How to Make Money in Day Trading by Mandar Jamsandekar

Author:Mandar Jamsandekar [Jamsandekar, Mandar]
Language: eng
Format: epub
ISBN: 9788170949725
Published: 2016-02-17T23:00:00+00:00

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.

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.

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.

This means the stock has to decide a direction going forward.

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