Friday, May 25, 2012

A brief note on Trading Psychology!

Bottom Line: Nifty continues to do what it is best at over past few months – making trading environment difficult for both longs and shorts!

Nifty Daily chart:

Nifty 60 mins chart:

Wave Analysis:

We mentioned in our previous update, “From trading perspective it is going to be a challenging environment and buying on supports and selling on resistance can be favorable strategy as of now.”

This proved very much accurate. Nifty bounced back from the support level of 4820 – 4830 and rallied hard to close at high point of the day near 4930. Nifty has been doing what it is best at since past few months, making trading environment extremely dynamic for both longs and shorts. The movement over past few days has been exactly like that of UP election result day, Budget day and similar to days when RBI announces monetary policies. Prices move steeply on intraday basis in either of the directions but closes the week with minor gain or loss on net basis. It is therefore imperative to have strict risk management and money management strategies in place with clearly defined objective trading strategy.

From wave perspective, it is difficult to say if Nifty is forming a flat upward correction or a sideways triangle pattern. A flat correction can take this leg up above 4950 towards 4980 and a triangle correction will imply prices will not break 4950 level. As shown on 60 mins chart, prices can also move within the parallel black channel between 4975 – 4850. Only a decisive close above 4970 – 4980 will indicate we are headed towards 5100 to 5150 levels. Also it is too soon to conclude this as next impulse up towards 5600 – 5700 levels unless we cross the strong hurdle at 5150. We still maintain our stand of crossing above 5600 levels once this correction that started in February 22 ends. The confirmation of the same will be obtained above 5150 levels.

In short, the first resistance now lies near 4970 followed by 5100 levels. On downside 4850 should be important level if prices have to continue short term up trend. Break below 4800 can take us towards 4650 levels.

A brief note on Trading Psychology:

Due to such high intraday volatile environment, a trader following strict stop loss might suffer loss on either side due to stop loss being hit and will then try to leverage more with no stop method in place exactly at the wrong time. Fear of being left out can be another emotional trait that can come into play in such trading environment. The reason for describing different thought process & psychology is to make our readers aware not to lose focus and get carried away which will otherwise result into buying high and selling low.

There are different market structures suitable for different trading styles. The current one is rewarding to people who are best playing in a range and buying near supports, selling near resistances. The other set of traders who want to ride the trend does exactly opposite and end up buying high and selling low during such environments. The first set of traders were not able to ride the complete trend up in January but are able to leverage current trading environment whereas it is the other way for second set of traders. There are very few set of people who can switch their trading styles as per the market dynamism successfully. The case in point is all of these trading styles can give money provided if you lose less in the environment not suitable for you. The aim of the game should be to earn profits on net basis with strict money management strategies in place!

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