[ad_1]
The broader market rally is continuing on Friday as well as the frontline index scaled to a new high of 20,190.9, by 11:49 AM IST. Firstly, talking about the trend, traders should not think of going short on this stupendous rally, especially not without managing their risks properly. Going against the trend is generally not rewarding and can rip an account apart if the losses are not contained.
However, there’s a technique called mean reversion which is based on the premise of going against the trend in an attempt to capture a counter-trend move. For traders looking to fade this rally, they should ideally wait for a bearish signal, and that too once the underlying security becomes overbought. The RSI (daily, 14) is clearly showing the overbought reading of 76.3 on the index as of now, making it overbought as per the standard threshold level of 70.
Image Description: Daily chart of Nifty 50 (spot) with the RSI at the bottom
Image Source: Investing.com
Here’s one neat trick that can help take a low-risk entry into a short trade. If you look at the past 8 sessions (including today), there’s one pattern that is clearly visible, i.e. the index has never breached its previous day’s low. In short, for the 8 consecutive sessions, Nifty 50 has made higher lows.
Keeping this price action in mind, traders now need to wait for this pattern to break. Once the index goes below its previous day’s low, traders can look for short opportunities with a stop loss of the high of that time.
This mean reversion trick significantly reduces the risk as the distance between the previous day’s low and the high will likely be quite less, translating into a lower risk. Unless the previous session’s low is not breached just like the past 8 sessions, no short entry should be attempted as per the price action mentioned above.
Read More: Morning Breakout: Stock Makes a Clear Statement with a 5% Rally!
In case you want to connect with me, reach out on Twitter. My handle is – aayushxkhanna
[ad_2]
Source link
