Let us first identify a trend in a stock.

In VIP Industries, you can spot a downtrend easily.

Stock went from 175 to 110 in pretty much a straight line. At 110 some buying or short covering was seen and then again it was back to 110 in couple of days time clearly suggesting down trend. The important thing was it did not break 110 and I anticipated that 110 could prove to be a pivot of trend reversal. This is when I took a trade against the trend.

Here are my trades.

Nov 22 2011 is when I took a small position of 100 shares in VIP Industries at a price of 118ish. 24th Nov is when I was convinced that bounce is evident and so I added to my initial position.

Stop loss was 110 with a target of 130 odd. The ROI for the trade was I would either make 12 Rs per share or loose 8 Rs per share i.e. a ratio of 1.5 is to 1 for target versus stop loss.

I saw a peak in VIP Industries at 128 and not at 130, which was my target and so I sold of on 29th Nov 2011 at around 125 odd levels.

On Nov 30 I took up yet another position at around 123 levels. I actually rushed into this trade but as I was trading against the trend I had a strict stop loss of 120 that was previous days low. As the stock broke 120 I was out of it with a small loss.

3 Golden rules when trading against trend

1. Don’t rush - When you are trading against trend, wait for the support (resistance if shorting) to be created and tested more than once before you even think about trading against the trend.
2. Follow strict stop loss – Genius of a trader can be wrong and there is no harm in accepting you were wrong but trying to prove you were right and holding on to a position can prove more fatal. I could loose 33 % of my investment from 120 to 80 if I would not have followed the stop loss.
3. No trade is good trade - Don’t trade if you are not sure because it is better not to trade against the trend. Wait for the trend reversal. You may miss the sharp bounces from support but that means you are trading with more conviction.

I hope this helps fellow traders trade with more conviction in market.

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1. Why Nifty Around 5600 is in No Trade Zone?
2. How to Trade In Market?
3. How Much I Lost in Current Market Crash?

I have shares of XYZ Company at some price and it has fallen 20-30%. Can I buy more of XYZ at these levels or wait for some more correction before buying.

Similar questions are being fired to every blogger and Manshu of onemint wrote don’t average down and compound your problems.

Let me show you what Manshu is trying to explain in his article with an example. Read my post Multibagger Stock Idea – Gateway Distriparks Ltd.

I was not very bullish on the market when I published that post and so I had very small investment in the stock just to make sure, if there is correction in the market and if the stock does not breach the support of 140 I may add more to my position at the same pricing 144. The idea behind the small position was not to average at lower levels.

Once stock traded decisively below 140 on 14th November 2011 I was out of it. As of today the stock is trading around 125 and I have easily saved myself 15 Rs per share. If I want, I can get into the same stock at a lot lesser price or may be at the same price of 140 depending on what charts tell me.

You can argue that what I am saying is about the small cap and mid cap stocks but what about investment in the blue chip large cap stock which has fallen 20-30% and so should I average them or not.

The answer is still NO because I am not a fan of averaging even the blue chip companies at lower levels. I average them at higher levels. As of now what I prefer when the market is falling is – See if the blue chip companies can cross major resistance levels and if they don’t which is more likely I try to come out of those stocks and then buy them back again at the support levels or lower levels. See how I trade my Long Term Investment Portfolio and profit from it.

Don’t average and earn more but you can earn by selling your positions and then buying back at lesser price and pocketing some cash. Share your views and feedback in comments below.

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1. Multibagger Stock Idea – Gateway Distriparks Ltd

Nov 9 2011, in my article on Trading Investment Portfolio I explained how to find the resistance level with example of Nestle India. I mentioned 4500 was very crucial for Nestle India and used the same level to tap some gains as well on that day.

Now observe the chart of Nestle India on November 14th 2011, the level of 4500 proves crucial yet once again.

So my question to all my reader is – Do you agree that Support and Resistance level works in market? Share your views in comments below.

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Trades in Nestle India on 8th Nov 2011

And if you just look at the trade details you may think I shorted Nestle India at around 10:30 AM in the morning and covered it back at around 2 PM but that is actually not true. Why it is not short selling, let me first tell you some background about Nestle India.

