BullBull trains investors and traders in technicals, options, fundamentals, operator tricks and more. It also hosts research tools that help investors discover valuable information, option premiums, intrinsic value and more.
To manage stock market trading risk and create a trading plan, follow these steps:
PART 1: A Trader’s Typical Profit & Loss Account
Trading is a 50:50 proposition. A 60% win ratio in the market is considered as a terrific achievement.
Successful traders make money because:
(a) Targets are higher than SLs. For example, 2% target and 0.75% SL with a 50% success ration works out to a 62.5% gain (50 X 2% = 100% (minus) 50 X 0.75% = 37.5%)
(b) They are extremely disciplined
(c ) They are not emotional about their trades, and follow their trading plan/risk management policy
PART 2: Determine Your Trading Capital
(a) Fix your trading capital. Remember that 80% to 90% of total investible funds are typically deployed in long term investments, and the rest are allocated to trading
(b) Take into account whether your trading capital is fixed or floating. That is, many traders (salaried, businessmen) add to it every month and it keeps increasing.
Fix a monthly number. Perhaps you can make an Excel sheet that contains a column for monthly trading capital allocation.
PART 3: How much can you afford t0 lose per trade?
The first question to ask yourself after fixing your trading capital is —
How much can you afford to lose per trade without upsetting you psychologically or financially? This is the key to your trading success.
Let’s take an example:
(a) Trading Capital = Rs 1,00,000
You want to deploy it in = 20 Trades
Therefore maximum loss/trade that you can take is = Rs 5000
(b) Now with Rs 5,000 fixed as a Stop Loss number, you need to check your investment strategy. Should you invest in Futures, Options or Spot?
(c) You cannot invest in Futures because the margin per lot is upwards of Rs 1,00,000, and that is higher than your trading capital. So, Futures is out.
(d) You can invest in options, but know that options lot quantities are rather large and a small fluctuation in the CMP can trigger your stop loss. For example, IGL lot size is 2750, and therefore if you buy one lot, a small movement as low as Rs 1.75 in the CMP can trigger your SL. Therefore, if you cannot take a loss of more than your budgeted number of Rs 5,000, then options are not for you. Perhaps, in options, you can consider investing in stocks in which the lot size is small (for example, RIL, Page Industries, Bajaj Auto, etc.)
(e) The safest trade in this example would be to invest in the spot market.
(f) I’m not even considering writing options because that is extremely risky and not for the average retail trader.
This chart will give you an idea on how risk can be managed per the numbers given in the example above:
PART 4: Fine Tune Your Trading Psychology
First off, know that in a series of 10 trades, the following are the worst and the best case scenarios:
In the first scenario, a trader tends to become depressed and he will likely stop trading because he feels he cannot make money.
In the second scenario, a trader tends to become overconfident and he will likely start stepping out of his trading plan and become indisciplined.
If you have to survive in the market, you must follow your trading plan. If you don’t, you will ultimately lose money.
That said, you also have to fine tune your trading psychology. Here is a list of Do’s and Don’t’s:
1.Work with greed and fear. Use logic. Set modest targets and stop losses.
2.Trust your eyes based on what you see on the charts alone. (Also analyze FnO Data).
3.Forget that trading is a 50% proposition.
4.Grieve losses, or celebrate gains – just move on.
1.Stick to your risk management plan.
2.Analyze the short term trade trend before entering into a trade.
3.Trade per your capital and risk management policy. Choose an instrument wisely (Cash, options, futures)
4.Be prepared one day in advance (by evening before trading day)
5.Be extremely disciplined
So that’s it. A Trading Plan and a Risk Management Policy is actually common sense, but many traders do not follow it. Start with these simple trading and psychology tune-ups and you will see the results in a couple of months when you become a disciplined trader and from then on you can start your journey to go pro. Good luck.
1. An 18% rise in volume coupled with a 9% rise in price and 420% rise in volumes in Infibeam indicates that someone in the know has picked up stock in the FnO market.
