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Stock Market Trading Book
'It's not important whether you are right or wrong, it more important
how much you lose when you are wrong and how much money you make when
you are right.': George
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Trading Strategy: Lessons
months back I started sending out emails to friends and relatives about
basics of my techniques that I use for short to medium term trading.
The purpose was to share my knowledge and invite greater participation
to test these techniques real time in US stocks. Though the total number
of SIGNALs I use are more than ten, I sent out four lessons explaining
four different signals. The result: each of those emails were great
success, very accurate and great timing... I have put them here, if
you are interested. Try them.
Summary of first 4 lessons: Nov 3, 1999. (Quick
view on stock charts)
Lesson 1. FullStop, Aug 11, 1999
Lesson 2. Gangotri. Aug 17, 1999
Lesson 3. Kick. Sept 21, 1999.
Lesson 4. Jump. Sept 22, 1999.
Click here to access
some of the BEST FREE STOCK
Strategy basics: Let me explain you all my 'indicators'
which help me 'guesstimate' (guess+ estimate) very basic 'demand and
supply' dynamics of mysterious market and to capture changes as and
when they happen. Tell me if you guys are interested because this
is highly technical. It is also the most courageous and unique approach
to analyze the market trends. I understand that each of you may not
be interested in it. If so, pls ignore this email.)
ASSUMPTIONS AND FRAMEWORK:
Every news, fed action, corporate result, analyst's recommendation or
anything you may think of affects a stock' price (list of such influential
factors would run into hundreds). As you would appreciate, the combined
effect of all such factors is often so complex, 'mysterious' and offsetting
that it often makes us believe that the markets are 'crazy'. However,
each such development continuously boils down to 'shifts' of demand
and supply curves which in turn pushes prices into a different 'range'.
The shifting of demand and supply curve is very dynamic and hard to
I ATTEMPT TO WATCH AND UNDERSTAND THIS VERY LOWER LEVEL OF MARKET BEHAVIOR
and for this all I use is daily prices- Open, High, Low, Close and sometimes
Volume. I understand that ONE can never be cent percent true about markets.
So I target that I should be true 70%.(So pls don't bug me if I am wrong.
However I would be really happy to discuss failures and learn from them.)
Trade only when the potential for profit is three times more than likely
losses. Be patient and wait for such opportunity.
three things give me three different prices:
Action price (at which to buy or sell),
stoploss price (the price at which I would acknowledge that I
made mistake and would stop my losses from accumulating further) and
target price (at which I would book profit if I am true).
most other analysts, I give lot of importance to the daily OPEN price.
Open price is the price at which a stock/market starts trading. Yesterday's
prices, overnight developments, newspaper articles, nightly business
reports etc and also institutional investors and all sorts of traders
with their 'homework' start trading when the market opens. So the Open
Price is a very good indicator to understand the aggregate effect of
everything taken together that has happened since close of yesterday's
market and opening of today's. I hope I am able to make my point clear
PRINCIPLES AND OBJECTIVES:
be a bull or a bear.
- Make MARKET
TREND your friend instead of fighting with it head-on.
of capital FIRST. Wait for opportunities and do the risk reward analysis
before you take a plunge
- and then
in yourself instead of believing in others.
that matters in this game is MONEY WE MAKE and not the impressions we
create on others about how smart WE ARE.
your stop-loss limits and book profit at target levels unless you have
stronger signals which suggest otherwise.
CONDITIONS: very basic thing I work with is a CONDITION. As an
example a typical condition is: Today's open price is greater than
yesterday's high price. I work with many such conditions each of which
is some indicator or measurement of changes that take place in demand
or supply or both.
SIGNALS: Each signal is a SET of some conditions maybe 5 or
sometimes 10 which are TRUE all together. Each signal is like a typical
TEST to measure shifts in demand and/or supply curves. It can also
be viewed as a SCENARIO.
ACTIONS: Each SIGNAL that takes place gives me following things:
Type of Signal: BUY or SELL or WAIT. Stoploss Price and sometimes
to list of lessons |
of first 4 lessons: Nov. 3, 1999. Click
here to see on charts how the lessons have performed .. Everybody.
All four lessons are a great success....I hope you guys understand
and appreciate the timing and reasoning this approach accomplishes.
1. (chart) Signal was bear Fullstop.
We tested it on Wed 8/11/99 10:30 AM (during market hours) on NASDAQ
index when it was 2520 or so and we clearly flashed beginning of the
uptrend. (check the date and time and NASDAQ chart/prices). If you
are tracking it, this was the first day of the current bull run which
has taken it to 3000 plus today and we had tracked the signal online.
So it was like, we got on the train during first 4 hours. Nothing
was so accurate to point to the end of downtrend and beginning of
Uptrend. (see this on the chart of NASDAQ)
2. Signal was Gangotri. We tested it during the market hours on NASDAQ
but if you are able to recall it properly, the NASDAQ had closed higher
when the markets closed on that day. So the last CONDITION in the
SIGNAL had failed (...today's close price has to be lower than yesterday's
open and close prices......)and actually no signal was generated on
that day. (However if you had applied Gangotries to other situations,
your payoff would be much higher on average).