Background

Nestle India is one of my preferred forever stock and it is never ever recommend to short Nestle. (See my list of forever stocks). Nestle India is one of those kind of stock that I have in my portfolio all the time but that does not mean I don’t trade in it. Every time I see weakness in the stock, I reduce my position and then re-enter in it once again at levels I think can be more beneficial to me. (See here where I was out of Nestle and then back again pretty much at the same pricing).

Nestle India has been reporting good results for last 19 quarters (or 5 years) and each good result declaration is followed by profit booking. I anticipated profit booking yesterday because same thing happened in May 2011 as well.

Now you can understand what type of trade I did in Nestle India. I actually offloaded my investment position in Nestle India at around 10:30 AM and got into my investment mode once again at 2PM and in the process pocketing few thousands.

Why the trades?

You may be wondering why I why I was out of my forever stock? The reason I was out because I knew 4500 has been a resistance for Nestle India for quite sometime now and it has retraced back from 4500 many times.

Nestle India Last 6 Months

Yesterday also it hit the resistance in the opening trade and tried breaking out above the key resistance level of 4500. So I was actively watching the stock to see how it performed at the break out with a stop loss of 4470. Once it was below 4470 at around 10:30AM I was out of the stock.

When I was thinking about stop loss I had couple of plans in my mind.

1. Get back into Nestle at around support levels once again.
2. Re-enter in Nestle India when it can decisively close above 4500 and shows a clear breakout pattern.

So I was actively watching the stock and it was under pressure for each 25 Rs with almost no recovery whatsoever.

Nestle India on 8th Nov 2011

At 1 PM I was very keen to get back into Nestle India but as late as I preferably can hold myself.  Ideally around 3PM.

As I was actively watching the stock, I saw a spike in the stock from 4370 to above 4400 levels and I jumped into the trade. Actually it was a panic from my end where I wanted to protect my gains. No regrets and yet another lesson learnt.

Final Thoughts

Long term investing does not mean you cannot make money from your investment trading those stocks and at times intraday. Make sure you watch your investment and grab the opportunity that comes your way.

Share your views and feedback in comments below.

Chart by Interactive Broker’s Trader Workstation

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1. Mutual funds can ensure a good long-term health of a portfolio
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3. Learn From My Trading Mistake

I don’t use margins because I hope for the best but remain prepared for the worst. Taking the same example from Sudhip’s comment for using a margin of 20 times. Let us say we have 1L or 100,000 in a trading account. For day trading you can actually buy securities worth of 20L or 2000,000

Say on 20L you have a target of 4% and a stop loss of 2% of your purchase price.

The day you make profit you gain 80,000 Rs but say if you hit the stop loss you loose 40,000 Rs out of your 100,000. Make sure you are prepared for a stop loss trade as well where 2% in either direction is very possible and probable.

I always trade at the most of 1/3rd to 1/4th of my net asset in the account 25,000 only. Even if I hit a stop loss of 5% I would be losing less than 2% of my trading assets.

So next time somebody offers you more margin remember that it is a product that gives you more disadvantages than advantage. Share your views about trading with margins in comments below.

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1. Learn From My Trading Mistake
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I lost Rs 32,322 on my trading portfolio of 800,000 because of two successive stop losses. Roughly 4% (2% in each stop loss) and as of now I am all cash.

Note:- The loss does not include ELSS mutual fund losses.

The stocks I was holding were Neslte and Camlin and stop loss for them was 4200 and 70 respectively.

Why Stoploss for Nestle was 4200?

4200 was key resistance which was taken out and was behaving as support. 4200 was my stoploss this time.

Why Camlin stoploss was 70?

We see stock consolidating around 70 on the back of open offer news. The level of 70 was not breach decisively for long time and was my stop loss.

Are you holding any stock in this downtrend? How much did you loose in the current market crash and in which stocks? Share your thoughts in comments below.

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1. Understanding Signals of Market Crash & Sentiments of Retail Investors
2. How to deal with Stock Market
3. Lessons from the crash of January 2008

I thought I will also make some noise ( ) and write an article to help traders and investors understand the clues and psychological characteristics in a market crash. No one can predict the day or time of the crash, but if you pay attention, you can recognize the signals well before in advance and can also know the after effect of the crash.

