WHAT DO WE UNDERSTAND BY MULTIPLE CONFIRMATIONS? NORMALLY, WHEN WE TRADE WE DO FOCUS ON TRENDS AND SIGNALS. BUT MORE OFTEN THAN NOT, SUCH SIGNALS CAN BE QUITE MISLEADING. THAT IS WHY WE MUST WAIT FOR MULTIPLE CONFIRMATIONS. A SMART TRADER NEVER TRADES A STOCK OR AN INDEX PURELY BASED ON ONE SIGNAL. THEY PROVIDE FOR THE FACT THAT ISOLATED SIGNALS CAN BE MISLEADING AND THEREFORE LOOK FOR MULTIPLE SIGNALS. THESE MULTIPLE CONFIRMATIONS COULD BE TECHNICAL, FUNDAMENTAL OR VOLUME DRIVEN
WHAT ARE THE TYPES OF MULTIPLE CONFIRMATIONS FOR TRADERS?
Let us assume that you are taking a trading call on Reliance industries. You have seen that the stock is consistently touching the short term support and bouncing back. Can you take that as a signal and buy the stock? That is hard to answer as it is always safer to opt for multiple confirmations. Let us go back to the case of the Reliance Trade. There are a variety of multiple confirmations that you can look for. You can look for the volume support and whether the volume build-up is on the up side or the down side. That is normally quite a decisive factor for aggressive traders. Even if you are a short term trader in the market, do not underestimate the power of news flows while taking your trading call. Look at banks post the PNB crisis. Although they are touching supports, the presence of negative news flows is making these stocks consistently weaker.
THE LOGIC BEHIND MULTIPLE CONFIRMATIONS
Why should you look for multiple confirmations? Remember, as a trader your primary job is to worry about protecting your capital and not about making money in trading. The best way to protect your capital is to minimise the risk in trading. The only way you can minimize your risk in trading is to wait for multiple confirmations. But first, when should you not wait for multiple confirmations? If you are trading a trending market purely for the momentum then you need not worry too much about multiple confirmations. Trading the trend is good enough as long as momentum is in your favour. In normal market conditions it is always safer and more advisable to seek multiple confirmations before committing your funds to a trading decision. That is because you are drawing a fine and delicate balance between stop losses and profits. Multiple confirmations help you to put your stop losses and your profit booking targets at more realistic and profitable levels. That is the essential and indisputable logic behind waiting for multiple confirmations before trading.
“I always try to precisely define my risk so that I do not have to really worry about the risk in my trades” – Tony Saliba
6 WAYS TO SEEK MULTIPLE CONFIRMATIONS BEFORE TRADING
- Consistency of support and resistance levels is the best confirmation of trade. However, this is a very basic form of confirmation. When technical supports are being consistently hit it means that the combination of price, volumes and buying conviction is coming together to make the point an ideal buying level or selling level. However, it needs to remember that this is a basic level of confirmation and it needs to be backed up with more such data points and indicators.
- More often than not, volumes are an indisputable trend catcher. Watch out for whether the volumes are showing a sharp rise around the supports and resistances. That is a better confirmation of the price trend than just look at prices and the supports and resistances. When you see clear volume spurts around the supports and the resistances, it is a much clearer indication that the price trend is sustainable.
- At least for stocks that are on the F&O list, the build up in open interest can be a good indicator. Remember, OI build up has different implications. It could imply positions being built up, positions being unwound, it could also short covering and it could be pure hedge positions. However, it is useful as an additional level of trade confirmation.
- What are the big traders in the market doing? Are we seeing a sudden spurt in the bulk deals and block deals in the stock? Are these bulk deals and block deals happening above the CMP or below the CMP? Are we seeing genuine long-only fund interest getting built up in the stock? These are some of the questions that big trades can answer and can give you useful inputs into a trade confirmation.
- As we said earlier, don’t underestimate the power of news flows. Normally, stocks sustain their rise when there is a consistent flow of news flows that is positive. Take any sector like banking or realty. The rally in the last one year was largely backed by positive news flows. On the other hand, IT and pharma have been under pressure because the news flows on these sectors have been largely having a negative impact.
- Volatility can make or break a trading idea. Focus on how the volatility in the stock is trending. A sharp rise in volatility can give you ample trading opportunities but you also need to be wary that stop losses could get triggered. That is the downside of volatility. Also volatile stocks typically tend to trend down. Stocks become more predictable when the volatility falls to lower levels. You need to impute this metrics into your trading.
WAIT FOR MULTIPLE CONFIRMATIONS IF REQUIRED
As a trader never be in a tearing hurry to get into a trade or get out of a trade. Be patient and wait for multiple confirmations. These multiple confirmations can go a long way in reducing your risk in the markets.