2. Godrej Consumer Product can be a stock to watch. The FnO market witnessed a 255% rise in volume with a 7.5% rise in OI. If market starts trending up, it could be a stock to watch.
3. Jet Airways – The cash price is 263 and the Futures price is 243. The premium between the cash and futures market fluctuates between Rs 8 and Rs 22-23. It is now at 20. If you want to take your chances in arbitraging….. (likewise, there is a Rs 4 gap in Reliance Capital, with futures cheaper than the spot price…)
4. The realty sector saw a sharp drop in OI. Is the dream run over for the time being?
5. Heavy call writing (11600-11700) and put covering (11500) in Nifty indicates we may have a tough session tomorrow, but you never know..
6. Very heavy put writing for Cipla 540 indicates that the stock may move up.
7. Heavy call writing for Wipro 285 and 290 CE and 280 PE indicates that the stock may move in a range for some time.
1. A 14% rise in volume coupled with a 1% rise in price of the BNF indicates that it may head higher on 10-4-19
2. A 11% rise in OI of DHFL coupled with massive volumes and a 4% surge in price in the last session of trade indicates that informed buyers are chasing the stock.
3. Just Dial is a stock to be watched tomorrow. Operators were toying with it in the FnO market and it can move sharply tomorrow, mostly up.
4. Ashok Leyland saw heavy volumes and short covering today in the futures market. It may catch the Maruti fever tomorrow and snake its way up.
5. Heavy volumes were witnessed in the Sun Pharma stock which recouped all its losses. Should be watched tomorrow.
6. Wipro could be the IT stock to watch in 2019. Heavy volumes coupled with a 3.5% rise in price may see it heading higher tomorrow.
7. Bajaj Auto too was chased in the futures market. Stock may head higher tomorrow.
8. Call covering in ICICI Bank indicates that writers are nervous that the stock may rise.
9. Reliance Capital recouped all its losses and closed above its VWAP in the Futures market. Looks interesting.
10. MCX may move wildly tomorrow as it recovered its losses today. Stock to be tracked tomorrow.
These are 10 highlights that are appropriate to publish. There are others too, but 10 cues seem more than enough.
Markets are subject to global factors and therefore the comments made here may lose their validity by tomorrow. However, if global and internal factors are stable, these cues could work.
This strategy is for day traders, and for those aspiring to become day traders.
Expiry trading is one of the most anticipated days for options writers and institutions because there’s money to be made on the table.
In most cases, the retail investor loses out and that’s because he is impulsive. He does not calculate and enters and exits without logic, and perhaps on the advice of others.
In any case, that is the retail investors’ problem. Here is how you can measure volatility and trade on expiry day:
I’m taking the Bank Nifty as an example. You can apply the same principle to Nifty too.
IMPORTANT – ASSUME THAT EXPIRY TRADING DAY IS TODAY
STEP 1: 9.30 AM: Check the Bank Nifty level. Let us assume it is 30085.
So, the option strike price that is closest to the spot price is 30,100.
Now check the premiums of the 30,100 strike price – of both CE and PE
30100CE = 149.50
30100PE = 270.oo
EARLY MORNING ANALYSIS 1: This implies that options writers (brokerages, institutions, and professional writers) are expecting the BNF to drop because the PE premium is almost twice that of the CE premium. So the first inference early in the morning is that the bias is bearish (but this can change during the day)
EARLY MORNING ANALYSIS 2: Options writers make money because premiums drop as time decays. This implies that options writers (brokerages, institutions, and professional writers) are expecting the premium on the 30,100 strike price to fall by the end of the day. In early morning hours, on expiry day, it would be prudent to assume that the expected fall would be at least 20% to 30%.
EARLY MORNING ANALYSIS 3: Options writers make money because premiums drop as time decays. This implies that options writers (brokerages, institutions, and professional writers) are expecting the premium on the 30,100 strike price to fall by the end of the day. In early morning hours, on expiry day, it would be prudent to assume that the expected fall would be at least 10% to 20%.
