Is it okay to trade against Market Sentiment?

So, a couple of weeks back, I made a video about how to rate market sentiments, using advances and declines. And it was a good video. You guys liked it. You guys gave us a lot of good feedback and everything was fine. But today I felt that a very important point regarding the market sentiment was not addressed in that video.

And since half knowledge is even worse than ignorance. I want you guys to have the complete context, the complete framework to analyze the market sentiment, and I’m just going to keep it short and sweet. There are no animations. There are no fancy slides. I’m just going to take a real-life example from today to illustrate that very important point.

So, without any further ado, let me get to the point. So, this morning when I was analyzing the charts with my team, I mentioned that this market is extremely bullish. This market has broken out of a three-month range and it isn’t the expansion mode and ready to move higher. Right. So that is something that we do religiously daily.

We brainstorm, we understand what the market context is. We understand the market sentiment. Come up with a game plan for the day, for the week, and the month. But what happened within the first hour of the market opening is that I initiated a short trade and this is a trade that I took now, when I took the trade, one of my team members brought a very interesting point that why are you taking a trade against the market sentiment?

Because you made that video. You were explaining that very clearly that day, that we always need to trade with the market sentiment. And you yourself have said several times that at the beginning of your career, that you have lost a lot of money trading against the market sentiment. So, why are you going against the market sentiment?

And that made me realize that very important point that I failed to mention in that video. And what is that point is that the sentiment analysis has to be done in the same timeframe as your trade. And what that means is that if you’re taking a swing trade, for example, or a positional trade for example. You should be looking at the market sentiment at a broader level, right.

So, you should be looking at the FII numbers or the COVID numbers, or the vaccination numbers. Right? So, all those big factors move the market on a higher timeframe. So those are the indicators that help us understand the market sentiment at a broader level. But when you are trading on an intraday timeframe, you cannot take those factors, those big factors that affect the broader market on an intraday level, right?

Those factors will not help you understand the market sentiment on an intraday basis. Right? So, the analysis of the market sentiment has to be in the same timeframe as your trade. So, let’s take a look at a daily chart of nifty. And you can very clearly see that nifty has broken out of a range of the past three to four months.

And now it is making all-time highs. So, the sentiment in the market at a broader level, at the daily level, if you look at the daily charts, they are very positive. So, what happens is when we are listening to the news, when we are looking at these charts, we clearly get the sense that this is a new, fresh expansion in this market, right.

This is a new phase of a bull market. So, everything is going to be going up. But if you bring that mindset on an intraday basis, what do you think would have happened today? Let’s so let’s take a look at the intraday chart. So, this is the intraday chart of nifty. And you can see clearly that people who got too excited today with this little move that happened, basically got trapped big time.

Right? So, the point that I’m trying to make here is that the sentiment that the market has at a broader level cannot be used for taking intraday trades. And if you do, then you will always be at risk of getting trapped. So, I took a short position on bank nifty at 953, that’s when I got the signal. So, I sold this option at 737 rupees.

So let me just show you that I on bank nifty’s chart, that will actually make more sense. So, 953 is somewhere around here. So, I shorted bank nifty, somewhere around here I covered my position. So even though this market is extremely bullish, I was not hesitant to take a short position because bullish market sentiment is applicable on a daily chart.

It’s not applicable on an intraday chart. On an intraday chart, if you take a look at the advances and declines, you can clearly see what is going on, right? So, this is the advanced decline chart for today. You can see that clearly right from the get-go this market started getting weaker and weaker and weaker and throughout the day, the bearish sentiment continued.

So that is exactly the reason why after taking that first trade, the second trade, the two long positions that I tried, I did not like to stay in that trade for a very long time. So, I basically did scalping. So, the first trade was, of course here, I took a short trade here. This is the trade where I was comfortable with this, the trade where I like to stick around.

So, this date worked out perfectly fine. Then I took one long trade here, with a very little bump. I made some money here and then the second long trade was somewhere around here. That was again, a very quick scalp. So, on an intraday basis, once I understood that the sentiments are weak, I was much more comfortable staying in a short position for a long amount of time as compared to the long positions. Right.

So, the long positions here, as, as you can see here, I entered at 10:22. And I exited at 10:24. So, this is a scalp, right? And the second long position was at 12:32 and then I exited it at 12: 38. So about like five minutes. So, these are quick scalps that made me some money, right? So, the point that I’m trying to make is that on an intraday basis, the sentiments can change.

Sometimes the sentiments can change from the first half, the second half. Sometimes the sentiments can keep changing throughout the day as well. So, whatever happens, to be the sentiment at a broader level on the daily charts that may not necessarily translate on an intraday basis. That’s number one.

Number two, whatever happens, to be the sentiment on an intraday basis. I’m comfortable staying in that position for a long amount of time and it can be half an hour. It can be, you know, a couple of hours as well, but if I’m not very comfortable staying in a trade, I’m not very sure what exactly is the sentiment at that point of time, I would rather take quick scalps, make some quick money and come out. Right.

So that is how dynamic intraday trading is. But does that mean that I can take a short position on bank nifty and I can carry it back home for tomorrow or the day after? Absolutely not. Absolutely not. I will not be in this kind of bullish sentiment market daily at a broader level. I don’t want to be taking a short position home because I don’t know what kind of a gap-up can happen tomorrow.

So, this is the key point, guys that I’m trying to explain here, you need to pay attention to the sentiment in the context of the timeframe, right? So whatever timeframe that you’re trading, you have to look at this sentiment in that particular timeframe. So, if you’re looking for a swing trade, you have to look at the sentiments on a daily timeframe.

You have to look at the FII data you’re to look at the open interest analysis. So, all those factors help us decide swing trades. And we should be paying attention to that, but you cannot extrapolate that analysis for an intraday trade because as you have seen, and you can even see right now, the way the market has moved today, this is not the kind of a market which you can trade based on one static view of the market sentiment. Right.

The market went up, it came down it. Then again, went up a little bit, came down, went up, then came down, then it’s going back up again. You cannot take the positives and from the daily charts, and then you can apply that in the intraday context. So, the bottom-line guys here is again the same that the market sentiment analysis has to be done in the same time frame as you’re trading.

Thank you for watching and hope you learned something new.

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