This document discusses the dangers of having an "I know it all" attitude when it comes to day trading. It notes that proper knowledge and learning from others' mistakes is important, as the stock market can be ruthless to those who think they don't need guidance. While studying potential trades is important, endless research after losses often leads traders to change strategies frequently and experiment desperately with their money. Maintaining focus and having clarity about one's role as a trader is key to avoiding costly mistakes.

3. About the Book
How to Make Money in Day Trading: Trade on an
Invitation
Day trading holds tremendous attraction for those seeking to make money
in the markets. Nearly 90% of market players are interested in day trading
because it requires lower capital, you don’t carry overnight risks and you
can make money whether the market is rising or falling.
The attraction can also be fatal because you have to act fast and if you don’t
have a clear strategy, the rapidly unfolding market events can stampede you
into making wrong moves.
This book contains a powerful day trading strategy, complete from how to
select a stock to trade, to risk management and profitable exits. The strategy
rests on the author’s innovative concepts of trade invitation, and running
and stagnant prices.
Highlights:
Should you be day trading? Where to start
Understanding trends — and how they are affected by changes in
market sentiments
How to interpret what the price is telling you
How to identify a trade invitation
How to confirm the validity of a trade invitation
How and when to use running price to enter a trade
Simple stop loss rules to manage the risk of a trade going wrong
When to book profits.

4. Here is a concise, actionable guide to making money in day trading by a
successful day trader who has trained more than 40,000 traders. Come,
profit from it.

5. Praise from Professional Traders
~
“An excellent book with a roadmap to be successful using discipline,
strategy and risk management, all covered in a simple way. I would
recommend this book to both existing traders and people who want to
start day trading.”
— Ajay Laddha, Director, Vantage Wealth Management Pvt Ltd.
~
“Covers a difficult topic like day trading in a simple manner. A good
help to (those) . . . who want to be traders. They will surely benefit from
these simple and realistic ideas.”
— Sachin Dabke, Director, Baroc Technologies.
~
“(This) book lays the foundation for a day trader . . . to successfully sail
through the stormy winds of the stock markets.”
— Sandeep Wagle, Founder and CEO, Power My Wealth.
~

6. About the Author
MANDAR JAMSANDEKAR is a Director at Precision Technical Analysis Pvt
Ltd, a pioneer in the field of technical analysis in India. In the last 15 years,
Precision Technicals has trained more than 40,000 people in day trading and
investing using technical analysis.
He is also owner of Precision Broking and creator of India’s Best Technical
Analysis Strategy Software for Investment and Trading — PROFISION and
PROFISION Pro — and the creator of the Running Price and Stagnant Price
logic.
As a SEBI registered Research Analyst, he appears on business channels
including ET NOW, Bloomberg India TV. He also writes for newspapers.
To stay updated about his latest research, you can log on to —
www.precisiontechnicals.com or join his YouTube Channel – “Precision
Technicals.”
You can also connect with him on his Twitter handle @mandarj2002

8. www.visionbooksindia.com
Disclaimer
The author and the publisher disclaim all legal or other responsibilities for any losses which
investors may suffer by investing or trading using the methods described in this book. Readers are
advised to seek professional guidance before making any specific investments.
ALL RIGHTS RESERVED; no part of this publication may be reproduced, stored in a retrieval system, or
transmitted in any form or by any means, electronic, mechanical, photocopying, recording, or
otherwise without the prior written permission of the Publisher. This book may not be lent, resold,
hired out or otherwise disposed of by way of trade in any form of binding or cover other than that in
which it is published without the prior written consent of the Publisher.
A Vision Books Original
First eBook Edition, 2016
First Print Edition, 2016
eISBN
eISBN 10: 81-7094-972-6
eISBN 13: 978-81-7094-972-5
© Mandar Jamsandekar, 2016
First Published in 2016
by
Vision Books Pvt. Ltd.
(Incorporating Orient Paperbacks and CARING imprints)
24 Feroze Gandhi Road, Lajpat Nagar 3
New Delhi 110024, India.
Phone: (+91-11) 2984 0821 / 22
e-mail: visionbooks@gmail.com

9. Dedication
~
In loving memory of my father
Late Shri Balkrishna Jamsandekar (1933-2012).
He taught me lessons of patience,
perseverance and hard work.
I will always miss my baba.
This book is also dedicated to
my mother Suhasini, my wife Smita, my son Soham.
Without their support and encouragement this would not
have been possible.

10. Contents
~
Acknowledgements
Introduction: Why a Book on Day Trading?
1. The “I Know it All” Syndrome
2. The Newcomer’s Costly Myth
3. Should You Be in the Stock Market?
1. Are You Mentally Prepared for the Stock Markets?
2. Are You Physically Fit for the Stock Markets?
3. Are You Financially Fit for the Stock Markets?
4. Where to Start?
5. Are You a Day Trader, Positional Trader or an Investor?
6. Day Trading is Not for the Weak-Hearted
7. Understanding Trends
The Effect of Sentiment on Trends
Wishful Trend
Up Trend
Down Trend
Sideways Trend
8. Understanding Price
Decoding Price
9. Listen to What the Price Tells You
Candlestick Charts
Different Shapes and Colours of Candles
10. Chart Time Frames
11. Trading on an Invitation
Chat with the Candlestick
Trade Entry

11. Trade Invitation
How Big Moves Happen
12. Identifying Sentiment Shifts
1. Flag Formation
2. Sideways Breakouts
3. Trend Change Breakout
13. How to Validate a Trade Invitation
How Volumes Validate a Trade Invitation
14. Risk Management
Where to Place a Stop Loss
15. When to Exit a Trade Using Running Price, Stagnant Price Logic
How Much Profit is Good Profit?
Running Price, Stagnant Price
Summary
16. How to be Comfortable when Trading
17. How to Control Losing Trades: Trading Liquid Markets and
Stocks
18. Live Trade! — A Case Study
19. Money Management
20. Trade Discipline
21. Wait for the Right Opportunity to Trade
22. Mandar's 80:20 Rule of the Stock Markets
23. 7 Rules to Win in the Stock Markets
24. How Much Knowledge is Enough?
25. Using Technical Analysis Software

12. Acknowledgements
~
I would like to acknowledge some people who have been my strength time
and again — Sanjay Lele Kaka, Sachin Dabke, Nitin Sardesai, Ajay
Laddha, Umesh Parshurami, Sanjay Abhyankar, Amita Gosavi, Amit
Amale, Rahul Pawar, Ganesh Vartak and Partha Sur.
My team mates at Precision Technicals have stood by me through my roller
coaster rides.
My clients are like my family, individuals who have stayed with me and my
company for the last 15 years.
You are an inspiration which keeps us going forward with strength.
A mere thank you would never be enough for your contribution.

13. Introduction
~
Why a Book on Day Trading?
There are better topics to write a book on. Why not write a book on
investing or, maybe, on technical analysis — why select day trading?
The answer is simple: 90% of the players in the markets are interested in
day trading, notwithstanding the millions saying that day trading is taboo,
or that nobody makes money as a day trader. We hear a lot of such kind of
negative stories about day trading.
Yet 90% of market players are interested in day trading. Why?
One main reason is that day trading involves a lower amount of capital to
start with.
Everybody comes to the market with an objective of making loads of
money and the best part of day trading is that you have fewer headaches as
compared to any other business or working in a job. Plus, day trading gives
you the freedom to trade the markets if and when you want to. You don’t
have to trade the markets when you are busy, but when you have the time
you can make money trading.
Another advantage is that you can make money both when the markets are
rising and also when they are falling. Then, again, as a day trader you can
get leverage. For example, I get 5 times leverage or, at times, 10 times
leverage depending on the broker with whom I trade. This means that if I
deposit ` 10,000 with the broker, he would allow me to trade worth `
50,000, or even a lakh of rupees depending on the leverage. And, last but
not the least, a day trader carries no overnight risk. Everything is settled on
the same day — profit or loss. And, every day is a new day.

14. If done properly, day trading offers a good opportunity to make money in
the stock markets.
~
I am a Director at Precision Technical Analysis Pvt Ltd., a pioneer in the
field of technical analysis in India. From 1999, my company has trained
more than 40,000 people in day trading and investing using technical
analysis.
I started my career with Tata Motors in 1991 which was then known as
Telco. I worked on engines research as my specialisation. This research
mind-set was triggered by the experience that I gathered during this period
till I quit in 1999.
Like millions out there, I too wanted to make a lot of money and I felt that
the best option that I had was the stock markets. I was aware of the stock
markets because in the period between 1991 and 1994, newspapers used to
be full of news on the then big bull Harshad Mehta. The articles speculated
endlessly on the way he had made big money, and how the stock markets
had become an opportunity for everyone else to do the same. You get
attracted to such things. I hailed from Pune. Though it was only 150
kilometres away from the financial capital Mumbai, it was then a remote
place, quite cut off from the stock markets. It was a time when there were
no computers, Internet, communication tools.
I found a mentor in my company in a man named Loganathan, I got
motivated by him because he used to invest 80% of his salary in stocks. He
was the one who first taught me some investment lessons which I value
even today.
My first brush with the stock markets was in 1995 with the HDFC Bank
IPO. Four years later, I decided to quit my job in 1999. I realised the
importance of technical analysis even in those early years. It had started

