## 19 March 2011

### Risk Vs Return - A Great Tutorial By David Jenyns

his following article has been extracted from David Jenyns' Trading Secrets Revealed Course and a must for traders to have a look into.

The most important rule in trading is to keep your losses small. This is the only way to ensure that if the market moves against you, you will live to trade another day – in other words, you will not suffer a loss that will take you out of the trading game. Remember, 95% of trades will lose – do your best not to be one of them.

One of the best ways to do this is to ensure that you have a fixed amount as a proportion of your account that you are willing to risk on any trade. This ensures that if you have a losing trade, you will only lose the predetermined amount.

This has been discussed in previous articles and will be discussed again in future ones as well. In general, the maximum loss should be set to no more than 1-3% of your total trading float. This seems very small but it can lead to huge gains in the long run.

Another rule is to try and estimate your target value. In other words, what is the value of the stock that you are expecting it to go to? You should only enter the trade if you expect the trade to provide more if you obtain your target value than lose if you hit your maximum loss value. Your mechanical trading system should be built with this principle in mind.

The Reward / Risk Ratio

This is a good time to introduce the principle of the reward / risk ratio. In principle, this ratio will provide you with a very important piece of information to decide whether to enter into a trade or not.

If we believe that a trade will provide three times more profit than the amount that is risked, then the reward / risk ratio is 3:1. In a similar way, if we believe that there is three times more risk to a trade than there is of the trade winning, then the reward / risk is 1:3. The example below illustrates this in more detail.

Example

We wish to purchase stock XYZ at \$10 a share and we expect that the stock will increase to \$11 over the space of about a month. We also place a stop level (i.e. a level that we will exit the stock) at \$9.80 based on our mechanical trading system.

This means that the amount we will risk per share is \$0.20 but we stand to gain approximately \$1.00 per share. The reward / risk ratio is therefore 1:0.2 and this equates to 5:1. This means that there is 5 times more reward for the risk that you will incur. This trade seems like a good one to take!

Now we will not risk more than 2% of our account and that we have an account of \$10,000. This means that we will not risk more than \$400. As the reward/risk reward is 5:1, this means that we could stand to gain about \$2,000 on this trade alone if we purchase \$10,000 worth of shares!

As you will read further, it is not a good idea to put all of your money into one trade. The example above suggests that you will put all of your money into XYZ. In reality, it is a good idea to put only a fixed percentage of your money into one stock to ensure that you are not over exposed to the whims of one market alone. This will be discussed in future articles.

As another rule, the reward / risk must always be on your side – in other words, you must always have more of a chance to make more money than lose it. Some traders will insist on a reward / risk ratio of at least 3:1 before even considering the trade. They will not enter any other trade unless this ratio is met. You need to develop your own risk profile and stick to it.

### Trading Glossary - Part II (P-Z)

PIVOT: A market reference point. Our most frequently used pivots are swing highs and swing lows such as the high and low of a daily bar or the highs and lows of the hourly cycles.

PREMIUM (Nifty's): When the price of an index future is trading greater than Fair Value.

RAT TRADE: An afternoon breakout trade that is made in the generally taken place after 02:15 PM.

RESISTANCE: Area where Sellers have come in the past.

ROBUST: Refers to a method or system that is profitable across a variety of markets, time frames and parameters. It is the opposite 'curve-fit' or 'optimized.'

SCALP: A Short-term trade that capitalizes on the market's smaller fluctuations.

SHAKEOUT FAKEOUT: A sharp downward move following an area of distribution that quickly reverses itself and comes back up through the distribution area.

SHORT SKIRT: The name of a very short term pattern trade taken on a one-minuteNifty futures charts. A form of pullback trade on a very short time frame.

SKIDS: Slippage or the difference between the price that a stop order was placed and the actual fill price.

SLOP AND CHOP: Action in the market when institutions are absent and liquidity is poor.

SMA: Simple Moving Average.

SPRING: Originally a Wyckoff term, is used to denote an impulsive move often associated with a test of support. See also 'Upthrust.'

STOP ORDER: An order that becomes a market order when the price touches that level.

SUPPORT: Area where buyers have stepped in the past.

SWEET STUFF: Nickname for the sugar futures.

