How rule-based strategies can help you from FOMO, revenge trading

However, here lies a notable predicament. As humans, we tend to have behavioural biases and be susceptible to emotional inclinations. This more often than not clouds our judgments, leading to poor trading decisions.

For example, how many times have we traded in the fear of missing out (FOMO) or traded the same share in order to take revenge and make a profit from the same? Don’t we sell a stock when we see handsome gains and then regret it the moment the scrip subsequently touches a new high?

If your answer to the above is yes, what can you do?

The solution is Rule-based trading. This is a way to overcome these emotional and behavioural biases. Rule-based trading is a mechanism where you have a written set of rules for everything from start to end. Traders precisely define the rules regarding which stocks to enter, when to enter, how much money will be placed on it, and when they will exit. These rules could be based on technical analysis, fundamental analysis, or a combination of both. These conditions should be simple enough that they can easily be executable by anyone.

Once the pre-defined rules for entry and exit are set, the trader does not have to do anything. If the trade signal occurs, you execute the trade. You place the stop loss and targets simultaneously as per the pre-defined rules and conditions. After the initiation of the trade, the trader just has to wait until the target has been achieved or the stop loss is hit.

Rule-based trading is not just for intraday traders or short-term traders. Regardless of whether you are an intraday or short-term trader or a long-term investor, a rule-based strategy could help you to achieve your goals without heartburn.The key is to identify the appropriate set of rules and conditions which would yield good returns for you. The selection of these rule-based strategies will depend greatly on your experience and temperament.

A smart investor needs to clearly understand the risks and challenges before beginning trading based on the rules. It is important to back-test your strategy before you actually start to trade.

Due to the inherent efficiency of markets, discovering a sustained trading advantage can be a challenging endeavour. Thus, by trading based on pre-defined rules, traders are more likely to Ace the Index.

Technical Analysis

ET CONTRIBUTORS

The frontline index started the week with a bullish candle and made a high of 18,459 levels, post that the index continued to drift lower throughout the week. Prices on the daily chart formed a bearish engulfing candle stick pattern on the 16th of May and prices remained below the low of the pattern for the rest of the week.

The divergence was spotted between the price and the momentum oscillator RSI (14) where prices made a new intermediate high and the oscillator found resistance at the overbought zone along with negative divergence. The index eventually closed 111 points lower at 18,203 levels with a 0.61% fall on the weekly closing basis.

The index has retraced by 38.20% Fibonacci level from the low of 17,553 to the high of 18,458 at 18,115 levels. The index is approaching closer to its 21–day exponential moving average on the daily chart which is placed at 18,080 levels.

Technically, the view on the broader time frame remains bullish but due to an overbought technical structure on the daily chart, profit booking at the current level cannot be ruled out. For bulls, 18,450-18,500 would act as immediate resistance zones, while 18,000-17,900 would act as key support zones. Fresh buying momentum could be seen only above the level of 18,450.