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Stocks & Commodities V.

23:3 (64-71): Interview: Trading Diverences With Ashwani Gujral by Jayanthi Gopalakrishnan
INTERVIEW

Intraday Swings In Index Futures

Trading Divergences
With Ashwani Gujral
Ashwani Gujral first got acquainted with technical analysis when he was
studying for his master’s degree in business administration in the US
during the mid-1990s — and since then, there’s been no turning back.
These days, Gujral is an India-based technical analyst, commentator,
author, and trainer who follows both Indian and US markets; he’s also
an active short-term trader and a money manager. He is a frequent
contributor to various US trading magazines and makes regular weekly
appearances on Indian business television channels. Not only that, he
has an Internet presence, as he runs an index futures trading chatroom,
as well as a print presence, since he has just published a book called
How To Make Money Trading Derivatives: An Insider’s Guide. He can
be found at www.ashwanigujral.com.
STOCKS & COMMODITIES Editor Jayanthi Gopalakrishnan con-
ducted the interview with Gujral via instant messaging on the Internet,
starting on January 4, 2005.

ow did you get started in tech- This was one of the many

H nical analysis?
I did my master’s in busi-
ness administration (MBA) in
the US in 1995, which was when I
reasons I chose technical
analysis as my methodology
for analysis. Back in 1995, I
had a hard time just finding
became fascinated by the money man- annual reports, but of course
agement business. The first real gurus I that has changed. And that’s
wanted to emulate were Warren Buffett, how my fascination with
George Soros, and Peter Lynch. charting began, because that
put me on a par with large
Not a bad place to start! investment banks with thou-
Being an engineer and having an MBA sands of analysts making the
in finance certainly helped. As an engi- same forecasts. Basically, one thing led to another,
neer, I was trained to build frameworks and it’s become my life’s mission
and models to solve problems, and this How so? to create successful traders.
helped in developing a quantitative and I learned that I did not have
a logical approach to forecasting stock to decide the trend — all I
price movements. As an MBA, I was had to do was to catch the
trained to understand business models, major part of the move. Meanwhile, Again, like the rest of the financial
so that helped me understand the busi- reforms in Indian capital markets took markets.
ness of companies whose charts I picked place, so like the rest of the financial Earlier, the margin trading and cash
for analysis. This is important because I markets around the world, we totally markets in India were interlinked, and
advise investing in only fundamentally turned away from physical delivery. we had a local financing system called
sound and pedigreed companies, even We had 100% electronic trading in In- BADLA for buying and selling securi-
if it is done on the basis of charts. In dia, followed by the big software boom ties. The problem with that was when
addition, when I returned to India, I all over the world. Then, of course, the people used to build large positions on
found that technical data was much more subsequent bust also affected us. the margin trading side, the cash also
easily available than fundamental data. used to come crashing down. Then in
Copyright (c) Technical Analysis Inc.
Stocks & Commodities V. 23:3 (64-71): Interview: Trading Diverences With Ashwani Gujral by Jayanthi Gopalakrishnan

