Trading Goals

Recently, I received an email from a dear friend who had asked couple of questions on trading. I thought it might be useful to all of us as we all, at some point of time, keep asking these questions, especially when we are starting out.

I am reproducing some extract from that email communication (with few changes to maintain confidentiality), just in case it is helpful to some or all of us.

1) I read what was referred by you on Wiki for GANN theory. I am impressed with the theory but again there are enough cases against it as well. I mean there is no certainity in the theory as per the case studies. What are your thoughts on that? Arent the odds too high? May be i am missing something.

Response: To your first question, I would just use example of someone starting any business. It is not that a particular business model that fails, it is the people who fail. Why? Because they give up. They want immediate results. One has to decide whether it is a business (part time or full time) OR just a hobby OR just a wish to make money. So, there may be lot of examples against GANN’s success, it doesn’t prove that his techniques do not work. The fact that GANN made lot of money, tells us that there was something that he knew about the market movements.

Later, from 1985 to 2000, David Bowden from Australia (pls visit www.sitm.com.au ) also made lots of money using GANN techniques. So, my take is that if anyone can make money using a particular technique, we ALL can also do the same, if we are willing to learn and duplicate what they did.

David did a great work by simplifying GANN techniques which can be understood by any one, even a layman, provided the person is willing to put in work required as per their goal from trading. He made it ‘simple’ and simple doesn’t mean ‘easy’.

There are no free lunches. You have to put in the time, work and efforts required. It is no get rich quick funda. As David put it, “I don’t do extra-ordinary things, but I do ordinary things extra-ordinarily well.” Anyone who wants to become an expert has to learn and practice, in any field. You would have put in 4 years in engineering before becoming an engineer and then few years working to become better at what you do. That’s with any education or learning, and it’s the same here. I have learnt and used these techniques over last 4 years (since Oct 2006). If one devotes about 2 hours a day, and put in the work required, he/she would be in a position to forecast the stock/market movements with precision.

2) How do we trade? I mean what should i do? Buy/Sell a Particular SHARE and sell/buy it at a date/day recommended by you? Or should i do call/put on the actual Index? (If you feel i am jumping the gun too much just SAY SO – Or just reply will be answered on my blog or something on those lines)

Response : I would advise not to jump in straight away. To be able to advise you, I would need some more information like:

- whether you have a long term horizon or short term

- whether you want to learn trading or just trade. In other words, do you want a fish or want to learn fishing

- how much money do you want to make from stock markets (a target, may be every month, every year, in 2 years, 3 years, 5 years)

- Do you see it as a business, hobby or just checking

If the horizon is long term, then first just learn some simple concepts that I am sharing on www.sumitkgupta.com . These are applicable to all stocks and any market. Pick up one stock (any market) and one index (say NIFTY). You can find charts on them on Yahoo Finance. Here is a link to NIFTY bar chart on yahoo finance. It is an intra day chart i.e. for 1 day at 5 minutes interval. (http://ping.fm/SyFVu )

Start looking at Bar charts. Have a daily routine (1-2 hours daily, if you are serious). Don’t worry if you don’t understand anything. You didn’t learn walking, riding a bike or driving a car in first attempt. Believe me, effort is worth putting in. (I have a target to become a billionaire in 5 years trading in stock markets. August, 2015 And it’s done. Period. )

Once you respond, I will come back to you with a broad plan.

3) While answering above question – please note that my initial trading budget is only Rs. 25000. So i have no idea what and where to start with? I mean what is your advice shold i start with Indian markets or Oz Land?

Response: Capital is not an issue. You can start with any amount good enough to buy 1 (one) share.

I will cover more on this as well as few other techniques that one can use to learn trading, by trading without putting in any money, when we reach that stage.

Our education journey so far...

Last week had been pretty hectic and had to meet lots of personal commitments. A week with sense of achievment on personal front, but, had not been able to keep up with my PASSION, stock markets.

Let’s just recap the topics that we have covered thus far once to just refresh our memory.

