the stop is never pushed back, the stop is always adhered to, the stop is trailed upwards in
systematic fashion....
Fine, we now know the importance of having a stop, the types of stops, let us get into where we should place our stops as Traderji's
post states, there are a few ways of going about it. I basically use the Chart patterns way and the Channel Breakout way.
As said yesterday, it's up to your comfort levels........there are things that one can learn from books, and then there are things that can't.
One can learn about the various methods, the type that you are most comfortable with, you got to choose.......
Below is an example of a position trade basically Reliance Inds was in a sideways territory trading within an ascending triangle. We got
a clean breakout around the end of June, and then a pullback to support in July. We therefore enter that trade with a stop loss at the
previous pivot low. This becomes our INITIAL STOP. If Rel Inds had dumped the moment we bought it and hit our Initial Stop, that's it,
we are out. We look elsewhere or if Rel Inds gives us a signal for a reentry.
In this case, that entry was great. The resistance that the roof of the ascending triangle provided became support Right, now we take out
the previous pivot high of 520 as Rel Inds moves upwards. The moment we get a new high, raise the stop to the previous pivot low which
was 469.That move up made a new high of 585 and then pulled back to 526. Where is our stop now through all this activity, same place of
469.Now we get another move up. The moment we make newer highs above 585,we get to do what we enjoy most yep, now raise stops
to 526.
So on so forth the moment we take out a previous pivot high, raise the stops to its former pivot low. We therefore use pivots as our stop
areas especially in position trading, this also allows us to stay in the trade as long as possible. We are basically allowing the chart to do
its thing, we stand aside and go with the flow of the uptrend.
Now throughout RIL has been using that dark green trendline as its support but around March 2006, another development happens. We
started going vertical, a new trendline is drawn, the blue line, and then even more vertical, the orange line.
That break of the orange line was an area to get out of half the position. Meanwhile through the entire move from March, we apply the
Channel Breakout method (I usually apply the stop to the low of 2 bars ago on the weekly, and 3 bars ago if I am trading the daily charts).
In this case, RIL first broke through the trendline, and we are out half, then followed by taking out the low of 2 weekly bars ago in the
week with May 11th.
That's it, we are out, this position trade is over in this case, RIL continued its fall, and we can all feel good about ourselves, but there
are times, when we get out and RIL goes on to make new highs. Not a problem, part of trading.
At this point a question would be asked, at what place would you take profits? I don't. I travel the whole distance at full position and keep
raising stops till out. We would not get out at the top, but we would take an important chunk out the trend In this case of RIL, merely
playing the raising stops methods would have given you a run from 480 to 1100 (that's about 129% gain).
So basically I use the pivot method of trailing stops, if things get vertical then I employ the Trendline break stop, and the low of the last 2
week bars method.

Right, let us take another chart. Attached below is a chart of ABB.

Same here, ABB breaking out of a triangle on the weekly charts in Feb 2003, followed by a pullback in March 2003, to an area of support,
giving us a great entry point for an intermediate trade.
Once again, we have our Initial Stop in place, the moment ABB takes off, and makes a new high over the previous pivot high, the stop is
raised to the immediate previous pivot low so on so forth, the stops are trailed upwards. The beauty of the trail stop is that we know that
our entry point to where our current trail stop is ... is money in our pocket. Every decline in an uptrend forming a higher pivot low is
looked on with excitement instead of viewing it as money lost excitement because we get to raise our stop losses, and that means more
money in our pocket. We realise that there is no need to take out profits from the market at all the trail stops protect our profits.
Aug 03-Apr 04: Yet again, ABB starts to make steeper trendlines we now start to raise our stop loss to the low of 2 bars ago,all the
while keeping a close watch on the trendline. Our intention is to take out half on the break of the trendline and another half once the low of

2 bars ago is taken out.

May 14th week in 2004: That bar breaks both the trendlines and the low of the bar of 2 weeks ago we are out of the trade.
Oct 2004: We get a chance for a reentry after months of sideways movement, with ABB making a higher pivot low on the weekly.Again
we get our initial stops in place. Once again, the same process as above. And stops are raised with each new high to a higher pivot low.
Jan 06: From here ABB starts making steeper trendlines again once again we are looking at the trendline carefully. We are looking at
the low of 2 bars ago.
May 2006: We are stopped out of the trade, with both trendline break and the break below the low of 2 bars ago.
Now we wait for an opportunity to re-enter, and profit from yet another new intermediate uptrend.

A great post by Ashish from another thread that anyone who didn't get a read need to have a look great wisdom in every word

It's said that successful trades done without a proper trading plan are more dangerous than the failed one.
In the example given, no Stop Loss Level was inbuilt into the trade and holding was based upon conviction only. At that time, nobody
would have any idea if the drawdown would continue or would reverse. Luckily, the stock turned around and proved to be a multi-bagger.
Now it installs a believe in the trader that such trades can be repeated again and that is where disaster starts to wait.
Loosing 50% on a trade and still holding on represents an emotion called Hope and is very dangerous as traders have seen their entire
capital being wiped out in thousands of stocks only due to this single emotion.
A proper stop loss in case of any entry is better than letting oneself be prey of our own emotions.
Right, so we more or less know the importance of stops, we realise that having predetermined stops is an absolute must just as in any
battle, not only do we have our Entry strategies in place, we also have our Exit points in order. And all of this PREDETERMINED, and
written down before the trade.
For those who see no reason for having any stops, good luck to you, my friend, for yours is the path of extreme pain and total ruin.
Please do not go down that path. If you already have been on that path to ruin once before, please do not repeat it. If never been there,
learn from the mistakes of others.
Some wise person once said(was it Einstein-tend to remember quotes and forget who said what??!!)......"A fool never learns from his
mistakes, a smart person always learns from his mistakes, but a wise person learns from the mistakes of others."