THREE PUSHES: A characteristic pattern that occurs near important turning points. Usually three distinct 'test' of a high or low level, followed by a reversal.

TICK: Smallest increment that a price can change. 1 tick on an Nifty contract = .05 points, which is the equivalent of Rs. 2.50.

TICKS: The difference between the number of issues on the NSE that are trading UP from the last trade versus the number of issues that are trading down.

TREND DAY: A day where the market opens on one end of its range, closes on the opposite end, shows range expansion and has an increase in volume.

TRIGGER: Level at which a trade will be initiated if a market trades to that price.

TRIN: The TRIN (also know as the Trading Index and the ARMS Index) was invented by Richard Arms in the 1970s. It is calculated as follows: (Advancing issues / Declining issues) divided by (Advancing volume / Declining volume). If the index is above one, the average volume of stocks that fell on the NSE was greater than the average volume of stocks that rose. If the index is below one, then the converse is true.

UPTHRUST: Originally a Wyckoff term, is used to denote an impulsive move often associated with a test of resistance. See also 'Spring.'

VIX: VIX is a weighted measure of the implied volatility for put and call options. VIX represents the implied volatility for this hypothetical at-the-money option.

VOLATILITY: The range of the price action over N -Number of bars.

WEDGE: A low volatility point in which a triangle type formation can be drawn on the bar charts. The market can break out in EITHER direction from this formation.

WHIPSAW: Is when the market rapidly reverses its direction several times in succession.

"Z" DAY: A consolidation day that typically follows a trend day
PIVOT: A market reference point. Our most frequently used pivots are swing highs and swing lows such as the high and low of a daily bar or the highs and lows of the hourly cycles.

PREMIUM (Nifty's): When the price of an index future is trading greater than Fair Value.

RAT TRADE: An afternoon breakout trade that is made in the generally taken place after 02:15 PM.

RESISTANCE: Area where Sellers have come in the past.

ROBUST: Refers to a method or system that is profitable across a variety of markets, time frames and parameters. It is the opposite 'curve-fit' or 'optimized.'

SCALP: A Short-term trade that capitalizes on the market's smaller fluctuations.

SHAKEOUT FAKEOUT: A sharp downward move following an area of distribution that quickly reverses itself and comes back up through the distribution area.

SHORT SKIRT: The name of a very short term pattern trade taken on a one-minuteNifty futures charts. A form of pullback trade on a very short time frame.

SKIDS: Slippage or the difference between the price that a stop order was placed and the actual fill price.

SLOP AND CHOP: Action in the market when institutions are absent and liquidity is poor.

SMA: Simple Moving Average.

SPRING: Originally a Wyckoff term, is used to denote an impulsive move often associated with a test of support. See also 'Upthrust.'

STOP ORDER: An order that becomes a market order when the price touches that level.

SUPPORT: Area where buyers have stepped in the past.

SWEET STUFF: Nickname for the sugar futures.

THREE PUSHES: A characteristic pattern that occurs near important turning points. Usually three distinct 'test' of a high or low level, followed by a reversal.

TICK: Smallest increment that a price can change. 1 tick on an Nifty contract = .05 points, which is the equivalent of Rs. 2.50.

TICKS: The difference between the number of issues on the NSE that are trading UP from the last trade versus the number of issues that are trading down.

TREND DAY: A day where the market opens on one end of its range, closes on the opposite end, shows range expansion and has an increase in volume.

TRIGGER: Level at which a trade will be initiated if a market trades to that price.

TRIN: The TRIN (also know as the Trading Index and the ARMS Index) was invented by Richard Arms in the 1970s. It is calculated as follows: (Advancing issues / Declining issues) divided by (Advancing volume / Declining volume). If the index is above one, the average volume of stocks that fell on the NSE was greater than the average volume of stocks that rose. If the index is below one, then the converse is true.

UPTHRUST: Originally a Wyckoff term, is used to denote an impulsive move often associated with a test of resistance. See also 'Spring.'

VIX: VIX is a weighted measure of the implied volatility for put and call options. VIX represents the implied volatility for this hypothetical at-the-money option.

VOLATILITY: The range of the price action over N -Number of bars.