2001, the Indian market was hit with the fundamentals as far as I was concerned, carry losses home. I also do not carry
Ketan Parikh scam. but then I found out that markets pre- marginal profits home unless there are
dicted fundamentals before they hap- extraordinary circumstances involved,
Can you tell the readers who that is and pened. I couldn’t have such in-depth such as when the market is closing at
what that’s in reference to? knowledge of the markets to analyze highs. Once a position is deep in-the-
Ketan Parikh bought stocks in the them fundamentally, so I moved to tech- money†, I look for consolidations to
forward market — margin trading — nical analysis. I used fundamentals only add. I use patterns like bull and bear
and used the proceeds as they got cred- to the extent of making sure of the flags to add positions. The setups I
ited in his account every evening to company pedigree and used technical discuss here can also be used to add
build huge positions. So he used pro- analysis to buy and sell stocks. positions, as they occur almost once a
ceeds of leverage to build even more This went on till 2001, and once de- day. [Editor’s note: See sidebar, “Set-
leverage. This was because, like in the rivatives were introduced into the mar- ups.”] Once I am in a good position I try
ordinary futures market, in this market ket, that was it. I have not purchased a to push it, on all time frames. But I
you also had mark-to-market, so gains stock since. make sure that every time I add con-
and losses were added or subtracted tracts, they are a fraction of the original
from your account in the evening. In Is that because technicals work better position, so my breakeven does not run
addition, he took loans from coopera- in derivatives? up too close to the current market price.
tive banks and bought stocks on margin, Technical analysis works well with I take a lot of trades but really make
sending his favorite software stocks to anything that can be charted. The charts most of my money on a few big ones.
the stratosphere. I analyze are for equities, but since we
This game was a lot of fun, but when don’t have margin trading, trading fu- Tell us about your trading system us-
the bust happened, it put a few regional tures provides us with better leverage, ing index futures.
stock exchanges and banks under a pay- and hence a better risk/reward. It’s for intraday traders who trade the
ments crisis. Finally, the government I use the index chart and trade its five-minute time frame, but it can be
stepped in and scrapped the entire futures. You can use the index futures used to time entries by longer time
BADLA financing system and introduced chart as well, but here in India, the frames as well. Let’s start with momen-
derivatives. Today, all our derivatives futures keep moving into discount or tum setups, which is what I call them. I
are cash settled. With all these reforms premium, based on the bearishness or believe price follows momentum in gen-
happening, it was natural that trading bullishness. It made sense to use the eral, but whenever the two diverge, you
started taking a professional form. index chart itself. With derivatives, I get buy and sell signals. Now, the buy
have more flexibility: When I am get- setup means the momentum makes a
And then? ting good signals, I trade the futures. low for the day, whereas the price does
As word of mouth grew about my When the markets get choppy, I just sell not. Even though momentum went to
money management and technical analy- a straddle on index options and sit tight. oversold, the price had enough strength
sis activities, I started making appear- If markets are not showing strong trends to hold its lows.
ances on CNBC-TV18 [Editor’s note: I tend to do lower volume and not add, So when this momentum turns, you
the Indian affiliate of CNBC] and other so I can book quicker profits. will get a stronger move to the upside
channels, wrote a book and articles for — something like an a-b-c wave. We
several US trading magazines, and be- How do you trade derivatives? believe all price moves take an ABC
gan an index trading chatroom on the Almost all liquid derivatives instru- form, where you have a move in a
Internet. Writing helped my technical ments settle on the last Thursday of direction called A, then a correction or
analysis and trading, because it inter- every month. When markets consoli- consolidation in the opposite direction
nalized a lot of what I learned. Basi- date, selling index straddles often works called B, and then a continuation of the
cally, one thing led to another, and it’s better than getting chopped around tak- move A called C. So basically, we wait
become my life’s mission to create suc- ing marginal trades. These have a one- until the market shows us its hand.
cessful traders. month expiry so you end up making Now, the sell setup occurs when
money if the market is going into a momentum makes a high, while the price
Did you start out by trading equities, or consolidation on the daily time frame or does not. This means even though the
did you jump into futures? the weekly time frame. Every month, momentum went to its highest, the price
When I started trading in 1996, equi- there are about 22 trading sessions, so had such weakness that it could not
ties were the only thing out there. There time is on the side of the option seller. follow. So when the momentum turns
were no books to learn technical analy- down, you get a larger move on the
sis from, just one or two software pro- What type of money management strat- downside. We use stochastics, both fast
viders; most of the educational tools, egies do you use? and slow, as the measure of momentum.
books and courses, came around after I I do not risk more than 2% of total
had started. Initially, it was a bit of account equity on any one trade. I do not Could you walk me through it using
Copyright (c) Technical Analysis Inc.
Stocks & Commodities V. 23:3 (64-71): Interview: Trading Diverences With Ashwani Gujral by Jayanthi Gopalakrishnan

tion. But if you strictly go by the slow


stochastics, you get fewer but better
percentage trades.

