Possible Breakout in the Nifty.

After five weeks of a narrow trading range, the Nifty broke out, crossing the resistance at 5920, to close decisively above the 5920-5930 resistance zone.

The point of breakout is always the point of maximum risk. Stops are wide, below the support zone of the previous trading area. A majority of breakouts fail, therefore the probability of success are low. And yet, breakouts that succeed make lot of many, making range breakouts one of the more successful trading strategies.

This post will not tell you if this breakout will succeed. I do not know. I do know that my trading plan calls for taking positions in the direction of the breakout. Since the move has come after a particularly tight range, my assumption is that the probability of a successful breakout are enhanced. If the trend continues to move up, I will add to my long positions. I have no concerns on the trade losing money. If that happens, well, it happens. My concern is to trade the breakout properly and let the results be left to the market.

Going with the Flow

Trading with the trend – which is to go with the flow, is not an original idea. The concept has been around as long as markets have been trading – probably thousands of years. This is the only proven way of making money in markets.

Yet, most traders will have the strong desire to go against the prevailing trend – by calling tops and bottoms, or reversals.

Why?

I assume that a strong desire to be be the first person to buy at the lows and sell at the highs,  controls most of our trading actions. While our desire should be to be profitable, what actually emerges from our actions is our ego – we went long when no one else was willing…..

But simple probability favors going with the trend.

Traders have three possible actions at any given time: Buy, Sell or Stay Away. This means they have a 1 in three chance of getting the correct decision. If the trend is up, the trader will not keep the option of selling. Then he has two options: Buy or Stay Away. Now the probability has increased to one in two.

At some point the trend reverses, but wise traders will not be taking that reversal. They ill exit from existing positions, and, probably wait for confirmation of trend change.

Remember, trading is about building a house, brick by brick, one trade at a time.

Happy New Year.