WEDGE: A low volatility point in which a triangle type formation can be drawn on the bar charts. The market can break out in EITHER direction from this formation.

WHIPSAW: Is when the market rapidly reverses its direction several times in succession.

"Z" DAY: A consolidation day that typically follows a trend day

### Trading Glossary - Part II (P-Z)

PIVOT: A market reference point. Our most frequently used pivots are swing highs and swing lows such as the high and low of a daily bar or the highs and lows of the hourly cycles.

PREMIUM (Nifty's): When the price of an index future is trading greater than Fair Value.

RAT TRADE: An afternoon breakout trade that is made in the generally taken place after 02:15 PM.

RESISTANCE: Area where Sellers have come in the past.

ROBUST: Refers to a method or system that is profitable across a variety of markets, time frames and parameters. It is the opposite 'curve-fit' or 'optimized.'

SCALP: A Short-term trade that capitalizes on the market's smaller fluctuations.

SHAKEOUT FAKEOUT: A sharp downward move following an area of distribution that quickly reverses itself and comes back up through the distribution area.

SHORT SKIRT: The name of a very short term pattern trade taken on a one-minuteNifty futures charts. A form of pullback trade on a very short time frame.

SKIDS: Slippage or the difference between the price that a stop order was placed and the actual fill price.

SLOP AND CHOP: Action in the market when institutions are absent and liquidity is poor.

SMA: Simple Moving Average.

SPRING: Originally a Wyckoff term, is used to denote an impulsive move often associated with a test of support. See also 'Upthrust.'

STOP ORDER: An order that becomes a market order when the price touches that level.

SUPPORT: Area where buyers have stepped in the past.

SWEET STUFF: Nickname for the sugar futures.

THREE PUSHES: A characteristic pattern that occurs near important turning points. Usually three distinct 'test' of a high or low level, followed by a reversal.

TICK: Smallest increment that a price can change. 1 tick on an Nifty contract = .05 points, which is the equivalent of Rs. 2.50.

TICKS: The difference between the number of issues on the NSE that are trading UP from the last trade versus the number of issues that are trading down.

TREND DAY: A day where the market opens on one end of its range, closes on the opposite end, shows range expansion and has an increase in volume.

TRIGGER: Level at which a trade will be initiated if a market trades to that price.

TRIN: The TRIN (also know as the Trading Index and the ARMS Index) was invented by Richard Arms in the 1970s. It is calculated as follows: (Advancing issues / Declining issues) divided by (Advancing volume / Declining volume). If the index is above one, the average volume of stocks that fell on the NSE was greater than the average volume of stocks that rose. If the index is below one, then the converse is true.

UPTHRUST: Originally a Wyckoff term, is used to denote an impulsive move often associated with a test of resistance. See also 'Spring.'

VIX: VIX is a weighted measure of the implied volatility for put and call options. VIX represents the implied volatility for this hypothetical at-the-money option.

VOLATILITY: The range of the price action over N -Number of bars.

WEDGE: A low volatility point in which a triangle type formation can be drawn on the bar charts. The market can break out in EITHER direction from this formation.

WHIPSAW: Is when the market rapidly reverses its direction several times in succession.

"Z" DAY: A consolidation day that typically follows a trend day

### Trading Glossary - Part II (G-O)

GOLF: A mechanical trade that is made in the index futures that is entered on the close of the day.

GRAIL: A trade set-up based on a pullback to the 20 period EMA after the 14 period ADX has risen above 30. Pullback in rallies are bought, and pullbacks in declines are sold short. This pattern was discussed at lenght in Street Smarts book.

IMPULSE: Increase in the market momentum. Impulse moves tend to happen in the direction of the trend. On a bar chart they have the appearance of a sharp markup or markdown.

INSTITUTIONS: Mutual funds, pension funds, banks, and large commercials.

KELTNER CHANNELS: A 'trading band' indicator that is displayed on top of price charts. Similar to Bollinger Bands but calculated differently, using true-range rather than standard deviation.

LAST CALL: Trade that setups up in the last hour of a trend day.

LOAD THE BOAT: Use full line of leverage.

MACD: An oscillator based on the difference between two moving averages. We use the difference between a 3 and 10-period simple moving average or 6 and 13-period simple moving average.

