Trading Rules that matter
- Focus on what the stock is doing and not what it should be doing.
- Buy the stock that is doing the right thing and Avoid the stock that is doing the wrong thing.
- The beauty of the market is the stock that performs keeps doing well while the stock that does not perform remains stuck for a long time till some external forces change the direction of the stock
Case Study: ICICI Bank and HDFC Bank
HDFC Bank Price Action
If you see the chart below and have a Buy Low Sell High mental framework, then the HDFC Bank stock looks appealing. HDFC Bank should do well. But remember what the trading rule says – Focus on what the stock is doing and not what it should be doing.
HDFC Bank stock is down 15% YTD while Nifty is up 1.3%. That’s a serious underperformance. If we follow Rule # 3 as stated above, HDFC Bank stock will continue to underperform. HDFC Bank stock gapped down and is stuck at a lower level. HDFC Bank is doing the wrong thing – Gap down and underperformance. The price action theory says till something changes dramatically for the stock, one should continue to avoid the stock.
ICICI Bank Price Action
ICICI Bank stock is up 8% YTD and is seriously outperforming Nifty. Some might say that the stock has already moved higher and so one should skip it. But the question to ask – Is the stock doing the right thing? The answer is Yes.
When the whole market was obsessed with small caps, ICICI Bank stock did not fall below 920 and built a bullish base (1-2-3). Then in Dec, it Gapped up – point 4 (doing the right thing) and then took support at 100 dma (Point 5) and slowly has inched higher. Despite massive correction, the stock is still trading near highs. It means it is in strong hands. Such behavior usually attracts buying from institutions.
Purely following Price Action – we can say the following
- ICICI Bank is set to outperform Nifty
- HDFC Bank would underperform Nifty
If one has to add stock, one would be better off buying ICICI Bank on a relative basis
Source: Chartalert.com
Learn the Science of Stock Price Action
Fundamentals don’t drive stock prices.
How people perceive those fundamentals drives stock prices.
As a market participant/trader, keep an eye on how the market views the fundamentals than being obsessed with your own version of fundamentals. It means looking at the price action and it tells you without bias what the market thinks about the stock. Once you read the price action, go and find the reason why the market has such a view on the stock, and be aligned with it.
This is the level one mind training every individual requires to be in sync with market thinking. This is the real fundamental of Investing. I call it the Science of Stock Price Action
If price action fascinates you – then Science of Stock Price Action is a great place to start. I only cover the Indian stock market here.
Disclaimer – The state of the market notes is Deepak’s perspective on the market. The column is purely for educational purposes. Nothing contained herein is a solicitation to trade or a recommendation of a specific trade. By reading this publication you agree to make no trade relying in whole or in part on the comments of the writers