Update for 24th June 2011

 A Recovery is On After the Inside Day Candles !

Contrary to the expectations of a resumption of the downtrend or even a test of the panic low, it seems that Nifty futures contract has started a recovery. Though this author personally didn't believe that the contract would make the recovery, he was forced to comment in the previous post that the formation of two inside day candles in a row might be indicating even a reversal and therefore, the immediate next direction of  the contracts had become highly uncertain. That is why the inside day trading setup was described in the previous post. Now, the recovery is on. As far as the Momentum Signal system is concerned, the last sell signal lead to a maximum favorable excursion ( MFE ) of  319 points in the Nifty futures.  Even if the maximum recommended trailing stop of 2.5 % from the low after the trade was followed, the trade might have lead to profit of  188 points.

  Nifty Futures - Daily Chart    

Update for 23rd June 2011

  Two Inside Day Candles In a Row, What Now ?

As expected, Nifty futures traded sideways for the entire trading day on Wednesday, in spite of recovery in the international markets. The sideways trading observed during the last two trading days has lead to the formation of two inside day candles in the daily chart of Nifty futures. An inside candle after a fast move is an indication of indecision by the market participants. And sometimes these inside day candles can also indicate reversals and are used as trading setups. Here is a reproduction of an old post which described the inside day candle trading set up. 

How to Trade an Inside Day Candle

• As this author feels that he is obliged to the readers to at least add a small note on how to  trade an inside day candle, here it is !

            Inside Day Candle- Chart 1

• The last candles complete range is covered by the immediately preceding candle. Therefore, the last candle is called an inside candle. Please also note that the range of the inside day candle is very small in comparison with the previous candles.
• In order to trade the inside day candle, place a stop buy order above the high of the candle. 
•                                                                                                                                                                                    Inside Day Candle- Chart 2

• Similarly, place another stop sell order at the bottom of the candle.
• When one of the orders gets executed, the other order becomes the real stop loss order.
• Manage the trade by adjusting the stop loss or exit  near a known support or resistance.
• Not every trade may lead to profits and on certain days both orders may get executed leading to losses.

    Nifty Futures - Daily Chart   

Formation of the inside day candles makes the immediate next direction of the Nifty contracts uncertain. Though the medium term trend is downwards, especially after the break of long term support line, markets can even make surprise rallies and test the upper resistances once more before resuming the down trend. However, it seems that the chances of the Nifty futures resuming the downtrend outweighs the start of significant recovery.