Learning all major candlesticks patterns might be a tough thing specially for people like me who forget things very quickly and easily. Candlesticks nonetheless are the best charts for a trader. So there is no question of avoiding the because there are two many patterns to remember. Rather if we break down the price move it becomes pretty easy. A pattern is ultimately doing just that for you. If you find it hard to remember what is hammer or hanging man or spinning top just forget the technical names and focus on what a candle tells you. Four things – open high low and close. Instead of finding patterns just find out what a candle is telling about that day’s market action and you will be right most of the times. Later on as you practice more you will automatically remember all the technical terms for patterns.

Here we have SBI,trading symbol on nse is sbin. We look at the 7 months chart.  There are 10 crucial points in this chart. Number 1 is the top for the channel. Price came off that point two times. That is a double top. The text book definition is a little strict. What we need is the idea. On the chart at 1 price couldn’t break it twice. That is good enough for us. We know that it is not going to go any higher. Naturally it should go down but we have to wait before it does go down. That wait is over at 2. Price broke the channel range. We are good to short.  Price does not always run away. It will test highs and lows and then chose the direction. The candle plays a big role. If the breakout at two was with a small candle with  a long upper shadow i will take it as a sign that bulls still have some force. But that candle has no upper shadow. Price opened and simply went down with not a single tick on the up side. This is clear indication of bears force.  The next point at 3 has three white candles in a row. Price is moving down and a white candle shows buyers were stronger that sellers. But here those white candles didn’t make new highs. Look at the long upper shadows. Means buyers did pull price up but couldn’t sustain it there. Signal is still bearish. When you draw a top or bottom line simply focus on close beyond that line. Price crossing a line but not closing beyond it is no signal or reversal.

Points 6 and 8 are v shaped reversals. Prices turns violently without forming a proper base. Base is the launchpad of any reversal. Though these two did pull price up but it couldn’t cross the high line. Also notice at 11,6 and 8 price is lower than the previous low point. The upmove after these points were more like retracements than reversals.

Then comes the base. Point 10. Here price didn’t reverse in a jerky way. It made a base. A proper launchpad. That base was tested soon too and held good. Now price is much more likely to go up. Among the upmoves from points 11,6,8 and 10 only 10 had a clear candle formations. Look at candles after 10, mostly white. This is the effect of having a proper base in place. Earlier all retracements had mixed bag of candles,some white some black.

You can afford to totally ignore what those candles are called technically. As long as you know which candle is bullish and which is bearish you will do good.  On Monday 23-01-2012 the target will be to break the high price line. If it does that then you can expect more upmoves. If it doesn’t atleast it is not likely to have another selling spree considering that the bottom has been found. If i am long in sbi my personal target will be to book partial profit if it closes at 2000. And buy some more if it goes above 2000 and hold till 2100.

Infosys in last six month is as ugly as a candlestick chart can get. Too many gaps. Though most were in one direction even then its too much of a jerky ride. A short term trader with bad habits of missing stop losses this is sure death. There was one good up move in October 2011 but even that is too confusing and candles are not in a good shape there too. Price did rise high but this will not be a peaceful trade. Stock hit a clear strong resistance at 2900. Staying true to its jerky nature came down all the way to 2600.

In this kind of stock your month’s profits can be wiped out in one bad day. So if you are not a long term investor who buys and hoards stocks stay away. And in case you have enough capital to facilitate a short trade margin then this is the stock for you. Short it. Wait for a close below 2600 and then it is a blind short trade. But do keep your stop loss in mind. Even though an up move is unlikely to sustain for long make sure you have an exit plan in place. Below 2600 if 2500 is broken too then there is no support for the stock.

This is what happens with stocks that gap too much. There is no base when they go rogue. Below 2500 I can not spot any support before 2200.

Tatasteel is a short term trader’s delight. This is one stock that is never out of momentum be it up or down. As of now it is on the up move. In last six months there have been many gaps. Gaps only tell that there are jerks in the stock. It is never a smooth moving stock and your stop loss has to be very very tight. It can go against an established trend in quick time. Right now facing resistance at one of the previous down gap starting point. If this could be broken on the upside then there is some more room left for up move.

Even on a positive break out beyond that gap the upside is limited. Right after 450 it faces more resistance. 418 is the first support point for me. It is trading at 435 so that gives me almost 15 points as check point on either side. Considering the swift this stock shows this range is pretty good to take a bet and keep a tight stop loss in place. For longs first exit sign is 450. Book partial profits there and if it keeps going up then just wait for the next resistance without buying more. For short keep building up until 450 is broken convincingly.  Last three days no new high is made. That suggests that buying pressure is losing steam.

