When a scrip makes lower highs and lower lows; that scrip is considered to be in downtrend. Downtrend simply means LTLB (Lower Top Lower Bottom) Pattern.
There are two evident uses of this pattern –
- If you’re in the scrip which is in downtrend, sell the scrip on the next swing high as shorters tend to short the scrip speculating more downside.
- Short the scrip at the swing high making the preceding swing high stop loss.
On an another note, the higher the timeframe, the less the noise, the more momentum and strength in the trend pattern!
Here goes the weekly chart of Reliance Communications which is in downtrend since October 2016. It recently broke out from the downtrend. Look at the strength of the breakout irrespective of the reason of breaking out!
The first swing high itself got surpassed in the next swing high making a false breakout at the start of the trade but we can avoid that as a good amount of retracement was anyways due when the stock already fell massively straight seven weeks!
Or, if you are unaware about fibonacci retracements, you can just make a re-entry again making the process less complex as shown above.
Here goes another case of Justdial which got stop loss hit at the very second swing. This trade is an emotional disaster. To maintain his discipline the trader saw the stock going to 1250 and the huge profit turned into loss when it went to 1650.
He has to stop out! Rules can’t be broken in a system. But it gave a chance of re-entry again which is way below the stop point making it another emotional pressure that he could have saved the realized loss. At this point of time, many traders wait on their gut feeling about the price to go above their exit price to short again which is completely wrong.
With simultaneous use of lower time frames one can exit the trade in between only to re-enter higher if one has the emotional capability to monitor this scrip maximizing the profit.
Now Justdial is on verge of breakout or false breakout. It would most probably be a false breakout as we don’t see the buy momentum like we saw in Reliance Communications.
On a different note, always respect the higher timeframe more than the lower timeframe. It increases the probability of profit.
If you short a scrip intraday which is on downtrend in both weekly and daily time frame then it is more favourable than a scrip which is in uptrend on weekly and downtrend in daily.