Analysis: Andrews Pitchfork on Nifty

Andrews Pitchfork drawn on Nifty chart. This too shows that we are hovering around resistance zone.

Education: How to Spot Sideways Market Early?

A big question many traders ask is… why do buy and sell signals fail sometimes?  My answer is this…most auto-signals usually fail in a heavily range-bound, and sideways market. It’s easy to spot a trending market but not so easy to spot/predict a sideways market before we are into it for a substantial amount of time. However, it’s all the more important to spot a sideways market so that we can stay away and avoid making losses. One way to spot this kind of market is by plotting 5 minute/day Exponential Moving Average (EMA) and 20 minute/day EMA on the chart. If it’s intraday chart then plot minutes EMA and if it’s daily chart then plot day EMA. Now, in a trending market, the two averages will be separated for a reasonable number of time/days. In a sideways market the averages will cross each other up and down frequently in a short duration. For example, if you find that the 5 minutes EMA line crosses the 20 minutes EMA line from below, and you get a buy signal as well, but in the next few minutes, before making a substantial move up, the price corrects down thereby making the 5 minutes EMA line to cross 20 minutes EMA line from up, then this indicates a sideways movement for the underlying stock.

I have two charts showing these cases. The first one, an intraday chart, showing clear trends. The second one, a daily chart, depicting a sideways market (see highlighted portion). See how the 5 EMA and 20 EMA lines cross over each other from up and down in a short duration. This is very useful in intraday trading. I promise to post a sideways intraday chart as well...

Education: Option Straddle Strategy

Overview

At this point, most of us think that Nifty could move significantly, either up or down, isn’t it? If this turns out to be true, then we should definitely take advantage and make profit in option trading. The Straddle strategy suits for a volatile market. However this strategy would end up in a loss if the underlying price doesn’t move significantly and stays at or near the initial price. This strategy has limited risk and unlimited profit.

How to Execute?

We buy a Call and Put of a stock with the same expiration date. Strike price could be same or different. For example, if Nifty is trading at 5300, and we think that it can move below 5100 or above 5500 in the short term, we can buy 5300 Call, assumed to be trading at 100, and buy 5300 Put, assumed to be trading at 100. In this strategy the maximum loss is 200. Maximum profit is unlimited. Suppose Nifty suddenly drops to 4900 at expiration or before, we would make a profit of 300 in Put option and lose 100 in Call option. So the net profit is 200 points per lot. Fantastic isn’t it?

How to Exit?

We can close the positions by selling the Call and Put options either before expiry or at expiry.