Before moving on about Money Management, here's another post about stop losses from our very wise Jaideep posted in Some
Good Steals nearly a year ago
Plenty has been said on this topic, Usha, all very wise ones at that. Try & go through the earlier posts. They will educate you no end on
your exit strategy etc. Meanwhile, I'll give you something to read on the topic & put you in the know of things. After all, I'm no expert TA
myself ...
A Stop-loss Order is an order placed with your broker to buy or sell once the stock reaches a certain price. A stop-loss is designed to limit
an investor's loss on a security position. Setting a stop-loss order for 10% below the price at which you bought the stock will limit your
loss to 10%. For example, let's say you just purchased SAIL at Rs.50 per share. Right after buying the stock you enter a stop-loss order for
$45. This means that if the stock falls below Rs.45,your shares will then be sold at the prevailing market price.
Positives and Negatives
The advantage of a stop order is you don't have to monitor on a daily basis how a stock is performing. This is especially when some other
commitments prevents you from monitoring your stocks for any period of time.
The disadvantage is that the stop price could be activated by a short-term fluctuation in a stock's price. The key is picking a stop-loss
percentage that allows a stock to fluctuate day to day while preventing as much downside risk as possible. Setting a 5% stop loss on a
stock that has a history of fluctuating 10% or more in a week is not the best strategy: you'll most likely just lose money on the brokerage
you'll pay for execution of your orders.
There are no hard and fast rules for the level at which stops should be placed. This totally depends on your individual investing style: an
active trader might use 5% while a long-term investor might choose 15% or more.
Another thing to keep in mind is that once your stop price is reached, your stop order becomes a market order and the price at which you
sell may be much different from the stop price. This is especially true in a fast-moving market where stock prices can change rapidly.
Not Just for Preventing Losses
Stop-loss orders are traditionally thought of as a way to prevent losses, thus the name. Another use of this tool, though, is to lock in profits,
in which case it is sometimes referred to as a "trailing stop". Here, the stop-loss order is set at a percentage level below not the price at
which you bought it but the current market price. The price of the stop loss adjusts as the stock price fluctuates. Remember, if a stock goes
up, what you have is an unrealized gain, which means you don't have the cash in hand until you sell. Using a trailing stop allows you to let
profits run while at the same time guaranteeing at least some realized capital gain.
Continuing with our SAIL example from above, say you set a trailing stop order for 10% below the current price, and the stock skyrockets
to Rs.80 within a month. Your trailing-stop order would then lock in at Rs.72 per share (Rs.80 - (10% x Rs.80) = Rs.72). This is the worst
price you would receive, so even if the stock takes an unexpected dip, you won't be in the red.
Advantages of the Stop-Loss Order
First of all, the beauty of the stop-loss order is that it costs nothing to implement. Your regular brokerage is charged only once the stop-loss
price has been reached and the stock must be sold. It's like a free insurance policy!
Secondly, but most importantly, a stop loss allows decision making to be free from any emotional influences. People tend to fall in love
with stocks, believing that if they give a stock another chance, it will come around. This causes procrastination and delay, giving the stock
yet another chance and then yet another. In the meantime, the losses mount....
No matter what type of investor you are, you should know why you own a stock. A value investor's criteria will be different from that of a
growth investor, which will be different still from an active trader. Any one strategy may work, but only if you stick to the strategy. This
also means that if you are a hardcore buy-and-hold investor, your stop-loss orders are next to useless.
The point here is to be confident in your strategy and carry through with your plan. Stop-loss orders can help you stay on track without
clouding your judgment with emotion.

Finally, it's important to realize that stop-loss orders do not guarantee you'll make money in the stock market; you still have to make
intelligent investment decisions. If you don't, you'll lose just as much money as you would without a stop loss, only at a much slower rate.

Conclusion
A stop-loss order is such a simple little tool, yet so many investors fail to use it. Whether to prevent excessive losses or to lock in profits,
nearly all investing styles can benefit from this trade. Think of a stop loss as an insurance policy: you hope you never have to use it, but it's
good to know you have the protection should you need it.
HAPPY TRADING & LOADS OF PATIENCE, you'll need all this to laugh all the way to the Bank (as Saint said). Best of Luck.

For those who are not in the habit of reading each and every post out there, do keep a lookout for some nice ones by RVLV. An
example ...
STOPLOSS -BIG Mystery -and its three golden keys
---------------------Mystery of Stoploss
One of the great mysteries of trading is the dreadful stop.
what kind of stops should I use?
The philosophy outlined here regarding stops is very different than most others. when you learn how to use stoploss wisely, you discover
that stops dont have to hurt.

Stoploss orders are the medicine of trading.