Let us now understands the signal’s of market crash is coming as well as understand the sentiments of retail investors.

Crashes happens in downtrend

On June 30th 2011 I wrote an article about why I think the market is in no trade zone. I saw a downtrend in the market. The no trade zone was clearly because the Nifty was in the resistance zone in a downtrend.

Bounces fizzles out faster

Nifty was not able to cross the resistance levels of 5600 decisively for the last few months.

As you can see in the chart above the same downtrend I talked about here is still continuing with the latest peak in Nifty is less than it previous peak. Also we see some additional levels like 5200 and 5400 support levels for the Nifty are broken and so they will act as a very strong resistance levels in the near future.

Media Hype

In a downtrend common investor and trader don’t make substantial money from the market and so they actually turn on the TV and news channel to see if they can get clues about the happenings in market. If you are not sure how to use the Media you are bound to fall into the trap. Each bounce in a downtrend is hyped by media which makes a trap for non savvy investors and traders who are reluctant to learn and understand the market.

The Sentiments of Retail Investor

Once trapped, retail investor leaves the market thinking stocks is not for them. At times they even keep what they hold in their portfolio because of huge losses and wait for their purchase price to return. In the mean time they make calls to the same news channel asking what they should be doing about their holdings.

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On June 17th when I looked at Nifty charts I knew 5600 is a long term resistance for Nifty.

As of today June 30th 2011 after 2 days of good up swing from 5500 to 5600, today Nifty again consolidated around 5600 levels with low of 5605 and this is actually a no trade zone for me as of now. Nifty is in a short term down trend. See the charts below.

I prefer trading along the trend and so if Nifty cracks 5600 decisively I would go short in Nifty with recent peak as my stop loss but for long position I would ideally like to see Nifty take out the previous peak but I don’t expect that to happen any time soon.

What are your views of the market?

Charts by Yahoo Finance

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Let us look at the stock charts for past 1 year.

As you can see some numbers and horizontal lines in the above image. Let me explain each number.

1. Stock was purchased at around 33 in the month of January. It was clearly not the right time to buy this stock because of clear break down in the stock charts forming lower bottoms from 40 to 36 to 32 and finally to 28.
2. If purchased at around 33 in January, we should have a strict stop loss at the last support levels of 28. I would have taken this position if and only if I am fine risking my 5 Rs per share because this is very high risk trade because you are trying to get into a stock which is falling for last few days. Few days after the purchase, stop loss is hit but the fall is very sharp. Either use the stop loss in the fall or wait for a bounce after the fall to exit the position.
3. Point 3 clearly shows that we have a strong bounce after the fall and I prefer to use the bounce to execute my stop losses. A point to note here is the bounce can never take the stock pass 28 which was a support and is now acting as a strong resistance. See Why Support Becomes Resistance When Broken
4. 28 is a strong resistance and this is confirmed once again with the formation of double top. Stock opens above 28 on a day but could not close above 28 clearly suggesting it as strong resistance.
5. Many a times we want to see if the resistance is taken out or not but this has to be done again with a new stop loss. 22.5 should be the second stop loss from that point because you could see the stock bouncing from that level.
6. As we did miss everything now we have no option but to have the stop loss of 16.5 and hold on to the stock.

I hope this helps other fellow traders understand the market technically.

Final Thoughts

Technically this stock is showing complete breakdown for the last 7+ months and so I would be very sceptical about the company and will only be only looking to come out of my position if either it cracks 16.5 or reaches near 27 odd levels.

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Yesterday before market opening Hindalco came up with very good set of results and on many major news channel brokerage houses gave price target as 208 but see the charts of Hindalco for yesterday.

So are you still buying stocks that have reported very good numbers but when you buy them they start sliding down? If your answer is yes it’s time to learn and understand market.

Charts by Interactive Brokers Trader Workstation

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First trades.

At 10:21 I purchased Hexaware technologies at a price of Rs 70.30, sold off at 10:32 making a loss of roughly 500 bucks for my position.  At 2 PM I again purchased the same stock at much higher price.

You may be thinking me as mad now – selling lower buying higher right?  Let me share with you my madness story.

