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For short term traders, the Nifty gave a trend day on Tuesday. After a big move, markets were expected to remain choppy. On Wednesday and Thursday, the Index moved inside a narrow range giving a range boundary of 4720 and 4800. On Friday, a breakdown was quickly proved false as the Index went below 4720 then recovered and closed inside the range.
Now, the Nifty has been inside a fairly narrow range for three days (four, if we include Saturday). It is reasonable to expect this process of contraction to move into expansion, soon enough. This means, we can expect a breakout / breakdown and a trending move.
When? And, in what direction? Both the questions will have to be answered by the market itself. What is easier to do is to avoid trading inside the range. A risk then arises, what happens if markets open with a breakaway gap (up or down.)? Traders who wish to avoid this risk can buy an options straddle – Buy 4700 put and 4800 call. Here, the risk is of price decay in options if the Nifty continues to remain in a range. But, then there is no free lunch.
Trading Friday’s move:
Pradeep Rajput writes: Need ur view on today movement. since it breached the 4720,but soon came back and made the day high and finally settled almost flat. though it went above to SL 4780, in this kind of sudden spike do u follow ur SL or wait for the market to settle down with ur open position continue.
Ur comment is highly appreciable.
My Notes: Thanks, Pradeep for this important question. On Friday, the Nifty went below 4720, triggering a short trade. Once I am in a trade, I feel I should remain with the position unless proved otherwise. I look for the market to close above the opposite side of the range. In this case, I waited for the Nifty to close above 4780, an event that has not yet come about.
The reason for this rule is to avoid making many whipsawed trades while prices chop around intraday. So, I have an initial short position in the Nifty. I will add to this position if the markets move below 4720. On Monday, I will exit the trade (a) if the Nifty gives a bullish ORB breakout and then goes above 4780, or, (b) finally closes above 4780.