Remember that options writers keep booking gains and adopting a variety of options writing strategies, but that’s another story.
EARLY MORNING OPTION WRITING: From the premiums in the morning, you should calculate the levels of the expected rise and fall.
30100 CE is 149.50 – so it is possible that BNF may do 30,250 (30100 + 149.50) on the way up.
30100 PE is 270 – so it is possible BNF may do 29,830 (30100 – 270) on the way down
Therefore you can try your luck in writing 30,300 or above CEs and and PEs below 29,700 on early morning Expiry Day.
You should monitor your position continuously and take targeted profits when the combined premium falls below your price (you are the best judge of your targets). Cover up both the CE and PE at one time, as soon as your targets are met. In case of a loss, book out as soon as it hits, don’t get emotional about it.
STEP 2: Start checking the Charts: Port the BNF on a chart and keep a close eye on it. Use this setup.
STEP 3: Every 5-10 Minutes, or when you see significant movement on the chart: Keep checking the premiums you have sold. Remember that you should keep booking and entering into new positions as dictated by the charts and the premiums.
Remember one thing – A day trader keeps monitoring the market live. Therefore if you are a positional trader, do not try this strategy or you will burn your hands and pockets.
Second – if you are an aspiring day trader, use this strategy only on paper. DO NOT enter into real trades unless you gain at least 6 months of experience in the spot trading market.
Finally remember that options writing is a dangerous game in which the big boys use a heck lot of algos and mathematical tools. Though this strategy helps you understand what the big guns are up to, you must be cautious in your approach. Selling one lot of the BNF costs you Rs 60000 in margin money and therefore writing is not everyone’s game.
Take these caveats into account before attempting any writing. Good luck.
So, let’s take this EOD example of 29-3-19 (day traders can perform this analysis in a live market too)
Let’s take the first stock – IDBI Bank
The OI change percentage is 22% and on 29-3-19, a total of 57,20,000 shares were bought (because price rose) and added to the total outstanding position of 3,15,60,000.
If you have read the OI article above, you would be by now realizing that IDBI outlook is bullish.
The volume too has jumped 184% t 2.66 crores, implying that buyers were chasing the stock.
So in Step 1 we have deduced that bulls added 57.2 lakh shares in IDBI adding a whole 22.14% to OI (or outstanding positions).
STEP 2: Check the Volumes and Deliveries in the Cash Market
On 29-3-19, 2.25 crore shares were traded in the spot market, and 71,62,502 shares were deliverable.
STEP 3: Analyzing Volumes in Cash and FnO
In FnO Market: 2.66 crore shares were traded and of these 57.2 lakh shares were taken home. The total position outstanding on 29-3-19 EOD in the Futures market is about 3.16 crore shares.
In Cash Market: 2.25 crore shares were traded, and 71.62 lakh shares were deliverable.
There was a rise in price in both markets and a total of 1.288 crore (57.2 + 71.62 lakh shares) were added. The price rose 3%.
From this we can conclude that IDBI Bank is in bull territory.
However this need not be the case every time, for example:
1. Operators may be selling in the FnO market but buying small quantities in the cash market just to keep investor interest going. Or, operators may buy a big chunk in the cash market to drive up prices and when the herd starts buying, they start selling in the FnO market.
2. Operators may be buying in the FnO market but selling small quantities in the cash market just to keep bears active. Or, operators may sell a big chunk in the cash market to drive up prices and when the herd starts hammering, they start buying in the FnO market.
This is why correlating volumes in the both cash and FnO market makes infinite sense for serious traders. Day traders should analyze both in real time and at EOD, while positional traders should check data at EOD.
STEP 4: Analyzing Historical Data in Cash Markets
After getting the hang of what the operators are up to in the cash and futures market, there is one final check left.
You should check the historical data of the stock in the cash market. In our case, of IDBI:
IDBI Bank’s volumes have started jumping up exponentially from 28 and 29 march 2019 on.