MARK UP: A Wyckoff term, used to denote the phase of the market where prices rise, from the beginning of a bull market to its top.

MARKET LEADERSHIP: Market leadership refers to those sectors and industries that are currently bringing in the best returns.

MARKET ORDER: An order to buy or sell a stock immediately at the best available current price. A market order guarantees execution.

MIT: Market-if-touched order. An order which becomes a market order if the specified price is reached.

MOC: Market-on-close order. A buy or sell order which is to be executed as a market order as close as possible to the end of the day.

MOMENTUM: The difference between the last price and the price N-numbers bar. A 2-period Rate of Change (ROC) is the same as a 2-period Momentum.

NR7: The narrowest high-low range of the past seven days.

OOPS TRADE: A term originally coined by Larry Williams which refers to a market that gaps below the previous day's low (or above the previous day's high) and then quickly reverses its direction.

OOZE: Down trending price action that slowly inches down without any upward reactions of any magnitude. One of the strongest forms of trending action.

OPENING BULGE: Period after the opening when the public has a tendency to pay too high a price.

OPENING PLAY: The markets first tendency of the day.

OUCH SETUPS: When a market Closes in the upper 75% of its range but then gaps lower the next day around the previous day's low (vice versa to the upside).

OVERHEAD SUPPLY: Are where the market had found support in the past but the price is currently trading lower.

### Trading Glossary - Part I (A-F)

ADX: Trend strength oscillator originally developed J. Welles Wilder Jr. that fluctuates between 0 and 100.

BEAR FLAG: Classic bar chart pattern that occurs in a trending market, a bearish continuation pattern.

BEAR TRAP: A bear trap occurs when the market breaks below chart support, bringing traders in on the short side, then quickly reverses, trapping traders with losses.
BREADTH: The difference between the number of advancing issues and the number of declining issues on the NYSE.

BREAKOUT TRADE: A trade that occurs when the market breaks above or below some pre-define range, usually a nearby support or resistance levels such as the previous day's high or low, or the last 60 minutes high/low. Breakouts are often associated with low volatility readings.

BULL FLAG: Classic bar chart pattern that occurs in a trending market, a bullish continuation pattern.

BULL TRAP: A bull trap occurs when the market breaks above chart resistance, bringing traders in on the long side, then quickly reverses, trapping traders with losses.

CREEPER MARKET: A market that slowly creeps higher without a significant retracement. One of the strongest types of trending action that does not catch people's attention.

DIVERGENCE: A divergence is indicated when momentum fails to confirm a new low or new high in the price. Divergences usually show up best with oscillators such as the 3/10 and 5/35 MACD.

EDGE: Term used to describe when a trader has the advantage or a favorable margin. It is even better when this margin can be quantified statistically.

EMA: Exponential Moving Average. We generally use a 13 or 21-period setting.

EQUILIBRIUM LEVEL: The point at which buyers and sellers are in balance. Coincides with a neutral chart point that is often at the end of a consolidation period.

EVENT RISK: The risk that some unexpected event will cause a substantial change in the market value of a security. For example, missed earnings, lawsuits, crop failures, war, etc.

FADE: A countertrend trade.

FAIR VALUE: Fair value reflects the relationship between stock index futures and the index's current levels. It is a theoretical estimate of where the futures should be trading based on their underlying cash index with short-term interest rates and dividends factored into the calculation. Determining the fair value relationship between the Nifty futures contract and the underlying Nifty index requires adding the cost of borrowing the money to buy the Nifty stocks, while subtracting the gain these stocks pay in dividends.

FILL OR KILL: This means do it now if the stock is available in the crowd or from the specialist, otherwise kill the order altogethe

## 14 March 2011

### Ichimoku Cloud Scanner v2.0 – AFL Code

The Demerit with the older version of Ichimoku cloud scanner is that there is too much of difference between the cloud(stop loss) and the candle which has been overcome by introducing stop loss for the trade with little modification in the trading rules.

The above nifty chart shows a trailing stop loss(black line) of 6034. But the cloud(6137) is heavily far from the Close value(5751).

Note : Black line indicate only trailing stop loss for trades but not a trailing stop loss mechanism.

