DISCLAIMER Author of this book is neither a certified trader nor a certified planner. NO WARRANTY/GUARANTEE FOR THE BOOK. Execution of the strategies appropriately is very important to earn profit in trades. The author will not be responsible if the trader misinterprets the strategy. The risk of trading is substantial and the author of the book in no way will be responsible for the losses or profits incurred. The decision of trading will solely be taken by the trader. All information in this book is for educational purpose. The actual trading may result in loss as no trading setup is guaranteed. So be prepared for it. By downloading this book you accept full responsibility for the actions, trades and results. Transactions in stocks, futures and commodities carry great risk. Stock market investments and trades are subjected to market risk. So trade at your own risk.
CONTENTS INTRODUCTION Chapter I – Possibility Chapter II – Technical Indicators Chapter III – Importance of Booking Profits Chapter IV – Intraday Trading and Traders Chapter V – Selecting the Stocks Chapter VI – Intraday Strategy
INTRODUCTION Thank you, for downloading this book. This book is the result of 7 years of testing and re-testing the strategy given in this book. Be prepared to be a part of the group of elite day traders, who are able to generate consistent profits over a period of time. And making a living out off the profits. Are you continuously incurring losses? Do you need help to overcome your losses? You have no clue about what to do next. This book will help you overcome your losses and in reaping continuous profits in coming future. This book will help you discover ways by which you can manage your risks and eliminate the fear of loss. The role of this book will be to empower you to take full control of trading decisions and bidding bye to the trading calls. I hope that the material of this book will help you become a good trader. This book will mainly help the beginners but the strategy will be helpful for both beginners and professionals.
I assume that the reader has basic knowledge about time frames, chart type, candle stick patterns and the working of technical indicators. Happy reading!!!!!!!
I.POSSIBILITY “Do not become so attached to anything that you cannot see past it to another possibility.” CHRISTOPHER PAOLINI When many of us think about the possibility of an event a coin toss comes to our mind. The probability of being right in a coin toss is 50%, but the chance of being wrong is also 50%. But, the major question is can this theory be applied to stock market? According to me, yes to some extent. As in stock market also the chance of your trade being wrong or right is exactly the same. But what’s different here is the process and understanding involved in either being right or wrong. Stock market works on fundamentals and economic conditions. On the other hand nothing as such is involved in tossing a coin. The movement in stock market can be predicted on the basis of specific points by using some tools. A trader’s current views on probability can be completely wrong and they could very well be the reasons why they are not making money in the markets. This chapter is an introduction to the possibilities of trading.
Let’s assume that at a given point of time a stock can just move up or down. Thus the possibility of going up or down is 50%. Although not all the traders will execute random trading, we will start with this scenario. We have an equal probability of a trade going right or wrong, but does the probability of one trade being right or wrong depend on its predecessors? No! Not at all. Each result is independent. A consecutive streak of correct trades can happen in random events. Let’s find out their probability. Profitable Trades Probability 1 50% 2 25% 3 12.5% 4 6.25% 5 3.125%
Here is where the chances declined. Let’s say we have just made five profitable trades in a row. According to the table the chance of such an event happening is just 3.125% in case of random trades. One cannot survive in stock market only on the basis of luck, efforts have to be made to analyse the condition and then trade. So, how is the above taken example helpful? It is helpful because it tells us not to increase our trading capital just after two or three continuous wins. The determines the efficiency of a trader. So, what is your current score? I hope it improves after you complete this book. number of continuous profitable trades
II. TECHNICAL INDICATORS Technical indicators are tools used to predict the future movement of a stock or market trend. They are used on the charts to analyse the condition. There are hundreds of technical indicators available for the technical analysts. Technical analysts can also develop their own technical indicator with the help of a programmer. Technical indicators are categorised into four major types: • Moving averages, MACD, Parabolic SAR , etc TREND MOMENTUM • Stochastics, CCI, RSI, etc • Bollinger Bands, Average True Range, etc VOLATILITY • Chaikin Oscillator, OBV, ROCV, etc. VOLUME: I.TREND:
The technical indicator which predicts about the movement of a stock’s price on the basis of its previous trend falls under this category. For example: moving averages, MACD , parabolic SAR, etc. II.MOMENTUM: Under this category are the indicators which predict the stock price on the basis of its past and current movement. They are proved to be one of the most correct trade identifying indicators if they are used correctly. They tell us about a stock being in oversold or overbought zone. For example: stochastics, cci, relative strength index. III.VOLATILITY: The technical indicators of this category tell us about the volatility of a stock. Volatility of a stock means the rapid tendency of a stock to change the direction of its move. For example: Bollinger bands, average true range, standard deviation. IV.VOLUME: The technical indicators of this type tell us about the volume of a stock. It tells us that whether the
selling of the stock is taking place in large quantity or it is being bought in large quantities. For example: chaikin oscillator, obv, rate of change of volume (rocv). Technical analysis strategies are used to forecast upcoming prices of a stock, by analysing the chart patterns of past and current time. Unlike fundamental analysts – who decide on the basis of intrinsic value of a stock, the technical analysts use charts of the stock to predict the movement of stock. Technical analysis reflects the idea of the movement of stock price in a specific trend which depends upon the attitudes of large investors such as FIIs, DIIs, bank or some other big player. As technical analyst Murphy explains in his book “Charting Made Easy”: “Chart analysis or the technical analysis is the study of market action using price charts to forecast future price prediction. The cornerstone of the technical philosophy is the belief that all factors that influence price – fundamental information, political information, natural disasters and psychological factors – are quickly discounted in market activity.”
An essential pillar for technical analysis is the support and resistance of a stock. Technical analysts use support and resistance to predict the movement of a stock. It is useful for traders.
III. IMPORTANCE OF BOOKING PROFIT “You should book profitimmediately”, I told my friend. To this he replied, “I am a risk taking trader, and I will wait for much more returns”. Many of us would agree with my friend. So, I am writing this chapter to discuss the importance of booking profits regularly in market. Many intraday traders lack one thing and that is the reversal of stock can take place from any point. They just buy the stock and hold it for their desired time period. When one executes a trade in stock market it is very important to be aware about the condition of market and our stock as well. If a trader books profit at right times he/she can increase their returns by many times. So, we should now discuss about the reasons for booking profits. VOLATILITY OF MARKET EMOTIONAL ATTACHMENTS VOLATILITY OF STOCKS AVERAGE OUT
I.VOLATILITY OF MARKET: We all know that stock market is highly volatile. This volatility of market often makes it difficult for us to decide our entry and exit point in a stock. The stock markets of all the countries are linked. We all should have heard about the recent Greece crisis. And we saw how badly a small economy crisis altered the movement of markets of all countries. So, with due respect to the volatility of market, one should book profit. II.EMOTIONAL ATTACHMENT: We all get emotionally attached to the things that stay with us for quite some time. The same can be said about the stocks, we all get emotional about the stocks that we own. In my opinion this is a major reason why traders don’t make money in the market. If one overcomes their emotional dilemma. Then it will be very helpful for them to make money in market. III.VOLATILITY OF STOCKS: As markets are volatile in the same manner nothing can be much predicted about stock’s volatility. This is another reason to book profit. The stock that is among the gainers today might be the top loser next day.
That’s the unpredictability of stock as well as stock market. Maybe the stock chosen for trading, by a trader, be a dark horse now and become a lame one after some time. In that situation it will be better for the trades to square off his/her positions at that time. And switch to some other stocks for better returns. IV.AVERAGE OUT: A trader adopts this strategy to decrease the buying price of a stock in their trade. In this strategy they buy stocks when the price of stock goes beyond their buying price. It is advisable to all the traders that they should average out their stocks only during the upmove of stock, as no one can predict about the bottom of a stock. When traders go for averaging after their stop loss is hit. Then they are being trapped. It is always advisable to get out of a stock when it is in its bear phase, as no one can predict the bottom of stock. Many would argue with me on the above reasons that if we trade very often then it will impact our taxpaying. I absolutely agree that in such cases of high trade frequency, it will be considered as an “Income from business and profession” rather than “Short term
capital gains”. Worldwide, market experts have the opinion that one should look for opportunities in the stock market to earn money not about paying taxes on earnings. As I have learned from my mentors that stock market moves up or may fall down, but smart traders are the one who make money in both the kinds of market, irrespective of movement of market. Stock market does not apply a retarding force to their plans. And the bad phase of markets does not erode much amount of their position. So, one should always look for opportunities available in the stock market. And it is also true that no one can time market with total accuracy. It is important to have a target and stop loss, for the trades being done, to survive in the market.