Correlating this with the high OI data it implies that something is up in this stock and that it can be considered for a swing trade.
This is what you need to know about FnO volume analysis. Also, this article can go on and on with different scenarios such as slight changes to OI, volumes and price – positive or negative, but all that will be too much information to digest.
Therefore, apply this analysis strategy in a practice exercise and monitor your stock picks in an Excel Sheet. Get comfortable, and then trade.
That’s all for now. If this seems tough for you, feel free to ask questions on Twitter and I’ll be happy to help.
MACD (Moving Average Convergence Divergence) is considered a powerful signal for both trend followers and momentum chasers.
And it is for a good reason.
To know what makes MACD such a potent indicator, you need to understand each of its components and how each works. In fact, before using any indicator, you must understand its working completely.
So, let’s begin:
COMPONENTS OF MACD
1. The MACD Line
12 Period EMA (minus) 26 Period EMA (Exponential Moving Average)
What this calculation does is to deduct a longer EMA (26 Period) from a shorter (12 Period) EMA.
Let us understand the MACD line with the help of these examples:
12 Period EMA
26 Period EMA
The trend has become VERY STRONG in the last 12 days
The trend has become VERY WEAK in the last 12 days
The trend has become A LITTLE STRONG in the last 12 days
The trend has become A LITTLE WEAK in the last 12 days
By now, you would have understood that the MACD line represents the CURRENT TREND.
At this point you should know that Gerald Appel, the inventor of the MACD, suggested using the 12-26 MACD line for buying and a 19-39 MACD line for selling IN NEUTRAL MARKETS. He also recommends using a 6-19 MACD combo when markets are SUPER BULLISH and a 12-26 MACD combo when markets are SUPER BEARISH.
2. The SIGNAL Line
The Signal Line is a 9 Period EMA of the MACD line (as above).
The Signal Line therefore can be considered as a smoothed average of the MACD line.
3. The HISTOGRAM
The Histogram is represented by vertical lines and it represents the difference between the MACD Line and the Signal Line.
Before understanding the interpretation, let’s first understand the 3 elements above better with this chart:
In this example, the 26 EMA is 179.78 and the 12 EMA is 178.36.
So the MACD line is 178.36 (less) 179.78 = -1.42 (as you can see in the chart)
Now the 9 EMA of the MACD line is -0.7396
The Histogram is the difference between these two – that is, -1.42 (-) -0.7396 = -0.68
What do these numbers tell us?
They tell us that:
1. The 12 EMA of TaMO is lesser than the 26 EMA and therefore the current trend is negative. This is the MACD line.
2. The 9 EMA of the MACD line is greater than the MACD. This means that the current trend is bearish because the MACD line has fallen lower than its 9 EMA.
The Histogram Line represents the difference between the MACD and the Signal Line.
4. The ZERO LINE
The Zero line is like a wall that separates the negative and the positive values of the MACD and Signal Lines. When these lines are positive, they will be above the Zero Line, and vice versa.
Now, let us learn how to interpret the MACD:
HOW TO INTERPRET MACD
1. MACD LINE CROSSES ABOVE THE SIGNAL LINE AND BOTH ARE ABOVE THE ZERO LINE
When both the MACD and Signal Lines are above the Zero Line, it obviously indicates that the trend is bullish. Now in a bullish trend, when the MACD Line crosses above the Signal Line, it implies that the bullish trend is gathering momentum.
2. MACD LINE CROSSES ABOVE THE SIGNAL LINE AND BOTH ARE BELOW THE ZERO LINE
When both the MACD and Signal Lines are below the Zero Line, it obviously indicates that the trend is downward. Now in a bearish trend, when the MACD Line crosses above the Signal Line, it implies that the trend has turned bullish.
3. MACD LINE CROSSES BELOW THE SIGNAL LINE AND BOTH ARE ABOVE THE ZERO LINE
When both the MACD and Signal Lines are above the Zero Line, it obviously indicates that the trend is bullish. Now in a bullish trend, when the MACD Line crosses below the Signal Line, it implies that the trend has turned bearish.
