Stop-loss and range expansion.

Rocky has posted a number of similar comments relating to Range Expansion. Hi Rocky, I did reply to your question on Sept 15. Please read the post. Range Expansion is a valid means of making a partial or complete exit for day traders and swing traders. Since day trading is limited by time, any big thrusting move in our favor should be used to take profits. The concept is not needed for trend trading, because trends are not limited by any time constraints.

In the post on trading a bullish head and shoulder pattern, I suggested keeping a stoploss below the low of yesterday – because yesterday(tuesday) was a wide range trending day. avv says “Very useful post. I have a question with stop loss setting. The average true range on nifty (14days) is about 115. In that circumstances won’t the chances of one getting stopped out with 5050 stop loss almost guaranteed? Does stop loss has to be multiple of ATR to avoid getting stopped due to noise?”

My Notes: A stoploss can be any one of many methods. Each of the methods will give equally satisfactory results – the purpose is to protect against unneccessary losses. It is important to be consistent. For the head and shoulder pattern, the wide range day should hold if upside momentum is going to continue. On this basis, I suggested a stop below the low, which is 5035. The classical stop is below the right shoulder – 4900, but this stop is too wide and certainly represents a failure of the pattern much before it is reached.

Peter Brandt has an excellent blog where he discusses chart pattern trading. The idea of keeping a stop closer to the neckline comes from his book – Diary of a Professional Commodity Trader. I found that keeping the stop closer to the neckline makes the trading of head and shoulder patterns, much easier.

On ATR stops, if you develop a system based on using the ATR as a stop, you should have a multiple of the ATR – say 2 times the ATR. In the case of the head and shoulder, a move below the wide range bar will negate the upside momentum, so the ATR is not used here.

Mid Day Musings

Sify Technologies
Sify is listed in the U.S. exchanges and has been discussed today in the blog – Tischendorf Letter . I know that Sify was a child of the dot com bubble in the year 2000. Then the stocks were forgotten. Now, maybe a revival is in the offing. I request readers to share their knowledge on Sify and Rediff. [The post mentioned above has a kind reference to this blog].

You may also like to read this post from the same blog: Great Traders offer no excuses. Once you reach this post, you will find links to many other posts on trading psychology. go ahead, read them, the market is dull today, so make the best of your time.

In the morning, I suggested a trading plan using multiple positions. smit asks “sir what about trader playing with one lot only”.

My Notes: First, the correct term is ‘trading’ and not ‘playing’. I have a big problem when TV anchors ask me “how should you be playing xyz…”. The concept of playing trivalizes the serious business of trading. Ok, Sorry about that!
If you trade with only one lot, there are two options – First, trade the mini  nifty. The mini consists of 20 units as against 50 for the standard contract. Therefore, you can trade three mini contracts eventually. Second, take the first trade and skip the rest.

Referring to the bullish head and shoulder pattern: Rohit asks “Also will this upmove be sharp and one sided in straight line or we will go up and down and reach there.” Rohit has two other thoughtfull comments on the market. He feels that it is better to short at higher levels than to take a long trade now.

My Notes: Fair enough. We all trade according to our methods. I cannot say if the Nifty will go up. For all I know the 5165 resistance may hold. Therefore, I cannot say if we will have a straight line advance or a jagged up move.