15. gaining importance with the spread of computers and Internet. Finally we
came up with a strategy which would help investors, positional traders and
day traders win in the stock markets. Having worked with a few software
that were available in those days, I eventually launched my own technical
analysis strategy software named PROFISION, which is today India’s highest
selling subscription based software. I had realised that it was necessary to
educate investors and traders. The objective was to make the stock market a
better place to trade. If people become educated then they would trade with
knowledge and confidence and their experience would be positive.
Consequently, a lot more people would be encouraged to participate in the
stock markets as a business opportunity. This would also help increase the
depth of the stock markets which, in turn, would offer market players better
opportunities to make money. Thus started our education initiative.
When releasing PROFISION, the technical analysis strategy software we built
in-house, I was clear that this would be a no-nonsense software. We are all
shaped by our good and bad experiences in life. My experience told me that
when people start out in the stock markets, initially everything seems to go
well. Thereafter, as they get deeper into the markets, and make some losses,
they often get into endless research mode, seeking some golden key to open
the money box called the stock market. Once they get into this mode, they
go off-track, losing their focus — and along with it the initial profit that
they may have made as also their original capital. Eventually, they end up
cursing the stock market, operators, God, their own luck and quit the
markets forever. It does not stop there — they also give a bad name to the
stock markets, scaring away other people they know who were interested in
the stock markets.
Having observed this for many years, I felt the need to make the stock
markets an arena which could be traded scientifically and with discipline. I
believe that this can be done. I also realized that the perception which many
people have about the stock markets could be changed only if they had the

16. appropriate knowledge; the knowledge about what is right and what is not,
what works when and when it does not.
There are different types of analyses which are used in the stock markets.
One thing which you need to understand is that every analysis fails at one
time or another. There are no universal strategies that work all the time and
for everyone. The solution to stock market success is to understand the risks
involved, minimise them, and tweak your strategy as required. With the
right knowledge you would also be able to judge when an analysis could
fail. This could help you keep a low profile in the market during such
periods. This is important because a trader can only implement things
which are in his or her control.
Normally people consider things which they don’t understand to be of high
value and of great importance. I am not from that school of thought — and
therefore in this book you will find simple ideas, simple strategies and
simple examples which are meant to convey things immediately and clearly.
Through the various training programs on technical analysis, futures and
options, and day trading which I conduct across India, I felt the need for a
tool which could help take the right ideas to market traders and investors at
large. Thus came the idea of writing this book with which I can now reach
out to many people at the same time.
This book covers an easy to implement day trading strategy with which you
can make money in the market.
The important aspects which we will be discussing are:
1. Stock selection;
2. Risk management; and
3. Profit booking.

17. ~

18. 1
~
The “I Know it All” Syndrome
We always put in our all in order to achieve our ambitions and goals.
Whether you are a professional doctor, a lawyer, an engineer or a
businessman, to be successful you have to make the effort to master your
profession, plus work hard to make a name for yourself in it.
In the same way, you have to put in effort to understand the various trading
tools, such as candlesticks, averages, indicators and other aspects of
technical analysis. Now, the question is whether it is really possible to
understand and learn technical analysis from the Internet or from books
alone, without having a mentor or somebody else to help you in your
learning process. This is not possible when it comes to the stock market,
just as it is not possible in any other profession. When it comes to your
profession, the money that you make is the outcome of your education and
efforts. It is equally true of the stock market where the profits or the losses
are the outcome of the money that you invest in the market, plus the effort
you have made to identify a profitable trading opportunity. Appropriate and
adequate knowledge is a must to be a good decision maker in the stock
markets. I get surprised and also feel bad when I come across people who
have the “I know it all” syndrome.
You must always remember that it is your money which is at stake in the
stock markets and I believe that your money is hard earned. Getting into the
stock markets without the right knowledge about technical analysis is
nothing but gambling. If you are susceptible to this “I know it all”
syndrome, then I suggest you should avoid the stock markets altogether.
Stock markets are ruthless and the moment you feel you know it all, they
have a habit of immediately correcting you. And if you think you can
acquire the right knowledge based simply on your own experience, trust me

19. it would be costly to your pocket as well your mental well being. I come
from a school of thought which believes that learning from others’ mistakes
is cheaper and easier.
As a trader or an investor you also need to have clarity about your role.
Often people tend to react to some losses by feverishly researching various
different strategies in a bid to improve their performance. While knowledge
is essential, but when you cast about randomly, you often end up losing
focus and changing your strategies every now and then. This is nothing but
desperate experimentation with your hard earned money. If at all you want
to get into the research mode, then start a full fledged research company
which would research the stock markets and various strategies. As a trader
you must know your profile, know your role — you must have clarity, have
faith, be positive, study before you start — but don’t endlessly research.
Please understand that research and study are two different things. Studying
the best stock, and the risk and the rewards before you get into a trade is a
must. Research is altogether different.
Adventuring out can be costly — and when it comes to the stock market it
could be expensive.
The stock markets are here to stay but in the last twenty years I have seen
market participants churn. Check with your broker and he will share with
you his experience as to why participants keep changing. It is mainly
because people get into a research mode and then things don’t work out.
They get stuck in a stock, lose money, and then finally quit the market.
Nowadays investors and traders have access to online trading. With the
regulatory framework much more strict than what it was in the earlier days,
we have witnessed an enormous increase in online transactions with the
help of computers or smart phones. These terminals provide access to charts
and other technical parameters. With such access to information, people feel
that they understand charting well, leading to a most common myth — “I
know technical analysis.”

20. The important point is this: though the technical parameters like candles,
moving averages, indicators, etc. remain the same, it’s their interpretation
that matters.
Read this book, understand the strategies, the explanations and reasoning
for what is right and what is not, and you will know that merely having
access to a chart does not give you the ability to understand what is right
and what is not. If this would have been the way, then everybody working
in a hospital would have become a doctor.
This book aims at teaching you concepts and methods which are easy to
understand, implement and, most importantly, which work.
If followed consistently, these will help you to be a successful day trader.
~
THE “I KNOW IT ALL” ATTITUDE IS BAD FOR YOUR WELL-
BEING IN THE STOCK MARKET. BEING HUMBLE WILL
HELP YOU WIN!

21. 2
~
The Newcomer’s Costly Myth
During my various training programs across India, I meet many people. The
discussion and the experience sharing which happens with them are
amazing. I get to learn, plus I also get a chance to clarify the trading myths
which people have. I have realised that if this is done with the help of
examples then it becomes easy for people to understand, improve and move
forward.
I would like to share a common myth which I come across when I meet
people and one which I have also experienced during my own initial days in
this business.
When I started educating people on stock markets after having quit my job,
people used to ask me as to what I did. When I told them that I had started a
stock market training business, the reaction used to be a big question mark
on their faces.
The reason for this was that people often believe that all a person needs to
invest or trade in the stock markets is to have money. They believe that with
money you can invest in the best companies and generate profits. This is a
very costly myth. I started the education business in the year 1998-1999 but
the sad part is that even today I come across people who have the same
misunderstanding. Often people listen to somebody and get into the
markets, and when things don’t work as expected they lose money. Only
then do they understand the importance of knowledge.
You will be surprised that in my training sessions all across India, 50% of
the participants have gone through this cycle. They understand the
importance of acquiring knowledge only after they have lost money. They

22. then attend training sessions wanting to understand as to what went wrong
that they made losses, instead of profits.
It’s important to understand that when you make losses and then try
learning from your mistakes, you put a lot of pressure on your mind —
which is an emotional setback. You also put a lot of pressure on your
finances — which is a monetary setback. This is not only limited to you but
impacts all those connected to you; so the first to be affected by your
actions is your family.
While learning from your own experience is important, it cannot be the only
option. If you go on making losses then you may not have the finances or
the confidence to continue in the stock markets.
The moral is: first acquire the knowledge that is needed before putting your
hard-earned money in the stock markets.
~
YOUR MONEY IS HARD EARNED, DON’T INVEST IT
WITHOUT ACQUIRING SUFFICIENT KNOWLEDGE

23. 3
~
Should You Be in the Stock Market?
You also need to assess whether you are built for the stock markets.
As we all know there are many avenues for growing or making money.
Putting extra hours at work can earn you a salary hike, getting into real
estate in locations where the demand is growing can help grow your money,
buying into instruments where the demand is increasing can help you make
money and investing in fixed deposits can help you earn steady returns on
your hard-earned money. In short, there are several ways of increasing your
wealth; stock market is just one of them.
People get attracted to the stock markets because they are under the
impression that this is where they can make a fast buck. In other words,
they are attracted by the prospect of quick, big profits. I feel bad when I see
people acting foolishly when it comes to trading in the stock markets.
People come to the stock markets with only one objective and that is
making money, forgetting all that is required for doing so successfully.
They forget that it’s their money which is at stake, they forget the time they
spend in the process, and they forget the mental torture that a person has to
go through if something does not work out properly.
This casual attitude always surprises me. When it comes to buying a mobile
phone, the same people would thoroughly check the pros and cons of the
device. But when it comes to the stock markets, we only think of the pros
and not the cons. This is a recipe for disaster.
Therefore I believe that before you decide to enter the stock markets, you
should consider three factors.

24. 1. Are You Mentally Prepared for the Stock
Markets?
Participation in the stock markets can be an emotional roller-coaster. This is
because your hard-earned money is at stake. Positive financial news will
give you a positive frame of mind. But the moment you hear something
negative, it can equally swiftly lead to a negative mind-set. When both the
things come together, you end up being confused. These quickly varying
emotions may make you uneasy, sometimes they would make you happy
while at other times give you sleepless nights. In the stock markets, the
various factors which affect your emotions are price movements, news
items, views of people around you, views of people on television, Internet,
magazines, SMS, newspapers, research reports, etc.
So before you decide to enter the stock markets, you need to decide whether
you have a strong enough temperament which will not get unduly swayed
by others’ views. The only factors which you should rely on to make
decisions are stock price movement, pattern formation and reactions. If
your views and decisions are not going to be influenced because somebody
is suggesting something, that means you have a strong, independent mind.
And with an independent mind, you can be a success in the stock markets.

25. 2. Are You Physically Fit for the Stock Markets?
You need to ask yourself whether you are physically fit and strong. Do you
have a weak heart? If yes, then you should not be trading the stock markets.
You can then consider investing in the stock market via the mutual fund
route wherein you have a fund manager who is working as per regulatory
standards to generate the best returns for his investors. Stock market day
trading can be devastating if you have a weak heart.
It’s difficult to have a clear, composed mind if you are physically unfit.

