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Hi again! This lesson is going to bring all that we have learnt into a workable trading system. Every epitome of human endeavour had a strong plan behind it. A plan which people followed day in and day out to reach their goals. We all know the story of ...

Hi again! This lesson is going to bring all that we have learnt into a workable trading system. Every epitome of human endeavour had a strong plan behind it. A plan which people followed day in and day out to reach their goals. We all know the story of Edison, ISRO’s Mangalyan, Apple products and Amul – one of the largest milk producers in the world. They all have one thing in common, a relentless approach to finding what works and once they found it, they followed the system incessantly to achieve success. The stock market is no different; it also has to have a business plan, a Trading System.

A Trading System is made up of a predetermined:
1) Entry point (Long or Short)
2) Stoploss
3) Profit taking point
4) Position Sizing
The system must be tested thoroughly over many years to check for draw-downs, hit rate, risk reward ratios and other performance parameters. We will not be discussing these advanced concepts since this is an introductory course.

This system is a trend following system and, as you may have guessed, uses swing highs and lows to enter and exit markets. Make sure you are crystal clear on Swing Highs and Swing Lows we covered in the previous lesson.

This is the setup, it’s extremely simple –
First you must identify a swing high. Remember a swing high is just a resistance point. Prices went up because of demand and at some point the demand diminished or more supply came in and pushed prices down. That point is your swing high i.e. resistance. Now, wouldn’t it be significant if the markets rose again and went past that resistance point? That means there is renewed demand, right? THIS is our entry point for longs, when we cross a swing high, that is where we buy.

When the stock crosses resistance, it usually makes a significant move up. You know by now that we are merely following the big money, crossing a swing high means there is good reason for the stock to go up. Maybe good earnings, great macro policy or better banking rules – whatever the reason may be, big money is behind the demand and we can see the results in front of us.
On seeing more stocks, we may notice that some trades don’t do so well.

Now, you remember the coin flip example in Lesson 1 where we stated that if the odds are in your favour then you can be profitable? But there is one issue with stocks, if you are 100% invested in a stock and it crashes, you could lose all your previous profits. WE, however, have a system to save us against such situations – called the Stoploss and Position Sizing.

Lets start with the Stoploss. Basically this is the point at which you will exit if the trade goes against you. What would be a logical place for this? We have found that if support breaks, that is the last straw. Therefore, the latest swing low is the initial stoploss; as new swing lows form, you raise the stoploss to a higher level. Remember, the SL order is automatic, so there is an elimination of guesswork and fear – you simply follow the plan and place the order and you will be profitable.

Position Sizing
Now that we know how to buy and exit, the question arises – how many shares to buy? To the layman, it may seem pretty straight forward – if you have Rs.1 Lakh, then simply invest that amount when a Swing High breaks, but things are rarely so simple.

You see, you cannot risk more than 1%-1.5% per trade of your entire capital. Therefore, if you have Rs.1 Lakh in your account, you cannot risk more than Rs 1,000 – Rs.1,500 per trade. Notice that this has nothing to do with ‘how much’ to invest. That is irrelevant. What matters the most is how much you stand to lose in a trade – once we have that, we can figure out how much you can make in a profitable trade.

Calculating this is easy. Let’s assume your capital is Rs 5 Lakhs, 1% of that is Rs 5,000 – this is the maximum amount we can risk on any trade.
Now in this trade, here is the entry and this is the stoploss – this is a difference of 15 points. 15 points is the risk in the trade.
Rs 5,000 divided by 15 points = 333 shares
As you can see, if you entered a long position at 215 and the trade turned sour and your prices dropped to 195 – your stoploss at 200 would exit your position. That is a loss of Rs 5,000 plus brokerage. That means YOU are always in control, the profits and losses are in your hands.

The next trade is interesting, we have a difference of 11 points between entry and stoploss – that means Rs. 5,000 / 11 = 450 shares. We got profitably stopped out and cleaned a 53 point profit. If we removed 1.5 points for brokerage, taxes and slippage then that is a profit of Rs. 22,900.
We have a lot of practise charts in the course materials and Quiz.

So there you have it – you just created your first trading system using technical analysis. Congratulations, give yourself a little pat on the back! Believe it or not, what you just learned in these 5 Lessons forms the basic tenets of a system of trading, that is, Technical Analysis, something which many so called ‘experts’ fail to grasp. You have learned the fundamentals of this mode of trading.

In future courses, you will learn about the various types of indicators that can be employed to further enhance your trading systems and, of course, generate a higher return on your investments.

Ride your winners, cut your losses. See you, very soon, in another course on Trade Academy. And of course, don’t forget to check out the Course Materials.