Why?
Say the momentum made a high but
the market did not, so you have an a
wave down, a b wave up, and then you
ride a c wave down. This also gives the
closest stop — you use the high of the
day as your stop, for the sell setup.
Similarly, use the low of the day as a
stop for buy setups. The triggers can be
set according to each trader, which we
will discuss shortly. All you really need
is just one entry like that in a day, so
instead of beating around the bush—
which is what daytraders usually do—
YAHOO!

you get a clear way of taking a trade


once the market shows its hand. I will
FIGURE 1: MOMENTUM SETUP. Here you see a setup on the S&P 500 index using fast and slow stochastics.
introduce qualifications to this as well,
but this is the basic trend.
the chart in Figure 1 as an example? US because the S&P consists of 500
In Figure 1, the market opened with stocks. When you’re looking at the What is the essence of this system?
two up bars and then started coming breadth of the market, you know whether You know, I work with traders all the
down. So it touched lows for the day, as it is a narrow- or broad-based rally or a time, and these guys basically go around
did the momentum from our system. decline. The broader the market in a chasing the market like a chicken with
This tells us that the market is planning particular direction, the better the its head cut off. The beauty of this
to move down. Now, what you want to chances of the trade succeeding. Still, it technique is that whichever way the
do is make an entry into this downward gives you a feel for what is happening. market goes, this system forces you to
movement. The window directly below Now, coming back to Figure 1, which buy dips after an intraday uptrend and
the price chart displays the slow shows a sell setup when the slow sto- sell rallies after an intraday downtrend.
stochastics. The window below that chastic reaches oversold levels initially, That is what you’re supposed to do.
shows the fast stochastics. you get move A, in which you have to Because if you sell dips in an intraday
wait for the market to react on the up- uptrend and buy rallies in an intraday
Why do you use both fast and slow side to look for a short entry. As you can downtrend, you will be stopped out
stochastics? see, around 11 am the market started several times a day, even before the
As you know, stochastics can be used reacting on the upside, starting the wave trade works out.
to define market momentum. I use fast B. Both the slow and fast stochastics In addition, my system makes you
and slow stochastics because the fast one started moving. sell momentum — overbought and
hints at where the slow one may move oversold — which means if and when
next. The red line you see on the Stan- Do you have a particular point at which the momentum does turn downward,
dard & Poor’s chart is the 20-period you like to trade? even if the trade is not working out, you
exponential moving average (EMA). By Ideally, I trade only when the slow will get a decent exit because the rever-
the way, the Yahoo! chart is a five-minute stochastic is at extremes, because I find sal in momentum will pull it in its
chart, so once you form a bias based on the that it gives the best trades on a percent- direction to some degree.
initial move of the market to try to get a age basis. But sometimes if the market
better feel, you check out the market is showing a lot of weakness or strength, What are some other benefits?
breadth. This is available via Yahoo! and the slow stochastic may not reach over- You also get to trade divergence in
updated throughout the trading day. bought or oversold levels. When that price and momentum. I discuss only
happens, you can use some finesse. I two types of divergence between mo-
Can you tell our readers what happens use the fast stochastic in conjunction mentum and price, because they work
in India? with the 20-period MA. The moment the best. Through testing, I have found
In India, what happens is that index the fast stochastic becomes overbought, that other types of divergences do not
heavyweights sometimes skew the mar- and price moves above the 20-period work as well. The classic dilemma
ket. That problem may not exist in the EMA, you have a low-risk short situa- that traders face is whether a certain
Copyright (c) Technical Analysis Inc.
Stocks & Commodities V. 23:3 (64-71): Interview: Trading Diverences With Ashwani Gujral by Jayanthi Gopalakrishnan

support or resistance will hold or break


down or out. This can help solve that
dilemma to some degree. The best part
of this system is when the market is just
chopping around, it does not go to
extremes as often. So you’re kept out
of impulsive trades.