Trading Rules

1)Buy on Close above the cloud
2)Sell on Close below the cloud
3)Use the Cloud as Stop loss and reverse when the cloud is very near to the candle
3)Use STPL – (Black line) as trailing stop loss when the candle is far from the cloud
4)There is nothing to do with the color of the cloud( red/green cloud it doesnt matter )
5)Red Arrows indicates sell signal i.e candle closes below the cloud
6)Green Arrows indicates Buy Signal i.e candle closes above the cloud

Where STPL is nothing but the average of Close, Span lines SP1,SP2

Few Rules that I for the shorter timeframes 15min, 30min, hourly Charts and Daily

1)Buy or Sell Trade should be taken only on the presence of the appropriate signal. Trade should not me initiated belated to the signal

2)Dont initiate trade without sufficient signals.

3)If you are in a Buy Trade/Sell Trade book the trade if you are in profit at regular intervals. Dont wait for the next signal to exit the trade

4)For 15min trade book profit if you got 20-25pts in nifty and in Hourly Charts – 50-75 points and in Daily Charts – 150-200pts without waiting for next signal.

5)Respect the trailing stop loss when you are in trade

6)If you are confused with the way you are playing – just take rest.

.................................................................

Ichimoku forecast: Ichimoku Kinko Hyo is Japanese for “one glance cloud chart.” It consists of five lines called Tenkan-sen, Kijun-sen (sen is Japanese for line), Senkou Span A, Senkou Span B and Chinkou Span. The calculation uses four different time periods which we call termT, termK, termS and termC. The Ichimoku Kinko Hyo is graphed over the closing price line. The space between the Senkou spans is called the Cloud, and is usually graphed in a hatched pattern.

The word Ichimoku can be translated to mean “a glance” or “one look”. Kinko translates into “equilibrium” or “balance”, with respect to price and time, and Hyo is the Japanese word for “chart”. Thus, Ichimoku Kinko Hyo simply means “a glance at an equilibrium chart”, providing a panoramic view of where prices are likely to go and the position one should undertake.

The Ichimoku Kinko Hyo or equilibrium chart isolates higher probability trades in the forex market. It is new to the mainstream, but has been rising incrementally in popularity among novice and experienced traders. More known for its applications in the futures and equities forums, the Ichimoku displays a clearer picture because it shows more data points, which provide a more reliable price action. The application offers multiple tests and combines three indicators into one chart, allowing the trader to make the most informed decision

Rules are simple
1)Buy if Candle closes above the cloud.
2)Sell if Candle closes below the cloud

ICHIMOKU AFL:

_SECTION_BEGIN("Price");
SetChartOptions(0,chartShowArrows|chartShowDates);
_N(Title = StrFormat("{{NAME}} - {{INTERVAL}} {{DATE}} Open %g, Hi %g, Lo %g, Close %g (%.1f%%) {{VALUES}}", O, H, L, C, SelectedValue( ROC( C, 1 ) ) ));
Plot( C, "Close", ParamColor("Color", colorBlack ), styleNoTitle | ParamStyle("Style") | GetPriceStyle() );
_SECTION_END();

_SECTION_BEGIN("Ichimoku Hayo Kinko");
GraphXSpace =1;
prds = Param("Standard Line Periods?", 12,5,26,1);
prds1 = Param("Turning Line Periods?", 3,3,10,1);
prds2 = Param("Delayed Line Periods?", 11,4,25,1);
prds3 = Param("Spans Periods?", 18,10,52,1);

TL = ( HHV( H, prds1) + LLV( L, prds1) )/2;
SL = ( HHV( H, prds) + LLV( L, prds) )/2;
DL = Ref( C, prds2);
Sp1 = Ref( ( SL + TL )/2, -prds2)-(C*0.003);
Sp2 = Ref( (HHV( H, prds3) + LLV(L, prds3))/2, -prds2)+(C*0.003);

STPL=(C+sp1+sp2)/3;
Plot (STPL,"STPL",ParamColor("STPL", colorBlack), styleThick);

