In today’s special blog, we will focus on the importance of conducting our own analysis while trading in the Bank Nifty. Oftentimes, traders rely on others’ analyses or predictions, which can sometimes be accurate but also lead to wrong decisions. Therefore, it is crucial for traders to develop their own analysis skills and understand the concept behind it.
To help us with this topic, we have an expert with 15 years of experience in the stock market, Mr. Umesh Sharma. He will share his invaluable experience to guide us in learning chart analysis, predicting market moves, and analyzing important levels.
It’s important to note that the content of this blog transcends time. Even if you’re reading it a year from now, the principles and parameters discussed here will remain relevant. The goal is to empower you to perform your own analysis and make informed decisions.
Today, our focus will be on multi-time frame analysis. This approach involves analyzing multiple time frames, starting with the daily chart, to identify potential trading opportunities. Additionally, we will delve into the 4-hourly chart and even the 15-minute chart for more precise entry and exit points.
By incorporating multi-time frame analysis, we can better align our trading decisions with the overall trend while taking advantage of shorter-term opportunities. This approach also helps us manage risk effectively by setting appropriate stop-loss levels.
In our analysis of the Nifty chart on the daily time frame, we first focused on the importance of trendlines. As we observed an uptrend in the market, we plotted a trendline by connecting the lows of the candles. By analyzing the trendline, we could identify potential entry points for short positions when it broke.
When taking a short position based on a trendline breakdown, it is important to determine the appropriate stop loss level. In this case, the stop loss can be set at the high of the candle that confirmed the breakdown.
It’s worth noting that trendlines are not limited to uptrends; they can also be applied in downtrends. When analyzing a downtrend, we connect the highs of the candles and look for opportunities to enter short positions when the trendline is broken. The stop loss for such trades can be set at the low of the confirming candle.
Moving on to multi-time frame analysis, we shifted our focus to the 4-hourly chart. Here, we observed a bearish engulfing candlestick pattern, indicating a potential reversal. Additionally, we identified a double top pattern, denoted as DT, which suggests a bearish bias. Furthermore, we noticed negative divergence, where the market was making higher highs while the corresponding indicators were showing lower highs. This divergence hinted at a possible downward move.
When studying divergences, it is often helpful to minimize the chart to better visualize the patterns and indicators.
In addition to trendlines, patterns and candlestick analysis play a crucial role in trading. By learning different patterns, traders can identify potential market reversals, continuation patterns, or trend confirmations. Candlestick patterns, such as bearish engulfing patterns, can provide valuable insights into market sentiment and potential shifts in direction.
Understanding and recognizing these patterns can greatly enhance one’s ability to predict market moves and make informed trading decisions.
The double top pattern is a common chart pattern that indicates a potential reversal in an uptrend. It occurs when the market reaches a resistance level twice, fails to break through, and subsequently starts to decline. To effectively trade the double top pattern, traders need to consider a few key factors.
Firstly, it is important to identify the resistance level. In the case of a double top, the market reaches a high point, such as 201. Traders may initially believe that the resistance has been broken and consider taking a long position. However, it is crucial to exercise caution and wait for confirmation.
One important aspect to check is divergence. Divergence refers to the disparity between the price action and an indicator, such as the Moving Average Convergence Divergence (MACD). In the example provided, the high of the bearish candle is 18881.45, while the high of the subsequent candle is 18886. This indicates that the price has made a higher high, but the MACD bars are lower. This negative divergence serves as a warning sign that the market may experience a decline.
While divergence alone can provide an indication of a potential market reversal, it is often advisable to seek confirmation from other factors. In the case of the double top pattern, traders can look for a bearish engulfing candlestick pattern. This pattern occurs when a bearish candle fully engulfs the previous bullish candle, suggesting a shift in market sentiment.
By combining these confirmations, traders can make more informed trading decisions. The double top pattern serves as the initial confirmation, followed by the negative divergence as a secondary confirmation, and finally, the bearish engulfing pattern as a third confirmation. Similar to asking for directions and receiving multiple confirmations before proceeding, traders can gain more confidence in their trades with multiple signals supporting their decision.