We started with understanding the difference between Risk and Risky (http://ping.fm/DczTT). We primarily covered all the major, and most important rules of trading in that one topic. It is one of the most important post and the learning covered there under, which will form the basis of your trading as well trading psychology. It’s a great idea to keep re-visiting that post again, and again, and again….

We then covered some important Stock market terms. I use the word ’some’ because there are so many of them that one could write a full book covering all of these terms. (http://ping.fm/Uvuse)

We covered the importance and relevance of GANN techniques in our trading and stock market education. All my trading is based on GANN techniques. http://ping.fm/YhGXO We also learnt how valuable it is to use STOP LOSSes in your trading. STOP LOSSes are your LIFE JACKET in the stock market ocean. http://ping.fm/24kuH

We deviated a little to put in the post on Mayannaise Jar post (a MUST read), however, was a refresher that we should never forget to live life. Enjoy every moment that comes. http://ping.fm/bjE0O

We learnt constructing Bar chart, meanings of HIGH day, LOW day and how to construct a SWING chart using Bar chart. http://ping.fm/FWkar and http://ping.fm/wDtVn

Finally, we looked at Trading with the Trend http://ping.fm/cFIwX and Trend Determination http://ping.fm/Ml5j8

You might feel that I overemphasising on re-visiting above topics. However, in my opinion, if one were to understand and learn trading, analysing stock markets using technicals, then no one can ever over-emphasize on the above. These are basics and will go a long way in our getting trading education together. We learnt basic maths (addition, substraction, division, multiplication) and a language in primary school, very basic, looks like child’s play, which it is, BUT only once you have learnt it. Today, most of you would agree, these are the most used learning from 12 – 14 years of formal school education!!!!

That’s how it is with trading or technical analysis, or anything else in life!

In 19 May post, I had mentioned few dates and price levels to watch on NIFTY. I expected NIFTY to touch 4812 (by 7th June) before it could resume its upward journey. Today, NIFTY touched a Low of 4786 breaching my target of 4812.

NIFTY is in weak position now. Next few support levels that I would look for are 4767 (very strong support), 4675 and then 4538.

Looking at recent market movement, the possibilities are that NIFTY makes a Double Bottom at 4675 on 4th June 2010. Bear in mind, 4th June is a Friday.

How I am working out this date?

It went up 724 points in 58 days to 5399.7 on 7th April, 2010 from 4675 on 8th Feb 2010. 50% of this range in points and days is 362 points and 29 days (@ 12.50 per day). This gave us a target of 5037.50 on 6th May 2010 (calcualting from April 7 2010 Top). NIFTY day LOW for May 6, 2010 was 5037.75. Pretty close, isn’t it.

Adding 58 days to 7th April and reducing 724 points, gives us 4 June 2010 and 4675 price target.

If you check the days today from 7th April, 2010, it comes to 48 days and 614 points. A rate of 12.75 per day! Pretty close.

All above calculations may be confusing. And may be a little overwhelming. But these are aimed at demonstrating one point. HISTORY REPEATS, The fundamental belief on which Gann techniques and calculations are based.

I have proved these to my satisfaction many times. You may want to prove it to yourself, to your satisfaction.

Please also note, 5037 is now a resistance. Floor has now become the ceiling (refer to a previous post on Stock market terms which has information on Supports/Resistance).

Stay away from Buying for long term in this market, at least till 4th June, 2010. I may be wrong, but remember, it is better being profitable, than being right……….

NIFTY – revisiting 19th May forecast http://ping.fm/cEWcv

GANN used SWING charts to trade and applied his techniques on Swing charts to come up with his forecasts which were correct over 90% of the time. If we are even 60% correct in forecasting the market movements, we will be billionaires, whether in Rupee terms or $, I leave it to you :)

In last post, I had completed how to construct Swing charts. While I covered constructing only Daily swing charts using Daily bar charts, you can construct Swing charts in the same manner for Weekly, Monthly, Quarterly or Yearly Bar charts. It all depends on which Bar chart are you using for construction of Swing Chart.