But sometimes something that looks


like a strong momentum move is only
short-lived.
Yes, that is the reason we’re not chas-
ing momentum, but trying to trade di-
vergences. We’re trying to trade the

eSIGNAL
exception to the rule that price follows
momentum.
FIGURE 2: FILTERING MECHANISM. Here is an example of using a 30-minute chart as a filtering mechanism.
Note the favorable points to take five-minute buy and sell setups.
Do you find yourself out of the market
often when you use this system?
Yes. When a trend starts stalling, I
get out of there. I know I will always get
an entry in the next day or two. When
the market is chopping around in a nar-
row range, the system either does not
give signals or at least gives very few, as
the slow stochastics don’t reach over-
bought levels as often.
Now I’ll write a few words on how to
filter signals. I wrote an article on aver-
age directional movement index (ADX)
for STOCKS & COMMODITIES, if you’ll
remember. Now, as with all technical
analysis methods, if the market is in a
strong trend, techniques work much
better. These techniques are no excep-
tion, so a key parameter to watch is the
daily ADX. If it’s above 30, these setups
work very well. When the ADX is not
showing a strong trend, you should keep FIGURE 3: AN IDEAL SETUP. If the stochastics moves up and the price makes a new high, you would stop
looking for a setup. In this case, the stochastics moves drastically, but price doesn’t.
volume low and take profits quickly.
Another filter mechanism is the 30-
minute chart (Figure 2). When slow will take only the buy setups. The trade setup, you would use the next buy setup
stochastics on the 30-minute chart is preferably is taken as the slow stochastics to book profits. This is particularly use-
overbought and starts weakening, the comes down from the 80 level or moves ful if you are carrying overnight posi-
chances of getting a good five-minute up above the 20 level. If I am trading a tions and want to get out at a good exit.
sell setup are much higher. Similarly, range-bound market, I keep my volume That will make sure either you book
when slow stochastics on the 30-minute 60% of those during trending markets your profit near the high on a buy trade
chart is oversold and starts strengthen- and take profits quickly. or near the low on a sell trade.
ing, the chances of getting a good five- This can be used as a profit booking It’s important to note that if you use
minute buy setup are higher. mechanism as well. Say you take a trade slow stochastic overbought/oversold lev-
If the market on the 30-minute time using this method and it works well. els, you get fewer trades, but large moves.
frame is showing slow stochastics at How do you book a profit? You wait
overbought levels [above 80], I try to until the next opposite setup occurs What about triggers?
take only the five-minute sell setups. If again. This means if you traded the buy For the triggers I have spoken about,
the market on the 30-minute chart is setup, you would use the next sell setup I think you can use the previous two-
showing slow stochastics as oversold, I to book profits. If you traded the sell bar low, or the previous two-bar high
Copyright (c) Technical Analysis Inc.
Stocks & Commodities V. 23:3 (64-71): Interview: Trading Diverences With Ashwani Gujral by Jayanthi Gopalakrishnan

SETUPS
Key points about momentum setup • Take quicker profits in a range-bound market, preferably
• Buy setup • Slow stochastics makes a low for the day, as the slow stochastics reaches the other end
but the market does not make a new low for the day • Use 60% of trending volume in a rangebound market
• Sell setup • Slow stochastics makes a high for the day,
but the market does not make a new high for the day Triggers
• Previous 10-minute lows
If, because of a strong trend, the slow stochastics is not • Breakdown/breakout below the 20-period moving aver-
reaching extremes, the fast stochastics can also be used. age
• Just reaching extreme areas and then keeping a stan-
Things that this setup forces traders to do dard stop because the momentum moves the other
• Buying on dips, selling on rallies way at some point
• Buying when momentum is oversold, selling when
momentum is overbought Setup conditions
• Divergence between momentum and price The following information, which is available on Yahoo!, sets
• Even if the trade does not work, it considerably up the conditions for the trade:
reduces risk as the trade is taken on a momentum • Strong positive breadth facilitates buy trades
extreme and a good exit is provided • Strong negative breadth facilitates sell trades
• Marginal breadth usually discourages trading, as it
Key framework to apply these setups in means a consolidation day
• In a trending market, when ADX>30, take trades only in • Reversal of breadth from one extreme to another serves
the direction of the trend as confirmation of a larger move in the direction of
• In a range-bound market, when the ADX is declining breadth reversal
below 30, define daily support and resistance, buy on —A.G.
support and sell at resistance