4. MACD LINE CROSSES BELOW THE SIGNAL LINE AND BOTH ARE BELOW THE ZERO LINE
When both the MACD and Signal Lines are below the Zero Line, it obviously indicates that the trend is bearish. Now in a bullish trend, when the MACD Line crosses below the Signal Line, it implies that the bearish trend is gathering momentum.
5. INTERPRETING THE HISTOGRAM
The Histogram represents the difference between the MACD Line and the Signal Line. When the line is long or keeps getting longer it implies that the momentum is getting stronger. Know know that momentum becomes very strong, it gives way to profit booking and therefore, a few long Histogram lines followed by a shorter line signals that the momentum and volatility may be coming to an end.
Likewise, when the line becomes very short it implies that volatility may have ended, and that the trend is about to change.
6. INTERPRETING THE CONVERGENCES AND DIVERGENCES & ZERO LINE CROSSOVERS
There are tons of videos and posts online that go ga-ga about the divergences, convergences and the zero line crossovers.
However, per my experience, if you know Volume Spread Analysis, you will get signals much ahead of MACD’s convergences and divergences.
Any indicator that you use, you must know it thoroughly inside out. Unless you know how an indicator works, don’t use it because someone says so.
I’m sure that many of you want to invest in a blue chip that seems to have a lot of potential in the short-medium term, but lack the resources.
Most blue chips are priced sky high and you can hold only a few in your DP account because of the high value investment required.
For example, if you figure that Nestle has potential to run up substantially in the medium term, and want to invest in it, then you have to invest Rs 1,05,000 to buy just 10 shares. The psychology of an investor is such that he does not feel happy investing a large sum in a very few shares – most investors prefers quantity over quality.
So, the investor ditches the blue chip and moves on to low priced B group stocks, thereby missing out on a chance to invest in a blue chip.
This guide is intended to help small investors buy a substantial quantity of any blue chip by investing a few thousands. Remember this guide is only for investment in blue chips that are traded in FnO and is suitable for short-medium term investment.
STEP 1: PICK THE STOCK
Picking the stock depends on your trading strategy. Some use screeners, some watch TV channels (though not recommended for stock picks), some watch Open Interest data or economy- or company-related news, etc.
For this post, we have picked HDFC, CMP 1984 as on 20-3-19 close.
STEP 2: DETERMINE THE HOLDING PERIOD
Determine for how long you want to hold the stock. This depends on your trading temperament. Short termers typically hold 3-6 months, medium termers for 12-18 months.
Know that this strategy is not suitable for long term investing.
STEP 3: SET EXPECTATIONS
When you invest in any stock, you need to set targets. So, how much do you expect your stock to appreciate? Let’s say that for this post, we have set a target of 25% appreciation in 3-4 months. This means we are expecting HDFC to touch 2500 in 4 months.
STEP 3: COMPARE EXPECTATIONS WITH VOLATILITY
The rate of interest per month in private lending is at least 1.5% per month. In extreme cases it can exceed 2%. Let us say that if you were to borrow, you would have to pay 2% per month.
Now check the volatility of our pick – HDFC:
— Google “HDFC Volatility” (without the quotes)
— Your first result will be of TopStockResearch.com. Check the volatility.
For HDFC, the minimum volatility percentage is 1.67% per month and the maximum is 10.17% per year.
Based on historical trends, for our trade, HDFC can fluctuate by a maximum of 10% within a year (so for four months too it can fluctuate 10% either way).
But we are expecting it to move 25%.
This is an anomaly and if we are not careful, we can make a loss.
So the first thing we should know is:
If volatility is higher than our expectations, then we have a 50+% chance of succeeding.
But if volatility is lower than our expectations, then it can result in a loss. In such cases, we need to check the charts.
STEP 4: CHECK THE TREND ON THE CHARTS
HDFC seems to be in an uptrend (on daily and monthly charts) as per a trendline.
