When to Enter back into the markets?
As a swing trader, of course.
"I am afraid sometimes you'll play lonely games, too. Games you cant win 'cause you'll play against you" ~Dr. Seuss, Oh ! the palces you"ll go!
Investors/Traders broadly come from 2 schools:
The Buffeto-Mungerilal School of Value Investing.
The Minervini School of Easy Money Mofiosos.
Today I am talking only to you Mofiosos. If you did pay attention to the lectures, I believe you are largely in cash today.
And itching to get back in.
But not sure when.
So. Listen Up, Yo.
What do you need from the market as a momentum trader to make Money?
Ans: Uptrend + MOMENTUM
Both these terms mean nothing without mentioning the timeframe.
Swing traders (who trade the upswing on a daily timeframe which typically lasts for 3-8 days) need at least an uptrend on a daily timeframe.
And a POSITIVE & RISING momentum on a 20-day timeframe.
(Why 10/20? Because we have a confirmed uptrend/momentum on a time interval higher than our holding interval)
Where should I look for the Uptrend?
Well, you should look at the chart of the index whose constituents you trade the most.
For most purposes, CNX500 presents the closest true picture of the Indian markets. Therefore I look at the CNX500 chart.
So, what’s the daily trend on CNX 500?
It is on a downtrend.
Is it an easy money environment?
Definitely not. The cautious swing traders should just stay put until we are back on an uptrend.
But,
Let’s say, you wanna trade the counter-trend upmove.
Now, every reversal on a higher timeframe starts with a reversal of a lower timeframe. So if you want to catch the daily trend reversal early, look for a reversal on the lower timeframe. 30-60 min timeframe works best for me. Just pick one.
So, what’s the 30-minute trend on CNX500?
what? Still on a downtrend?
Cool. No problemo.
A breakout of 16800 will be the start of an uptrend, whereas the break of the previous lower low around 16460 will be a continuation of the downtrend.
Therefore as a trend trader, even in the intraday timeframe, we do not have an uptrend.
And so we wait for it to trend up. At the very least. Alright!
But bro! Could we have not traded the small bounce off the lows from Thursday till today?
Yes. We could have. As day traders, not swing traders (More on this below)
Now let’s look for Momentum:
Firstly, let me define momentum for you.
Momentum means the Rate of change.
So, a 20-period daily momentum means the rate of change in price in a 20-day timeframe.
= (close today - close 20 days ago)/20
Below is a chart showing the 10 and 20-day momentum of the price.
But what are we checking for?
Positive and rising momentum.
Do we have these?
Momentum = Negative (for both)
Rising? Yes.
So for swing traders (see how I assert the timeframe every time I open my mouth), it is important to have the momo +ve and rising.
Also, Notice. The decline in momentum since September 11th and the second leg of decline again post-October 18.
So always remember: POSITIVE AND RISING, both are required.
To summarize:
For you, i.e. a swing trader that trades momentum, get back into the market only when there is an uptrend and a POSITIVE and RISING momentum (on a 10/20 day timeframe).
This is mind you, at the very least.
Going forward, you need to be wary of the momentum fizzling out and the trend snapping back into a downtrend.
Hence, to have an easy money environment you need the market to turn into an uptrend in the higher timeframes as well.
Hit and Run Trading:
Now, here’s the thing.
Even on a downtrend, you get a counter-trend oversold rally. (like the one we had from Thursday to Friday)
They are short-lived.
These rallies are tradable but in a very short timeframe.
These trends would hardly be visible on daily charts and will be more visible on 15-30 min charts.
Hit & Run trading is not advisable if you are just learning to trade.
You need peak risk management and agility to get and get out (hence the name hit and run).
So best not to pay attention here.
I will share a quick example of my H&R trade this week on Thursday:
MapmyIndia:
I traded the anticipation of trend change which is also an iH&S breakout.
Tight Stops.
Risk First.
Trading the Bounce Intraday?
Completely Off-topic.
But as I said, everything is possible.
Open Range Breakouts (5 minutes or 15 minutes) are a good way to do this.
Just make sure that there is a bounce first. This is very important.
Like if you go fishing, you make sure the pond has fish right?
How do you know this?
Simply count the number of ORBs.
The higher the ORBs, the higher the probability of the bounce.
Just worked out the Homma ORB-15 indicator. You will probably hear more on this soon.
(see that ORBreakout (blue) increased on Thursday after opening indicating the bounce. Also, notice the plot pointing up at close on Friday. Red: ORBreakdown)
Too much information?
I will stop here then.
All of these questions, I discussed in depth with my private group yesterday on HPA weekly.
Do watch:
That's all for today.
before signing off, I wanna tell you this.
A trader that is successful is a trader with a SYSTEM.
A SYSTEM that aligns with his/her:
Timeframe,
Risk Appetite, &
Personality.
Get extreme clarity on this first.
If you are unsure about your style and system, Sakatas Homma helps you find it methodically.
I do that in 2 ways:
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