Be ready to move in at either direction. Get the entry and exit points ready and stop losses in place.  It all depends on the next day. If it is seen making a new high then long if not then short.

The overall trend in this stock is down. It came down substantially and right now trying to make its way up. It made a good base around 230. There is a nice little flat base there. No confusion that for the short term it is not going to be broken. After a big down move if a stock is seen rising sharply it doesn’t mean much in terms of power of that reversal. Until you have a platform to jump from you can not jump high. Here the stock has a good base. But as of today the stock has moved up pretty high enough already. So the question now is what is to be done next? If I didn’t but it at the bottom should I buy here now?

The immediate resistance is at 350. And the next is at 380. Today’s move in the stock is useless. There was no clear direction.  Though the upmove since the new year is good and strong I think this has run out of steam for now. Better to wait and watch. Today 340 put gained a lot. That also tells me that the downmove from here is much more expected.

The operative range for me between 300 to 350. Considering that is more than 15% on this stock I will go long if the stock holds above its previous day close point(318). And go short if it closes anywhere below yesterday’s open (312).

Never trade by an indicator only. You have to look at the price of your stock too. When you put AD and price line on one chart then you can use it properly. The indicator tracks down flow of money into and out of a stock.  When money flows in it is accumulation period. More traders are buying than selling. When money flows out of a stock it is distribution, more traders are selling than buying. The AD line thus only give you a trend. When it looks like the price chart and you have to put it in conjunction with the price then what is the significance of this indicator? Why to look at it?

Look at it to know which phase is going on in a stock. When you see that AD is rising or is constant at one place after a good rise you know that stock has more buying force than selling force. You see a divergence in price and AD line then i suggest you pay more attention to the price chart of the stock. Use the indicator for secondary confirmation only. Never trade solely on the indicator. When you see that rise in price is stagnant and price is also in a range you know it is time to book partial profit and wait before buying fresh. When you see that a stock is falling down and AD is also going south you know what is to be done.

Chose the time frame as per your choice. Some traders use different time frame of same indicator. If your system allows you can put 2-3 time frames of AD. With one price you can have this AD as the filter. If you see the change in shorter period AD is not in sync with the longer period AD then you can wait. And when all time frames show the same move it is that much more confirmed move.  Right now reliance is trading at 770 and AD is showing a top is made for the day. Price chart also says that today’s high is not yet broken and price is not going to go up. So i will not buy fresh reliance right now. Instead if i have some shares i will book partial profit and wait for the next move. ONGC is trading at 268 and AD is rising with the price. For me that is confirmation that stock still has some buying pressure. I can hold to my longs or buy some more.  NTPC is at 167 . Price chart is falling and AD line is flat. Price has come off the day’s high and AD is not doing anything too. I will not dare buy fresh NTPC.

This is the easiest setting of AD. You can add more. You can add more than one time frame and trade within the time frames. You buy when short period AD is rising and hold till the long period AD is gone flat. This might give a small profit. But trading like this you will be at the edge of your seat. And that is not a good position to trade from. Rather be cool. Look at the price and wait for AD to show the same shape as price. One indicator will give you different results as you change your trading style. You want to buy at the open and hold till the very close or you want to scalp every 20 minutes. Its upto you. But one thing is sure as you increase your trade frequency and number of trades your profitability will fall.

The drawback with AD is during a strong trend it gets a little slow. It will hang. It is not as live as the price itself. It will lag a little but in the long run that is a good thing for trader. Use AD if you are good at studying line charts. Not otherwise. Indicator is secondary, not primary.

As we saw in the last pose that indicators tell you when to go in and out. Some indicators move ahead of the market and some behind it. In both cases you are almost never in line with the price of the underlying. This is the biggest thing with using indicators. RSI may say that a stock is overbought but it doesn’t mean that there will be selling immediately in the stock. Selling might take some time to come to relieve the pressure of an overbought. In some cases a selling trend might never come. An overbought stock might be caught in a range and during that range the RSI will adjust itself. RSI will go down and once the range is broken RSI will again start going up. An overbought stock doesn’t always mean a selling spree. So if you bought puts thinking that RSI reading says it is overbought then you will be caught on the wrong foot if selling doesn’t come.

