Step-by-Step Guide to Mastering Market Language and Stock Selection

1. Introduction to Market Language

Before diving into stock selection, it is crucial to understand the language of the market. The market communicates through its movements and patterns, and learning how to interpret this language will give you a significant trading edge.

Understanding Flat Market Openings

A flat market opening is one where the market opens within a narrow range of 0.25% to 0.35% above or below the previous day’s close. It is neither a strong gap-up nor a gap-down.

Key Points to Remember:

• The most nervous traders during a flat open are those holding BTST (Buy Today, Sell Tomorrow) positions, expecting a gap-up.

• Fear often drives sellers in a flat market.

• Action Plan: Wait for the first 15 minutes after the market opens. Observe the market behavior closely.

• If the low breaks between 9:30 AM and 9:45 AM, prepare for further downside movement. This understanding should influence your stock selection.

2. Language of the Media

The media has its own way of interpreting the market, often influenced by analysts on financial news channels.

What to Do:

1. Listen to analysts and note their predictions. If they expect a market rally, identify the stocks they are bullish on.

2. Reverse Strategy: Observe the immediate reaction of the recommended stocks. If they spike within the first 10 minutes, consider a reverse trade (short sell or exit long positions) after setting a stop-loss of 1.5% to 2% points.

"Follow the language of media, but trust your strategy. The real opportunity often lies in trading against the herd mentality."

Example: If an analyst recommends a stock expected to rise, wait for a sharp move. After 10 minutes, if the price shows signs of reversal, take a position accordingly.

3. Language of Traders

Traders create patterns through repeated actions. Understanding how they react to support and resistance is essential.

Support and Resistance Explained:

• If a stock repeatedly touches ₹1,000 and pulls back, ₹1,000 is a resistance.

• If it breaks above ₹1,000 and holds, that level becomes support.

Key Strategy:

• If a stock’s price stabilizes above a key level, buy when it retraces to that level.

• Conversely, if a support level breaks and the stock pulls back to it, short sell from there.

"Your support is my resistance, and your resistance is my support. This mindset helps avoid traps."

Breakout Psychology:

• Many traders chase breakouts after resistance breaks. However, real opportunities lie in breakouts that fail early (at 20%) rather than those that sustain to 80% before reversal.

4. The Right Method for Stock Selection

Stock selection comes after mastering market language. Here’s a detailed process to follow:

Method 1: Based on Previous Day’s Movement

1. Create a list of stocks that moved +5% or -5% the previous day.

2. Check if these stocks have shown consistent movement over the last 2-3 days.

3. On the trading day, observe how these stocks behave at the previous day’s high and low levels:

   • If a stock opens gap-up but falls below the previous day’s high, prepare for a short trade.

   • If a stock opens gap-down but climbs above the previous day’s low, prepare for a long trade.

Method 2: Using NSE OI Spurts Data

1. Go to the NSE OI Spurts page.

2. Check the top gainers and losers.

3. From the list of top 5 gainers and top 5 losers, filter stocks that appear on the OI Spurt list.

4. Focus on:

   • Stocks with significant OI increase at 9:30 AM. If OI rises to 7, take note.

   • If no strong OI signal is seen by 9:30 AM, wait until 9:45 AM and look for stocks with OI rising to 4.

Important: A rise in OI does not always mean price will increase. OI can increase on the short side too.

Example:

• If two stocks from the gainers’ list show strong OI growth, prepare for a long trade. If one from the losers’ list has high OI, prepare for a short trade.

Entry and Exit Strategy

• Use a stop-loss of 1.5% to 2%.

• Avoid setting a predefined target.

• Trailing Stop Strategy:

  • On a 1-minute chart, use a 13-period moving average.

  • Exit if a candle closes below this average.

  • On a daily chart, use a two-candle rule for exits.

Secret Tip

Avoid stocks that:

• Have been running up or down for the last 2-3 days but show OI spurts on the third or fourth day. This often indicates a trap.

5. Short Covering and Data Interpretation

Short covering presents another opportunity hidden in data. Understanding this requires monitoring the OI decrease along with price increase. Look for reversal signs and capture moves in the opposite direction.