Quantifiying Situational Awareness
This is how I read the Breadth indicators?
“What is not defined cannot be measured. What is not measured, cannot be improved. What is not improved, is always degraded” ~ William Thomson Kelvin
Have you ever had that feeling “Market looks like it’s going to pullback anytime now”
but unable to derisk your positions.
Or, after a market correction, the feeling that we are going to bounce anytime now, but still unable to get back in.
Yes!
You bet.
I call that, having “FEELS”.
Most often these “FEELS” turn out to be true (but they often are not as well).
The academic term for this is called having “situational Awareness”.
A term I learned from Pradeep Bonde (StockBee).
It means, having an awareness of the market conditions. Is the market bullish or bearish? More importantly, where in the bullish/bearish regime are we in right now? Which will translate into “Should I be more aggressive, or should I protect my gains”?
In this article, using the breadth indicators, I will attempt to quantify the “FEELS” into an actionable objective system.
Towards
“Quantifying Situational Awareness”. Watch the video (link)
Why quantify Situational Awareness?
I have been time and again warned against objectifying my trading rules by my Truth Seeking Pod and rightly so. Trading is an Art and we operate at the edge of probabilities. Some amount of subjectively should therefore be left alone, untouched, unbesmirched.
But as a beginner trader, some solid rules will do more good than harm.
And so these rules should be seen as a guiding light and not something ultra rigid.
There are some more problems with NOT having guiding rules and solely operating on “FEELS”:
Feels can be outright wrong owing to a) overestimating your skills and b) Sampling Bias:
Some examples of traders operating on feels can be seen in the Twitter community.
Many traders disregard the breadth and swear by their existing portfolio and stocks in their watchlist. They say, “Stocks in your portfolio and watchlist are the first indicators of the Market Health”.
Well, maybe true. If you are a peak trader with huge experience. But to rely on them every time would mean slightly overestimating yourself as a trader (even for a peak trader).
We also often overestimate our portfolio and open positions.
There is a more dangerous problem here.
Sampling Bias.
A portfolio of 10 stocks is 0.05% of the market/NSE.
So that is a very tiny sample size.
Going to your watchlist, say 50 stocks, that’s still 0.25% of the market.
To then assume that those contain the best stocks would be over-relying on your skills. What if you are not so great at identifying the right stocks, and the right sectors, or your setup is simply not good?
Now the other way around is also true.
Say you had 8/10 stocks in your portfolio pharma stocks. Does that now mean markets are good and “all is well”?
Then some other traders will say, “Breakouts are not working”, “No follow through at all” or “Squats galore”! Yes, may be true. But have you quantified it? Have you gone through the entire market manually or is this just by looking at your watchlist? How do you know that stocks not in your tiny watchlist are not doing something different (like pharma now)? How many stocks broke out and out of those how many have squatted? Are those significantly higher/lower than what we had last week?
Why not use some actual measurements to support your “FEELS” then?
Key Situational Awareness Question:
Where are we on the broader market cycle?
Where are we on the shorter-term market cycle?
Which setups appear during which part of the longer/shorter market cycle?
Where are we on the broader market cycle?
Are we in a bull market or a bear market?
If we are in a bull market, are we at the beginning, midway, or around the end?
The start of the bull run favors positional plays more while at the end of the market, it’s better to open fewer positional plays and more swing trades.
There are many ways to ascertain this. General Breadth indices will help here. read more (Link).
Now, markets always pull back into the counter-trend direction. This brings us to the next question:
Where are we on the shorter-term market cycle?
Are we at the start of an uptrend?
In the middle?
About to Top?
Start of the pullback?
Depending on where we are, we can have answers to the following questions (as a short-term swing trader):
Should I:
Sit Out
Get back IN
Hold
Derisk
Which setups appear during which part of the longer/shorter market cycle?
Once you understand the Central Tendencies of a Market (this doesn't change ever), you will realize which setups (and hence entries) appear at which stages of a market trend. Immediate post a pullback when the market starts to recover, you will find a plethora of PB setups. See my PBC entries starting on 5th June onwards and topping around 11-13. While the tightness setups only appeared on the 11th... when the Market consolidated with volatility contracting as a whole. Similarly, we will see the PBs proliferating now more than the Tight BOs.
Where are we on the shorter-term market cycle?
% Stocks above 10DMA:
Link to the Dashboard: (link)
There are so many other ways to look at it, but “% stocks above 10DMA” is one of the simplest and most potent ways I use:
There are 3 things to look at:
% stocks above 10 DMA above/below 50%?
% stocks above 10 DMA above/below its 5DMA.
% stocks above 10 DMA sloping Up/down?
In addition to this:
A value of 80% and above can be considered as overbought, and
20% and below and oversold.
The probability of pullback increases once we are overbought while the probability of a bounce increases once we hit the oversold levels.
Corrigendum:
A less radical way to interpret the Breadth that makes better sense would be the following. (This came about with some deliberation with Nitin). The idea is to get more accurate with reading and anticipating breadth with time:
Additional indicators:
There are additional breadth indicators that I use in conjunction with the trend to develop a more robust “FEELS” of breadth, viz:
Net 4% movers
More on these later and in this Video (link):
In case you missed it,
I just finished my Annual Beginners Trading Masterclass tomorrow last month.
This year it was all about Trading Systems.
If you find my articles valuable, you will find the Masterclass 50 times more useful.
You can avail of the recorded session now.
More details below.
That's all for today.
I also help traders build their own personal trading system and show mine live every day in HPA.
(PS: 1-month free HPA access complementary with the Masterclass)
Details below:
Homma Private Access membership:
HPA is a subscription-based educational service (on WhatsApp). Benefits include:
Daily Market Breadth, Momentum, Sector Rotation, and Relative Strength Update.
Access to all my scanners including the BBB (buy before breakouts) scanner, and the Homma Khela Hobe 2.0 scanner.
Access to my proprietary Breadth-Momentum-Relative Strength & Sector Rotation dashboards.
Access to my Trading view indicators: Homma Khela Hobe, Buy before Breakouts (BBB), Homma Endgame, etc.
Access to live Telegram alerts to Homma Khela Hobe, Homma Pullback, and TGP scanners.
HPA Weekly: Hourly weekend deep dives and Q&A.
1-year access to The Technical Take premium.
Live alerts to high-risk-reward setups breaking out.
Live updates on my portfolio and the trading setup rationale.
Access to my high probability watchlist.
Yearly membership of 15000/- INR only.
UPI payment & WhatsApp @ 9481506784.
Yours
Sakatas “Quantify the feels” Homma.