SetChartOptions( 0, chartShowDates | chartShowArrows | chartLogarithmic | chartWrapTitle );
_N( Title = StrFormat( "{{NAME}} - " + SectorID( 1 ) + " - {{INTERVAL}} {{DATE}} Open %g, Hi %g, Lo %g, Close %g (%.1f%%) Vol " + WriteVal( V, 1.0 ) + " {{VALUES}}", O, H, L, C, SelectedValue( ROC( C, 1 ) ) ) );
Plot( C, "Close", colorBlack, styleCandle | styleNoTitle | ParamStyle( "Style" ) | GetPriceStyle() );

if ( ParamToggle( "Tooltip shows", "All Values|Only Prices" ) )
{
ToolTip = StrFormat( "Open: %g\nHigh: %g\nLow: %g\nClose: %g (%.1f%%)\nVolume: " + NumToStr( V, 1 ), O, H, L, C, SelectedValue( ROC( C, 1 ) ) );
}
Buy = Cross(Close,IIf(sp1>sp2,sp1,sp2));
Sell = Cross(IIf(sp1Sp2,ParamColor("Span1 Color", ColorRGB(0,255,0)),ParamColor("Span2 Color",ColorRGB(255,104,32))),styleCloud);
PlotShapes(IIf(Buy, shapeSquare, shapeNone),colorGreen, 0, L, Offset=-40);
PlotShapes(IIf(Buy, shapeSquare, shapeNone),colorLime, 0,L, Offset=-50);
PlotShapes(IIf(Buy, shapeUpArrow, shapeNone),colorWhite, 0,L, Offset=-45);
PlotShapes(IIf(Sell, shapeSquare, shapeNone),colorRed, 0, H, Offset=40);
PlotShapes(IIf(Sell, shapeSquare, shapeNone),colorOrange, 0,H, Offset=50);
PlotShapes(IIf(Sell, shapeDownArrow, shapeNone),colorWhite, 0,H, Offset=-45);

if( Status("action") == actionIndicator )
(
Title = EncodeColor(colorWhite)+ "NICK MA Swing System" + " - " + Name() + " - " + EncodeColor(colorRed)+ Interval(2) + EncodeColor(colorWhite) +
" - " + Date() +" - "+"\n" +EncodeColor(colorRed) +"Op-"+O+" "+"Hi-"+H+" "+"Lo-"+L+" "+
"Cl-"+C+" "+ "Vol= "+ WriteVal(V)+"\n"+
EncodeColor(colorLime)+
WriteIf (Buy , " GO LONG / Reverse Signal at "+C+" ","")+
WriteIf (Sell , " EXIT LONG / Reverse Signal at "+C+" ","")+"\n");

_SECTION_END();

### Classic Seven Samurai System(Indicator)

Well, its tukai again. I will represent you a very useful Trading Style for novice like me.

Trading Style: 7 Essential Indicators You Need
When developing your own trading style, there is a danger in becoming fascinated with indicators.

The newer trader experiments with one, finds it doesn’t work so well, then switches to another, then another, etc.

The list below highlights 7 key indicators that can be woven into your trading style. You may not need to go any further than this. Stick with the 7, practice them, get to know them inside out, and get the satisfaction of developing your own successful trading style.

Indicator 1
Candlesticks –watch for a hammer, doji, head and shoulders pattern, 1-2-3 formation, double top or bottom.

Indicator 2
Trendlines –draw common sense trendlines across the highs in a downtrend or lows in an uptrend. Watch for price to break the trendline and come back and test it.

Indicator 3
MACD –Watch for a difference between the highs and lows of MACD and price. When there is divergence watch closely for a good entry point once price has shifted in the direction of the divergence.

Indicator 4
200 EMA –this indicator is an all time favorite for traders across the TA world. take note whether price is above or below the 200 EMA to give you the sense of price direction.

Indicator 5
Pivot points –take note of previous support and resistance lines as price will come back to retest these levels time and time again.

Indicator 6
Fibonacci –learn how to use this tool well and take particular note of the 50 and 62 retracement levels, especially when they coincide with trendlines or previous support/resistance.

Indicator 7
Price & Volume itself –let price prove to you where it wants to go by setting entry orders rather than market orders when entering a trade. By setting an entry order, price has to reach the target and volume confirms you specify before pulling you into the trade.