IV. INTRADAY TRADING AND TRADERS Intraday trading is the type of trading in which the trader has to open and close a position on the same day. There are many reasons why a trader does this: they can capitalise short term gains, get more leverage and daily earning. As the leverage provided in intraday trade is more than swing trades, so the trader gets to amplify his/her returns although this also increases the risk levels. Intraday traders operate with some of the highest level of risks in their trades as compared to the overall market. They participate in rapidly changing market conditions trying to convert every opportunity into profit. They use technical analysis to find out the buying and selling opportunities. GUIDLINES FOR INTRADAY TRADERS: Doing something without setting up proper guidelines for does not prove to be very much helpful in this case profitable. The very quality that an intraday trader needs to have is discipline, discipline to follow all the guidelines strictly.
Here are some of the rules which should be strictly followed by an intraday trader: 1. Never invest all your money in the same trade. Tending to the volatility of market your analysis can backfire. So, you should never put all your money in the same trade. 2. Think about your risk taking ability. It is a known fact that intraday trading involves high degree of risk. Some of the trades involve much higher degree of risk, in such cases it is really important to know your risk appetite. Although the greater is the risk more is the return to be expected, but this does not mean one should take great risks in all his/her trades. Therefore, it is advised to trade with a stop loss which suits your risk appetite. 3. Choose stocks with high liquidity. Liquidity is a very important factor to be looked for while selecting stocks for intraday trading. If the stock lacks liquidity, then you will not be able to buy and sell it at the desired price. 4. Trade only two to three stocks at a time. After initiating the trade it is very important to continuously monitor those stocks. And it will not be possible to
effectively monitor more than two to three stocks at the same time. Hence, be preventive in executing more number of trades at the same time. 5. Continuously book profits. As I have explained it earlier, owing to those reasons it is very important to continuously book profits. 6. Follow the market trend, don’t fight against it. Trend, technical analysis and stop loss are your only good friends in the stock market. So, respect them. 7. Strictly follow your stop loss. SKILLS TO BE POSSESED BY AN INTRADAY TRADER: The following skills should be present in an intraday trader: 1. FOCUS: Focus is a very important skill that everyone has and it increases the more they exercise it. For an intraday trader focus is very important as there are much important and minute information available around. And if they miss any it might lead to loss. Some traders also focus on the types of securities they trade so they can deepen their understanding of a specific sector, industry, or currency.
2.CONTROL: Hand in hand with focus comes control. Along with focusing at the right place it is equally important for a trader to control emotions and strictly stick to the trading strategy. This is especially important in managing risk by using stop losses or taking profits at set points. Many strategies are designed so the trader loses a little in bad trade and systematically gains more on good trades. But, all of these can be achieved by having proper control. 3. RESEARCH: Traders need to have thirst for knowledge and information as well as the desire to find all the relevant data which can quench this thirst. It is advised to create calendars of economic releases and announcements that have measurable impact on the financial market. By being informed about all these traders are able to react to new information when the market digests this information. 4. RECORD KEEPING: One of the most important keys to trading is record keeping. If a trader records the outcomes of his/her trade then improving is just a matter of focusing on your mistakes or right activities and act accordingly. It is hard to show real progress without keeping accurate records.
5. ANALYTICAL SKILL: Analysis of data efficiently is very important to perform a profitable trade. There is a lot of maths involved in trading, but it is represented through charts with indicators and patterns from technical analysis. As a result traders need to develop their analytical skills so they can recognise trends.