26. 3. Are You Financially Fit for the Stock Markets?
Do you have enough surplus funds for trading in the stock market?
If you plan trade in the stock markets, then you need to understand that you
should be thinking like a businessman and taking decisions like one. You
must not trade in the markets with borrowed money. When you borrow
money to invest in the stock markets, and if something does not work as per
your expectation, then your decision making ability will be affected.
Personally, I believe a person needs to have a basic minimum of one lakh
rupees to meaningfully participate in the stock markets. If your trading
capital is lower, it is better to invest in the stock markets via the mutual
funds route.
Remember, the amount that you invest in the stock markets should not take
away your sleep. This is most important.
~
STOCK MARKET TRADING IS FOR THE STRONG HEARTED

27. 4
~
Where to Start?
When we plan to start trading, the questions which normally first come to
mind are: which stocks to trade, and whether to trade long or short. There
are different approaches which people use to find answers to these
questions.
One approach many people use is to switch on the television at 7 a.m. and
start listening to the endless discussions on the markets, developing news,
buzzing stocks, stock picks, and so on. Typically, much of it is confusing
and contradictory. Many a time it can also be a lot of fun. You switch on the
TV at 7 a.m. on Monday and you may have some guys talking bullish —
they are so bullish that you may feel that Nifty will rise by 2,000 points in a
day. The next day again you switch on the TV at 7 a.m. and the experts
have turned bearish — the view is now so bearish as if the Nifty is going to
fall by 2,000 points that very day! Naturally, you end up being confused
about your trade.
You would also come across programs wherein there are two experts talking
about a stock — one of them is bullish on the stock while the other one is
bearish on the same stock. Both of them have their own valid reasons for
their bullish and bearish views and at the end of the discussion the anchor
says that now it is up to you, the viewer, to decide what is right and what is
not.
The fun on TV goes on and on — when the markets hit all time highs, the
TV channels would call in only the bulls to speak, but when the markets are
selling off they call in only the bears to discuss how deep the fall could be.

28. Then from time to time there are those Alice in Wonderland like debates on
what if situations, such as: “What if the FIIs sold everything and decided to
take their money home?” Well, you can be sure that the two definite
outcomes of such discussions were, first the FIIs never sold and took all
their money home and, second, many individual investors and traders
stayed away from the markets because of this imaginary fear.
You need to understand that such hypothetical discussions can affect your
decision making and you must guard against that.
While such debates on TV may be completely unrealistic but they do create
a lot of emotional impact, particularly on individual investors.
The other method by which people try to find stocks to trade is through
newspapers and magazines. Also, nowadays everybody has a smart phone
and you continuously keep on getting updates on it. Internet is also a widely
used medium. Search for a stock tip on the Internet and you would come
across a few million links which tell you something or the other!
These are the popular approaches which ignorant investors use to find an
answer to the question as to which stock to trade since these sources are
easily accessible to all.
But what about ascertaining the authenticity of a news item or a stock pick?
One thing is for sure. In today’s financial world, you are continuously
flooded with a lot of information. As a trader or an investor it is important
for you to verify the information which you have received. You need to
process the information and check on your own whether something is valid.
Only then should you decide whether you want to get into a particular trade
or not.
You must understand that you alone are the best person in the world to look
after and grow your hard earned money.

29. Wise decisions can be taken only when you have the right knowledge. So
let us start on this path of getting the right knowledge . . .
~
WISE DECISIONS CAN BE TAKEN ONLY WITH RIGHT
KNOWLEDGE

30. 5
~
Are You a Day Trader, Positional Trader or an
Investor?
The essential factors which a person needs to consider before entering the stock
market venture are:
1. Funds.
2. Knowledge.
3. Discipline.
4. Patience.
5. Decision making ability.
6. Risk taking appetite.
7. Ability to accept one’s mistake — and move on.
Along with all the above points, I believe that the most important quality
which a trader needs is clarity. Clarity as to whether you are a day trader, a
positional trader or an investor.
Knowing and understanding your trading profile is very important. An individual
may opt for one of the three profiles, maybe two of the three profiles, or maybe
all the three profiles. But having this clarity before you start is a must.
Let me explain the importance of this clarity using a price chart of Tata Steel.
If you were generally asked about your opinion of Tata Steel, a majority of people
would likely reply that it’s a good company. The reply would be based on the
company’s general reputation over the years. Nobody would ask to be given
fifteen minutes to check the company’s details before replying.
So the answer would be given instantly and it could also be accompanied by
sound reasons — good management, company with a good reputation, Asia’s best

31. steel manufactur ing company, etc. Now let us look at the price chart for this
company in Figure 5.1. In 2008, the stock was trading at approximately ` 950
levels.
Figure 5.1: Monthly price chart of Tata Steel from 1998 to 2014
The markets were extremely bullish from 2007 till January 2008. The bullishness
was such that you could pick any stock blindfolded and it made money for you.
Now, suppose that during this period a trader decided to trade the Tata Steel
stock. His reasons for doing so were that it was a “good company,” plus that the
markets were bullish. So let’s assume that a day trader bought this stock at ` 950.
On that day, the stock closed ` 20 below his buying price. Therefore, the trader
decided to switch strategy and hold on to his trade and decided to carry the
position forward. His justification was that the stock would come up in the next
two to three days and he would then exit the trade at a profit. This is normally
used as a strategy by 90% of the traders.
On the other hand, booking losses, and accepting a mistake is a rarity. Plus, many
a time it has also been observed that the stock which is held bounces back again,
giving an opportunity to exit in profit. Be that as it may, based on the past
experience this trader decided to carry the position forward, thus now becoming a
positional trader solely because he couldn’t accept a loss.

32. To the trader’s bad luck, the stock was trading at ` 600 in the next three months.
So, from ` 950, the stock had corrected down to ` 600 levels. In self-justification,
the trader said to himself that this was a good correction for a stock like Tata
Steel. After this correction the stock would surely bounce back, he reasoned —
and that would offer a good opportunity to exit the trade in profit.
But by now this trader had to stop all his day trading activities because his money
was stuck having taken delivery of this stock. So now this day trader had
unwittingly become a short term investor, with markets teaching him values of
patience!
Six months later the same stock was trading below ` 200 levels. The day trader
had now become a long term investor who was busy convincing himself as to
how good his investment was and how he had “Asia’s Best Steel Company” in his
portfolio!
It did not end here — the trader was also busy advocating to people (free advice!)
that investing was better than day trading. The advantage in investing, he
propagated, was that you could hold on to a stock when it was not making money
for you, plus your patience can eventually take you to profits.
From its lows of approximately 2,252 in 2008, the Nifty in the next six years
moved up to 8,000 levels. So the markets went up, plus there were many stocks
which generated multibagger returns.
But this trader was unable to catch any of those opportunities, firstly because his
money was stuck and, secondly, he did not any more have the courage to bring in
fresh money to the stock markets.
So what went wrong here?
Two things: One, not using a stop loss and, two, not exiting the trade at the end of
the day with a modest loss.
Had this trader implemented a stop loss and exited the stock with a small loss, he
would have managed to save a lot of money and also time.

33. It is well said that taking small losses when warranted preempts suffering the
mother of all losses.
Stop loss implementation is important and so are the other points mentioned
above, but I believe the most important aspect before getting into the stock
markets is to have clarity about one’s profile.
Had this person been clear that he was a day trader and not an investor, he would
not have shifted his profile mid-way and got into this mess.
Changing one’s profile mid-trade due to the trade moving in an unexpected
direction is very common knee-jerk response and I am sure many of you have
gone through this at some time or the other.
Therefore, before you start trading you should be clear about the profile which
suits you:
1. Day trader;
2. Positional trader / Short term investor; or
3. Investor.
The three profiles have different characteristics as high-lighted in Table 5.1.
Table 5.1: Profile Characteristics of Day Trader, Positional Trader and Investor
Profile Knowledge Investment Risk Returns Monitorning
Day Trader Yes Low High Low During market hours
Swing Trader / Short Term
Investor
Yes Medium Moderate Moderate Once at the end of the
day
Long Term Investor Yes High Low Moderate At end of the day or once
in a week
As you would note from Table 5.1 for different profiles:
1. Investment capital requirement is different.
2. Time to be devoted for the markets is different.
3. The risk involved is different.
4. The expected returns are different.

34. 5. Knowledge required is different.
So, for example, if I call myself a day trader then I should be able to devote time
to the trade during the market hours. It cannot be that I enter a day trade and then
get busy in some other work.
As a positional trader, I should be able to see price charts at least every evening.
As an investor, I need to check the charts of the stocks in my portfolio once in a
week, maybe on the weekends.
So the involvement, the money required, the risk and the returns will change as
per the profile selected. Your comfort is the most important thing — and a profile
cannot be selected simply on the basis of minimum investment and maximum
return. This cannot be the criteria. The stock market is a business which involves
risk and therefore before selecting an appropriate profile, you need to give a
proper thought to the advantages and disadvantages involved in each profile.
So, now, if you decide on day trading, let us learn more about it.
In this process, let us first try to break certain myths involved in day trading.
~
CLARITY ABOUT YOUR PROFILE WILL KEEP YOU
COMFORTABLE AND HELP YOU TAKE BETTER DECISIONS

35. 6
~
Day Trading is Not for the Weak-Hearted
Generally we take the heart beating inside our body for granted. But I can
bet that the moment you enter a trade in the stock markets, you will
immediately realise the importance of this organ in your body.
This is so because the instant you enter a trade, your heart starts beating
faster. The longer you are in the trade, the faster is the pace of your beating
heart.
That is why it is said that the stock markets are not for the weak-hearted.
The speeding up of the heart’s beating happens because of the uncertainty
and the risk involved in stock market trading. So, what can you do to keep
calm?
First, a few questions here:
1. Has the stock market forced you to enter a trade?
2. Has it told you that if you don’t enter a trade you will not get food to
eat?
3. What was the objective for initiating the trade?
Obviously, no one has forced you to enter a trade; it is something which you
have done knowingly. You also understand that life will not stop if you
don’t trade. The trade entered is with an objective to make money, plus you
have the complete freedom to decide whether you trade or you don’t. So it’s
a deliberate choice you have made. Even then your heart beats loudly
during a trade; you might also be sweating.