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Discussions

Add Your Question
Adrian D 1 year ago

1.

The  charts explanation so good and example is so understanding and this trade academy are technical part so useful to all the customer but i have doubt this is long term but wht about short term and also option market how learn in intraday chart. I will also like you to add in technical(Indicators) part  more functions like MSI, RSI, SMA etc and also how to analysis future and option technical chart…

Ajay Kumar 1 year ago

2.

Dear Prateek sir I consider u my Guruji
I don’t know how to thank u though from my deep heart a big thank u for teaching n guiding me through TA.
I back tested swing high n swing low trading system for 2 months on commodities (MCX) n found it 75 to 85% correct. It was amazing experience.

Further I started trading in commodities from this Monday n got a solid profit of Rs. 15500 in just 2 days. Amazing.
Thank u again. God Bless you sir.

Orpheus G 1 year ago

3.

The technical aspects are explained nicely, i would like to request you to provide more tools for easy and fearless trading. Many peoples lacks knowledge regarding moving average and pivot levels and fibonacci  method so please explain it in details.

Ajay Kumar 1 year ago

4.

Dear Prateek sir,

I forgot to tell one thing that I m using hourly charts to trade on commodities. I have tested it on  daily charts too. Daily chart results are also 75% to 85%.

Thank you

Vikash Shaw 1 year ago

5.

nice vedio parteek sir,

Is this method will be applied on intraday trading or it is only for swing tarder

Prateek Singh
Prateek Singh 1 year ago

It’s important to choose timeframe well, anything above the 60min charts is good. Lower timeframes pose a problem with noise (too much insignificant information).
I would say, stick to the daily or weekly timeframe. Once in profits you may move down to 60mins. However, keep in mind that this is just an introductory method. We will be uploading much more reliable advanced methods soon.

Vikash Shaw 1 year ago

thanks for your suggestion ….can i choose the stock which are on downtrend or i have to find a stock which are on uptrend….. and what chart would you suggest for swing high or low … monthly .. 3Month .. 6month or yealry chart… if i go for daily timeframe…. thanks in advance sir

Prateek Singh
Prateek Singh 1 year ago

Start with 8 months of daily timeframe. Also start backtesting with 2 years of weekly charts data. Just spending time on the charts will teach alot. All the best

Ashton Menezes 11 months ago

6.

Dear Prateek,

as mentioned in the video its a buy call when the just previous swing high has been crossed. My question is what is the use of the swinghighs plotted in the previous months, are they only for deciding the trend, or they may be considered as resistance levels?

Vishwaman Raj 8 months ago

7.

You were using red and green candlesticks in the earlier lessons and now switched to the red and white. Is the white just an alternative for the green ones? Also, you mentioned for a swing low it has to be a red followed by a white, is that always the case? I’m looking at some charts and I some of these look like swing lows but they don’t follow the color code system. In this chart for example, I have marked out what I think are the swing highs and swing lows and set a stop loss at the last swing low. Doesn’t that seem a little too far away for a stop loss? If I want to push it up where would I move it to or should I leave it at that swing low?
Swing Highs – Blue
Swing Lows – Yellow

Learning Stocks!

Please tell me if I’m right?

 

P.S: I love your vids.

Orpheus Almeida 1 year ago

8.

what i like about this part is timely entry and exit from stock and  maintaining a stop loss which is very very important part in stock market and it also helps to minimize the loss.

Gautham Kumaran
Gautham Kumaran 8 months ago

9.

Hi Prateek,

Making this knowledge accessible through Trade Academy is great initiative, Thanks a lot for doing this. Keep up the good work

Arish N 1 year ago

10.

Nicely explained about swing high and low. So its very use to entry and exit from the market in right time with good profit. But still one thing is miss that is indicators if u input the indicators also its very good to get profit.

Tapan Ray 6 months ago

12.

TAPAN RAY

I THINK ONLY UNDERSTANDING CANDLE STICK PARTIALLY WILL NOT HELP MUCH. UNDERSTANDING FUNDAMENTALS IE; FINANCIAL RATIOS (MINIMUM 9), AND DIV YLD, EPS, PROFIT GROWTH RATE LAST 5 YRS, DEBT, ROE ETC ARE MORE IMPORTANT FROM LOGICAL DEMAND SIDE. MAKE LESSON N THAT.

Tapan Ray 6 months ago

13.

The lessons were good. But if one only depends on up & down trend and repeatedly exit & enter in a stock (pay all charges) that is unwise & boring.

I think it is prudent to analyze fundamentals (div yld, % increase in profit, EPS, ROE, ROCE, G-factor, cash flow… etc and different ratios like p/e, Debt/PAT…etc with SMA & EMA for 6 months & 15 days and wait for a low then buy. Exit at point when down sloping EMA intersects down sloping SMA. I generally sell by 1/5 of total holding of a particular share when price surges by 5 %to 10% in consecutive days keeping an on EMA.