on the five-minute chart, or when the


price goes through the 20-period EMA
in the direction of the trade.
I just use the oversold and over-
bought levels on the slow stochastic
and use a stop of the high or the low.
Now we move to the stuff below the
triggers. Check out Halliburton (Fig-
ure 3).
From that chart, you can see that the
stock prices corrected upward slightly
after trending down for most of the
day. This prompts you to short as the
slow stochastic reaches overbought
levels. Scenarios like this do happen.
Note that stochastics moves drasti-
cally, but price doesn’t. If the stochas-
tic moves up and the prices also make
a new high, then we quit looking for a
sell setup. It’s the same with lows, so FIGURE 4: CHOPPY MARKET. Even when the setup does not work well, you still get a decent exit.
basically this setup keeps you out of
trouble a number of times. (Figure 4). Now, this is where the setup plenty of that.
kind of diddles around. But you still Now, right below the chart [not
What else do you look at? don’t get chopped, and if you’re not shown] you have breadth. Believe it or
I look at the high and low of the given comfortable, you can exit at a decent not, I refresh the breadth every five
day. If you look below when you bring price again. The slow stochastic made minutes — that really tells me the odds
them up on Yahoo! charts, you’ll see a new highs. Prices did not see their pre- of my trade working. If I have an open
table that displays the highs and lows vious prices because everything closed position and the breadth strengthens, I
that you can use as your reference. lower. I could not find a buy setup, but am confident that this move has more to
Let’s move along to the CISCO chart I guess on an up day, you will find go. If the breadth weakens while I am

Copyright (c) Technical Analysis Inc.


Stocks & Commodities V. 23:3 (64-71): Interview: Trading Diverences With Ashwani Gujral by Jayanthi Gopalakrishnan

long, I tighten the stops. It’s the same I must stress again that having a Thank you for your time, Ashwani.
with sells. If the breadth is iffy, mean- perspective of the daily trend is impor-
ing very close to a 1-to-1 ratio, it’s a tant. I place a lot of emphasis on support SUGGESTED READING
sign that you need to take profits quickly, and resistance, which I draw on my Gujral, Ashwani [2005]. How To Make
as the market is not overly bullish or charts before planning the day’s trade. Money Trading Derivatives, Vision
bearish. The best trades, of course, oc- Since I have been using this technique, Books India.
cur when breadth moves from one ex- I have not had a stop that was hit be- _____ [2004]. “Candlestick Filtering,”
treme to the other. cause the entries are always on the Technical Analysis of STOCKS &
The best thing this system has done opposite extreme. In my earlier days, I COMMODITIES, Volume 22: April.
for me is that it allows me to watch the used to sell bottoms and buy tops. Us- _____ [2004]. “ADX: An Indicator And
market action and take in what’s going ing this system reduced all that, even if Trading System,” Technical Analy-
on while I wait for the setup to occur. I was wrong. You get a decent burial sis of STOCKS & COMMODITIES,
and don’t get shot. You can make four Volume 22: May.
And you do this with just an Internet points a day on the S&P. Most people _____ [2004]. “The Shark Attack Strat-
connection? will take that, and sometimes this lands egy And Fibonacci Levels,” Tech-
Yes, this is probably the most inex- you in large moves. If you understand nical Analysis of STOCKS & COM-
pensive way to trade the US markets, the essence, it just makes you do the MODITIES, Volume 22: June.
although you may need a 30-minute right things.
datafeed for filtering purposes. †See Traders’ Glossary for definition S&C

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