I saw news floating around for Hexaware technologies and as I saw the daily chart for the stock I assumed it a break out above 70 Rs. To add to my madness, saw few very large buy orders at 70 Rs and so I thought those buy orders will not allow the price to fall below 70.

So with a stop loss of 70 I jumped into the stock but as soon as the stock went below 70 I was out of it.

My mistakes

1. I jumped into the trades with no research whatsoever and was trying to follow the news and order volumes. I mentioned in my book why both are useless, still I could not resist myself to those mistakes. Luckily I was taught my own lessons for 500 bucks.
2. I took the trading decision so instantly that I even did not bother to see the technical charts like daily, weekly, monthly … Probably a feeling of missing out on a big gain.

I don’t prefer to buy the same stock again on the same day after squaring off but Hexaware was different. I spent few hours doing some research about the company. Stock price rise was because of good earnings reported by company in last few quarters and same is anticipated this time as well. Moving to technical’s I saw the yearly chart as follows.

65 Rs was peak for the stock and in the recent run up it broke above 65 Rs.

At price of 70+ we missed some steam in the stock but it is still that kind of stock which is fundamentally cheaper and so I expect some more upside. So I purchased the same stock once again on the same day at 70.35.

Guess what? The next day stock hit a low of 67.50.

This time I had a stop loss of 65 (i.e. above the previous peak break out) and so I did not panic. Remember Chart Patterns Can Save You From Panic Selling and now I am making handsome returns in Hexaware because it is trading well above 72.

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If possible, please share details about what has worked in comments below. I am sure it will be interesting to see what works for most of us.

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First the headline JPMorgan upgrades Unitech to overweight; target Rs 60.

I don’t buy the theory that JPMorgan is ready to do service for the Indian retail investor by making public it’s financial research about Unitech. My concerns are

1. How suddenly the land valuation becomes higher when everything related to interest is going down?
2. Suddenly JPMorgan’s take on the pending receivables is positive. Unitech from an over debt situation gets into a position of 3000 crores receivables.
3. Double PAT with no solid reasoning as to how will this be achieved.

And many more.

The only reason I see for such a crappy report is they (or some of their big clients) have a large holding in the stock which they want to offload. See how the increase in volumes for the shares yesterday and you know who could be the potential sellers.

Make sure you are not trapped with such crappy news. If you have read my book you should know how to play this to your gains. The idea is when the volume starts declining make sure you short the stock in the spike. I hope this helps all my follow investors.

Charts by Interactive Broker’s Trader Workstation

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In my Chart Pattern book I have a complete chapter on how to deal with morning panics and I am going to tell you how I applied the same yet again. I had an open position in Bhushan Steel yesterday (i.e. March 15 2011) and the chart of it did not look very pleasing in the morning.

Still I manage to sell the stock at pretty high point of the day and a profitable trade.

I managed to get the best possible price for my position because

1. My objective to buy Bhushan steel was clear. I took a short term trading call in Bhushan Steel couple of days back and so I was into the stock just for trading purpose.
2. Took a very small position and that too in a commodity producing stock. Remember world commodity prices are soaring.
3. Once I saw the morning panic I anticipated a bounce before an afternoon fade. The complete samples with examples is explained in my book.
4. I had a stop loss of 413 for my position and the reason for the stop loss was because stock formed a W pattern and then a breakout pattern above 413.

Four clear reasons for me not to panic but wait for an anticipated intraday bounce.

Clearly Charts can save you from a panic selling. Are you selling your position in a panic? If your answer is yes it’s time to get my ebook on Chart patterns and start reading.

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Nestle announced its result this weekend with very strong growth in third quarter ended December 2010.

1. Net profits up by almost 80% YoY.
2. Net sales up almost 23% YoY.

By all means better than expected result and as expected the opening for the stock was very strong in the morning with good volume but see how the complete trading session panned out for Nestle.

Remember today was a reasonably strong trading session in the second half for the market.

In Chapter 14 of my book about Technical Analysis I explained how to play good earnings that are reported over weekends and early morning.

So now my question is are you still buying stock with better than expected results or playing it the right way to make money from the market?

Charts by Interactive Brokers Trader Workstation

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