3. (chart) SIGNAL was KICK.
We tested it on AOL on Tue 9/21/99 4:41 PM (after market close). If
you are able to recall, AOL closed at 85 or so on that day and that
was THE FIRST DAY OF AOL's CURRENT BULL RUN which has taken it from
85 to 140 level today. (See this on the chart of AOL)
4. (chart) SIGNAL was JUMP. We
successfully tested it on BRCM on Wed 9/22/99 3:13 PM. Do you remember
that e-mail? (.".....a kind of rare combination to happen.....This
is a very powerful thing and a very strong signal). BRCM on that day
had closed at 113 and today it is at 150. MIND WELL, this was also the
THE FIRST DAY OF BRCM's CURRENT BULL RUN. These are the four lessons
so far. And each of them is a great success......(see this on the chart
of BRCM) ANY COMMENTS??
to list of lessons
1. Full-stop. Aug 11, 1999.
Let me write I how I view today's market (NASDAQ) as an example. Today
it is likely that we get a good signal which I call FULLSTOP.
market should have LOWEST low price(2442) for last few days. TRUE.
Today's close price (put the actual figure after market closes today)
should be higher than today's open (2532).TRUE (It was)
3. Today's low price has to be higher than yesterday's close (2490).
Yesterday's close (2490) has to be lower than yesterday's open(2520?).
5. IF today's low price turns out to be more than yesterday's high
price, you can be 80% sure that the market's down trend has ended
for the timebeing.
If all of the above conditions are true, then you can (i) take long
positions at current prices (ii) with Stoploss put at yesterday's
low price or rate.
Any questions???(I understand that my approach that is discussed above
and which I intend to continue further in next few emails is not quite
interesting matter for all investors. So if you find it REALLY interesting,
pls e-mail me back.
light discussion: STOCK market TIP is the worst kind of advice.
If you give a tip to someone and if you are right about it, the receiver
would say and would also actually BELIEVE that it was his idea ORIGINALLY;
if you are wrong in your tip, the BLAMES for his losses would undoubtedly
come back to you, maybe for years. So I do my best to avoid talking
about stocks with most people unless I am specifically asked by someone.
On the other side, I am really enthusiastic and helpful, if someone
asks me. The whole purpose in 'bugging you' with this series(hopefully)
of emails is sharing knowledge with friends and relatives'.(Thanks
to Kantilal Parekh, a veteran trader in India who passed away few
years back at around 90. (Stock traders usually don't live that long).
His trading system has influenced me a lot which I have attempted
to refine further based on my experience.)
to list of lessons | see what happened
2. Gangotri. Aug 17, 1999.
This is the last E-MAIL related to STOCK MARKET that is sent to almost
everybody who is on my list. Unless you have responded positively, you
would not be sent such stock related emails in future. Sorry.
Do you remember last e-mail? It was sent to everybody during the market
hours when the NASDAQ was approx. 2510. Our target was 2610 to 2690.
We are there.Today, something significant seems to be happening. NASDAQ
is at 2660.
This is another signal I use: It is called GANGOTRI. My favorite and
the most powerful signal.
1. Today's open (2675) has to be higher than yesterday's high (2661.15).
2. The market has to be in the up trend. TRUE (look at last few days)
3. Today's high has to be HIGHEST (2677, would it go higher than this
level? Wait until market closes today) since the bottom was formed
(2441). Could be TRUE but can be confirmed only after market closes
4. Today's close(put here today's close price) has to be lower than
yesterday's open (2647) as well as close (2647) (note: This
condition failed as that day's close was higher than previous day's
5. If volume is much better than yesterday, signal is more powerful.
(degree of confidence) I am in little hurry and am not able to recall
all of the conditions at present.
if all conditions are TRUE, strong sell signal is generated.
STOPLOSS: today's high (2677+ 13 points)
TARGET: Market could go as low as 15% to 20%.(sounds impossible right?
could go to 2200-2300 points) RISK of 40 NASDAQ points for gain of what?
400 points...with 80 % confidance. Do the probability arithmetic and
you would then love this theory more and more.. As I said, most of the
work I do is related to gauge the market demand and supply shifts and
maybe more useful for traders than investors. (However, there is no
fun in being loyal trader or investor; JUST FOLLOW THE MONEY WHEREVER
to list of lessons | see what
3. Kick. Sept 21, 1999. One more feather in the crown of Gangotri.
Do you remember my e-mail that I sent to you on 09/01/99 for LLY?
Here is the target of 65. NEW LESSON: Lesson 3. (Silverline: If you
are a bull by nature, something for you below. Love AOL).
the bull Gangotri is often referred to as KICK. (notes: 1.Kick can become
a 2-day gangotri.