When your trade is sick, stops are there to heal it.
The big question is whether you like to take the medicine before you get sick
as a preventive measure or you wait till you really get sick,and then use the medicine. Natural choice seems to the part two.
There a few ways of using stops:
1. No Stop specialist
What do you call a trader that doesnt use stops?
An investor.
When a trader lets a trade go against him, he gets married to the stock, starts looking at fundamentals then becomes an investor.
I have seen people, especially six years ago, buy a stock at 100 and still hold it today, even though its a penny stock today.
2. Random stop or Gambling stop
These happen when a trader knows how much money he wants to risk on a stock, his bet on the stock, and that is his stop.
Buy ABC stock with a 500 stop, because that is all they can allocate for this trade. These PEOPLE think trading as gambling, they put
their money on the table and forget about it.
The problem with this method is that it is not a method, there is no reasoning behind the placement of the stop.
3. Adding in stop
Some traders keep adding in money into their position as it goes against them. This is also called Dollar Cost Averaging.
When people begin trading they think that adding money to a position lowers your cost on it and, therefore, allows you to buy more shares
at a lower price. Any Investor, who liked ABC at 60, surely will like it so much more at 50, right?
The reasoning behind this method is very dangerous.
You buy 1000 shares at 60, buy another 1000 at 59, buy another 1000 at 58. Now, your average cost is 59, not 60 as you originally wanted.
The stock only has to jump up a single for you to break even, not two.
BIG PROBLEM
Problem comes when the stock keeps FALLING and you are now stuck with 3000 shares on the wrong side of a breakout.
People using this method wipe out their accounts. Traders will become investors. If not on the first 20 trades, then on the 21st that would
wipe them out.
It only takes one large loss to devastate an account and devastate the trader.
Stops are like medicine for your trading.

The longer you take before you swallow the bitter pill, the worse your condition is going to be.
Preventive medicine works so much better, it prevents small weaknesses from becoming serious diseases.
Trade this way if you agree it is better
Follow this method of stops =it is very simple,
KNOW YOUR ENTRY REASON,
WRITE IT DOWN,
Always exit a trade
when the reason for your entry no longer exists.
Take Notice We said Exit, not stop.
We do not take stops, we exit.
At times its a negative exit, but it is still an exit, not a stop.
A stop loss stops your loss, we are not interested in the trade becoming a loss.
Explainas follows
ENTRY
If you have done your analysis right, you should be able to pinpoint an entry.
=================
An entry is a trigger
that starts a trend,
starts a wave in a trend,
starts a bounce,
starts a fade or a break out.
=====================
BE accurate with your entry, AND your exit should be very simple.
If you entered a trend, you exit when you know that the reason for your entry no longer exists, when the stock refuses to start your trend.
If you entered a breakout, you know the reason for your entry no longer exists when the stock returns back into your consolidation.
So how much is that?
Your stop, or negative exit, (if you did your home work and pinpointed your entry,) is Noise + Spread.
Noise is the normal fluctuation of the stock and spread is the difference between bid and ask.
Basically, if you add them together, it is the amount that the stock can pull back before you know that your entry is wrong.
For example, in day trading, most of our negative exits are less than 1 RUPEE Most of the stocks that we trade have less than A COUPLE
OF RUPEES spread and noise. In Swing trading, most of our negative exits are less than 10 TO 20 RUPEES(TEN TIMES plus THAT OF
DAYTRADING) for the same reason.
Some people day trade with a RUPEE stop or even two or three rupees. If you do your home work and can pinpoint your entry, how many

1 rupee negative exits can you take before you equal one point or two points?
Imagine having 10-20 attempts for the price of one.
--------------------------------------Three keys
There are three keys to success here:
1. Pinpoint your entry You need to know exactly where to enter.
2. Know exactly where the reason for your entry no longer exists Where on the chart does price have to go to invalidate your entry?
3. Re-entry If the stock comes back and your setup is still valid, make sure that you re-enter.
Most of us pay less than 100 in commissions, which is a lot less than a devastating stop loss of multiple points.
If you have to pay 500 plus rupees for a trade that didnt work, it is a business expense, not a stop loss. It protects you financially and
psychologically. It allows you to re-enter the trade without any damages.
If you exit with an expense of 1000, it will do a lot less damage than several thousands or your whole account.
How would you feel if you spent a few hundred bucks on a trade vs. lost several thousands on a gamble?
Traders need to get educated how to pinpoint their entries and know exactly when the trade is working or not, in order to keep stops down
to business expenses, instead of serious losses.
The secret to longevity and prosperity in trading is
knowing why you are entering,
pinpointing your entries and
preservation of your capital.
Preservation of capital is always more important than capital appreciation.
Hope this helps your trading in some way.
Dedicated to maximizing your profits,

QUESTION
Ok back to queries :-) Placing stop. do u exit on intra day fluctuation or if EOD is below your stop. Cause in Intraday, like u have
mentioned it might just hit it the stop loss for a couple of minutes and start moving up again and we miss the move. In EOD the stock
might go down much more than our stop loss price and our loss %age to our capital will go wrong, So which is a better strategy or it
depends to an individual.
It must be a common phenomenon that the stop gets hit and the stock starts running again. In such a situation do we analyse the stock
again or should we just let it go.

REPLY BY SAINT
That's a common dilemma that we all face however accurate your stop is, and however much you give it room, it can still happen.
Now comes the problem let us say we entered a stock at 50.The previous pivot low was 45.You decided to give it some room to wiggle
your stop is at 44.5 or slightly lower. Great, so far so good, all systems go, everything in place.
Now the stock corrects almost after you buy it (common phenomenon, my friend, happens to us all, can be rather irritating and frustrating,
but that's part of the game!!) and it comes to 45, and falls through 44.5.
Now the dilemma is this is this a false breakdown, or a shake-out bar, etc, or is it a genuine move down. Now many people have
different ways to deal with it.
Mine is simple I exit!!
Why? Because this move could go down to 40,35,etc and I would be left with a huge loss in my account, left with a feeling of regret, and
the would've-should've-could've syndrome.
So, I am very rigid about the stop loss and am certainly out if it hits. Would be waiting on the sidelines though for an opportunity to reenter.

