Saturday, May 29, 2010
Watch Nifty Technical Analysis for the Last Week
- NIFTY TECHNICAL ANALYSIS FOR LAST WEEK
1) NIFTY HAS MADE A REVERSAL FROM CHANNEL BOTTOM. MACD HAS NOT GIVEN A BUY YET.
2) AS YOU CAN SEE THE LAST TWO TIMES WHEN NIFTY CAME CLOSE TO THE CHANNEL BOTTOM IT COMBINED WITH MACD CROSSOVER TO GIVE A GOOD REVERSAL
3) I AM EXPECTING IT TO HAPPEN AGAIN. BUT HAS RESISTANCE AROUND 5080.
4) IT MAY GO DOWN A BIT FROM CURRENT LEVELS.
5) BUT THE CORRECTION FROM HERE MAY NOT BE TOO LARGE AND AN UP MOVE FOLLOWED BY THE BREAKING OF 5080 WILL TAKE NIFTY TO NEW HIGH'S
Watch Nifty Reversal not Changed the Weekly Down Trend
Inspite of a 300 point rise, Nifty could not close above 5-wk sma. But just squeezed into the rising channel - Can it keep up with the rising channel in the coming weeks..?
Nifty managed to close above this falling "Daily channel" suggesting upside possibility. The next pivot high of 5105 coincides with the "Monthly ema" and Monday is the monthly close - Can it close above that after failing the weekly close (Closed below 5077)..??
Nifty , in the past, risen sharply (once from 3900 & another from 4500) - But this time the higher time frame TA is down and a crucial monthly close is awaited on Monday.
Nifty managed to close above this falling "Daily channel" suggesting upside possibility. The next pivot high of 5105 coincides with the "Monthly ema" and Monday is the monthly close - Can it close above that after failing the weekly close (Closed below 5077)..?? Nifty , in the past, risen sharply (once from 3900 & another from 4500) - But this time the higher time frame TA is down and a crucial monthly close is awaited on Monday.
Tips for How to Earn Minimum 30% Profit in One Month
How much profit you will make in a month? Will you believe, if we say 30%?
If you follow a simple strategy which is called as “Take small profits and do multiple trades” which is explained in following example
Let’s see the following example
Please note - Currently our intraday brokerage charges are 0.03% for buying and 0.03% for selling,
Taxes to pay for intraday trading :
1. The Service tax is 10.36% only on brokerage.(Update Mar 09- The service tax is reduced to 10.30% including education cess )
2. The STT (Security Transaction Tax) is 0.025% only on selling amount.
3. The Stamp duty on total turnover for a day which is 0.002%.
4. and finally you have to pay Regulatory charges on total turnover for a day which is 0.004%
No need to worry about these taxes as all these taxes will add up to very small amount at the end of the day compared to intraday profits.
Example -
Suppose you have bought the shares of Bharati Airtel at Rs.315 and quantity 100 so the total amount you have to pay is Rs.315 x 100 = Rs.31,500.
Let’s see how to calculate the brokerage and taxes.
Your buying amount is
Rs.31500 (Rs.315x100 Qty shares)
Brokerage charges
0.03% as brokerage (It’s our brokerage rates) on 31,500 comes to Rs.9.45
Service Tax
The service tax is 10.36% only on brokerage amount, so 10.36 % on Rs.9.45 comes to Rs 0.98.
Total charges you have to pay on buying amount is :
The total brokerage + service tax which come to Rs.9.45 + Rs.0.98 = Rs.10.43
Now let’s calculate the Brokerage and Taxes on selling amount :
Your selling amount
Suppose you sold Bharati Airtel shares at Rs.316 (you took profit of only Rs 1), Qty - 100 so the amount comes to Rs.31,600 (Rs.316 x 100 Qty shares). Your profit is Rs 100.
Brokerage charge
0.03% brokerage on 31,600, comes to Rs.9.48
Service Tax
The service tax is 10.36% only on brokerage amount, so 10.36 % on Rs.9.48 comes to Rs 0.99.
STT (Service Transaction Tax) is only on selling amount
The STT (Service Transaction Tax) is 0.025% on selling amount (the selling amount is 31,600) which comes to Rs.6.32.