After confirming the double top pattern and bearish engulfing pattern on the daily and 4-hourly charts, we now shift our focus to the 15-minute chart for more precise trading analysis. In this smaller time frame, we aim to identify key support and resistance levels.
When examining the 15-minute chart, we locate a support area or demand zone where the market has previously shown a bounce. In this example, the support area is identified at 18640. It’s essential to monitor this level closely.
Once we have established the support area, we observe the price action. If the market breaks below the support area with a penetrating candle, it indicates a potential opportunity to enter a sell position. It’s crucial to note that traders working with daily charts should wait for confirmation from the subsequent candle before executing a trade.
To manage risk effectively, we must determine a suitable stop loss level. In this case, we can place the stop loss at the high of the penetrating candle. Stop loss is a critical component of trading to protect against adverse price movements.
Moreover, it is also important to look for any reversal candlestick patterns that may form within the support area. Candlestick patterns like hammers, morning stars, piercing patterns, bullish engulfing patterns, bullish haramis, and inverted hammers can provide additional confirmation for potential reversals.
Learning and understanding these candlestick patterns can enhance our ability to identify favorable trade setups and make well-informed trading decisions.
When analyzing the 15-minute chart, it’s important to look for reversal patterns in the market. Some traders prefer buying in the support area, while others opt to sell in the support area. However, it’s crucial to adopt an opportunistic approach rather than being biased towards buying or selling.
To prepare for the upcoming market session, plot the 15-minute chart and identify key levels. For example, let’s assume the support level is at 18,650. If a bearish candle forms that breaks below this support level, wait for the next 15 minutes to see if a breakdown occurs. After 9:30 am, when the market is more settled, you can consider taking a trade.
It’s worth noting that it’s generally advisable to wait for the first 15 minutes of the market open to pass before making trading decisions. This allows for more clarity in price action and reduces the risk associated with volatile opening movements.
Suppose the breakdown occurs and you decide to sell. Now, you need to set a target. Determine the resistance and support levels. Let’s assume the resistance is at 18,750 and the support is at 18,650, creating a difference of 100 points. Your target should be within the range of 18,550 to 18,580. However, remember that hitting the target is not guaranteed, and the market may reverse.
To secure profits, it’s advisable to book at least the first target between 18,570 and 18,580 when the market starts to reverse.
In another scenario, the market may not open down but rather with a gap. If there is a substantial gap and the market breaks above 18,750, you can consider buying at the high of the bullish candle. Alternatively, if the previous bullish candle breaks at this level, and you observe reversal candlestick patterns such as the Morningstar or Hammer, you can buy from the bottom.
Now let’s shift our focus to Bank Nifty and analyze its levels. The crucial support level for Bank Nifty is identified at 43,520. If the market breaks below this support level with a bearish candle, it presents a potential buying opportunity.
On a 15-minute chart, when the support level breaks, traders can consider entering a buy position when a penetrated candle forms. This penetrated candle can be bearish, with its opening and closing at the lower end of the candle.
The target for this trade would be the resistance level of 43,850, with the support level set at 43,500. The difference between these levels is 300 points, making it the potential profit target.
In an alternative scenario, the market may not necessarily open with a bearish gap. It could open bearish and then show signs of reversal. To capture this reversal, traders should observe the support area, which acts as a demand zone. If a bullish candlestick pattern forms within this area, traders can consider buying when a penetrated candle with a high break occurs.
Moving on to the analysis of Fin Nifty, we examine its 15-minute chart. The resistance level is around 19,620, while the support level is around 19,490, with a difference of approximately 130 points.
If the market begins with a bearish candle and breaks below the low of a penetrated candle, it suggests a potential sell position. The stop loss for this trade can be set at the high of the penetrated candle.
Similar to Bank Nifty, if traders observe a reversal candlestick pattern within the support area, they can consider reversing their position. However, it is important to have a solid understanding of candlestick patterns to effectively execute such trades.
The profit target for a reversal trade in Fin Nifty would depend on the specific candlestick pattern and market dynamics.