Franklin Ochoa has beautifully described how a market behaves in a day. This should be in the mind of every trader.
Here are few vital points taken from his book, secrets of a pivot boss. The concept has been nativized to the present scenario for better understanding.
Never predict markets
A successful trader will first understand the trend. Never predict the market before. A wise trader always fly with the flow. Predicting a market these days is foolish.
Every successful trader initially understands the trend of the market before he dives in. People usually lose money when they do not know what they are doing in the stock market. It is not a gambling for sure. A person with pure foresight and timely wisdom will always be rewarded by the stock market.
Hence many traders advise to be away for the first few minutes of stock market opening.
Remember the first few sessions of stock market is only for SCALPERS. Only for the experienced scalpers.
If you are lucky, you may win in this race, but most people fail to do so. My advice is to stay away from stock market at least for 10:00 Am.
It is better to be patient and observe the trend in the first few hours of stock market.
The initial balance
In most of the cases the markets set its base and target in the first few sessions of the market. The initial momentum obtained in the price is considered as initial balance of the stock market.
There are many faces of stock market which are linked with this initial balance. In the Indian context we can consider the initial balance as the time the market takes to move between 9:15 am to 10:00 am (it can change according to individual’s perspective).
The initial balance should be considered as the reference point and predict future moves based on trend. This is what a successful trader will do.
Hence the initial balance decides the day trend in most scenarios. There are 2 main concepts / possibilities related to initial balance.
- Either the initial balance can be narrow
- Or the initial balance can be wide.
When the market moves out of the initial balance, the upper and lower limit of initial balance becomes support and resistance for the next moves respectively.
What happens if the initial balance is narrow?
Narrow initial balance can move the market towards big trends. Yes! In case of a narrow initial balance, the market can trend either upwards or downwards.
The psychology behind it is simple. Traders at the time of market opening are in a state of dilemma as they do not have clear direction. Hence the market usually fights in a narrow zone for a specific period.
But as the time passes, traders become more and more aggressive and finally one side wins the battle. It means either the initiative buyers (who initiate huge buying and make the market to go up), or the initiative sellers (Who initiate huge selling or bring the market down) will win the battle. Now the market becomes one sided.
The trend continues until a strong support or resistance comes over it.
What happens when the initial balance is wide?
When the initial balance is wide, the market can behave in 3 ways
- Range bound
- Side ways
- Break out
When the initial balance is wide, the market may set its limits to a narrow range and may trade with it that limits. Usually, this type of market is inactive and will not be run by initiative traders.
In simple words, these are the days when initiative buyers and sellers do not participate. This type of market is usually seen before a huge rally or trend.
The direction of market will be clear but is strictly range bound. That means we can see that the market is likely to move upward or downward, but not today.
Sideways market is different from the range bound market, where the range is much wider is sideways.
Moreover, the initiative buyers and sellers play active role in here, whereas in range bound market we will not see them. The initiative buyers and sellers move the market within a wider range.
The sideways market usually occurs after a big breakout or trend is completed.
In some scenarios there will be false breakouts where the high and lows of initial balance become the support and resistance also.
As we discussed earlier in a range bound market, the momentum is stickly restricted to a narrow range. Usually, initiative buyers or sellers will not participate in such range bound markets.
But sometimes, a positive or negative news might may cause the initiative buyers or sellers who are inactive to take sides and start trading.
This is when we see such breakouts. Breakout days are mostly news driven and the momentum is unpredictable.
Remember the market always responds more than required in such scenarios.