QUESTION
Now I've some doubts regarding the buy / stoploss signal using the pivots, which you had taught in one of your earlier post.
(I use the word theory to mean your words:"... buy after the second candlestick takes over the high of the previous candlestick ")
Referring to the attached chart, can you please explain me the following queries?
I placed all those "black coloured" buy / stoploss according to your theory, which I hope are correct. I've doubts in those "Rose" coloured
buy / stoploss.
Question1: If you notice those rose coloured ones,
a) They are placed according to your same "theory".
b) They are only at pullbacks
c) But as we can see they are placed somewhat in the middle of the "up trend", which leads to breaking out of the stop loss very very soon,
although the uptrend is intact.
d) So both rose and black coloured ones are from the same theory, buy rose is wrong (I guess) and blacks are correct. WHY IS IT SO?

(or) How should one behave in those "rose" coloured pullbacks?

Question2: In case of "stoploss3" where should the stoploss be exactly?
a) Below the low of red bar or
b) Below the low of green bar

REPLY BY SAINT
Question 1: Great question once again the chart that you had posted is that of the daily chart.
The question you have to ask is: Which time frame is it that you are playing? If your answer is: Short term, then, you are out at Rose
Coloured Buy 5, once SL5 is taken out, so on so forth.
Now if your answer is: Intermediate term, then the black coloured Buys and SL's are correct.

Only thing is the one marked as SL 6 in rose colour, instead that could also be a black coloured SL (intermediate).
Now once you get the move on a weekly chart, every pullback is a buying opportunity (black ones). Every time we take out the previous
pivot high, keep raising stop losses to the immediate previous pivot low. So on so forth If you are playing the weekly charts, and the
intermediate time frame, forget the rose coloured ones. What you are looking out for, licking your lips, are those black coloured ones.
Question 2: Below the low of the green bar

MONEY MANAGEMENT
Get your trading strategies in place and above all stop and money management techniques. Money management is so important, even
more than entry and exit strategies it is money management that separates the men from the boys, it is money management that is the
Holy Grail in Trading. You have poor strategies but good money management skills.......you WILL survive, you may not become a great
trader, but you will still be around in a few years. On the other hand, if you are great at entries,and exits, but know zilch about money
management you WILL come to your Doom sooner or later!!
Not trying to go all lunatic all over again but knowing money management is so very important, so so important. So, let us get down to
a bit of Money Management in the next few posts
This part you MUST absorb, no two ways about it those that have read Elder would feel like taking a yawn on the next few posts. Do
yawn, no harm though in reading again but to those who have never heard of this strange 2 words called "Money Management", the
next few posts are for you and like I said before, there are no two ways about it.
MONEY MANAGEMENT IS VITAL TO TRADING SURVIVAL,TRADING SUCCESS,AND TRADING PROFITS know them
and open the treasures available. Know them not ,and that will be at your peril and doom.
Basically, we use money management rules to restrict how much the market can take away from us. Certain rules that we follow with
discipline. Rules that are written and implemented trade after trade, again and again. Rules that help us to stay with the trend and to let
profits run as long as possible. Rules that trigger off small losses as compared to the big profits.
Like a warrior, this is the Code that a trader swears by, and adheres to, come what may.
If his stop is triggerred, he is out, he does not sit there reasoning that the economy is growing 15%,and the fundamentals of this company
is great, and that it is expecting good earnings If the stop is hit, that's it. He/She's out of that trade. All thought therefore goes into the
trade BEFORE the trade. No more thoughts after the trade has been set in motion.
The mind is set into "NOW" mode, no more planning ,no more thinking. When the stop is hit, the trader is out and that's that!
But, there is more to money management other than stops stops is an aspect of it. But there is more
But before getting into it, just noticed that there always is this great amount of blabber about the number of wins a trader has had, etc etc
So before getting into things, felt that we all should realise one thing. We are in this business to make profits, we are NOT in this
business to win you can have a Batting Avg of 95% and lose out when you look at profits and losses. You can have a Batting Avg of
30% and come out with stupendous profits by the end of the month.
How is that possible? Well, presume you make an average of Rs200 per trade for 19 trades, and lose Rs.5000 in the 20th trade, well,you
are sitting pretty with a 95%batting avg and a loss at the end of the month.
Presuming that you have made losses in 14 trades, an average of Rs.400 per trade, and we made Rs10,000 in the other 6 trades, well,we
are sitting with a profit at the end of the month although we have been wrong 70% of the time.
So, it's not about about the number of wins that one makes, it's all about making profits and that verily is the heart and core of money
management!
We look at a trade, yummy, yummy trade a beautiful clean sideways pattern just itching to breakout. Our plan is to buy the breakout
and ride the trend ,trail stopping upwards at every pivot low. Cool. So far so good. We now need to ascertain how many shares we plan to
buy. For example, the stop is Rs.20 away from our entry point. Right, do we buy 10 shares(which means we lose Rs.200 if stopped), or do
we buy a 100 shares (which means we lose Rs.2000 if stopped), or a 1000 shares (which means we lose Rs.20000 if stopped)?
The amount of money lost if stopped is the risk on this trade. Don't let it get past 2% of your equity. Which means, first calculation is:

