Situational Awareness (SA)

Credits - Pradeep Bonde aka Stockbee

Background

• The term "Situational Awareness" (SA) was formally defined in 1988 by Endsley. However, The term is said to have been used by United States Air Force (USAF) fighter aircrew returning from the Korean and Vietnam wars, Who identified good SA as a decisive factor in air combat. Human factors scientists widely adopted the term in the 1990s.

• SA is a pilot's technique to maintain awareness of the aircraft, Its location, And all factors related to flight safety. It involves perceiving critical environmental factors, Understanding their meaning, And projecting their future status. SA is especially relevant in fast-paced, Complex environments with high levels of uncertainty, Volatility, Ambiguity, And complexity (VUCA).

• Similarly, as traders or market participants we should always be aware of the situation and accordingly change and adapt to market conditions.

Introduction

• SA can be determined from many factors such as,

  1. How exactly are our opened positions are performing.

  2. The number of stocks in a scanner. For example, in bullish scanner stocks showing is less than normal then it’s telling us conditions are not favorable for going long vice versa for shorts.

  3. Equity curve direction where it's pointing up or down.

  4. Is there any follow through in stocks. For example, trade objective is 20% and the trades your taking is just making 10% in and around then that means there no follow through. etc.

  5. But we will use market monitor.

• Market monitor is broadly based on mean revision and it’s a timing model that will help you to navigate the market’s volatility smoothly and also helps us to keep us in right direction of the market most of the time and not all the time because there is always chance of extremity.

Market Monitor

First Things First

Image - Look and feel

Context

• The main use of market monitor is to know the turn arounds points in market that is extreme levels based on the concept of mean revision.

• This will help in understanding if money is flowing in the market or going out.

• Any inference made is always mostly likely to happen nothing here in market is certain.

• Only data that are shown are in terms of percentage is MR20 rest everything is absolute number.

• Thanks to Chartink platform data is automatically updated in real time but its inaccurate till 6:00 PM because of exchange settlement.

• Whenever the inference is drawn or made it should be done before the market opens and never in real time.

• Important thing in market is setup then comes MM as this is just a secondary tool or a supporting tool.

• Just because MM is saying something don't make trading decisions. Again its just a supporting factor or a conformation tool.

• In trading only thing to keep variability is risk nothing else. As per the MM make changes to risk. That means changing gears as per RMS.

• Complete market monitor has two filters to remove extreme things. One is liquidity filter that is stocks having more than 10CR of VP and second is price filter that is stock price ranging from 10 to 20000 is considered for all the calculation.

• You will not become pro-overnight it takes time to understand and apply things in real time once you have spent enough time it becomes second nature, and you may also come out with new useful observations.

• And to get fast and better understanding of MM and its readings, Open nifty multi cap 50:25:25 index charts and simultaneously see how MM behaves alongside and draw inference and also see what values to expect at what stage of market.

MR 20 - Mean Revision 20

Logic

• Value shown here is % of stocks that are above EMA 20.

• This is the metric that helps to determine the trend.

• This is main and most important aspect of MM to determine the trend that means only trend.

Inference

• 80 and 20 are the upper and lower bands of the scale and this is like a oscillator where numbers keep moving from one extreme to other extreme but not in literal terms, but it oscillates.

  • Whenever the MR20 reaches 80 and above then look for bearish setups because markets might stall or reverse from here.

  • Whenever the value of MR20 reaches 20, look for bullish setup. That means selloff is over most probably and there will be a bounce in market.

  • Note there is always a possibility that values can stay in extreme zones that is above 80 and below 20 for few days before changing the direction that is so called cool off or stalling. Usually MR20 staying at extreme overbought zone that is more than 80 is far more likely then MR20 staying below 20 because of bullish bias of markets.

  • Above 80 be cautious with going long and at level less than 20 be cautious with going short.

• 3 day rule that is when values back to back increase or decrease for three consecutive days then trend persists on values direction that means if values are increasing then markets are bullish and if values are decreasing the its bearish.

  • For example, if day 1 value is 85 then day 2 is 81 and then day 3 is 76 then its most likely that the values go even further down like 54 30 etc. Therefore, inference is bearish.

  • The day you can see 3 consecutive days of fall then downward trend has been established.

  • The day you see 3 consecutive days of rise then upward trend has been established.

U4 - Up 4% Plus

Logic

• Value shown here is number of stocks that made 4% + up move and todays volume is greater than yesterday volume on specific day. Here volume is considered because to make inference that 4% change is happening with good volume, that means just 4% move is far superior that 4% move with volume.

• This metric helps to determine the intensity of bullishness.

Inference

• Here it’s all about seeing with respect to normal days.