Total charges you have to pay on selling amount is = Brokerage + service tax + STT
= Rs.9.48 + Rs.0.99 + Rs.6.32
= Rs.16.79
Total amount you have to pay on buying and selling is (including Brokerage and taxes) :
= Rs.10.43 (buying) + Rs.16.79 (selling)
= Rs.27.22
Also you have to pay stamp duty and regulatory charges on total turnover:
Rate - The stamp duty on total turnover for a day is 0.002% and Regulatory charges are 0.004%.
Stamp duty and regulatory charges are applied on total turnover of a day.
The total turn over is calculated by adding the buying and selling amount happened through out the day.
In above example the Buying amount is 31500 and selling amount is 31600 which adds up to Rs. 61300
Stamp duty is 0.002% and Regulatory charges are 0.004% which adds up to 0.006%
So on total turnover amount of Rs. 61300 and the stamp duty and regulatory charges on that comes to Rs 3.8.
So the total amount you have to pay for the trade of buying 100 shares of Bharati Airtel at Rs 315 and selling them at Rs 316 comes to = Rs 27.22 + 3.8 (stamp and regulatory charges) = 31.02 which includes brokerage rates and various taxes
Conclusion :
So now the conclusion is you paid Rs.31.02 (brokerage and taxes) while you earned the profit of Rs.100.
So your Net profit is Rs 69 [Rs 100 - Rs 31 (brokerage and taxes) ]
So don’t you think 69% profit in single trade is quite enough to do thousands per day?
If you continue doing such small trades with small profits then you will end up with big amount at the end of the day.
Let’s see how it will add up to thousands :
Suppose if you do only 10 trades in a day by taking only Rs 1 as profit then it will add
up to Rs 690 (Rs 69 x 10 trades in a day).
Please note - One rupee movement in share price of Rs 300 happens very easily and for many times in a day.
So if possible select higher prices share for day trading so that you can take small profits and do multiple trades.
How to make thousands in a day? :
Now let’s see how to do thousands with same strategy as mentioned above.
Its simple, you just have to increase your quantity of shares.
In above example you have bought only 100 quantities, if you just make it double then your profit will also get doubled.
How much will you make in a month?
Rs.69 per trade as net profit (as per above example).
10 trades per day (how much trades are possible, you will come to know by doing paper trading practice, which we already explained in day trading section, and according to our analysis 10 trades in a day are very easily possible)
Total Rs.69x10 trades = Rs.690 per day.
Total approximate 20 trading days in a month.
So Rs.690x20 = Rs.13,800.
Please note - You can also do 5 trades in a day and earn good amount in a day and adding it with thousands at the end of the month.
Let’s consider some losses while trading :
Trading without losses is not possible for any trader, but trader has to reduce the losses and maximize the profits.
(Please visit our different day trading sections to read about reducing the losses in day trading)
Now let’s suppose you made loss on some days or due to some reason you are not able to trade on some days, so let’s consider 5 days as compensation as loss in a month.
So 5 days losses comes to Rs 3450 (Rs 690 per day x 5 days).
So the compensation for losses for 5 days in a month comes to is Rs.3450.
Final Total Net Profit
You are making profit of Rs 10350 (Rs13,800 - 3450) profit per month.
Your investment is Rs 35,000 and you are getting profit of Rs 10,350 per month so in just 3 to 4 months you are making your money double.
Trading on Margin Amount :
In the above example the margin amount is not used but only the investment amount Rs 35000 is used.
Margin amount is the extra amount given by the broker to trade for a day.
Margin amount varies from broker to broker but generally they provide 3 to 4 times.
Big Disadvantage of Margin amount - If you use the margin amount then you have to square off your trades before market closes. Whether you are in profit or loss you have to square off your trades before market closes or else heavy penalty will apply.
Important Precaution - In margin amount the risk is very high. You have to square off your trades on same day.
We generally advice to not to use margin amount for new comers to trading.
If you dont use margin amount then you can hold your positions for next day or as long as you want because you are using your own money and not broker's money (margin amount).
New comers to day trading :
You can invest small amount like Rs 5000 or 10,000 and earn profits in a month and once you gain experience then you can invest big amount.
The conclusion is forgetting the "Greed Factor and Taking Small Profits" will make miracle to your Trading.
