Login
Sign Up
Short term traders – day traders as well as swing should consider the value of context when determining their trading strategies. Context refers to a big picture of the markets, to understand where the analysis of the current time frame fits in the big picture. This includes understanding the big picture in higher time frames, in different markets, as well as in the environment surrounding the markets.
Let us assume that the Nifty has been going down for three days, with the 20 day as well as the 8 day moving average falling. This tells us that the short term trend is down. This is the analysis of the current time frame – the time frame in which we trade. But, we should consider the context in which the analysis is made. Maybe the current down move is only a correction on the weekly chart. Maybe, the U.S. and HongKong markets have started a rally which may influence our markets soon enough. Perhaps, a bullish news event is possible, Inflation numbers may be coming down.
It makes sense to correlate our own analysis with the broader view, and, avoid taking positions when significant disagrrement emerges between different markets and analysis.
I am writing this to explain that short term trading requires a common sense approach. An exclusive focus on the intra day chart is not the optimum way to trade short term.
Identify your Trend
The technical Trader should look at a chart and almosty instantly decide on the trend visible. This should become second nature. Such ‘second nature’ analysis is possible when the Trader is aware of the rules used to identify the trend. These rules must be used consistently, such that repeatition makes the trend process perfect.
Any number of ways can be used for trend. All of the methods eventually lead to the same goal. But, the trader should select one method and use it again and again. Be consistent. A simple trend method is to look at higher highs and higher lows which make an uptrend, and, lower highs and lower lows which make a downtrend. A second method is to use three moving averages – 200, 50 and 20. When price is above the 200 MA, the primary trend is up. When price is above 50 MA the intermediate trend is up. When price is above 20 MA, the minor trend is up. The reverse is applicable for down trend. Yet another way is to use the RSI for trend identification. RSI above 60 is strong uptrend, below 40 is downtrend, inbetween is a continuation of the previous trend. The CCI can also be use in a similar fashion.
My suggestion is: decide which method is comfortable for you, and stick to it. So, next time you open a chart, ask yourself: what is the trend? And, answer this question with the same methods of analysis.