V. SELECTING THE STOCKS While trading it is very important to choose the correct stock to trade. There are thousands of equities to choose from, and day traders can virtually pick any stock they want. So, the very first step to figure out is to select a stock to trade. But the question arises out of the thousand stocks which one to choose? An intraday trader should choose a stock from the major index of respective market. For example, in India Nifty 50 is a major index and it consists of 50 stocks. For other markets choose your respective major index. Out of these 50 stocks, carry out the analysis on all after the market closes. This way you will get 5 to 6 stocks which can provide you a good opportunity on the next day. Now a question might arise in your mind why to choose stock from major index? The reasons are: 1. LIQUIDITY: The stocks under the major index have good liquidity and large volume. So larger quantities can be sold or bought without significantly affecting the stock price.
2.CANNOT BE MANIPULATED: They are innumerable examples of stock market manipulations and all of them have been in small cap and mid cap stocks. As the stocks under major index are large cap therefore they cannot be manipulated. 3. GOOD VOLATILITY: These stocks have medium to high volatility, which is helpful for intraday traders. The traders can choose stocks that tend to move a lot in terms of points or percentage as these two will help in nurturing good results. 4. MARKET MOVERS: As they have more weightage in the market, therefore they play a very decisive role in the movement of market.
INTRADAY STRATEGY This strategy requires use of three technical indicators, they are: Stochastic RSI, MACD and EMA. DESCRIPTION OF SETUP: Select all the three above stated technical indicators. Select EMA three times. For the first select time frame of 5 days, 8 days for the second and 13 days for the third one. Use standard setting for Stochastic RSI and MACD. Also select the heikin-ashi candles with time frame of 15 minutes.
PRINCIPLE OF STRATEGY: The setup works on the principle of demand and supply. The stock price fluctuates on the basis of this principle. Whenever the demand of a stock is more than its supply, then the price of stock goes up. Conversely, when the supply is more than the demand, the price goes down. For tracing the demand we use Stochastic RSI. The next principle involved is the support and resistance of stock. A stock when near its support is expected to move up. And when near its resistance, is expected to go down. For keeping an idea of this we will be using three EMAs. STRATEGY: The strategy is devised using the above stated principles. First of all prepare your setup as directed.
SIGNAL TO BUY: STEP 1: Observe the EMA lines. If the 13 days line of EMA is at the bottom, 5 days at the top and 8 days in the middle. This implies the stock is trading above its support. And it is a buy signal. STEP 2:
Observe the Stochastic RSI. If the blue line is above the red line, then check for the value of blue line. If it is in the range of 50-70, then this is a buy signal. STEP 3: Observe the MACD. If the blue line is above the red line, then this also is a buy signal. If you get buy signals from all the three indicators, then go for the trade. The exit point will be depending on the stochastic RSI. Once the blue line reaches 100, and after that starts declining. Then that should be taken as your exit point. If the trend reverses in the middle without being completed, then quit the trade. But as you are using three technical indicators therefore the chances of trend getting reversed will be very less. But, be cautious. SIGNAL TO SHORT SELL: STEP 1: Observe the EMA lines. If the 5 days line of EMA is at the bottom, 13 days at the top and 8 days in the middle. This implies the stock is trading below its resistance. And it is a sell signal.
STEP 2: Observe the Stochastic RSI. If the red line is above the blue line, then check for the value of red line. If it is in the range of 30-50, then this is a sell signal. STEP 3: Observe the MACD. If the red line is above the blue line, then this also is a sell signal. If you get sell signals from all the three indicators, then go for the trade. The exit point will be depending on the stochastic RSI. Once the red line reaches 0, and after that starts moving up. Then that should be taken as your exit point. If the trend reverses in the middle without being completed, then quit the trade. But as you are using three technical indicators therefore the chances of trend getting reversed will be very less. But, be cautious. The accuracy of this setup is 79%. But, you will be benefitted from the strategy only if you trade after getting proper signals from all the three indicators. This strategy has been back tested. And also it finds good number of trades in intraday. You can check out
the setup snapshot inserted in the document, for better understanding. If you have any doubt regarding the strategy, feel free to contact us. For more information visit: protradingz.com ALL THE BEST!!! Thank you for reading.