36. When that happens, it means you are getting uncomfortable. And when a
person is uncomfortable he cannot make good profits as he is not in a frame
of mind to take the right decisions. He would tend to take small profits and
big losses.
If you know beforehand that this is a problem and that this is something
which can make you uncomfortable, then it is time to take some preventive
measures which can stop this from happening, such as:
1. Be clear about your logic for entering the trade.
2. Work out beforehand the risk involved in a trade.
3. Be clear about the returns expected from that trade.
4. Be clear as regards the time period for which you have to hold on to
the trade.
Normally what happens is that a trader first gets into a trade and if the trade
goes into a loss, he then tries to find reasons to justify the trade.
If you were to do just the opposite, the end result would be a lot different, a
lot better.
In other words, you need to know beforehand the rationale for a trade and
the risk that is involved. This would make you a lot more comfortable and
pre-empt those heart-stopping nervous moments.
Another thing which I have observed is that while people are ever eager to
book small profits, but owing to confusion and panic when trades start
going wrong, they end up with huge losses. I believe this should just be the
other way round.
In this book you will find money-making trading strategies you can use.
~

37. KEEPING YOURSELF COMFORTABLE WILL HELP YOU
STAY IN THE WINNING TRADES

38. 7
~
Understanding Trends
A price is created due to contradictory views. This difference of opinion
ensures continuous shifts between demand and supply, taking the prices up
and down. Along with this, as the investor and trader expectations change,
you will find that the price tends to move in the direction of their
expectations.
Thus, as expectations change from bullish to bearish, the price trend also
changes from an upward trend to a downward trend.
Conversely, when the expectations change from bearish to bullish, the price
trend changes to up.
Finally, when there is no consensual view on a particular stock — or about
the market as a whole — the price tends to move sideways.
So, basically, a change of trend signifies a change of expectations.

39. The Effect of Sentiment on Trends
Let me share an experience which illustrates how sentiment impacts trends.
The setting is our office.
On a day when the Nifty is a hundred points up the office phones ring
continuously. Sales calls made by my team mates are readily picked up by
prospective clients.
Does that mean that those people have all made money on that particular
day and therefore they take our calls? Yes, well, some may have a portfolio
of stocks and on that day their portfolio may have appreciated and therefore
they may be in a positive frame of mind to take the call or to discuss with
my team mates what we have to offer. Even those clients who do not have a
portfolio, or those who didn’t find their portfolio appreciating even though
the Nifty was up by a hundred points, are also ready to listen.
But on a day when the Nifty is down by a hundred points, the office phones
are so silent as if a sad event has occurred due to which people are in no
mood to talk. The phones simply don’t ring on such days. The calls made
by my sales team get the answer to give call back the next day. Or, often,
people simply don’t take the calls at all.
In earlier days when stock markets were restricted to Dalal Street, such a
mood swing could clearly be seen in terms of the level of business done by
hawkers on the roads near the Bombay Stock Exchange.
When the markets were up, the hawkers would mint money while on down
days, often they themselves would be the only ones eating their snacks.
This is the impact of sentiment and we all are built in that way.

40. Emotions play a vital role in your decision making and you should be able
to control them. If you know things beforehand, then you can better prepare
yourself for the coming days.
People say that there are three trends in the markets but I believe that there
are four trends in the Indian stock markets. These are:
1. Up trend.
2. Down trend.
3. Sideways trend.
4. Wishful trend.

41. Wishful Trend
Wishful trend is what makes a person sit hopefully watching a stock like
Tata Steel fall from its highs of ` 1,000 in 2008 to lows of below ` 200 in
2010. Such hope is also what makes the same person thereafter hold on to
Tata Steel till 2014 when the price still traded at less than 50% of the highs
that it had made in 2008. This is the same trend which makes a trader stay
long when suddenly the market starts falling in intraday trade. And this is
the same trend which makes a trader average more long positions as the
price continues to fall further.
If you feel you are built for the stock markets, and if you feel that you want
to flourish in the market for a long time, then you should understand this
trend very well. You should also understand that this trend is your enemy. If
you are aware of this beforehand, then that will help you be alert and
cautious whenever you see any such a thing happening. In short, you should
be avoiding this trend for your own good.
This is a trend created by hope, and you must understand that hopes don’t
work in the stock market. The only thing which works here is being
realistic.
Never try to outsmart the stock markets as they can be ruthless at times.

42. Up Trend
An up trend is one when prices are moving up continuously making higher highs
and higher bottoms. So in an up trend you have the price moving up steadily
during the day, without bucking the trend and continuing to make new highs.
Look at the chart in Figure 7.1 where the up trend can be clearly observed. The
price started out flat, then made higher bottoms and then also made higher highs.
The price continued to trade in that trend till the end of the day’s trading session.
In such a case, you should initiate only long trades.
Figure 7.1: Up trend with higher highs and higher lows
I have seen many traders who do not use charts to trade and who instead feel that
their gut feeling is God’s special gift to them of a third eye to judge what’s
coming. If they come across a stock which is trading with gains of, say, 5% they
then conclude that the price has gone up enough and therefore there are chances
that it will correct — and so they go short.
This is a very wrong way to go about entering a trade. It could have been
understandable when we did not have software displaying charts and trends of a
stock price. Not any more.

43. Many a time you will also come across individuals who enter such a short trade
and then to their disbelief the stock hits an upper circuit before giving them a
chance to cover their position. The end result is that the stock goes for an auction
and if you have seen the kind of auctions that take place then you would
automatically understand the importance of staying with the trend.
If you want to observe this you can stay logged into your trading terminal after
the market closes. The post closing window which opens ten minutes after the
normal market closing will show you the quantities which traders have had to
place to cover their trades.
You should stay long when you see price trading in an up trend. Even if your
entry is at a wrong level, but because your position is aligned to the trend, in this
case long, and the tide is upwards, it will ensure that you will sail out in profits.
Even if you don’t make sizeable profits, the favourable trend will ensure that you
don’t end up making sizeable losses.
Exit the trade on a change of trend.

44. Down Trend
In this trend the prices are falling. As noted earlier, a majority of the traders hates
this trend. By nature, we are built to stay long and not short.
To be a successful day trader, however, you should be able to go short when the
opportunity arises, or when you get an invitation for a short trade.
The reason for this is that when prices fall, they do so like the proverbial nine
pins and big gains are therefore possible.
If you are familiar with the game of bowling, you would know that there are nine
pins which a player has to hit with a ball with the intention of felling the
maximum number in the least number of tries. A player tries and hits the centre
one first because he knows that as this pin falls, it will take down the second one,
then the third one, then the fourth one, and so on.
The same thing happens in the stock markets. Prices sometimes fall as if there is
no tomorrow and the markets are going to shut down forever. Such falls are
nearly vertical. The up moves, on the other hand, are always zig-zag. This
happens because after every up move, some profit booking makes the price go
sideways till the time the stock gathers further strength. The most important thing
a day trader should know is to stay in line with the trend that comes his or her
way. Any trend, whether it is up or down, is an opportunity for a day trader to
profit from.
During a down trend the prices move down making lower tops and lower
bottoms. Again, when traders see prices falling they mistakenly buy that stock
with a view that the stock will correct upwards and they can make a fast buck.
This is a very wrong thing to do. It is always best to stay with the ongoing price
trend, until it has clearly come to an end. By doing so, even if your trade is
entered at a wrong level, it will end up in profits because the overall trend of the
stock price is down. At the very least, you will not make huge losses if you
continue with the direction of the flow.

45. In the chart in Figure 7.2, you can see that the price first started making lower
tops, followed by lower bottoms, suggesting that the price is in a down trend. You
can also clearly see the final leg of the fall which is near-vertical, with price
falling like nine pins. In a down trend, therefore, your trades have to be on the
short side — which means you sell first and buy later.
Figure 7.2: Nifty in a down trend with lower tops and lower bottoms
Exit the trade on a change of trend.

46. Sideways Trend
This is a trend wherein the price is fluctuating in a range, i.e. between two levels.
When the price moves in a narrow range it is difficult for a trader to enter and exit
a trade with a good profit, particularly after the brokerage and taxes are accounted
for. So if the range is narrow, then it is better for a trader to wait for the price to
first clearly decide its direction by either an upward breakout or a downward
break-out.
A breakout from a narrow range would automatically become an invitation to
initiate a trade in that direction. Normally in charts used for day trading, 5-minute
charts for example, when prices move into a sideways trend they tend to fluctuate
in a small range. Therefore, the idea of going long on the lower end of the range
and going short at the higher end of the range does not arise at all.
As a trader, you should not hate this trend. Rather, this is a trend which I believe
everyone should be in love with. There is a simple reason why I say this. When a
stock moves in a sideways trend, do you expect it to stay in this trend forever?
The answer is no, which means that going forward the stock is going to move in
some direction, either up or down. And the direction of the breakout will decide
the direction of your trade.
If this is the case then I would say that a stock which is in a sideways range can
become an opportunity in the time to come.
Once the market opens, give some time to the stock to form trends. Thirty
minutes into the trading day you can start identifying stocks which are moving in
a sideways trend. Mark the levels on the charts and wait for a breakout.
This breakout then becomes your invitation to enter a trade.
In Figure 7.3, throughout the day the price moved sideways between the two
horizontal lines without giving us a break-out. This means that on that particular
day the price did not give any opportunity to trade.