• If the value is triple digit or in and around it that is more than 75 or in and around it that means intensity of buying is high.

• If MM shows back-to-back triple digit if not triple digit and it's in and around triple digit that is the range between is from 75 to 100+ then that means, it's a start of the new bull swing.

• After intensified buying it's usually followed up normal buying but buying continues this is because markets always favor's the buying then selling and markets keep going forever in the long run.

• Helps in going aggressive long. But when? That is when you see multiply 75+ in U4. multiple and also considered recent trade feedback.

D4 - Down -4% Plus

Logic

• Value shown here is number of stocks that made -4% down move and todays volume is greater than yesterday volume on specific day. Why volume is considered is mentioned above.

• This metric helps to determine the intensity of bearishness.

• Usually, the intensity of bearishness will be more than the intensity of bullishness because of inherent nature of the markets because as it takes time to go up but falls in a Jiffy.

Inference

• Intensified selling is always followed up by buying because markets favor buyers more than sellers.

• Always be bullish until proven wrong, Markets always turn in a dime.

• Selling intensity is always short lived.

• When to go very aggressive long? After MR20 sliding near or below 20 for days to weeks plus recent trades feedback.

W20 - Weekly Up By 20%

Logic

• Number of stocks that moved more than 20% in a week.

• Value shown here, for example is 105 that means there are 105 stocks in market that moved more than 20% in a week. So now you see, If you were able to catch at least small part of the overall moves with our setups? How good or how effectively I am using the opportunity presented by markets.

• Basically, to gauge our trading skills with respect to opportunity presented by markets.

Inference

• As the number increases follow through in stocks is happening so start benefiting from it.

• As the number decreases then there is a selling that's happening in market. Time to short or sit on side lines.

• This also can be used to know turnover in markets. For that if values are more than 30 40 then chances of correction and if value is less then 10 at any given point then high probability is that you get a bullish tradeable rally.

Important Points

• MR20 will give you a sense of direction and not strength or intensity or even magnitude.

• U4 & D4 will tell us the intensity of buying or selling that is strength.

• To determine the trend that is bullish or bearish consider latest 3 days values. Very important until its printed don't make inference of bullish or bearishness.

• If value in MR20 is up down up down and not trending that means markets are volatile or choppy. Here selective stock tends to work.

• If 3 days numbers are continuously decreasing in MR20. Likely the trend will continue in downside. Similarly, if 3 days numbers are continuously increasing in MR20 then trend will be bullish. For how long U4 and D4 will help you as they tell the intensity.

• To build positions thinks ahead of 3 days. For example, if MR20 is showing as 7 then if you're thinking to open shorts then working of it is very low that means probability is very less because there are more chances of bounce, buying kicking in at any movement then shorts working.

• W20 can be used to see how many opportunities was there in market how much you could catch that is how many stocks making that kind of move with specific magnitude of 20% + for W20.

• Changing gears in position size should be based on recent trades feedback and market response to your SA. Here changing gear means % of risk you are willing to take per trade that is 0.125%, 0.25%, 0.50% or 0.75%. When to go aggressive? When you see multiple day above 60 70 in U4.

• U4 and D4 number increase suddenly or numbers are around each other then it will result in volatility in coming days because of indecision in market.

• When you see back to back big numbers like 70 75+ or 100+ in U4 then change gears fast and super money can be made but remember not in isolation but also with constantly seeking for trades feedback.

• When MR20 is going from LL to UL trade objective is 20%+. TSL 2R.

• When MR20 is going from UL to LL or chopping around that is volatile then trade objective is 10%+. TSL 1R.

• Direction of trades should be decided as per PAD for each specific trading session.

Action Reaction for Momentum Burst Traders

• IPO setup, Trade whenever you spot them as SA doesn't matter for them.

• Whenever MR20 is below and around 20 then look for bounce in market and setups to give first priority is to BB and second setup is CT. Don't even think of shorting here.

• Whenever MR20 is above 80, look for shorting that is WSS setup and on bullish side be very selective that is CT and CD and continue to trade them on bullish side with caution.

• In PAD, If % advance is more than % decline then give priority to one CT second CD and BB however if MR20 is near 20 then its BB, CT and CD.

• In PAD, If % decline is more than % advance then give priority to CT on bearish side. As WSS is taken on previous trading session.

• Priority order of setups for trading on bullish side is IPO, CT, CD and BB.

• Priority order of setups for trading on bearish side is WSS and bearish CT.

• Whenever there is a GU in overall market then try to restrict the number of trades and its size because 99% of the time you will lose money. Logic behind it is, Due to gap up there is very high chance of profit booking in most of the stocks which results in higher volatility and hence making money is becomes very difficult.

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