2. Bearish counterpart of Kick is Dive.)
Warning: It is not as powerful as Gangotri. Chances of failure
are more. (Than why do we still like it? 'Cause it still falls into
3:1 ratio of Reward to risk.).
take AOL as an example here today.
1. Today's open (81 7/8)has to be lower than yesterday's low (82).
(similar to gangotri)
2. Today's close (84 7/8) has to be higher than yesterday's close (82.8275).
(if today's close is also higher than yesterday's open (86.0625),
then this would be a bull gangotri. However, If tomorrow, AOL closes
above 86.0625, this would be a 2-day Gangotri. Though not as powerful
as a normal Gangotri; it is still a pretty good signal)
3. Today's low (around 80?) has to be lowest in last few days/weeks.
4. Today's volume has to be higher than normal volume.
Can go long on stock. TARGET: Targets are not as specific as they are
in Gangotri. However if tomorrow's close is higher than today's close,
change in trend can be expected for quite some time.
STOP LOSS: Today's low - 1/2 percent ( 80 $ -0.50 cents) for traders.
For investors, stoploss can be overlooked because (1) AOL has come down
from a high of 170 or so. So there is good value in this price for near
future. (2) most important reason for breaking a rule (only for investors-
rule of stoploss) is that AOL has been pretty strong in such a down
day. Relatively very strong performance in a very weak day. What I would
do? Watch tomorrow. As soon as it crosses 86 1/2, get on to it. Don't
buy it below 79 in any case for the time being. Watch out for buying
opportunities in AOL and keep it as a potential BUY candidate. Any confusions?
Questions? Comments? Throw them to me. Love investment rides. Handle
your heart with care. (Also use your own logic and strategy before you
make any investment decisions.)
Jayesh Patel, Ext 3785. Share your knowledge. It's a way to achieve
to list of lessons | see what
4. Jump. Sept 22, 1999. Thank God, (Oh no, Thank AOL), you gave
a good example for KICK by closing at 90+ today. (up by more than
5 dollars). Today it is a turn of BRCM to be used as an example for
a new exercise. If you remember, a bearish outlook was taken on BRCM
based on its chart around 128. Today it has closed at 113. If any
one of you is really short on it, I would advise you to cover the
short position (I would resist the temptation to initiate a long position
in it for certain reasons). Ideally BRCM could have been bought today
at around 109 as soon as it opened for trading.
DESCRIPTION: A very good signal for trend-reversal from bearish
to bullish. (It's bearish counterpart is FALL.) It is more reliable
and powerful than FULL STOP and is just little different. It also contains
a signal BULL GAP in it with only little but very powerful modification.
1. Today's low (108) has to be higher than yesterday's high price (107.5).(it
is a gap)TRUE
2. Yesterday's low (103.12) has to lowest for last few days/weeks.TRUE
3. Today's close (113) has to be higher than today's open (108.75).TRUE
4. Volume has to be more today (3.4 million Vs 2.8 million yesterday)
for increased confidence.TRUE
5. Yesterday's low has to be less than the recent bottom. I mean a new
lower bottom formation should be in making. (Unless you are serious
enough to master this technique, you can omit this condition) TRUE
Cover your short and can initiate a bullish position. (Short term
traders/day traders can be more proactive to take bullish position
as soon as BRCM opens higher(108) than yesterday's high (107.5) instead
of waiting for the prices to close.) STOP LOSS: Yesterday's low price
- 1% (103.12 - 1 = 102 dollar) TARGET: No specific targets are there
for this signal. VALIDATION: Close above today's close (113) in next
three days is a good confirmation of trend reversal. This is it for
JUMP. (Yesterday, there was a BEAR GAP in BRCM and today there is
a BULL GAP. This is a kind of rare combination to happen. Today 108.75,
115.12, 108, 113.25. Yesterday 107.5, 107.5, 103.12, 104.12. The day
before yesterday, 112.68, 113.75, 108.75, 109.31. This is a very
powerful thing and a very strong signal. This has made me drop
my Bearish outlook on BRCM and book profit.) Comments
STUFF): BRCM is a good example to reiterate to you all why I love this
approach of analysis. As you would agree, stock markets are very dynamic
and we are here to make money. For this, we need to change our opinions
and positions as quickly as possible, as and when things change. AND
to understand such changes, it does not take lots of IQ or lots of degrees
or TV shows or magazines..; all that is required is just an objective
approach to DAILY PRICES and an attempt to clear ourselves from emotions.
Why we lose money in markets? 'cause we take an approach ...like an
ostrich in a desert. We close our eyes to certain warnings, 'paint'
the reality in our favor, talk to only those friends who could justify
(and not criticize) our decisions.
For me, trends are like a crazy river and there is no fun in swimming
against the flow. I have followed many theories and strategies so far,
but nothing is as effective and as fast as this theory in confirming
the changes in trend, acknowledging mistakes(stop-losses) and giving
you target prices.
to list of lessons | see what happened
own judgment and strategies in making your investment decisions.)