How much Capital do I have in my trading Account? (trading acct only, not the worth of your house and car and jewellery all put
together).
Let us say that I have 10 lakhs in my trading account, that means the maximum risk that I can take on any single trade is :2% of 10 lakhs =
20,000.
Which is to say that if I enter into a trade, and the trade goes against me, I will lose Rs.20000.
So whether you paid 2.5 lakhs for that stock or not, you are not risking 2.5 lakhs, but Rs.20000, as that is where your stop is.
Now must it definitely be 2% of the capital not necessarily. Can be anywhere between 0.5 - 2%,but no more than that. I personally use
0.75% of my capital as a stop loss, but that is something you have to tweak to your comfort levels. But,to stress again, no more than 2%!
So,therefore, first I look at my trading capital at the end of the month. I then assess how much my risk would be the next month. For
example, let us say I have 10 lakhs at the end of July. Let us say I take 1% loss in each trade. Therefore for the month of August, I would
be risking Rs.10,000 per trade (to reiterate, that means the amount lost if stopped out).
Now I have my ups and downs in August, and landed up in August with an equity of 10.5 lakhs, now my risk in the month of September
would be 1% of 10.5lakhs = 10,500 per trade.
So too, if my equity had dropped that month to 9.5lakhs, then my risk of 1% for the following month would be 9,500 per trade so on so
forth!!
Right, I now know my trading capital, the amount of percentage risk that I am willing to take, and the amount of money risked for the
following month at the end of each month now how do I calculate share size:
Share Size = (% risk x trading capital) divided by (entry-predetermined stoploss)
So, therefore, we look at our charts, we get our entry point let us say 200,and our stop loss is at 175.Now presuming our capital is 10
lakhs,and our percentage risk per trade is 1%.
Therefore,Share Size=(1% of 10lakhs)divided by (200-175)
= 10,000 divided by 25
= 400
Therefore in the above example we would buy 400 shares with an entry at 200 with a predetermined stop loss at 175 .The maximum we
should lose in this trade if stopped would be Rs.10,000/=
The 2% rule for assessing position sizing is vital, but there is more to be done.
We have therefore gone about the importance of stops, and how vital it is for trading success. We have realised that we are going to be
laughing our hearts out to the bank, so long as we take small losses, and let our profits ride. In short we look to make big gains, at the risk
of many small losses.
We have also discussed that there are many methods of placing stops the important thing is to have stops and the discipline to adhere to
them. So like we discussed, we place our stops just a bit below the previous pivot low, and trail stop upwards.
We had discussed the other day that the maximum risk per trade is 2%preferably lower. And yes Pranay if you are comfortable with a
risk of 1% as stated in the other example, yes,that would be 1% per trade. And to go over it again, presuming that my trading capital is 10
lakhs (yes Ger06,by that, we mean the money that you have set aside for your trading. If you do derivatives and equities, calculate them
separately. By trading capital, we are not talking net worth....simply the money put aside for trading) first we calculate how much we
are willing to risk.

Therefore, if we are willing to risk no more than 1% per trade, that would mean 1% of 10lakhs,ie Rs10,000/= per trade. And therefore if
our stop loss is Rs.20 away from our entry price, we can therefore buy 10,000 divided by 20 = 500 shares.
However juicy the charts look, if our stop is Rs.20 away, and our risk is 1% on 10lakh portfolio, then that's that,500 shares no more no
less.
Now coming to Pranay's valid doubt for one trade, we plan to risk no more than 1%.Therefore, for 25 trades, we would be risking 25%
of our portfolio, right? NO Therefore, another condition that has to be met. Else, we would be right about placing our stops and right
even about share sizing, but a huge market move taking all stocks down would trigger all our stops.
And with it, a sizeable chunk of our portfolio

MAX RISK
Now we come to another major part of money management that must be looked into just as how crucial having a predetermined stop is
and proper share sizing, this part is vital for the survival of our trading account and therefore our survival as traders.
If we were to risk 2% per trade and we get into 20 stocks, a move down would trigger all the 20 stops we have put proper stops, great
we have taken small losses, great and yet, our account is down 40%. If our trading capital was 10lakhs, well 4 lakhs has vanished
into thin air!! This is unacceptable and unpardonable as far as the trader is concerned.
We therefore have another set of percentages in place so that we are protected from market movements now what that percentage is
basically comes back to the individual trader and his comfort levels. There are many absolute truths in the world of trading, but no
absolute methods, all relative to what our psyche allows us.
For example, I believe that a 2% risk is just too much to bear, I am on the other hand comfortable with a risk of 0.5-0.75% so there are
as many methods as there are traders. Basically tweak to your individual comfort levels.
Now what are these percentage rules of max risk that I am speaking of?
1) In an intraday position, take no more total risk than 4% in that day. Which means that I would take no more than 4 trades at the same
time. Why? Because I am risking 1% per trade, and if I take more than 4 trades, I would be risking more than 4% in that day.
Therefore, I enter into TISCO with my stop loss at the previous pivot low at a risk of 1%.Then,I see a great setup in RIL,same thing as
above. Now I see a great trade in ITC, I grabbed that as well. Then a beauty in ACC. Now I have 4 trades running simultaneously, and I
risking 4% as of now. I then see a great play in SBI But my rules prevent me from taking that 5th trade, however juicy that set up.
Now I get a great move in TISCO and ACC, and that gives me the opportunity to raise my stops in the two to breakeven. Now I can take
SBI if it still looks great if it has already run off, well, nothing can be done about it. Missed money better than lost money!!
Also make sure you have your max percent loss in a week after which you wouldn't trade any more, and your max percent loss in a month
after which you are no more than a bystander. If I lose 10%, that 's it I am out for the month. Many put that figure to 6%,or 8% once
again, your comfort levels.
2) In a swing position that may last up to 4-5 days, once again similar rules come into play. I basically take a max risk of 6% now why
these figures, well, basically no real reason except years of toying around and tweaking it to comfort levels. As said before you will have
to do the same.
So, here again, a risk of 1% per trade allows me to take 6 swings that week. Every time I am able to raise my stop to break even, I am
allowed another trade. Else that's that

