Nifty at resistance.

The Nifty is back again at 5150, which is the resistance for the Index over the past one month. If the Index clears this resistance to close above it, we also have confirmation of a bullish head and shoulder pattern which then gives a target of – hold your breath -5600. Markets can do whatever they want.

Position Sizing: Money in trading comes from management of risk which covers stop losses, quantitiy, pyramiding, trailing stops and profit targets. The quantity and pyramiding can be taken as Position Sizing.
We have been discussing the bullish head and shoulder pattern for some days. Here is a complete trading plan to manage the H&S trade.

1. Trade in October Nifty futures/ October Nifty 5000 calls
2. Determine the quantity that you plan to trade in. It should be possible to trade one third quantity at any time.
3. On a breakout above 5165, take a position for one third the quantity. Your stop will be Tuesday’s low, i.e. 5050.
4. The possible loss as per 3 above is 115 points. Calculate the money loss. If you have taken 50 Nifty (this is 1/3rd) then the money loss will be 50 * 115 = 5750 Rupees. This loss should not be more than 1% of your trading capital. If it exceeds 1% then go back to 2 and recalculate the quantity.
5. Add one third of the quantity on a close above 5165. the close should be in the top 20% of the day’s range. Add the quantity just before the close.
6. Your stop for the second lot in 5 above will be the low of the day in which you added the quantity.
7. Buy the balance one third once the Nifty crosses 5250 and pulls back. Stop will be low of the pullback.
8. Exit the first lot when the Nifty crosses 5300. Exit the second lot with a parabolic SAR stop. Exit the third lot at the 5600 target or a 3 day trailing stop of lows once the Nifty crosses 5500.

Okay, this is as good a plan as any to trade a chart pattern. The entire focus is on managing your risk. I gave this as an example, although it is perfectly valid. Traders can modify the plan, change it to their needs or simply discard the idea – your choice.