Converting analysis into a profitable trade

Please read the entire document patiently. It is not an analysis but much more important than that.

On 15th June, 2016 Infosys came out with disappointing results, the stock closed at 1072, 100 points down from the previous close. We did post a near term bearish outlook of this stock two weeks ago. The article was named Infosys.....downward journey. BUT could we convert the analysis into a profitable trade?

If the answer is yes, then we have learnt the art of trading. If not, then what went wrong?

We will discuss what could be the thought process for converting this into a profitable trade.

Technical Analysis is only the first step towards successful trading. There are lots of extraordinary chartists around us, where as good traders are hard to find. Designing a strategy with proper risk management is the key. Because at end of the day "It's not whether you're right or wrong that's important, but how much money you make when you're right and how much you lose when you're wrong." This is probably the most important consideration in trading as said by George Soros, one of the greatest traders of all time.

We will take this example of Infosys and discuss what could be the thought process for converting this into a profitable trade.

We found a bearish head and shoulder formation in daily line chart of Infosys. After completing the formation the stock climbed above the neckline to raise question about this pattern. Stops were triggered 2-3 times. This gave some issues to the people those are sceptical about Technical Analysis.

But a quintessential technical analyst knows that there was a distribution in Infosys, which led to form this bearish pattern. They also know that unless price crosses right shoulder with expanding volume, risk of falling persists.

Moreover, when your own money is at risk, the theory is not sufficient. Professional traders do not rely on Technical Analysis alone. They know a stock like Infosys cannot fall by 8-10%, only because it has formed a head and shoulder. This may sound like a challenge to the theory of Technical Analysis, which assumes everything is reflected in price but things do not happen that way.

Technical Analysis is a subject of probability. Pattern failure is part of the theory. Most of the time, a news triggers the expected movement after completing a pattern.

In this case of Infosys, professional traders were looking for news that may trigger the fall. This was important because Nifty did not show any sign of weakness, though it was rising with diminishing volume. Looking for news in a bearish looking stock was not that necessary in a bear market. But this was the other way around.

So this head and shoulder can meet its target on back of stock specific news. What could be that news in this earning session? Answer was easy; it has to be the quarterly result of Infosys.  

On 15th July 2016, professionals were ready to short Infosys below 1175. The stock was hovering around 1180-1185 just before the results. Immediately after the result, it broke 1175 and fell 100 points within a very short span. Please find below price of Infosys on that particular day.  

	Open	High	Low	Close	Change
Infosys...Cash	1189.50	1189.90	1052	1072.55	-9.67%
Infosys…Future	1190	1193.90	1062.20	1076.85	-9.6%
1140 Put	18.90	83	12.95	66.80	205%
1120 Put	13.90	66.05	9.25	50.05	209%

Lot of money could be made. Unfortunately people focus on Analysis and ignore strategy formulation. In our opinion 80% importance should be given on the strategy formulation and risk management. 20% focus should be paid on Analysis. To be precise without strategy formulation and risk management, it is impossible to be a professional trader.

So now onward, please pay attention towards strategy formulation and risk management. 

Disclaimer - The views here expressed and the charts shared are strictly for educational purpose and not a guideline for buy or sell. The author will not be responsible for any loss, that may occur.