APART FROM THE TRADE SETUP, I HAVE ALSO EXPLAINED THE MOST IMPORTANT ASPECT WHICH IS POSITION SIZING AND RISK MANAGEMENT.
THIS FORMS 80% OF A TRADING STRATEGY AND THE BALANCE 20% IS THE TRADING SETUP. FOLLOWING THIS WILL INCREASE THE PROBABILITY OF SUCCESS IN TRADING BUSINESS.
Higher time frame (weekly).
1) Stock has breached 30 .
2) Stock has breached the previous weekly of 220.
3) Falling RS confirms the beginning of a possible downtrend for this stock.
4) Next weekly is 180.
Intermediate time frame (daily)
1) Stock has breached 200 .
2) Stock has also breached the with good volumes.
3) / RS etc are pointing towards a possible continuation of downtrend.
Lower time frame (hourly) - Trade entry time frame
1) Wait for the price to come to the value zone which is between 20 and 30 .
2) Once the price is into the value zone, next step is to watch out for a trigger to enter a short position. Trigger is a candle which could potentially be identified by confirming 533 crossunder above 50. In all probability that should rest somewhere around 229-230 making it as the ideal entry point for a short trade.
Position sizing and Risk mgmt:
1) Assuming trading capital of Rs 10 lacs.
2) Assuming risk appetite is 5% of trading capital, which is Rs 50,000.
3) NRML Margin required for this trade = Rs 1 lac.
4) Loss willing to accept as per stop loss = (Stop price - Entry price) X Lot size = (225-237)*3500 = Rs 42,000. Since this is less than the risk appetite, ie item 4, this trade is ACCPETABLE.
5) In other words,
Risk appetite = Rs 50,000
Entry point = Rs 225
Stop = Rs 239
Risk = Rs 14 per 1 stock (not 1 lot).
Number of stocks permitted to enter as per risk appetite = 50,000 / 14 = 3571.
standard lot size = 3500
Since lot size is less than no. of stocks permitted to trade, this trade is ACCEPTABLE.
Hence, no. of lots permitted to trade with a capital of Rs 10 lacs is 1.
Exact capital required to trade this setup = Risk X lot size X no. of lots / Risk appetite % = 14 X 3500 X 1 / 5% = Rs 9.8 lacs.
ie, FOR EACH LOT AS PER THE RISK APPETITE OF 5% OF TRADING CAPITAL, RS 9.8 LACS IS REQUIRED AS TRADING CAPITAL.