If you follow a simple strategy which is called as “Take small profits and do multiple trades” which is explained in following example
Let’s see the following example
Please note - Currently our intraday brokerage charges are 0.03% for buying and 0.03% for selling,
Taxes to pay for intraday trading :
1. The Service tax is 10.36% only on brokerage.(Update Mar 09- The service tax is reduced to 10.30% including education cess )
2. The STT (Security Transaction Tax) is 0.025% only on selling amount.
3. The Stamp duty on total turnover for a day which is 0.002%.
4. and finally you have to pay Regulatory charges on total turnover for a day which is 0.004%
No need to worry about these taxes as all these taxes will add up to very small amount at the end of the day compared to intraday profits.
Example -
Suppose you have bought the shares of Bharati Airtel at Rs.315 and quantity 100 so the total amount you have to pay is Rs.315 x 100 = Rs.31,500.
Let’s see how to calculate the brokerage and taxes.
Your buying amount is
Rs.31500 (Rs.315x100 Qty shares)
Brokerage charges
0.03% as brokerage (It’s our brokerage rates) on 31,500 comes to Rs.9.45
Service Tax
The service tax is 10.36% only on brokerage amount, so 10.36 % on Rs.9.45 comes to Rs 0.98.
Total charges you have to pay on buying amount is :
The total brokerage + service tax which come to Rs.9.45 + Rs.0.98 = Rs.10.43
Now let’s calculate the Brokerage and Taxes on selling amount :
Your selling amount
Suppose you sold Bharati Airtel shares at Rs.316 (you took profit of only Rs 1), Qty - 100 so the amount comes to Rs.31,600 (Rs.316 x 100 Qty shares). Your profit is Rs 100.
Brokerage charge
0.03% brokerage on 31,600, comes to Rs.9.48
Service Tax
The service tax is 10.36% only on brokerage amount, so 10.36 % on Rs.9.48 comes to Rs 0.99.
STT (Service Transaction Tax) is only on selling amount
The STT (Service Transaction Tax) is 0.025% on selling amount (the selling amount is 31,600) which comes to Rs.6.32.
Total charges you have to pay on selling amount is = Brokerage + service tax + STT
= Rs.9.48 + Rs.0.99 + Rs.6.32
= Rs.16.79
Total amount you have to pay on buying and selling is (including Brokerage and taxes) :
= Rs.10.43 (buying) + Rs.16.79 (selling)
= Rs.27.22
Also you have to pay stamp duty and regulatory charges on total turnover:
Rate - The stamp duty on total turnover for a day is 0.002% and Regulatory charges are 0.004%.
Stamp duty and regulatory charges are applied on total turnover of a day.
The total turn over is calculated by adding the buying and selling amount happened through out the day.
In above example the Buying amount is 31500 and selling amount is 31600 which adds up to Rs. 61300
Stamp duty is 0.002% and Regulatory charges are 0.004% which adds up to 0.006%
So on total turnover amount of Rs. 61300 and the stamp duty and regulatory charges on that comes to Rs 3.8.
So the total amount you have to pay for the trade of buying 100 shares of Bharati Airtel at Rs 315 and selling them at Rs 316 comes to = Rs 27.22 + 3.8 (stamp and regulatory charges) = 31.02 which includes brokerage rates and various taxes
Conclusion :
So now the conclusion is you paid Rs.31.02 (brokerage and taxes) while you earned the profit of Rs.100.
So your Net profit is Rs 69 [Rs 100 - Rs 31 (brokerage and taxes) ]
So don’t you think 69% profit in single trade is quite enough to do thousands per day?
If you continue doing such small trades with small profits then you will end up with big amount at the end of the day.
Let’s see how it will add up to thousands :
Suppose if you do only 10 trades in a day by taking only Rs 1 as profit then it will add
up to Rs 690 (Rs 69 x 10 trades in a day).
Please note - One rupee movement in share price of Rs 300 happens very easily and for many times in a day.
So if possible select higher prices share for day trading so that you can take small profits and do multiple trades.
How to make thousands in a day? :
Now let’s see how to do thousands with same strategy as mentioned above.
Its simple, you just have to increase your quantity of shares.
In above example you have bought only 100 quantities, if you just make it double then your profit will also get doubled.
How much will you make in a month?
Rs.69 per trade as net profit (as per above example).
10 trades per day (how much trades are possible, you will come to know by doing paper trading practice, which we already explained in day trading section, and according to our analysis 10 trades in a day are very easily possible)
Total Rs.69x10 trades = Rs.690 per day.
Total approximate 20 trading days in a month.
So Rs.690x20 = Rs.13,800.
Please note - You can also do 5 trades in a day and earn good amount in a day and adding it with thousands at the end of the month.
