A view on the Nifty & Exiting a Profitable Trade.

The Index may have made a short term low at 4788. A rally from this low is not an immediate requirement.

Index may chop around for some days or even weeks, although I would expect a test of the 5050 resistance levels before long, and, chopping around after this test.

IF the low holds at 4788, then the Nifty may be setting up for a decent pre-diwali rally.

Exiting a Profitable Trade

From The Stock Sage

Another problem that regularly comes about for a trader is to follow the plan through to the end and allow a winning trade to fully work in ones favor. Jeff Gundlach was on Bloomberg this morning and was asked an excellent question by Tom Keene:

Keene: (On Gundlach’s call to go 100x short $AAPL and long natural gas $NG_F which is +24% since he proposed it) “How do you get out of a trade like that? When does Jeff Gundlach know when to exit a successful trade?”

Gundlach: “The biggest mistake that investors make when they’re in a winning trade is to get out too soon…”

This is absolutely 100% true. What makes investors get out of a winning trade too soon?

#1. Fear of losing the profit

#2. Psychological need to be right, taking the profit satisfies a deep-seated intellectual need to be “right” even though it may end up being the wrong thing to do

#3. Paying attention to some extraneous new piece of information that may or may not be material to ones trading plan

The Bullish case for new highs

New Highs are bullish. This very simple rule can enable traders to take many profitable trades (go long at new highs) and also avoid losses (never short when prices are making these highs).

On Thursday, the Nifty drifted down. Then around 11 AM, Nifty futures crossed 4843 which was the day’s high till then. Remember, new highs are bullish. So we went long at 4843. In just an hour Futures were touching 4900 which was out target. Wow! Great trade.

Do all new highs succeed? The answer is a categorical NO. I think 2 out of 3 new highs will pullback, often act as tops. The one that succeeds compensates for the failures.
What happens when we buy new highs? We are going with market flow. That is always a good idea.