47. Figure 7.3: A sideways trend – note how the price movement is restricted in a range between
the two horizontal lines
Always keep in mind that well-known adage that the trend is your friend. You
will never regret this lesson.
Going against the trend is a wrong idea which some traders have.
~
BEWARE THE WISHFUL TREND — IT IS YOUR ENEMY

48. 8
~
Understanding Price
Suppose, we buy Reliance at, say, ` 1,000 and sell it at ` 1,050, we would
make a profit of ` 50 per share. When we do this we are not trading the net
profits of Reliance, nor the debts or the business of Reliance. What we are
doing is trading the price of Reliance.
So, if we have a bullish view we buy first and sell later. With a bearish
view, on the other hand, we sell first and buy later.
In short, what we do is that we trade the price to make money. If this is true
then we need to correctly understand what this price is that we are trading.
And, as you already know, in day trading we have to be very fast because
any delay in execution can lead to missing the appropriate price and thus
losing a trade opportunity.
So, what is price?
A price is a value consensus between a buyer and seller. In other words, the
price is a rate at which a buyer is ready to buy something and a seller is
ready to sell it. Only on an agreement between the two can we have a trade
taking place.
If the buyer and seller are at two different price levels, then a trade does not
materialise. So a price is formed only when both agree to trade at the same
rate.
The interesting part of price is that it is arrived at as a result of contradictory
views. There are lakhs of people coming to the market, entering both long
trades as well as short trades. Because everyone has a different view, and
many have contradictory views, the markets move up and down.

49. Among market players, there are some who trade with knowledge of
technical analysis, some trade with knowledge of fundamental analysis,
others trade because they may have heard somebody talk about a stock on
television, some trade because they have read a tip in newspapers,
magazines or on the Internet, some trade because they may have received
some advice on a stock from a broker, a friend or from an advisor.
Nowadays, we all also receive a lot of SMS messages — so some will be
trading because they have received an SMS which reads, “Jackpot! Jackpot!
Buy! Buy! Buy!” — and after having read that SMS you start imagining
yourself sitting in a BMW driving down to a casino in Las Vegas! Some
people trade because they have received, as they call it, a Khabar from a
friend who lives close to Dalal Street!
The point is that all sorts of people come to the markets and trade — either
long or short — and this creates a price for various stocks. Therefore this
price, the nature of which we will be analysing, can never be wrong.
Have you ever traded sitting at a broker’s office, as was the norm till 2010?
Such rooms used to be crowded with traders sitting behind the dealer.
Suddenly somebody from inside used to call out the name of a stock —
Khabar — XYZ stock would rally. The room would then turn into a
vegetable market. Everybody, would jump on to the stock — “Buy 25,”
“Buy 50,” “Buy 100,” “Buy 200,” “Buy 500,” “Buy 1,000,” “Buy 5,000.”
Among the crowd there would also generally be a few people sitting at the
back who were not interested in the orders which were being placed by
others in the room. Instead, these people were more interested in tracking
what the person sitting right next to the dealer was doing. As soon as that
person placed a buy order, these two would jump up to sell the stock. Why
were they doing so? Simple — they had discovered that whenever he
entered a trade, it failed. Thus, when he entered a long trade the price would
go down, and when he entered a short trade, the price would rise. What they
had done was that they had identified a Panvati as it is called in Hindi.
When he lost money, they made money and when he made money they

50. used to lose. But they had realised that his failure rate was more than his
winning rate.
So these guys did not want any analysts to guide them. They entered trades
based simply on this Panvati logic. Such traders also help in creating a
price.
Please do not take this example to be an endorsement of such a way of
entering trades. Quite the opposite. What I want to highlight with this
example is that there are plenty of bizarre ideas with which people come to
the stock markets to trade. Such absurd examples and strategies are aplenty.
Here is another idea: “Open two accounts, one in your name and the other
in your spouse’s name. Go long in your account and go short in the same
stock with the same quantity in your wife’s account. During the day the
stock will move in some direction — square off the trade and you will make
money.”
I felt dizzy when I heard this idea and realised that if you meet a thousand
people they would be able to give you a thousand ideas for picking and
trading stocks!
But none of them survive in the markets for any length of time, a clear
testimony to the silliness of such crazy ideas.
There are better ways of entering a trade and we will be discussing these in
the later chapters.
One important thing which I wanted to convey by these examples was that a
price is created by a lot many — and different — views and the price can
therefore never be wrong.
The reason why we analyse and try to understand price is that by an
intelligent reading of the price we can understand the way the traders have

51. positioned themselves in a stock. Are the buyers stronger or the sellers? Or,
is it that neither category has a firm view on the stock?

52. Decoding Price
When I say price, I mean to say the four price fields:
1. Open;
2. High;
3. Low; and
4. Close.
These four price fields are important for us in order to understand how the traders
have positioned themselves in a stock — long, short or neutral.
If I asked you to look at the chart in Figure 8.1 and tell me what the overall view
on the Nifty is and where it is heading in the chart, the answer would be that the
overall trend of the Nifty is up. But if you are then asked, “Tell me what
happened on 17 October 2014 — buying or selling?” you would not be able to
answer this by looking at the chart because it is a line chart which displays only
one price field, which is usually the closing price.
Figure 8.1: Nifty line chart without the open, high, low and close

53. But now instead of a line chart let’s look at Table 8.1 which displays the
following data:
1. Date;
2. Open;
3. High;
4. Low; and
5. Close.
Table 8.1: Date-wise Open, High, Low and Close Prices of Nifty
Date Open High Low Close
23.10.2014 8027.7 8031.75 8008.85 8014.55
22.10.2014 7997.8 8005 7974.55 7995.9
21.10.2014 7906.15 7936.6 7874.35 7927.75
20.10.2014 7896.95 7905.95 7856.95 7879.4
17.10.2014 7733.75 7819.2 7723.85 7779.7
16.10.2014 7837.3 7893.9 7729.65 7748.2
14.10.2014 7923.25 7928 7825.45 7864
13.10.2014 7831 7901.15 7796 7884.25
10.10.2014 7911 7924.05 7848.45 7859.95
09.10.2014 7886.5 7972.35 7886.5 7960.55
08.10.2014 7828.75 7869.9 7815.75 7842.7
07.10.2014 7897.4 7943.05 7842.7 7852.4
If I were to now ask you the same question — tell me what happened on 17
October 2014, buying or selling? — would you be able to come up with the
answer? Yes, you would.
You would be able to do so though it might take you a little time. You would have
to check the Open Price, the High Price, the Low Price and the Closing Price and
then you would need to judge whether the close price was higher than the open
price, or lower than the open price. If the close was higher than the open, you
would understand that the price went up because of buying — and this means that
it was a buying period. If, on the other hand, the close was lower than the open, it
tells you that the price came down because of selling. So you will understand
whether the period was a selling period or a buying period but for you to do this

54. you will have to take a little bit of time as you will have to compare these values
in the table.
Now, if I were to show you a candlestick chart of the type shown in Figure 8.2
and told you that the hollow candles were buying candles and the filled ones, or
the dark ones, were selling candles, you would be able to identify the buying
periods and selling periods by simply looking at this chart. The best part of a
candlestick chart is that it gives us an instant visual interpretation. And when we
are thinking of day trading, the decisions have to be taken very fast.
Figure 8.2: Candlestick chart — the hollow (white) candles are buying candles, the filled (dark)
candles are selling candles
If you look at Figure 8.2 you would notice that apart from different colours, the
candles also have different sizes and shapes. Every candle thus tells us whether
the buyers were strong or the sellers, or if they were both equal. We will
understand this better as we go along and learn how these candlestick charts are
formed in a little more detail.
~
PRICE IS FACTUAL EVIDENCE OF THE TRADES EXECUTED AND
IS BEST READ ON A CANDLESTICK CHART

55. 9
~
Listen to What the Price Tells You
The most important thing to understand is that the price talks to you and as
a day trader you need to understand what the price is telling you.
People use different logic for buying and selling of stocks. For example,
some use indicators and others look at volumes. Now, think logically —
does an FII come and buy a stock because an indicator is giving a buy
signal? Or, is the indicator giving a buy because the FIIs have bought the
stock and pushed the price up? People tend to overlook that an indicator
moves because of the price, and that the price doesn’t move because of the
indicator. If strong hands in the markets have to buy or sell a stock, they
don’t do so because of the indicator moving up or down. In fact, it’s their
buying and selling which makes the price rise and fall and that, in turn,
makes the indicator move up and down.
Another important thing which intelligent investors or traders need to
understand is that if you search on the Internet you would come across
thousands of strategies and an equal number of “sure-shot” indicators. But
here we need to understand that the 500th person who built his indicator did
so because he wanted a “sure shot” way of making money in the markets.
This also means that he did not have faith in the earlier 499 indicators in the
market. The same thing is true with the 1000th person who came up with an
idea, a strategy or an indicator — he wanted to do something better than the
earlier 999 ones. Again it means that he did not have faith in those 999 ones
which were already there in the market. And the sad part is that as an
investor or a trader we want to follow all these one thousand indicators to
help us make money! So, how is this book going to be different? The big
difference is that this book will discuss a strategy using simple methods —
no new discoveries but the right optimisations to help us achieve our goals.

56. Candlestick Charts
As we can see from Figure 9.1 there are two types of candles — one is a hollow
or white candle, and the other is a filled or solid candle. What differentiates the
two is the difference between the open and the close prices:
A white candle indicates that the close was higher than the open;
A filled or a black candle indicates that the close was lower than the open.
Figure 9.1: White candles, black candles and how high, low, open, and close are plotted.
Therefore, a white candle tells us that buying dominated or that the buyers were
strong, while a black candle tells us that selling dominated, or that the sellers
were stronger.
To plot candlesticks we need four price fields — open, high, low, and close.
Candlesticks can be plotted for different time periods, such as 1-minute candle, 3-
minute candle, 5-minute candle, 15-minute candle, 30-minute candle, 60-minute
candle, day-end candle, week-end candle, month-end candle, quarterly candle,
yearly candle, and so on.

57. The various period candles display the buying and selling action for that
particular period.
The different colours and the different shapes and sizes of candles reveal how the
buyers and sellers positioned themselves in a stock for that particular period.