3) In a position trade, that can take up to weeks to months, I tend to take a max risk of 12%,meaning that if you are taking a 1%risk per
trade, max number of stocks that can be got into is 12. And then, once you get to breakeven stop in a trade, you are allowed to get into a
new position or add to the previous position.
If you are the type that can take on a bigger amount of risk, fine but total portfolio risk no greater than 20%.Greater than that, think you
would be fishing for trouble. So careful on that one.
It is very important that these rules are in place very, very important!! The percentages you as the trader will have to work out. But you
MUST have a stop, you MUST adhere to them, you MUST have a risk per trade and share size accordingly, and you MUST have a max
risk that you are willing to take, after which you are going to pull the plugs. And you MUST have a point where a bad day or month is
accepted as it is and all trading comes to an end. If you are out on the 15th day of the month, that does not mean that you sleep and
watch TV for the rest of the month You come to work as in every other day, you paper trade, and you do it till the end of the month.
Your first trade would be the first day of next month.
Discipline is discipline, and rules are rules These are like commandments in the Holy Scriptures of the Trader. Not observing them is
sacrilege, a blasphemy. They, once drawn up, MUST be followed at all cost.
There's still more that one has to learn about Money management I hope this is at least a start.
And 2 posts that one has to go through, one from Credit Violet, and another from Swing Trader ..
By Credit Violet
Money management is the process of analyzing trades for risk and potential profits, determining how much risk, if any, is acceptable and
managing a trade position (if taken) to control risk and maximize profitability.
Many traders pay lip service to money management while spending the bulk of their time and energy trying to find the perfect (read:
imaginary) trading system or entry method. But traders ignore money management at their own peril.
The importance of money management can best be shown through drawdown analysis.
Drawdown
Drawdown is simply the amount of money you lose trading, expressed as a percentage of your total trading equity. If all your trades were
profitable, you would never experience a drawdown. Drawdown does not measure overall performance, only the money lost while
achieving that performance. Its calculation begins only with a losing trade and continues as long as the account hits new equity lows.
Suppose you begin with an account of 10,000 and lose 2,000. Your drawdown would be 20%. On the 8,000 that remains, if you
subsequently make 1,000, then lose 2,000, you now have a drawdown of 30% (8,000 + 1,000 - 2,000 =7,000, a 30% loss on the original
equity stake of 10,000). But, if you made 4,000 after the initial 2,000 loss (increasing your account equity to 12,000), then lost another
3,000, your drawdown would be 25% (12,000 - 3,000 = 9,000, a 25% drop from the new equity high of 12,000).
Maximum drawdown is the largest percentage drop in your account between equity peaks. In other words, it's how much money you lose
until you get back to breakeven. If you began with 10,000 and lost 4,000 before getting back to breakeven, your maximum drawdown
would be 40%. Keep in mind that no matter how much you are up in your account at any given time--100%, 200%, 300%--a 100%
drawdown will wipe out your trading account. This leads us to our next topic: the difficulty of recovering from drawdowns.
Even worse is that as the drawdowns deepen, the recovery percentage begins to grow geometrically. For example, a 50% loss requires a
100% return just to get back to break even (see Table 1 and Figure 1 for details).
Professional traders and money mangers are well aware of how difficult it is to recover from drawdowns. Those who succeed long term
have the utmost respect for risk. They get on top and stay on top, not by being gunslingers and taking huge risks, but by controlling risk
through proper money management. Sure, we all like to read about famous traders who parlay small sums into fortunes, but what these
stories fail to mention is that many such traders, through lack of respect for risk, are eventually wiped out.

