The Wall Street Fool

Apurva Sheth
Who is a fool?

Edvin Lefevre - author of Reminiscences of a Stock Operator, one of the best novels about trading - said, 'A fool is a person who does the wrong thing at all times everywhere.'

Well then, who is a Wall Street fool?

A Wall Street fool is a person who thinks he must trade all the time.

Many traders think they should trade daily. They desire constant action irrespective of market conditions. They think they are working for daily wages and should take home some money every day. This is foolish.

A trader should always first observe the market conditions and trade only if they are conducive to his style of trading.

Most traders are trend followers. Trend following is a trading style that makes money only when markets are trending either up or down. When markets are moving sideways, the probability of losing money is high. So it's better to wait patiently for opportunities and resist the temptation to trade all the time.

Take our markets as an example. Here I have a 15-minute intraday chart of the Nifty since May 9, 2016.

Intraday Price Action in Nifty since May 9, 2016
Intraday Price Action in Nifty since May 9, 2016

You can see that since May 9, the Nifty has traded mostly in a tight 100-point band between 7,800 and 7,900. It overshot this range by a small margin on May 17 as it hit a high of 7,940 but ended the session below 7,900 on the same day.

The lower end of the range for the Nifty is between 7,800 and 7,760. It has traded closer to the lower end of this range and even slipped slightly below it during this week.

Trading activity has been extremely range bound and choppy over the last fortnight. The Nifty has opened with a gap up (GU) or gap down (GD) in seven out of last thirteen trading sessions. A gap up or gap down occurs after an overnight development and give traders no time to react.

The Nifty action has also become wild and unpredictable over the last few days. Let's take the May 23 trading session as an example.

The index opened higher with a GU of more than 50 points at 7,813 and then moved to a high of 7,820. But within half an hour of opening, it gave up all these gains. It traded on a flattish note until noon when it dipped in to the red. Moments later it began to recover and by 2:30pm it was again above 7,800. But this was just a flash in the pan as the Nifty gave up all these gains and ended the session near the day's low of 7,730.

This was a terrible day for traders as markets jumped all around. Choppy days like these are difficult to trade, especially for day traders. It isn't easy for swing traders either (who have a longer time horizon). Just when it seems that a stock is breaking out, it can snap back into the range or even worse breach the range and move against you.

There are two challenges in such market conditions. The first is identifying the market situation itself. One should have basic knowledge of technical analysis to identify supports and resistances and trading ranges. But this isn't difficult. One can identify these trading ranges with the help of a charting tool and some experience.

Knowing markets are in a range and identifying the range isn't as big a challenge as waiting patiently for the right opportunity. Most traders eventually give in to the temptation and trade when they should sit on cash. Today's session was an exception as the markets continued their momentum after opening. But they have traded on an extremely choppy note after open on most of the days since May 9. And one would have been better off avoiding trading in such an environment.

Trading for the sake of trading and not because there is an opportunity to make money is one of the biggest trading mistakes.

As I showed in the above chart, our markets have hardly given any meaningful opportunities over the last few days. But we haven't given in to the temptation to trade.

At Swing Trader, we have stayed true to our process and refrained from trading when there weren't any opportunities.

We had just one live trade in our portfolio and are sitting on 88% cash. The Nifty has rallied more than 180 points today and it seems like markets may have made up their mind where they want to go. I will go back to my charts and look for ideal trade setups. If I find anything interesting I will immediately send the recommendation to my subscribers, so that they can act on it tomorrow as soon as the markets open. And if I don't find trades then we will wait for ideal trade setups.

I would make a recommendation only if the trade is as obvious as picking money up off the floor.

In trading, there are times for making money and there are times for keeping it. The last few days was a time when you kept the money you've already made.

What is your strategy? How are you trading the Nifty and the markets these days? Share your views in the Club or share your comments here.

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