Nifty Daily Technical Analysis

April 21, 2010 by: Cyberjunky
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How to trade using this chart

Those new to the stock market may be amazed or rather perplexed by the movement of the stock Indices namely the Nifty and the Sensex. Sometimes, they may find it really hard to understand why they move the way they do.

For those and others who have been in the market for quite a bit, this strategy would be a great starting point in their endeavor to make a living out of the stock market.

We will consider trading the nifty futures. Why nifty futures? Unlike stocks, the Nifty Futures is an indices and it is the larger barometer of the Indian Stock market in general and so it is highly volatile, which it should be for traders to make money out of its moves. Its high volatility and ease of trading would make it the ideal candidate for us to select it for starting trading it.

Since lay traders and newbies would not consider spending money on real time data which costs quite a bit and the software associated with it and the necessity of other associated trading aides, we would take an auto refreshing yahoo feed for our trading and tracking purpose which will just as well serve our purpose.

First there are two types of strategies in trading the Nifty Futures.
1. Pure Intraday Trades.
2. Pure Positional Trades.

The Pure Intraday Trader is one who makes most out of the small moves or large moves the markets tend to make within the day and capitalizes on it. He tends to close his position within the end of the trading day and finishes off his trades.

On the other hand the Pure positional trader is bent on capitalizing the larger moves that happen over a period of time. He carries forward his positions for the next trading day.

Having said about both these types of traders and trades, now let us examine which is advantageous to the other. In intraday trades, the profit or loss margin might be less since the indices might move in a smaller range. In positional trades the profits or loss might be more since the moves might be in proportion to the overnight International market moves and in some cases it might give a big gap up or gap down move which might or might not be favorable to the position we hold. Personally, I would advise any trader who is interested in trading the market for a living to go for an intraday trade rather than a positional trade due to the fact that it takes out the tension out of you. Since you do not have any overnight positions, you need not worry about where the international markets are heading and you need not lose your sleep staying awake and watching the DOW JONES industrial average till late at night or do you need to lose your patience with your wife over trivial things just because of irritability of holding overnight positions!!!!!lol.

Now to the timeframe to be adopted to trade the Intraday Nifty Strategy. The timeframe we chose will be one-day technical chart.

You can bookmark this page and watch it during market hours and as it refreshes every 10 seconds, it does not require that you do it manually, it helps a lot with the decision making process.

Now to the part of getting into a trade. Go long when the GREEN line crosses above the RED line and go short when the RED line crosses below the GREEN line.

This strategy can yeild results provided you trade every signal generated on it and also follow some trading strategy.

Suppose we get a buy signal at 3650 and nifty drops to 3630 against our trade, then what do we do? So each and every trade should be done with a Strict stop loss. Before we get into any trade we should fix how much we can lose on that particular trade before we enter into it thus making risk to reward ratio favorable for us. We can consider using a 20-point stop loss or a bigger stop if you are playing positional and so on.

Let us consider another scenario where after we get a buy signal at 3650, the nifty moves in favor of our strategy and it moves 50 points up to 3700. Now what do we do? If we sit idle and keep dreaming about higher levels, there is every chance that the markets might drift lower to the point where we entered. So just as it is important to have a Stop loss in our trade, we should have a exit strategy in place so as to book profits when the markets move in our direction.

So suppose we have a fixed target and a fixed Stop loss. Suppose our risk (stop loss) is 20 points and our reward (profit booking) is 40 points, then our risk to reward ratio is 1:2 which is good by any standards.

Having said all this, it would be wise on everybody’s part to paper trade this strategy for at least a minimum of two months with Stop Losses and profit targets using their capital and their risk appetites and then jump into the real trades.

As always, Caution is advised in using this strategy. This is not a recommendation to buy or sell, rather it is for educational purpose only. The consequence of using this strategy lies wholly on the user and it shall be deemed fit to ask your investment advisor or consultant before you start doing anything.