Let’s consider some losses while trading :
Trading without losses is not possible for any trader, but trader has to reduce the losses and maximize the profits.
(Please visit our different day trading sections to read about reducing the losses in day trading)
Now let’s suppose you made loss on some days or due to some reason you are not able to trade on some days, so let’s consider 5 days as compensation as loss in a month.
So 5 days losses comes to Rs 3450 (Rs 690 per day x 5 days).
So the compensation for losses for 5 days in a month comes to is Rs.3450.
Final Total Net Profit
You are making profit of Rs 10350 (Rs13,800 - 3450) profit per month.
Your investment is Rs 35,000 and you are getting profit of Rs 10,350 per month so in just 3 to 4 months you are making your money double.
Trading on Margin Amount :
In the above example the margin amount is not used but only the investment amount Rs 35000 is used.
Margin amount is the extra amount given by the broker to trade for a day.
Margin amount varies from broker to broker but generally they provide 3 to 4 times.
Big Disadvantage of Margin amount - If you use the margin amount then you have to square off your trades before market closes. Whether you are in profit or loss you have to square off your trades before market closes or else heavy penalty will apply.
Important Precaution - In margin amount the risk is very high. You have to square off your trades on same day.
We generally advice to not to use margin amount for new comers to trading.
If you dont use margin amount then you can hold your positions for next day or as long as you want because you are using your own money and not broker's money (margin amount).
New comers to day trading :
You can invest small amount like Rs 5000 or 10,000 and earn profits in a month and once you gain experience then you can invest big amount.
The conclusion is forgetting the "Greed Factor and Taking Small Profits" will make miracle to your Trading.
Some Important Tips for Day Trading
Emotions in day trading :
In order to be a successful day trader as you need to have the right tools, right market direction, and the right trading systems in the same you also need to have control on your emotions because the buy and sell orders initialize from your emotions.
It is totally true that it is not possible to get rid of your emotions completely but managing at some extent will prove beneficial.
According to our experience emotions pals a major role in day trading.
If you have bad or sad mood then your trading may not be too successful.
If you are happy and cheerful then your trading will see its positive effects.
Following are few emotions which play a major role during taking decisions :
Fear and greed
Increasing Targets
Moving from Paper Trading to Live Trading
Patience and Discipline
Patience, Decisiveness, and Calmness
Recognizing and Overcoming Stubbornness
Fear and Greed :
The two main emotions that day traders experience are fear and greed, and while you will probably not be able to remove these emotions completely, you will need to manage them for some extent.
Fear :
Fear is the emotion that stops us from doing things that might be too risky. In the right quantity, fear is obviously an emotion that we need, but when fear becomes too great then we can be prevented from doing things that might be necessary.
In day trading, the main fear a trader has is that they are going to lose money. This is a normal fear as no trader wants to lose money, but it is illogical if it prevents the trader from taking any trades.
As an example, a trader might make loose an initial trade, and then be too fearful to make the next trade which should not happen in day trading.
The emotion of fear can be overcome by acknowledging that all day traders have losing trades occasionally, but as long as they are less frequent than the winning trades, there is nothing to be afraid of as there will still be in a net profit.
Greed :
Greed is the opposite emotion to fear.
The right amount of greed is necessary because it gives us the motivation to work at something, but when we are too greedy we will start doing things even when we know that we should not.
In day trading, greed can make traders to make unnecessary trades, or hold on to positions which are in loss, wait for big profit in single trade and so on.
The emotion of greed can be overcome by following the “Analyze, wait, watch and trade” principle which is mention in our next subsections
Increasing Targets :
Day traders should put their exit (square off) order which is nothing but limit order once they buy or short sell their trade.
This is the right method for winning strategy.
Because traders keep increasing the targets once the share price start moving in their favor but this can be risky. This happens due to greed factor to get more and more profit in single trade.
So book your profits on your already decided targets.
While shifting from paper trading to Live Trading :
When you are planning to start actual day trading, once you successfully complete the paper trading practice, then you may get fear while trading because you are using you actual money
Fear of Losing Money :
The reason that your trading system suddenly stops working because the additional emotion that comes while using own real money. The fear of losing one's own money is a very strong emotion, and can cause even experienced traders to make mistakes. Hesitating before entering a trade, moving their stop loss to break even too early, or taking a smaller profit than they would normally, are all common mistakes that are made because of the emotion of fear.