Guidelines that should help your long-term trading success

1. Risk only a small percentage of total equity on each trade, preferably no more than 2% of your portfolio value. I know of two traders
who have been actively trading for over 15 years, both of whom have amassed small fortunes during this time. In fact, both have paid for
their dream homes with cash out of their trading accounts. I was amazed to find out that one rarely trades over 1,000 shares of stock and
the other rarely trades more than two or three futures contracts at a time. Both use extremely tight stops and risk less than 1% per trade.
2. Limit your total portfolio risk to 20%. In other words, if you were stopped out on every open position in your account at the same time,
you would still retain 80% of your original trading capital.
3. Keep your reward-to-risk ratio at a minimum of 2:1, and preferably 3:1 or higher. In other words, if you are risking 1 point on each
trade, you should be making, on average, at least 2 points. An S&P futures system I recently saw did just the opposite: It risked 3 points to
make only 1. That is, for every losing trade, it took 3 winners make up for it. The first drawdown (string of losses) would wipe out all of
the trader's money.
4. Be realistic about the amount of risk required to properly trade a given market. For instance, don't kid yourself by thinking you are only
risking a small amount if you are position trading (holding overnight) in a high-flying technology stock or a highly leveraged and volatile
market like the S&P futures.
5. Understand the volatility of the market you are trading and adjust position size accordingly. That is, take smaller positions in more
volatile stocks and futures. Also, be aware that volatility is constantly changing as markets heat up and cool off.
6. Understand position correlation. If you are long heating oil, crude oil and unleaded gas, in reality you do not have three positions.
Because these markets are so highly correlated (meaning their price moves are very similar), you really have one position in energy with
three times the risk of a single position. It would essentially be the same as trading three crude, three heating oil, or three unleaded gas
contracts.
7. Lock in at least a portion of windfall profits. If you are fortunate enough to catch a substantial move in a short amount of time, liquidate
at least part of your position. This is especially true for short-term trading, for which large gains are few and far between.
8. The more active a trader you are, the less you should risk per trade. Obviously, if you are making dozens of trades a day you can't afford
to risk even 2% per trade--one really bad day could virtually wipe you out. Longer-term traders who may make three to four trades per
year could risk more, say 3-5% per trade. Regardless of how active you are, just limit total portfolio risk to 20% (rule #2).
9. Make sure you are adequately capitalized. There is no "Holy Grail" in trading. However, if there was one, I think it would be having
enough money to trade and taking small risks. These principles help you survive long enough to prosper. I know of many successful
traders who wiped out small accounts early in their careers. It was only until they became adequately capitalized and took reasonable risks
that they survived as long term traders.
10. Never add to or "average down" a losing position. If you are wrong, admit it and get out. Two wrongs do not make a right.
11. Avoid pyramiding altogether or only pyramid properly. By "properly," I mean only adding to profitable positions and establishing the
largest position first. In other words the position should look like an actual pyramid. For example, if your typical total position size in a
stock is 1000 shares then you might initially buy 600 shares, add 300 (if the initial position is profitable), then 100 more as the position
moves in your direction. In addition, if you do pyramid, make sure the total position risk is within the guidelines outlined earlier (i.e., 2%
on the entire position, total portfolio risk no more that 20%, etc.).
12. Always have an actual stop in the market. "Mental stops" do not work.
13. Be willing to take money off the table as a position moves in your favor; "2-for-1 money management1" is a good start. Essentially,
once your profits exceed your initial risk, exit half of your position and move your stop to breakeven on the remainder of your position.
This way, barring overnight gaps, you are ensured, at worst, a breakeven trade, and you still have the potential for gains on the remainder

of the position.
14. Understand the market you are trading. This is especially true in derivative trading (i.e. options, futures).
15. Strive to keep maximum drawdowns between 20 and 25%. Once drawdowns exceed this amount it becomes increasingly difficult, if
not impossible, to completely recover. The importance of keeping drawdowns within reason was illustrated in the first installment of this
series.

16. Be willing to stop trading and re-evaluate the markets and your methodology when you encounter a string of losses. The markets will
always be there. Gann said it best in his book, How to Make Profits in Commodities, published over 50 years ago: "When you make one to
three trades that show losses, whether they be large or small, something is wrong with you and not the market. Your trend may have
changed. My rule is to get out and wait. Study the reason for your losses. Remember, you will never lose any money by being out of the
market."
17. Consider the psychological impact of losing money. Unlike most of the other techniques discussed here, this one can't be quantified.
Obviously, no one likes to lose money. However, each individual reacts differently. You must honestly ask yourself, What would happen if
I lose X%? Would it have a material effect on my lifestyle, my family or my mental well being? You should be willing to accept the
consequences of being stopped out on any or all of your trades. Emotionally, you should be completely comfortable with the risks you are
taking.
The main point is that money management doesn't have to be rocket science. It all boils down to understanding the risk of the investment,
risking only a small percentage on any one trade (or trading approach) and keeping total exposure within reason. While the list above is
not exhaustive, I believe it will help keep you out of the majority of trouble spots. Those who survive to become successful traders not
only study methodologies for trading, but they also study the risks associated with them. I strongly urge you to do the same.
By Swing Trader
Hello Everyone,
Now that the market is in a short term downtrend and stock tip threads have mostly disappeared I think it is a good time to discuss what is
really important in trading - Position Sizing / Money Management Strategies. I Would like to hear/discuss the different sorts of position
sizing strategies experienced traders here use for stock trading.
For new traders:
"Position Sizing" is the way you determine the number of shares of a stock you would buy when you decide to initiate a trade (and also
how many shares you would continue to hold throughout the duration of the trade). It also decides how much equity will be allocated to a
single position. Position Sizing is used by everyone even though they might not think about it (usually traders just buy 100 or 50 shares or
any number that they are comfortable with or can afford). But good position sizing is what makes or breaks a trader, it is the strategy that
keeps a trader in the business longer. It turns a mediocre trading system into an excellent one (but won't help a losing system).
The most popular/recommended position sizing strategy is to risk not more than 2% on any single position.
New traders - make sure you go thru' previous threads in "Risk & Money Management" section of this forum, there are good posts on risk
& money mgmt by Traderji & CreditViolet.
Books on position sizing:
Trade Your Way To Financial Freedom by Dr. Van Tharp
Portfolio Management Formulas by Ralph Vince
The Mathematics of Money Management by Ralph Vince
The Trading Game by Ryan Jones