58. Different Shapes and Colours of Candles
Let us consider the example featured in Figure 9.2
Figure 9.2: Such a candle indicates the day’s open and close were nearly at the same level
though the stock traded at higher and lower prices during the day
The candle displayed in the chart in Figure 9.2 tells us that the stock either went
up or down after opening. Let’s consider that it went up from its open of 7,650 to
make a high of 7,700. Obviously, if a price goes up it will be because of buying.
Thus, buyers took the price up from 7,650 to 7,700. Now had the buyers been
confident about the move, their buying action would have made the price close at
the highest point, and there would thus be a white candle suggesting that the
buyers were stronger.
On the other hand, had the sellers been confident of the down move, then we
would have seen a black candle. But this, too, did not happen, indicating that the
sellers were not confident of the move. So, the price made a low of 7,630 and
then retraced upward to close somewhere near where it had opened as the traders
started squaring up their trade.
When we look at this type of a candle it tells us that neither the buyers nor the
sellers were able to decide the direction of the stock price. This means that traders

59. were either confused, or neutral, or indecisive.
As we go along, we will come across candles of different colours, shapes and
sizes. Some of these are featured in Figure 9.3.
The first 5 candles from the left in the top row of Figure 9.3 are strong candles.
All the rest are indecision candles for intraday trading when monitored on a 5-
minute time frame chart.
Figure 9.3: A variety of candles of different colours, sizes and shapes
So now if I were to ask you as to which candles you would like to trade for
intraday, the answer would be the first five because these candles give you some
kind of a view — either bullish or bearish. I would not like to trade the rest of the
candles because they themselves don’t have a view. They are indecision candles
and I would not like to trade a price where buyers and sellers don’t have a view.
~
AN INDICATOR DOES NOT CREATE THE PRICE, THE PRICE
CREATES THE INDICATOR

60. 10
~
Chart Time Frames
When it comes to intraday trading there are different time frame charts
which are available for you to use. And different traders do prefer different
time frames based on their comfort, strategy and understanding.
The following are the different time periods for which stock price charts are
available:
Tick Data Chart.
1 Min (Minute) Data Chart.
3 Min (Minute) Data Chart.
5 Min (Minute) Data Chart.
15 Min (Minute) Data Chart.
30 Min (Minute) Data Chart.
60 Min (Minute) Data Chart.
I believe that the 5-minute chart is the best time frame chart for a day trader.
Then why do many traders use other time frames? To tell you the truth,
80% of traders thoughtlessly use time periods based on somebody’s advice,
or after having seen someone else use it. Others are motivated by the ideas
shared by sales persons of companies who sell their software to the traders
showing them only those things which have worked and hiding the real
facts.
To understand this better, please see Table 10.1 wherein we have compared
data for different time period charts on eight parameters. The table itself
will give you an answer as to which time period chart is best suited for day
trading.

61. Table 10.1: Comparing Different Time Period Charts
Sl. No. Parameter Tick Charts 5 Min Charts 15 Min Charts Day Chart
1 Period Every Trade 5 Min OHLC 15 Min OHLC One Day OHLC
2 Frequency of Signals High Medium Low Low
3 Whipsaws High Medium Low Low
4 No. of Trades High Medium Low Low
5 Brokerage High Medium Low Low
6 Size of Profits Low Medium High High
7 Size of Losses Low Low Medium Medium
8 Emotions Involved High Medium Low Low
Table 10.1 clearly brings out the following:
1. Lower the time period, higher the number of signals and whipsaws
generated and higher the brokerage, thus lowering the profits.
2. Trading is a business where a lot of emotions, such as fear and greed,
are involved. As the time frame reduces the problems related to
emotions increase.
The 5-minute chart strikes a good balance among number of signals,
number of trades, the size of profits, losses and emotions involved in the
trade.
~
DATA PROVES THAT 5-MINUTE CHART IS BEST SUITED FOR
A DAY TRADER

62. 11
~
Trading on an Invitation

63. Chat with the Candlestick
As we’ve seen, candlestick charts highlight the way traders have positioned
themselves, whether long or short. They tell us who is strong — the buyers
or the sellers. They also tell us the direction in which the price is heading.
A chat with the price is important for two reasons:
1. It helps in trade entry; and
2. It helps in risk management.

64. Trade Entry
As mentioned earlier, people use different logic for entering a trade. We will
use the logic of the price telling us what is happening.
Currently, there are approximately 1,800-odd stocks which are traded on
India’s National Stock Exchange (NSE). All these stocks move up, move
down or move sideways every day. The movements could be in a range
between 0.1% to 20%. The main thing is that they all keep moving up and
down every day. Just because all the stocks move up and down daily,
though, does it mean you should be trading all these stocks?
Clearly, it is practically not possible to trade so many stocks. Then let’s
reduce this number to, say, the top 100 stocks on NSE. Chances are that all
these 100 stocks are either going to move up or down every day. Does that
mean I should trade all these stocks? Say, go long in half of them and go
short in the remaining? That would plainly be idiotic. So, then the question
is which stock do I trade?
Here let’s consider an example.
You must have been to a banquet hall for a party or a marriage function.
Typically, these halls have some or the other function going on every day —
a marriage or some other party. Does that mean you attend all these
functions? I am sure the answer would be a big no.
You don’t do so because you do not have an invitation to attend all the
functions.
Now a slightly mischievous question — would you attend the function if
the menu or the food that is being served is good or of your liking?

65. I am sure that you would again say that you would not attend the function
because you are not invited.
Very true. You have to use the same logic when it comes to the stock
markets. Just as you would attend a function only if you are invited, you
should trade a stock only when it gives you an invitation to do so.
You should not trade a stock just because you like it, or because your gut is
telling you something about it, or because you may have heard something
about it on television or read something about it in papers, magazines or the
Internet, or because the company has announced good results.

66. Trade Invitation
Now let us understand what a trade invitation is.
In the chart in Figure 11.1 you can see that the price of Adani Enterprises has
moved from ` 210 up to ` 320-330 levels in a period of about a month.
Figure 11.1: Is this an invitation to trade?
Let us suppose that we had bought this stock at ` 210, and in a very short time
frame the stock has moved to ` 320-330 levels. This means the stock has
appreciated by approximately 50%. Now, what action would you take looking at
this price rise if you were an investor in this stock? Would you continue to hold it
or book profits? Most people would like to book profits in such a situation.
Profit booking would indeed have been warranted if the chart had bearish candles
toward the end of the period, as is the case in the chart in Figure 11.2.

67. Figure 11.2: Profit booking is warranted
But this is not the case in the chart in Figure 11.1. In this chart, we can’t see the
sellers overpowering the buyers and forcing the price down. So what is it that is
preventing the price from falling? You may think that it could be buying at lower
levels which is providing support and not allowing the price to fall. For a
moment, let’s consider that to be true.
Now let us look at the other side of the story with another example.
Let us consider that we missed the opportunity of buying this stock at ` 210-220
levels. Now the price is at ` 320-330 levels and you happen to ask me to
recommend a good stock to buy. I tell you to buy this particular stock at ` 330.
Then you ask me what the price of the stock was one month back and I tell you
that the price was ` 210. After learning that the price has already appreciated by
50% in a month, what would your decision be? Would you buy this stock? Again,
a majority of people probably would not for the reason that the stock has already
witnessed a price rally and the fear it might correct.

68. But as discussed earlier, the price is not falling because there must be buying
support at this level. So who is providing support to this stock?
The answer is simple. It may be somebody who has better information than what
we have. Thus, it could be the strong hand in the markets who is buying the stock,
or it could be people who have the power of knowledge, plus the capacity to
invest.
Now if this is true, it means that the consolidation that we see in this stock is
because of the buying and selling being equal.
We can see this clearly in the chart in Figure 11.3
Figure 11.3: Adani Enterprises consolidates (right hand of the chart) due to the buying and
selling being equal
The next question now is whether this stock would stay in this sideways trend
forever. Obviously, the answer is no.

69. This means the stock has to decide a direction going forward. It has to break out
either on the higher side or on the lower side. Either way it is going to present an
opportunity going forward. Which is why this stock can be called a “stone of
today which will turn into a diamond tomorrow.”
Now let’s look at the chart of the same stock in Figure 11.4, which shows the
price action of the next few days.
Figure 11.4: Upward breakout after a sideways phase
You can see that after having gone through a sideways range the stock has given
us an upward breakout.
So this becomes an invitation for us to enter a trade.
On a 5-minute intraday chart this kind of a sentiment shift has the capacity to
generate big moves. Here is why:
1. The working day of a trader is from 9.15 a.m. to 3.30 p.m.

70. 2. By 3.30 p.m., the intraday trader has to square off his trade.
3. So, the first reason for such a breakout is genuine buying, or selling, as the
case may be.
4. The second reason is the short covering, or the long covering, by traders
whose positions are stuck on the other side of the trade after the breakout.

71. How Big Moves Happen
In the case of 5-minute intraday chart, there are four things which will lead to big
moves:
1. Sentiment shift from bullish to bearish;
2. Sentiment shift from bearish to bullish;
3. Sentiment shift from neutral to bullish; or
4. Sentiment shift from neutral to bearish.
The advantage of using change in sentiment as a trigger is the potential of a big
move which would be generated after a sentiment shift happens.
Let’s consider the chart in Figure 11.5
Figure 11.5: Range bound Nifty doesn’t offer a trade invitation
As you would note, throughout the day, until the last 10 minutes of trade, Nifty
traded between a range of 8,012 and 7,994. This means that on this day Nifty did
not present a trade invitation. This is something which every trader needs to be

72. prepared for. If you don’t get an invitation it means there isn’t an opportunity to
trade. In such a situation, it is best to stay away from the markets for that day.
Compulsive trading is not a good strategy for growing your hard-earned
money. And just as uninvited guests at a function or a marriage party are
thrown out, so, too, are “uninvited” traders in the stock markets.
~
ENTER A TRADE ONLY ON AN INVITATION

73. 12
~
Identifying Sentiment Shifts
Now, how does one gauge sentiment shifts? You do so by looking for the
following price patterns on a 5-minute intraday chart?
1. Flag formation;
2. Sideways breakouts; and
3. Trend change breakouts.
A shift in sentiment creates price patterns. This happens because of change
of expectations. As the sentiments, or expectations, change from bullish to
bearish, or from bearish to bullish, or from neutral to bullish, or from
neutral to bearish, prices form distinct patterns. All stocks go through these
patterns as the sentiments do not remain constant all the time. The
advantages of price patterns are:
They give us major moves;
They give us approximate time targets; and
They also give us approximate price targets.

