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Monday, 8 September 2014

Importance of Market Direction in Intraday Trading.

Readers, today I give this important lesson on intraday trading for the benefit of all. Please read this several times and practice in your daily trades. Please write to me in case you have any questions.

In our two trading systems - Opening Range Breakout and Intraday Trading System, we have defined overall market direction as an important indicator for high probability trade setup.

While individual stocks break the support or resistance levels, it is also important to look at how the broader markets behave and plan your trades in broader direction to have higher rate of success.

General Rules

Neutral Zone - Cautious trading. Trade only in stock showing strong trend.

Positive Zone - Reduce short positions. Close profitable short positions. Do not enter any fresh shorts. Look for potential buying opportunities.
Bullish Zone - Exit all short positions. Continue with the trend on profitable long positions.

Negative Zone - Reduce long positions. Close profitable long positions. Do not enter any fresh longs. Look for potential breakdown of stocks to create shorts.
Bearish Zone - Exit all long positions. Continue with the trend on profitable short positions.

How a Bearish day works for Intraday trading

I explain this with today's market as an example. Following were the levels given in pre-market calls. These levels are based on simple support / resistance / pivot points.

Resistance Levels:6740-60
Support Levels:6680-60

Positive above:6720
Bullish momentum above:6740

Negative below:6700
Bearish momentum below: 6680

Today market did not go above 6720, so the market was never positive.After two hours of opening, the index slipped to the negative zone. Overall market direction was confirmed to be negative.

What to do when the index is between 6700 and 6720 (Neutral Zone) ?

This zone is tricky to trade since the market along with our stocks could move either way. Trade in very limited quantity strictly based on Intraday Trading systems. 

What to do when the index is between 6700 and 6680 (Negative Zone) ?

In such a market, do not go aggressive on any long positions. If you are holding long positions in profit, take the profits and be in cash.

Identify weak stocks that are breaking crucial support. Go short using ORB or Intraday Trading Systems.

What to do when the index is below 6680 (Bearish momentum zone) ?

Exit all longs even if the individual stocks are showing a strength. No longs strictly in the bearish momentum zone. 

Continue holding the shorts. Follow trend trading method in my trading system. Initiate new shorts based on ORB or Intraday trading system.

Once downward trend established, dont hope for a reversal, trade with the trend and short on rise. But remember that markets can change direction any time, that is where the importance of stop losses come into picture.

Exactly opposite of the above needs to be done in the case of a bullish day. I will explain with an example once we have such a day.

Happy trading.



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