Thursday, March 17, 2016

When is it most likely that your stops are hit !!

Last 2 months - Jan and Feb are behind us. These 2 months were like nightmare for traders. On how many occasions it has happened that we felt market (Nifty) is trading in oversold zone? And since it is oversold, many of us would have tried to 'bottom fish' Nifty or individual stocks or Nifty Call Options at this lower level.
However most of the times Nifty has deceived and went further below by ruthlessly taking out the stop-losses thereby breaching the support levels.
Let me give some instances-
1. On 11 Jan 16 Nifty was near double-ish bottom. Usually Nifty gives small upward (Or downward if in up-trend) pull-back to respect the support. In this case Nifty outright broke the support near 7550 and went down till 7250.

2. On 10 Feb 16 when Nifty was trading near 7250 low which was a double-ish bottom it refused to give any upward pull-back, broken the support and went further down to make low of 7869.

Traders can avoid situations like this with the help of IndiaVIX.



Have you checked India VIX on both these occasions?
On 11 Jan India VIX was trading at 18.6 after breaking resistance (on VIX Chart) near 17.7 formed on 14 Dec 15, while trying to move further high. This can be seen from India VIX chart which was in the process of making higher high, then.

On 10 Feb India VIX was trading at 22.4 while trying to move further high. You can see from the chart that India VIX was in clear uptrend.

Below is India VIX chart. I prefer to see India VIX chart as Line Chart which helps me understanding the trend without the intra-day 'noise'



Here is the explanation-
Whenever India VIX trades beyond 17, you can safely assume that markets are highly volatile. There is lot of uncertainty around. Chances of big moves coming are very high. Mostly India VIX is high when markets are in sharp down trend. (I will come back on why India VIX move higher up when markets moves fast down and (usually) not when markets move fast up)

You can check India VIX chart here:
https://www1.nseindia.com/ChartApp/install/charts/mainpage.jsp

For safe trading a trader must follow India VIX. For safe journey, avoid trading when India VIX trades above 16 or 17. Still, if you trade, it is mostly likely that your stops will be taken our irrespective of support or resistance.

When India VIX trades below 16 you can safely assume that big moves are not coming and markets will move steadily in the direction of its trend. Charts will nicely obey supports and resistances.

Have safe trading. 

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