Independence Day Special - Trading the Trend

In Stock/Commodity/Forex the moves on Intraday, short-term, medium-term dependant on long term trend. Trading in intraday, short-term, medium-term time frames in the direction of long term trend results in consistent profits. For this purpose, we have identified the following setup with Moving Averages.

Here in this set up, we will first follow 2 years (2Y) chart, where 1 days = 1 tick/ 1 candle) of Nifty and plot 50, 100 and 200 EMA lines on the charts. Click here to see the chart

Now, on the chart click on Technical Indicators, select Exponential Moving Averages and enter values 50, 100 and 200 (10, 20 and 50 for short term and 20, 50 and 100 for medium term) as shown in the following picture

This will add 3 lines on the chart for 50 day EMA, 100 day EMA and 200 day EMA on the chart.

Click on Image to enlarge

Once the EMA lines are added, repeat the steps and add MACD also. After both EMA and MACD added chart will look as follows

Click on Image to enlarge

Click here to go directly to link that is already pre-configured with this set up

Once the set-up is done, note the EMAs values on the top right corner of the chart.

Rules for Long Term Trend Trading Game:

1.    In the long term (2Y Chart) note 50, 100 and 200 EMAs. If the values are 50EMA>100EMA>200EMA the long term trend is up and vice versa for down trend ie 50<100<200 EMAs

2.    In the above scenario (if 50>100>200 EMAs) we should always look for long opportunities in the intraday, shorter or medium term trading. And vice versa for short opportunities.

3.    If the price is too far (ie over 5% from the nearest EMA) there are two possibilities to be noted

a)    Wait for the Price to re-trace towards EMA and enter trades in the direction of Moving Average Cross Over.

b)    Look at MACD for divergence and take counter trend trades with targets at EMA lines.

4.    If trading with MACD cross over/divergence there are 2 types of trading opportunities can be identified

a)    Enter first position on MACD cross over (Long positions if cross over is far below “0” and vice versa for short) and enter the second position on the MACD lines crossing “0” line (Long if crossing from below to above and vice versa)

b)    Do not take position at first cross but wait for the MACD lines to cross “0” line to take position in the direction of cross over.

5.    The trend following long trades occur when 50>100>200 and the price touches these EMA lines with SL placed at next EMA line.

6.    Continuous close above farthest line from the current price is required for the trend reversal.

Example:

Click on Image to enlarge

In the above example, since April 2012 the trend has been down for Nifty and arrows marked in green on MACD are counter trend long opportunities and arrows marked in red are trend following short opportunities. Circles marked in black are EMA –ve cross over shorting opportunities. Circles marked in Green are long trading opportunities in +ve trend and circles marked in red are short opportunities in down trend.

Rules for Trading intraday, short or medium term based on long term trend:

1.    Identify the Long Term Trend on 2Y chart and move down to 5D chart where 1 tick/candle = 5 minutes.

2.    From the above example we knew that the trend has turned to +ve on 31^st July 2012 when the Nifty Price closed at 5230 (Last green circle on the right side of the chart), so we should practically look for only Long Opportunities from the start of August month!

3.    After identifying trend on long term chart ie Long as of now, we shall move to 5D chart by clicking 5D at the bottom of the chart. Note: The EMA lines drawn on 2Y chart will remain of 5D chart also (5D = 5 days price chart)

Example of Trades:

Click on Image to enlarge 

In the above chart circles & arrows drawn in green are trend following Long Opportunities and Circle and arrows drawn are counter trend short opportunities in Intraday.

Note: It is always advisable to avoid counter trend trades in Intraday & short term as Stop Loss hit on these trades will be more than the profit potential. Hence, as far as possible it is better to stick to major trend and trade accordingly in Nifty. If Nifty’s trend is clear even most stocks’ trends will also be the same. Stick to rules and profits will follow…. Team MTT