But understanding charts is important specially for trading derivatives but fundamentals must not be ignored. I am not at all anxious for small crash after demonetization. By now 40% of my holding are up over what it was on 19th October 16 and remainig shares are now 3% to %% under except Bosch which is under 10%.  Within 1Q 17 they all will be very much green except may be Bosch.

Tapan Ray 5 months ago

14.

Lesion 5. Entry & exit points might be quite frequent. I generally don’ exit at those points u advised to exit. I invest 1/5 of of my initial investment on the share & continue to buy on dips up to 5% devaluation of the script. I do it b’cos my number one preference to buy a share is fundamental analysis of last 3 years such as EPS/BV, ROC, ROE, % growth in profit & sales, Debt/Prof, Div & Div Yld, P/E preferably >18 & <36, OPBIT & PAT etc. My second preference is EMA (5 & 20),MACD, Bollinger, ADX,RSI. I listen read advice on buy & sell from brokers & advisors but never follow (let them profit out of their own knowledge & be billionaire). Lessons were v.good but must be read with knowing fundamentals.I made 51.37% profit (Jan 16 – Dec 16) 51.39% on investment as on 1st Jan 2016. I am only a B.Sc (Physics) with self aquared knowledge in Eco & Fin analysis.

Girish Golvankar 1 year ago

15.

Hi Prateek, thanks alot for the wonderfully explained charts. One question i have is that which charting software beginners should use preferably a free one.

Thanks

Prateek Singh
Prateek Singh 1 year ago

Thank you for your kind words!  You have three options.  Use broker provided charts such as Upstox, use chartink, icharts kr a more advanced platform like traderscokpit.com

IMRAN MUSHTAQ 1 year ago

16.

Dear Prateek, I really like the simple approach that you use to teach for stock trading, it is excellent. Is it possible that we have a section on this site where we/learners can discuss daily moves in stock trends and interpret those based on our understanding of this course…you can guide us right wherever you find we go wrong in our interpretation

Prateek Singh
Prateek Singh 1 year ago

That sounds like a wonderful idea, how do you propose we do this? It can get really confusing when many people post many stock ideas and many of replies are received. I feel a forum is best for that, but if we can find a way to organise it – it would be killer! Thank you for your suggestion

Prateek Singh
Prateek Singh 1 year ago

Imran why don’t you start by posting a chart yourself here? You can upload it on an image uploading site and share the link. As it grows we will devote a dedicated section to it.

IMRAN MUSHTAQ 1 year ago

What if we begin with NIFTY index itself….after all our motto here is to learn and interpret charts. Also major news related to index is readily available….the same may not be true in stock specific case, hence the news based spikes in individual stocks can be avoided to keep it simple. Keen to hear from you on this !!

Tanmoy 1 year ago

17.

Hi Prateek, While explaining the swing high breakout in the very first chart in this video (axis bank daily chart), I can see that the 6th (a bit doubtful as the wick might have crossed the 5th candle by margin)  and 9th candle forms swing high, but you havn’t considered them instead you have considered the 13th/14th as the first swing high in the chart. Please advise  me where am I going wrong? Thanks

Satish Babu
Trade Academy 1 year ago

Hey Tonmoy! Was a bit unwell and missed your question. So you have marked the Swing Highs correctly however in the video I am explaining something different. In the video I said ‘buy the swing high’ then trail your stops to the latest swing lows, trailing means we hold onto the stock for as long as possible until a swing low is broken down. This way we get to stay with the stock for most of the uptrend. This method however requires patience. I personally do not trail because im a very impatient person, I exit at 2 times risk.

Tanmoy 1 year ago

Thank you Prateek for the help, (http://postimg.org/image/dcrfjep6p/), I have marked the swing highs with black arrow, out of which you havn’t considered the first one as swing high

while explaining the swing high breakout in the very first chart in this video (axis bank daily chart) and rest of the arrows are also swing high points but you havn’t considered them. 

Tanmoy 1 year ago

Thank you Prateek for the help, (http://postimg.org/image/dcrfjep6p/), I have marked the swing highs with black arrow, out of which you havn’t considered the first one as swing high while explaining the swing high breakout in the very first chart in this video (axis bank daily chart) and rest of the arrows are also swing high points but you havn’t considered them. 

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About Mentor

Instuctor
Prateek Singh
Started Trading: 2006
His Strategy: Price Action
In love with trading and an entrepreneur at heart, Prateek has many years of trading experience on the stock market. While his forte is in swing trading... Read More
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