You may have heard the term, Trade with the Trend. If not, then you have come across it now. Why to trade with the trend?

Have you ever tried swimming or rowing the boat against the flow of the river?? It is tough, tiring, exhausting, risky and sometimes fatal. Same with Stock markets. If you have taken a Short position in BULL market, you know what happens! Similarly, Buy stocks when the market is going down, you know what your feelings are. You may emerge as a winner or profit even trading against the trend, but that will be exhausting, tough, take away your sleep at night and is RISKY as well.

Remember, our first resolve is to survive in the market. Objective is to “make big profits and keep losses small”. We will cover this piece in detail when we discuss the Money Management rules.

So, if we want to buy a stock but see that the Trend is down on that stock, what do we do. We do, NOTHING. Just wait for the trend to turn UP. Most people lose money because they were trading against the trend. And, irony is that they don’t even know what the trend is!! They just trade on TIPs, or GUT feel. You may work on TIPs given by someone, but you should use TIPs only as an additional information for your analysis. These TIPs may be correct sometimes and make you money, but then a dead wall clock (or any watch/clock) is also right twice every day!!

Before we trade, we need to know what the TREND is. And Swing charts help us in identifying the trend.

Meaning of Trend : Direction of the movement of the market or stock at a particular time.

Trend may be:
1. UP - when the market is moving in UP direction
2. DOWN – when the market is moving DOWN direction, or
3. Uncertain – when it is doesn’t have a direction. This is also called “Sideways movement” or “Range Bound”.

I will cover the trend determination in the next post.

Till then, I advise you to go back to the earlier articles and review them once again. Keep constructing Swing charts and keep reviewing more and more Bar charts that you can lay your hands on. You can find Bar charts online. Some places are Yahoo Finance, MoneyControl, NSE, Money.cnn, ICICIDirect.com, Commsec.com.au, MFGLobal.com.au, futuresource.com.

Taking forward from last post on Swing Charts…..

In swing charts, we draw up the swings that a market is making or the direction in which market is moving. [I use the word market more often. You may replace it with stock, contract, commodity, forex or any other instrument. It works on all]. If it was an UP day on bar chart, we will move up the line on SWING chart. Please see pictures below with explanations below them.



In the pic above, there are 2 charts, Bar Chart on the left hand side and Swing Chart on the right hand side. Swing chart is constructed based on Bar Chart. In the bar chart above, there are 5 bars drawn for 5 days with each chart numbered from 1 to 5 for each day.

In the Swing chart, there are 5 points numbered from 1 to 5. Each of these points represent the HIGH point of the corresponding day.

Please note the blue line drawn on Swing chart ending at point 1. What we have done is, we have drawn a straight line up, till the High of the Day 1 on Bar Chart.

Now see the red line in SWING chart ending at point 2. This line is drawn up to the HIGH of Day 2. We have moved up the same line on SWING chart because Day 2 was an UP day. We have not drawn an other line on SWING chart but extended the same line UP. Different color has been used to illustrate the extension of the line on SWING chart.

Points 3, 4 and 5 represent the HIGHs of corresponding days and colors of the line represent the movement of the line UP to the HIGH of corresponding day on SWING CHART.

Point 0 to Point 5 on SWING chart is ONE swing because the market has not witnessed a LOW day yet.

Now look at Pic 2 below:



We observe that Day 6 was a LOW day, because the HIGH AND LOW of Day 6, were lower than the HIGH AND LOW of Day 5 respectively. We now move down our SWING chart down from point 5 to point 6.

Point 6 and 7 represent the LOW of Day 6 and Day 7 respectively.

Similarly, since Day 7 was a LOW day as well, we move down the SWING chart to point 7. Point 5 to point 7 represent another SWING, this time DOWN Swing.

You may go through the Bar Chart and Swing Chart for NIFTY for last couple of months provided below and notice how the Bar and SWING chart look for the same period.

Swing Charts … Contd…. 2 http://ping.fm/IyJz9