74. 1. Flag Formation
Flag formations comprise both up as well as down flags.
In the chart in Figure 12.1, the price started moving up from levels of ` 124 and
made a high at approximately ` 154. After that, the stock witnessed some amount
of profit booking. This is clear from the fact that the rally in the stock price got
arrested. At the same time, fresh buying was also coming in which helped the
stock stay afloat by restricting the price from falling any more. This meant that
the buying and selling in this stock was equal, leading it into a sideways trend. In
the shaded portion in the chart, the price movement can be seen restricted
between the two levels, in sideways trend was between ` 148 and ` 154.
Figure 12.1: Up flag formation indicated by white arrows. Note how the price first moves up
gradually, then gets range bound, and then breaks out sharply upward
After having traded in this range for a month the stock finally gave a breakout on
the higher side. This can be seen in the form of a white candle which closed
above this range after the sideways trend.
Another important thing which one needs to understand here is that if a stock has
to break out from a range — wherein the buying and selling is equal — then this
is possible only when buying has the strength to fully absorb the selling. This can

75. happen only when there is genuine buying. And if this is true, then it will not be
wrong to expect the buying to continue for the next few candles.
In other words, genuine buying is the first thing which helps the price break
out above a range.
What happens next is that traders who were short during the sideways trend in the
expectation that the price would fall, would now be facing a loss. And normally
when the position is making a loss, people don’t tend to immediately square off
their trade. They wait for a while hoping that a correction would bring the price
down and they could then cover their trade and minimise the losses. But when the
price does not come down and instead it keeps moving up, then there is a point
when such traders lose patience and cover their trades. This is called short
covering, and this is what makes the prices rally fast and triggers big moves.
When this happens, the price forms an up flag formation. It is called a flag
because the price move looks like a flag — the consolidation marked with a
rectangle is the cloth of the flag and the trend before this cloth is the pole of the
flag.
When this pattern is formed, normally the price then moves up the same distance
as of the pole when added from the low of the cloth of the flag. This gives us the
price target. The time needed for the target to be achieved is usually onethird of
the time taken for the pattern to form from the start of the pole to the breakout
point.
A similar logic is at work when the price forms a down flag formation.
In the chart in Figure 12.2 the price first fell from levels of approximately ` 110 to
around ` 88. After that, the price moved into a narrowing consolidation which is
highlighted in the chart with a triangle. After moving in this range for two to three
weeks, the stock finally gives a downward breakout. In this case the selling has to
be big enough to first absorb the ongoing buying going on within the range; only
then would it be able to take the price down further.

76. Figure 12.2: Formation of a down flag
So first there is genuine selling which takes the price down and then people
who are long come square off their trade, which drives the price further
lower.

77. Important Note
On 5-minute charts, every day is a new day therefore the flag formations have to
be considered from the day’s open; in other words, from the first 5-minute candle
for that day — as in Figure 12.3.
Figure 12.3: Nifty down flag formation on a 5-minute chart
There is no point in looking at the chart in carry forward mode as we are in a
rolling settlement where each day is a new day.

78. 2. Sideways Breakouts
You will often observe this pattern on 5-minute charts.
In this scenario, the stock starts trading when the markets open at 9.15 a.m. It
then moves flat, or sideways, in between a range. Sometime in the afternoon the
stock then gives a breakout, either above or below the range.
If it is an upward breakout then it becomes an invitation for you to go long.
Conversely, if it is a downward breakout, then it becomes an invitation for you to
go short.
In the Nifty charts in Figure 12.4 and Figure 12.5 you can clearly see that the
Nifty moved into a sideways trend after opening — and stayed that way for a
long duration. It then gave us a breakout on the higher side. The sideways range
is marked with two horizontal lines. The moment it gives us a breakout, this
becomes a sideways breakout pattern.
Figure 12.4: Nifty breaks out upward from a sideways range which is indicated by two
horizontal lines

79. Figure 12.5: Nifty breaks out upward from a sideways range which is indicated by two
horizontal lines
When this occurs, it means that first there is buying with strength which absorbs
the selling and takes the price up. This up move then triggers the second action —
short covering from those that are stuck on the opposite side of the move. So in
this case the traders who are short will cover their positions, helping the price
rally further.
Just the opposite of this can be observed in the chart in Figure 12.6.

80. Figure 12.6: Downside breakout of Nifty from a sideways range
In the 5-minute chart of the Nifty in Figure 12.6 you can see that it starts trading
at 9.15 a.m. after which it moves into a sideways trend — indicated by two
horizontal lines in the chart — followed by a downward breakout. This becomes
an invitation for you to enter a trade. Because the breakout is on the lower side,
the opportunity here is to go short. So, strong selling which absorbs the buying
initially takes the price below the range. Then the traders who are long come to
cover their trades thus pushing the price down further.
These patterns will be observed frequently on 5-minute intraday charts and they
become good invitations for one to catch.

81. 3. Trend Change Breakout
In this pattern the price first tends to go down, it then moves into a consolidation,
followed by a change in the direction of the earlier trend. This is called as a
“trend change breakout.”
For example, in the chart in Figure 12.7, after it broke upward the price rallied in
the direction of the breakout.
Figure 12.7: An invitation to trade long after an upward breakout of the price
A similar but reverse situation can be observed in Figure 12.8 with the price first
going up, then moving into a consolidation and then giving a downward breakout
and then moving in the downward direction. The consolidation is marked with
two horizontal lines.

82. Figure 12.8: An invitation to trade short after a downward breakout from the range
The direction of the breakout decides the direction of your trade — long or short.
In the chart in Figure 12.8, you can see that the price first moved up, then went
into a consolidation, and finally gave us a breakout on the lower side, which
means it has broken the support. This becomes an invitation for a short trade.
The three patterns discussed in this chapter generate big moves and therefore they
work very nicely on 5-minute intraday charts.
These are invitations which help us to enter a trade.
And remember we use these invitations — or reasons — to enter a trade because
in these three cases there is a sentiment shift happening. And when this happens,
you are likely to get big moves after the breakout.
~
ENTERING TRADE ON A SENTIMENT SHIFT HAS THE
POTENTIAL TO GENERATE BIG MOVES

83. 13
~
How to Validate a Trade Invitation
We have now analysed situations which are invitations to enter an intraday
trade.
But how does one assess how strong, or valid, a trade invitation is? In
technical trading, validity and confirmation play an important role.
Validation helps in reducing both the likelihood and the number of failed
trades.
Let’s understand validation with the help of an example.
Suppose we go to watch a movie in a multiplex but are not sure which
screen might be playing a good movie, and neither are we aware of the
movies that are playing. So, how can we decide which screen is playing a
good movie to watch?
The answer is simple — we would look for the screen which is attracting
the maximum number of people. That is the one likely to be playing a good
movie. Here, the number of people is a good validation.
The same rule applies in the stock market.
Thus, we should be trading a stock which gives us a trade invitation —
along with a confirmation based on volumes. Just as in the multiplex
example, people would not like to trade a stock where trading interest is
low.

84. How Volumes Validate a Trade Invitation
When it comes to volumes in day trading, we should compare the volume of the
breakout candle, — namely the invitation candle — with the volumes of the three
previous candles.
The reason for this is that price levels keep on changing with time, plus the
market participation also keeps on changing. So data older than a few days is not
of much value in intraday trading.
For example, in the chart in Figure 13.1 one can clearly see that after the stock
started trading at 9.15 a.m. it faced resistance at the level marked with the upper
horizontal line. After that, the stock gave a breakout at noon with the 5-minute
candle closing above this resistance level. This now becomes an invitation for a
trade. But before you enter the trade, you need to confirm the validity of this
breakout with the help of volumes. For this, the volumes should be rising when
the invitation candle is formed. A rise in volume means that it is not only you
who sees this as a breakout but many other traders also consider this candle to be
signalling a breakout. Since there is indeed an increase in volume, as shown by
the circled portion of the chart, this confirms the validity of the trade invitation
and you can now get into a trade. This being an upward breakout, the trade to be
entered in this stock would obviously be a long trade.

85. Figure 13.1: Note how the upward breakout is accompanied by significantly higher volume,
thus confirming that this is a valid trade invitation
So far, so good. Now the next thing which you need to attend to — and one which
traders most ignore — is risk management.
~
VALIDATION HELPS IN REDUCING THE LIKELIHOOD NUMBER
AND FAILED TRADES

86. 14
~
Risk Management
In this chapter, we will look at implementing risk management.
For a trader, risk management is basically the implementation of a stop loss
strategy. Strangely, though, this practice is rare among traders.
I have been educating people about trading all across India, from
Chandigarh to Chennai, and everywhere I hear the same thing: “We don’t
implement a stop loss because the stop loss first gets triggered and then the
price moves.”
When I ask such traders as to the reason for this, they say, “Operators can
see our stop loss and therefore they first trigger them — and after that they
take the price in the direction of our trade.”
I am puzzled and amazed at such answers since such a belief is nothing but
another stock market myth. When I say this, I do not mean that stop losses
never trigger and that they don’t ever throw you out of a trade which you
may not have willingly exited. Indeed, stop losses do get triggered and
when they do, you must exit the trade. Stop loss is meant to reduce a loss. If
you can prevent further losses by squaring off a failed trade there can’t be
anything better.
Let me be very clear that in this strategy your stop losses will sometimes be
triggered but you would remain on the winning side over a period of time.
So, then, what is this myth about stop loss always getting prematurely
triggered. Let me explain. We are all shaped by our experiences. Our good
and bad experiences create our foundation, our thoughts and our views
which, in turn, help us build ourselves.