The other thing with indicators is that when they were calculated the first time they were calculated using the end of day data. Most traders use them in intraday trading. Without adjusting the fact that end of day price is a different story than intraday price. RSI in end of day charts will be much smoother. You see the same indicator in intraday chart and you will find many whipsaws. The reason is that input data increase. In end of day indicator when data range increases it flatten the indicator. It removes whipsaws and also the effect is that it removes trade signals. In intraday trading when data range increases the same indicator becomes more violent and both whipsaws and trade signals increase. This causes all the more trouble.

So what should an options trader do when deciding which indicator to use for trading? There is no final answer to that. You need to understand you own trading style. How much capital you have and what targets have you set for yourself. Once you finalise all that then you go about making a trading plan. And part of it is choosing the indicator. I think traders who rely heavily on intraday trading are the ones who are trying to make quick money. I personally am not a big fan of this theory. For me the swing method is the best way to approach both stock and options trading. But those who want to go ahead with intraday trading must first study the indicator. Don’t just read a short note on any website and think that this is all you need to know.

If you don’t know how an indicator is calculated then you will not know what affects the indicator and how it behaves. You will end up trading all signals it gives. And before you know it will be too late. The key to trading indicators profitably is in understanding the indicator first. What it tells, how is it calculated and what factors affect it? Both in intraday trading and swing trading. If you know your indicator then you will be able to use it well. And then trading is an art altogether. Indicator is just a brush. Now we move on to the next part. Picking indicators and decoding them. These are my views. I don’t say this is the absolute truth. I am a student of share market. Not a master. If you think i am making a false assumptions please feel free to point it out. We share, we learn.

The first thing we need to clear our mind about is that we are looking to find an indicator that suits options trading needs. Most of the indicators that are known are based on underlying’s price movements. And options is also based on an underlying’s price movement.  A share moves up and down. Its price is used for an indicator. The indicator then calculates the price in a manner and presents an idea of the behaviour of that stock. We use that indication for trading. Some traders are hardcore indicator traders. They use only indicators and don’t even look at the chart. Some use bother charts and indicators. Some use only charts. The biggest thing an indicator does for you is that it takes the emotional element out. And this is a big achievement. Here is how an indicator is normally used in trading. Say you are using RSI, a very popular and common indicator. You decide i will buy when the stock is oversold and sell when stock is overbought. A simple and effective strategy. If you start looking at the chart there will be so many patterns and distractions that it will be very painful and confusing for you to decide when a stock is overbought or oversold. You switch to RSI and now all you have to do is wait till the RSI gives a signal of a stock being overbought or oversold. This way you reduce your work. When RSI says oversold you jump in and buy. When it says overbought you jump out and sell. If you are using only RSI looking only at RSI then this will be easier for you to do. It will leave no confusion in mind.

But everyone will be making huge money if using an indicator was that simple. Indicators are defined under two categories , leading and lagging. Those that are leading indicators move ahead of the market and the other move behind it. In both cases you are either ahead of the market or behind it. This causes dissatisfaction in most indicator traders. Ideally you should take whatever profit is coming your way without any desperation for maximizing wealth in short time. But that rarely happens.  When you use a leading indicator you go short or long before market falls or rises. Sometime the gap might be 4-5 days long. This may cause you to change your position and take an opposite one. And suddenly you will find that market has kickstarted the move and now you are standing on the wrong side. This can be avoided if the person is trading in stocks with a slightly medium term view. That timeframe will give him enough time to hang on to a position until market moves in the same direction. Patience is more important that capital in trading. And patience is what most people don’t have. Indicators need you to be patient.

Using indicators in options poses a different problem. It is the behaviour of premium with its underlying. This is a tricky thing. You can read in a book how out of money, at the money and in the money strikes behave. But it is a different story altogether when you come to real trading world. In the next post we look into this behaviour and then see what are the challenges with indicators in options trading. Later on we will pick all popular indicator and try to decode them for options trading.

In Indian markets options are still a new thing. Though there are newer options categories available now still an average share market investor is quite away from options. In fact the brokers themselves are not too comfortable with options. Some of them are not even aware of the difference between options and futures. You might find it difficult to believe but I don’t . I have met such brokers. They are a piece of art. Anyways, getting back to the normal options trading for a normal trader.