Plus we have come to some kind of conclusion that the stock will appreciate 25% in 4 months. Of course, this expectation needs to be backed by solid reasons and data – for example, liquidity norms relaxed for housing companies by RBI can benefit HDFC, HDFC is one of the leaders in housing finance and has solid parentage, etc.
At this stage we must be reasonably certain of an upward price movement before proceeding to the next step.
STEP 4: CHECK THE PREMIUM OF AN ALMOST AT-THE-MONEY CALL OPTION FOR THE NEXT EXPIRY
In the case of HDFC, the 2000CE for APRIL EXPIRY IS priced at 53 bucks.
Now, 53 bucks is about 2.67% (53/1984).
Remember above that we have assumed that we will end up paying 2% interest per month if we were to borrow from a private lender.
We also can assume that HDFC can fluctuate 3%-5% (or even 10% – the full range of its annual volatility) given the market conditions as on 21-3-19 (Fed paused rate hike, markets in bull grip, gush of liquidity for HFCs, bullish trend on charts, solid company, etc.)
Therefore, based on reasonable assumptions, economic news, global markets and our expectations, we can assume that the premium of Rs 53 on the HDFC 2000CE is worth investing in.
If the premium seems overpriced – DO NOT ENTER INTO THE TRADE.
STEP 5: DEALING WITH LOSSES AND CARRYING OVER
Even though you are reasonably sure of HDFC price appreciating, you must also be prepared for a fall in its price.
Therefore, stop losses are essential and this is where your Risk:Reward ratio comes into play.
Let us say that you are 66% sure of HDFC appreciating and you figure that in April it should do 2075 at least.
Your typical Risk-Reward is 1:2.
So, this implies that you are expecting a 75 buck jump and therefore should budget for a 37.5 buck fall in its price. If it falls by 37.50 bucks, you should square up your 2000CE.
But that doesn’t mean that you should give up on your bullish views.
As HDFC begins to turn around after a fall, and if the markets are in good or steady health, you must re enter at a lower strike price. Of course, you should apply all the assumptions above (volatility, market conditions, global markets, etc.)
STEP 6: HOW THIS STRATEGY HELPS
Think about it: If we are bullish on HDFC today and wanted to buy 500 shares, we would have to shell out 10 LAKHS. But with this options strategy, we paid only Rs 26,500 (1 lot of HDFC = 500 shares).
Even if the HDFC price were to fall after our buying the stock in the spot market, we would have incurred similar losses just like wwe would have incurred were we holding the CE.
The advice to you is to try out this strategy on paper and become more comfortable before entering an actual trade.
This is all there is to it – it’s very simple and effective when you think about it. Good luck.
The first step is knowing how to set pivot points after discovering a stock to trade in.
Let’s take the example of Nifty.
SETTING PIVOT POINTS FOR INTRA DAY TRADERS
Intraday traders typically trade on 5-Minute and 15-Minute periods and they should set pivot points based on
(a) Previous Day High, Low and Close
(b) High and Low of first 15 Minute candle of the day
Let us assume we are trading on 1-3-19. From the chart above, here is our reading:
1. We drew pivot points on the High, Low and Close of 28-2-19
2. We drew pivot points on High and Low of 1st 15 Minute candle of 1-3-19.
3. Remember that the first 15 Minute Candle is a no trade because it is full of noisy traders.
4. Now we start our chart reading
5. The second 15 Minute Candle broke below the previous day’s high. It also broke below the high of the 1st 15 Minute Candle. This was a sell signal, but the volumes were poor.
6. After a couple of it pierced below the low of the first 15 Minute Candle. This too is a sell signal, but again the volumes were low.
7. Later it started rising, recovered lost ground, and broke above the high of the 1st 15 Minute Candle. Again, the volumes were poor. But the big thing was that the pivot points gave you meaningful signals without you having to rely on any technical indicators.
Adding VWAP to the chart above would have helped us confirm the signals emitted by the price-pivot point movements.
