The above picture shows the charts of Nifty Futures and Spot for 12th of October 2012. NF chart is on top and the lower one is Nifty Spot.NS and NF move in tandem. In higher time frames price discovery happens on NS and NF follows. Due to the premium and discount components we cannot rely solely upon NS levels.We are playing with 10-15 points stop loss and NF can move on its own and stop us out.Sometimes NS leads and pull NF along and when NF run amok NS rein it.
Look at the above chart. Please note that there is no relevance for exact price levels. Decision points are important. In the morning NS was leading. It hit PDH and a BOF happened. NF failed to test the PDH hence I missed the trade.
On the way down NF was leading and hit the IR Low and broke it. I shorted the BPB and got stopped out. It was a clear BOF on NS. This loss could have avoided by monitoring NS.But I would have lost money going long when NF came back above IR Low because it was already a BOF on NS.
This area requires a detailed study. We may need to act differently depending on which one leads, NF or NS.Leader is the one which hits the DP first and not the one quoting higher.Please do some brain storming and let me know your ideas. This may help us to catch some good trades and avoid some bad entries.
I would like to thank "bizagra" and " Atharva" for bringing this subject to my notice..
Kindly read the comments and give me some feedback