First thing, if you short an option you are to pay for the margin and that margin is mark-to-market. This is a complicated process in itself but not too complicated. However if you take only long positions then there is no margin needed in that case. And going long in options is good enough to give you any amount of profit that you want. Second thing , trading in stock options and index options are two different things. So beware don’t treat them alike. Previously i wrote about the differences between stock options and index options.  Third thing, don’t go too high on the concepts like implied volatility and delta neutral strategies. I am not writing them off but only saying that for a starter this is not the kind of thing one should be indulging in. Fourth thing, pay special attention to how prices behave when the expiry week is on. You will easily spot some tips. Watch them for a month and you will know that certain strikes go right to the top and then fall mercilessly. One thing to remember is that an  out-of-money strike is going to expire worthless. This is a key thing. If you can remember that an out-of-money strike is going to expire worthless that will give you many ideas about how to use and chose the strikes correctly.

Fifth thing, fix your timeframe. Don’t enter into a trade with an intraday timeframe and then convert it into a swing trade for three to four days. Once a timeframe is fixed, stick to it. There are no hard and fast right and wrong timeframes in options. So chose the one that suits your trading style and your capital the best. One thing is sure that if you chose your strikes well and get in at the right time then one single trade can give you almost 100 percent profit within a span of two to three days. That is not at all impossible. And that doesn’t even take a Ph.D. in finance. All it takes is some experience and a strong character.

Pay special attention to what is the brokerage you are paying on your options trades.  Most brokers will give you cheap rates on cash segment but in derivatives their brokerage goes high. It is pretty common that a broker will charge as much as 100rs per lot. This is pure madness. If you are starting with  a small capital then they are not going to give you the best deal. In that case make sure that you are fully aware of the charges you are paying for the brokerage. Remember to ask them if the charges are on one leg or both legs. Means the same charge is applied for buying and selling or is it applied only on buying.

Keep these simple things in mind. Watch the underlying you want to trade for a month. Pay special attention to the expiry week and how it builds up. Look out for premium behaviour in the expiry week and make a note of it. Do it for as long as you can. Even if you are not a finance wizard you can make good profit from careful options trading. And don’t subscribe to those sms tips. You don’t need that.

Making profits in share market is not an easy thing i agree. But this is not an impossible taks either. All it takes is practice and discipline. In one of his seminars Alexander elder talks about trading becoming “muscle memory”. That is how much practice it takes. Discipline is about your character becoming used to the environment of share market. Buying an Audi doesn’t make you a great driver. In share market it is not how much capital you have but your character that defines your success. Those who have a big enough corpus get services like PMS and other such high fashion things. Even in those services the service provider says that your investments are subject to market risk. I wonder if he can not manage the market risk then why is he charging you a fee? If he is as good as you then why pay him? Rather do it yourself. Atleast you will be saving his cost.

Making money from share market is a possibility. Only it takes some hardwork. But then making money from anywhere takes hardwork. The important thing is whether you are doing your share of hard work or not. If you do it properly then share market is right out there to give you good returns. The next time some one starts talkin about share market being highly risky and such stuff just ask them if they really know what they are doing in share market. I have met some sub-brokers who don’t even know the difference between futures and options. All it takes for you to open a sub-brokership is some capital and nothing else. They don’t even check what is your educational background. This means that people who are becoming share brokers are not even qualified enough to do this. Then they start providing tips to the customers. Customers think that the share broker knows what he is talking about and they trade on those tips. Broker ends up making money through brokerage and customer is left wondering what just happened. I particularly remember a case where one person liquidated all his real estate assets to invest in share market. He comfortably invested almost 20 lacs in his demat account. The relationship manager of the broker company started telling him things and within a year the customer was left with peanuts in his demat account. He lost almost every single rupee of his capital. And even then he was not angry because the relationship manager has cleverly convinced him that share market is one place where you might double your money or lose all of it. So keep trying unless you double your money and don’t stop if you lose all of it. Arrange more and invest again. That customer who had lost this much was still ready to liquidate more of his assets and invest it in share market.

Even those who don’t want to actively participate in share market must know that this is not a gambling place. This is not an illogical place where no one can predict what future holds. Share market is run on finance and economics. Share market is a place where some of the sharpest brains in the world meet together and compete against each other. If you enter the market and you are not trained enough those sharp people are going to rob you off everything you have. But if you are trained enough, if you have the characteristics of a trader and if you have the willingness to do the hard work then share market gives you rewards. The next time your broker or adviser tells you that there is no guarantee on share market investments you should ask him why? Ask him on what basis he gives you those trading tips? What is his educational background? Share market is not a black hole.