9. As you will observe VWAP confirmed the sell signal in the first instance, but was delayed in giving the buy signal wen the price started rising. When the price started rising, the pivot point alerted way in advance.
10. A word about Pivot Points – As stated above, pivot points work as support and resistance levels. When a support is broken, it becomes a resistance point, and when a resistance point is broken, it becomes a support. Apply this logic while reading charts.
11. You also can combine your pivot point reading with any technical indicator of your choice. That’s left to you. Typically, know that price action traders do not use indicators much.
So, if you use pivot points, Volume Spread Analysis and VWAP (on days when the volume is poor), your chart reading will become sharper and your success percentage will improve.
Try it out and leave feedback – whether this worked for you or didn’t.
If you are an amateur in the Technical Analysis game, know that besides charts, there are many factors that impact the prices, and that predicting on the basis of charts alone leaves you with a 30%-50% chance of success.
I will not elaborate much on this because there are at least 6-7 factors that impact stock prices – besides the technical charts.
Here’s just one example that will help you understand the importance of analyzing other data before making a trading decision.
Here is the Ultratech Cements Chart. Note the price movement between 31-7-18 and 9-8-18.
It was all systems go and the stock was looking very bullish. (See Indicators and price action)
Now, see what happened immediately after:
The stock just fell off a cliff.
An amateur or an arrogant experienced chartist will give you the standard nonsense – Bhav Bhagwan Che (in Gujarati).
There was a massive underlying reason.
Now check this data:
During this period, the promoters were selling stock.
In the bullish period, they sold off 7,80,000 shares!
And that’s a huge, huge number for Ultratech, considering that it is a 4 figure stock.
But the price kept on going up despite the news.
Why did this anomaly happen?
Were operators rigging the price? Unsure, but possible.
Was the retail investor prodded to buy? Oh, yes, you bet:
Now, here is an example of the 3 key factors of VSA:
The stock opened at 95 and went on to hit a high of 105, but it couldn’t sustain and fell to 100. The close is midway between the open and the high. The volume for this bar must be compared with the average volumes or with the volumes immediately preceding it. Interpretation is discussed below.
What you must know about VSA:
1. About 60% to 70% of a volume bar is of operators and institutions who are smarter than you and I.
2. You ALWAYS MUST CHECK multi time frames before analyzing volumes to determine support and resistance levels. Start with month – move to week – then check day – hour. Anything lower is noise. This is because operators know how to game chartists who check singular time frames.
3. Remember this if VSA indicates bullishness on lower periods and bearishness on higher time periods (or vice versa), it implies that the operators are trying to game traders. DO NOT FORGET ANALYZING MULTI TIME FRAMES WHILE DOING VSA.
4. Your job is to look for strength in down-bars and weakness in up-bars.
5. The close of the candle is extremely important. It must be correlated to the range (Check interpretation below). The open is not important.
6. VSA can be used on any time frame.
— Scalpers can use it on 3m-5m Candles
— Other Intra day traders can use it on 15m and 30m charts
— BTSTtraders can analyze VSA on 1H, 2H and Daily time frames
— Positional traders should analyze Daily, Weekly and Monthly VSA
7. You must compare the volume bar with the preceding 2-4 volume bars to determine smart money movement.
8. Before you head to the interpretation, you should know:
In this example, I have used the Yes Bank Daily Chart. Note that you can apply the interpretation below to any chart of your choice, and as suggested above.
A & C: LARGE CANDLE RANGE WITH RISING VOLUMES
In this example, the Volume bar is greater than the preceding 2-4 volume bars and the candle is red with a large body. The close is right next to the low of the day. This signifies that operators dumped the stock on that day and that the next open will be lower.
B: SMALL CANDLE BODY WITH RISING VOLUMES
In this example, the Volumes are extraordinarily high as compared to than the preceding volume bars. The candle is green and more importantly, the selling has been rejected and the close is closer to the high. This signifies that operators very heavily bought the stocks and perhaps retail got out or shorted.