My Strategy:
I use a combination of percent risk & percent volatility strategy. Here are the rules I use:
- My main aim is to ensure that I stay in the business longer so my trading system gets a fair chance to realise its potential.
- No position should be greater than 10% of my total trading equity
- I don't risk more than 1% of my total trading equity on any single position
- I make sure my positions are "volatility balanced". In other words I make sure that all my positions fluctuate approximately the same
each day in the market. I do this using Average True Range of the stock.
Example:
Say I am planning to buy HINDLEVER, here is what I would do to determine the number of shares I would buy:
Total Equity : 100,000.00
Max Equity for each trade : 10,000.00 (10% of total equity)
Risk Amount : 1,000.00 (1% of total equity)
Volatility Amount : 500.00 (0.5% of total equity. This is the fluctuation level per day per position)
Average True Range (10 Day Avg) : 5.63
Last Market Closing Price : 173.20 (For simplicity assume this is the entry price)
Stop Loss at : 163.40 (Will get out just below previous reaction low)
Number of shares to buy (percent risk model) = Risk Amount / (Entry Price - Stop Loss Price)
Number of shares to buy (percent risk model) = 1000 / (173.20 - 163.40)
Number of shares to buy (percent risk model) = 102 Shares
Number of shares to buy (percent volatility model) = Volatility Amount / Average True Range (10 Day)
Number of shares to buy (percent volatility model) = 500 / 5.63
Number of shares to buy (percent volatility model) = 88 shares
Number of shares to buy (based on Max Equity for each trade) = Max Equity for each trade / Last Market Closing Price
Number of shares to buy (based on Max Equity for each trade) = 10000 / 173.20
Number of shares to buy (based on Max Equity for each trade) = 57 shares
I will buy minimum number of shares determined from the above three models. So in the above case I would buy 57 shares.
So here is what I basically do. I am still trying to fine tune these things. The above parameters used are what I am currently using but I am
in the process of doing trial & error to come up with parameters that fit me well. I would now like to hear what the experienced traders
here do.

Positive Divergence of Price wrt MACD

A positive divergence occurs when MACD begins to advance and the security is still in a downtrend and makes a lower reaction low.
MACD can either form as a series of higher lows or a second low that is higher than the previous low. Positive divergences are probably
the least common of the three signals, but are usually the most reliable and lead to the biggest moves.
See attached charts of Arvind mills in weekly and daily mode.

DAILY MODE

WEEKLY MODE

QUESTION
How do we use histograms on MACD. I mean I want to plot The difference between the MACD and signal line. And also It gives me the
option to change the time period for the signal line( which is 9). But i am not able to change the time period of the two moving averages
used to plot MACD.
Can you guide me what time periods should I use for the three simple indicators( RSI, MACD, Stochastics). Right now I am using 14 days
for RSI. Stochastics 5 and 3. Signal line 9 and I am not sure what period it is using for the plotting the MACD. And should we us different
time periods for daily charts, for weekly charts and for monthly charts. Also do they change if market is volatile. If yes could pls briefly
note them down for me.

REPLY BY SAINT
I basically use the RSI at 14, and the Stochs at 14,5,3 but all this is more a personal preference. Play around with it till you attain
comfort levels.And,no,I don't change the periods in different time frames.
Please do have a look at the link below for more education....
http://stockcharts.com/education/IndicatorAnalysis/indic_stochasticOscillator.html
http://stockcharts.com/education/IndicatorAnalysis/indic_RSI.html
http://stockcharts.com/education/IndicatorAnalysis/indic_MACD1.html

QUESTION
If a security in down trend, but Momentum indicatiors (like Stochastic, RSI) generate buy signal in some interval of time due to oversold
position. I want your guidance on following points:
1) To determine the right time to buy.
2) To find out down trend is over or price may be reverse
3) Suggest an indicator to overcome this problem

REPLY BY SAINT
Depends on the timeframe of the downtrend if we are talking daily charts and the stock is in a downtrend, meaning it is making lower
pivot highs and lows, and momentum indicators on that daily charts tell you oversold, it NEVER is the time to buy The right time to
buy would be if we make a higher pivot low and you get confirmation once a previous pivot high is taken out. So, the important thing is
always PRICE,PRICE and PRICE.
Question 2 is answered by the answer to question 1 above.
An indicator to overcome this problem? None stay with price, pivots and trends. An indicator may at best confirm to you what you
should already be knowing. For eg. We have a strong uptrend indicators tell us that we are overbought, what do we do? Nothing .We hold
The uptrend gets stronger and stronger. The indicators continue to be overbought. We Hold. Now we start breaking previous pivots, we
sell, whatever the indicators tell us.
My suggestion: Learn Trends, Pivots and Patterns then go with the flow of the trend. But do learn about the various indicators. Because
they may come in handy in shorter time frames, and for the pure fun of it.

QUESTION
I am new and am very interested in the technical analysis. I have purchased a few books on technical analysis, but I find all of them dont
actually tell you how to use the different graphs moving average or oscillators.
Rather, they duel on how to construct it what actually is ie its definition. I could not find in any of my books how to interpret and use it to
take trading decision. Could u suggest me some good books regarding interpretation and how to use these charts..

REPLY BY SAINT
Many threads here that teach a lot of TA. Else have a look at http://www.stockcharts.com/education
For a trading decision off a chart, one must first be able to interpret a chart. To interpret a chart, one must be able to do the basics. Learn
the basics now, first step first As for books, TECH ANALYSIS EXPLAINED by PRING,TECH ANALYSIS OF STK TRENDS by
EDWARDS,MCGEE, and Technical Analysis of the Finacial Markets by John J. Murphyanother

QUESTION
Hi! Im new in this thread, here is very good things about share market, one of these - teaching fundamental rule is very appreciated. I
request to friends to learn to catch fish in chinese style.

REPLY BY SAINT
From what I understand, I think you are referring to learning Fundamental Analysis there are many within the forum whom I respect
for their knowledge of Fundamentals.like Pankaj (pkjha). Suggest you get in touch with him to learn some fundamental stuff.
This thread is limited to the trader who believes in trading using charts, a trader who follows trends, a trader whose primary objective is to
make as much profits as possible in the simplest method possible.
Compiled by SJL