87. Let me explain this in the form of a story.
A person decides to enter the stock market. His friends tell him that the
stock market is a high risk business and discipline is a must in order to
survive in the market for long.
The trader pays heed to this advice because it is for his own good.
Accordingly, he decides to set a maximum per day loss limit so that he does
not wipe out his entire earnings in a short span of time. Accordingly, this
trader decides on a maximum loss amount of ` 1,000 per day.
Is there anything wrong in this thought process? No, noth ing wrong at all;
in fact, it is a good thing for a trader to be disciplined and have a trading
plan before setting out on the journey.
The trader then opens a trading account and decides to start his venture in
the stock market.
On his first day in the market he selects a stock to trade. When the markets
open, he calls up his broker to place a buy order of 500 shares. The dealer
immediately gives a confirmation that the stock has been bought, along
with details of the buying price. The trader also remembers the trade
discipline aspect, namely the stop loss. So he instructs the dealer to place a
stop loss at ` 2 below the buying price. This is as per the trading plan which
he has finalised after getting inputs from his friends.
He has also decided that his maximum daily loss limit is ` 1,000 and
because he is trading 500 shares, he places a stop loss ` 2 below his buying
price.
At 12 noon he checks the price and finds that the stock is 10% above his
buying price. The trader is happy at the prospect of his first successful
trade. He is already seeing himself sitting next to other great investors and
traders in history when he makes a call to his broker to book profits.

88. At the broker’s office the dealer picks up the call and all the trader’s dreams
come crashing when he is told that his stop loss got triggered and therefore
the trader did not now have a position.
The trader can’t believe this. It could not have happened; the stock was up
by 10%, he says, but the dealer manages to convince the trader by narrating
all the facts. The trader is sad at this incident but finally accepts the
situation and waits for the next day.
Day one for this trader was a loss making one but he has one thing to
rejoice about; he now knows that the stock which he picked had moved in
the direction he had anticipated, which he takes to mean that his stock
picking ability is good.
The next day he again selects a stock to trade, calls his broker and places a
buying order for 500 shares. The dealer executes the order and gives him
the trade details. Not forgetting his trading plan, the trader again instructs
the dealer to place a stop loss at ` 2 below the buying price. The dealer duly
places the stop loss and the trader goes back to his work.
At 2 p.m. the trader checks the price of the stock and to his pleasant surprise
the stock has hit an upper circuit of 20%. He is, of course, happy with this
move as he figures that he has now recovered his previous day’s loss, plus
he has additional profits to enjoy.
He calls his broker but the dealer again gives him the sad news of his stop
loss having been triggered before the stock moved up. This time the trader
gets really angry. He can’t believe this could have happened again as the
stock had hit an upper circuit! He tells off the dealer saying that all brokers
were cheats, that they didn’t want clients to make money and threatens to
file a complaint, and goes on to say a lot many things.
Patiently, the dealer again explains the whole matter to the trader and,
finally, after a lot of discussion he manages to convince the trader that the

89. stop loss had indeed got triggered before the price moved up. The trader is
sad about his second day’s loss but finally accepts the situation and decides
to focus on the next day.
One thing of which he is firmly convinced about by now is that he has
sound stock picking ability. The stocks which he picked on both days had
worked out well.
On the third day, the trader goes through the same experience again.
Now, do you think this trader would implement a stop loss from day four
onwards?
No, not at all, because by now he is absolutely convinced that stop losses
invariably get triggered before the price moves in the favourable direction.
He concludes that this happens because operators can somehow see your
stop loss, and that they then manipulate prices since they don’t want you to
make money. “Our loss is their profit,” he tells himself, and a lot of such
wrong beliefs are now built into this trader’s mind.
Then he stops implementing stop losses and one day he finds himself stuck
holding a stock as an unintended investor, waiting for the price to come
back above his buying price. This trader has become an investor.
You can imagine the rest of the story.
So, then, what went wrong in this whole episode?
Simply, what went wrong was the wrong level where the stop loss was
implemented. There was no rationale for placing the ` 2 stop loss. I have
seen people implement stop losses ` 1 above and below their selling and
buying prices, depending on the side of trade. At times traders also have
stop losses as close as a few paisa. Now, tell me, is this logically correct?

90. Do you really believe operators can see stop losses on the trading terminal.
That, too, on the system of the largest exchange in India? If we were to
believe this, then it means the system is hacked — and if this is true then it
means that India’s economy is hacked, too! Logically speaking, this is
something which is not possible.
Actually, what goes wrong is that a trade is often entered without a logical
reason, meaning without a proper trade invitation. With an illogical trade
entry, the chances of the stock moving against you increase.
The second aspect which needs rectification is the level at which the stop
loss is placed. If a stop loss is placed at an illogical level, then, too, traders
will go through such experiences.
I believe if your trade entry is right — meaning that it is based on the logic
explained in the earlier chapter, then your risk management stop loss will
also be at the right level.

91. Where to Place a Stop Loss
So, where should one place the stop loss? The answer is very simple. If you
are sitting on a chair and there is fear that if the chair breaks you may fall
and hurt yourself, then you need a stop loss — namely, some protection to
avoid the risk of injury. Now in this case your stop loss has to be below the
level where you are sitting. It cannot be above that level.
In the same way a stop loss in the stock markets has to be below a good
support when you enter a buy trade, and above a strong resistance when you
enter a sell trade.
Many a time it may so happen that the distance between the support and the
traded price is large. And you fear that by the time the stop loss gets
triggered, you may have incurred a huge loss. Obviously, one trades in the
hope of making profits, and so it’s vital to keep losses down. For that there
are two things which you can do:
One is to avoid such a trade, and
The second thing to do is to reduce, or adjust, your quantity in such a
way that your trade remains balanced.
So, then, where do we place a stop loss?
You can use the following logic for the implementation of stop losses.

92. 1. On a Buy Signal
Stop loss should be placed below the low of the event candle namely the
invitation candle — as brought out in the chart in Figure 14.1
Figure 14.1: The stop loss below the invitation candle is indicated by an upward pointing arrow

93. 2. On a Sell Signal
The stop loss must be placed above the high of the event candle, namely the
invitation candle, as indicated in the chart in Figure 14.2.
Figure 14.2: As the sideways move breaks down, you go short with a stop loss above the
invitation candle as highlighted by the down pointing arrow
The next question is: how much below the low and above the high should the stop
loss be placed?
In arriving at an answer, we have to ensure that the distance of the stop loss
remains uniform for all the differently priced stocks.
Therefore, we keep it 0.2% above and below the high and low, respectively. With
a percentage difference, there will be uniformity in all the stocks that you trade.
In real-life trading when you do not have a lot of time to calculate stop losses, a
simple thumb rule that you can remember is:

94. 1. If a stock trades below ` 500, keep a difference of ` 1.
2. If a stock trades between ` 500 and ` 1,000, keep a difference of ` 2.
3. If s stock trades between ` 1,000 and ` 1,500, keep a difference of ` 3.
And, so on.
Another important thing to remember is that the stop loss must be logged in the
system as soon as you enter a long or a short trade.
One good thing about doing so is that when you enter a trade you have advance
clarity as to how much risk is involved in the trade that you have entered. You are
then no longer shooting in the dark. Everything that we do in the stock markets
should be with a reason.
Always remember that if you have to survive and flourish in the markets for long,
the implementation of a stop loss is a must.
And, also always remember the following: Taking small losses as and when
required is better than taking the mother of all losses one day.
~
KNOWING THE RISK BEFOREHAND CAN HELP YOU DECIDE
WHETHER TO ENTER THE TRADE OR NOT

95. 15
~
When to Exit a Trade Using Running Price,
Stagnant Price Logic
We have now seen when to enter a trade and where to implement the stop
loss. Now, when and where should you book profits?

96. How Much Profit is Good Profit?
This is a question which keeps puzzling traders all the time. It plays with
their emotions, making them take wrong decisions. There is a myth
involved here, too. The myth is that traders come to the market with
discipline, meaning with a trading plan, and further that just as they have a
predetermined maximum loss limit in mind, they also have a pre-
determined profit limit.
Deciding a profit limit is not wrong but doing it in the way that it is usually
done is surely wrong.
Let me explain. Traders often decide that “I want to make 3% every day, or
5% every day, or 10% every day. When I make that much profit, I will stop
trading.”
Now, if you trade a stock which moves up by 1% and if you have set
yourself a profit target of 5% then would you be able to achieve your
target? The answer is no.
Another important point is that some traders are happy with 0.5% profit,
others want 1% profit, some 3% profit, others 5% profit, while some want
10% profit; some may get 20% even and still they remain unsatisfied.
If this is the case, then the question is how much profit is good profit.
I believe that the profit target should be based on the stock that you are
trading. If the stock moves up by 10%, then you should be able to catch a
maximum out of that 10%. If the stock being traded moves up by 5%, then
the aim should be catch as much as possible of that 5% move.
Another important point to understand here is that it is difficult, if not
impossible, to catch the very top and the very bottom of a price move. Post

97. mortems are always easy but doing it in the live market is difficult.

98. Running Price, Stagnant Price
In the discussion that follows, we have broken the price into two phases — one,
we call the running price and the other stagnant price.
In the chart in Figure 15.1, you can clearly see the difference between running
price and stagnant price.
Figure 15.1: Example of running price and stagnant price
In the running price phase, which you can see on the left portion of the chart, you
have successive big white candles one after the other, running upwards.
Please note that in a down trend successive big black candles will also form
running price.
On the right hand side of the same chart you can see the stagnant price zone
characterised by a mixture of white and black candles, where the price is moving
up and down but more or less flat or sideways.
Running price is made up of those nice big candles which offer a clear trading
view. Stagnant price, on the other hand, is made up of indecisive candles where
traders do not get either a bullish or bearish view as these candles are more
neutral or indecisive.