A small candle body with solid volumes is a tell tale sign that something is about to give, and this is a signal that is independent of any indicator.
In this case, as you can see from the successive candles, the Yes Bank stock spurted from about 170 levels to 210+ in a matter of days.
You can apply this analysis to a bearish candle too for shorting.
C: SMALL CANDLE BODY WITH RISING VOLUMES (BEARISH EXAMPLE)
In this example, the Volumes are extraordinarily high as compared to than the preceding volume bars. The candle is red and more importantly, the buying has been rejected and the close is right near the low. This signifies that operators have very heavily sold the stock and perhaps retail got in and are trapped.
This is the candle of 25-1-19 (Friday) and as per VSA it is expected that the stock will witness selling action on 27-1-19 (Monday).
E & F: LARGE CANDLE BODY WITH LOW VOLUMES
A large candle body (bullish or bearish) with low or average volumes signifies that a big player is trying to game retail. However, there is no guarantee of that.
Therefore, you should always add 10 EMA to your VSA analysis specially while analyzing large candles with low volumes. In the example above, despite the low volumes, the stock has fallen (E) and risen (F), acting contrary to the theory.
Let us now add 10 EMA to the chart above and check the results:
Now, you can get a clearer picture. At (E) the price crossed below 10EMA and that was a signal not to buy the stock, contrary to VSA. At (F), the 10EMA signaled a buy despite the VSA suggesting average volumes.
Though VSA is an extremely powerful technique, it works even better when you use it with your favorite technical indicators. That way you get a double confirmation.
Read up all the links and the material above and practice it on charts to attain proficiency. Maintain an Excel sheet and enter your observations or paper trades and check the results after a month to gauge your success percentage.
One more thing: If you are an intra day trader, add VWAP to your setup for getting sharper signals.
As you keep practicing VSA, your chart reading will become sharper and your trading success % will increase over time.
Before using the Commodity Channel Index (CCI), you must know how it works.
The CCI first averages each candle by adding the Open, High and Low and dividing it by 3.
Then it creates a moving average from the average of each candle.
This moving average is te=hen divided by a mean deviation and a standard deviation is applied. This makes the CCI oscillate between +100 and -100. There is no set range of the CCI – it can go to any high or low.
So long the price of a security moves within this range, you can assume that it is business as usual.
…when the CCI crosses above +100, you can assume that the price of the security has started moving way above from its averages as calculated by CCI. This is a bullish signal.
…when the CCI crosses below -100, you can assume that the price of the security has started moving way below from its averages as calculated by CCI. This is a bearish signal.
However, what you should know is that if CCI moves way above +100, to say 200 0r 300, it implies the price has deviated too far way from the average price and that it is possible that the volatility is about to end. Similar logic applies to when the price falls way below -100..
The CCI default Period is set at 20 and it is recommended that you do not tweak it.
HOW TO USE CCI TO DISCOVER TRENDING CASH STOCKS
You now how how the CCI works, and that is a good thing because you must understand how each indicator works before applying it.
In the case of cash stocks, you must use CCI as a screener and not as a trade indicator.
You must work on 2 periods – WEEKLY AND MONTHLY.
Your screener setting should be
CCI (20) crossed above 100 (for each of the periods specified above).
The inference is that when a cash stock crosses above its smoothed and pivot-like CCI average, then it implies that something is up and the stock merits a look.
Whatever stocks are thrown up by the screener – remember to avoid penny stocks and stocks backed by low volumes.
Apply it on CASH (B Group) stocks. All the picks you get should be held for a positional trade and you also must check fundamentals.
Now, here is an example of CCI signalled a buy in Praj Industries on the weekly and monthly charts:
The CCI crossed above 100 in both the weekly and monthly charts ahead of the price eaking ot. Of course, it is normal that the weekly charts gave a signal first because the buying built up on the weekly chart and then spilled over into the monthly chart.
This is how you can use the Commodity Channel Index (CCI) to discover trending cash stocks for the medium-long term.