Overcoming the Fear :
If you are experiencing these problems then you have keep faith in practice trading practice what you did before doing your actual day trading.
If you would have made profits consistently in paper trading then you need to have faith in your trading system, and follow it exactly and on the other side still if you are not feeling confident then you should go back to paper trading practice.
Patience and Discipline :
Professional traders know that their emotions are going to affect their trading whether they like it or not. As a result, they develop personalities that allow them to overcome their emotions and trade profitably. Two of the most important personality traits are patience and discipline, because they allow you to handle one of the most difficult aspects of trading.
Possibly the most emotional time for a trader is when their profit / loss is negative, and they are waiting for their next trade to come along. During this time they will be impatient and anxious, and they will be desperate to take their next trade in order to make back the money that they have lost. Most new traders (and also many experienced traders) will start taking trades that are not part of their trading system. As soon as this happens, their loss will increase, and will continue to do so until they realize what they are doing and correct their behavior.
By developing a personality that counteracts your emotions you will be able to continue making logical decisions.
Patience and discipline are vital personality characters for professional traders.
Being patient allows you to wait for your next trade regardless of your current profit / loss, and being disciplined allows you to take only trades that are part of your trading system and not making unnecessary trades.
Maintain trading Log :
One method of learning how to be patient and discipline is to keep a detailed log of every trade that you take. At the end of the day (or week, or month), replay every trade, and compare the replayed trades to your trading log. If there are any differences, you should be able to determine what caused them, and hopefully know what you need to avoid the next time.
Another method of becoming patient and disciplined is to have absolute confidence in your trading system. Knowing that your trading system will make money over the long term can be enough to overcome the negative emotions that occur when you are experiencing a negative profit / loss. The only way to build confidence is to test your trades repeatedly in paper trading. If you have tested your trading system over a significant length of time, and it is consistently profitable, there is no reason to question that it will continue to be profitable
Patience, Decisiveness, and Calmness :
The idea of making a living as a day trader appeals to a large number of people, but not everybody has a personality suitable for day trading. Even people that are successful in other fields (even related fields), often find that they are not compatible with day trading.
Day trading is a flexible profession but there are few qualities that all day traders need to have in their personalities, in order to be successful (profitable) and those are
Patience
Decisiveness
Calmness
Patience :
Day trading is performed by sitting quietly in front of a computer, waiting anywhere from a few minutes, to several hours for the trade to come along.
Being able to wait patiently is a necessity; otherwise you will find yourself taking trades that are not part of your trading system and most likely losing money on them.
Decisiveness :
Deciding when to enter and exit trades is one of the most basic functions of a day trader, and it is important that these decisions are made as efficiently as possible. Being decisive is vital to successful day trading, otherwise you will only sit and watch trades that you should have actually taken. Being decisive does not mean being bold, and taking trades that you are not sure about, but it does mean acting promptly when a trade does come along.
Calmness :
Remaining calm during trading is one of the most important personality character for a day trader, but it is also one of the most difficult to obtain and practice.
As humans, the natural reactions to a winning trade are excitement and joy, and the natural reactions to a losing trade are panic and sadness, but day traders need to control these emotions, otherwise they will adversely affect their trading decisions (particularly the negative emotions).
For example, the panic that occurs after a losing trade might make you take a new trade almost immediately in an attempt to make the money back, even though there was no trade according to your trading system.
Paper trading practice :
It is a good way to practice your patience, decisiveness, and calmness during trading, without risking any real money.
After many hours, days, or weeks of practice you will have a good idea of how your personality and your emotions will affect your day trading, but even then, there will still be an emotional response when you start trading live.
Recognizing and Overcoming Stubbornness :
A large part of being a successful day trader is having the right personality character, or if not, at least being able to control the opposing personality traits. Human traders will always be influenced by their personalities and their resulting emotions, but professional traders have learned to overcome the emotions that are counter productive to their trading.
Stubbornness (inflexibility) :
One such personality characteristic is stubbornness.
Stubbornness (inflexibility) causes people to become attached to their decisions regardless of the consequences.
Day traders need to be decisive in order to make their trading decisions promptly, and then act upon those decisions without any hesitation, but they also need to be flexible and able to react when a decision was incorrect.
In order to be successful, day traders need to find the right combination of decisiveness and flexibility for their personality
Overcoming Stubbornness :
Stubborn people usually refuse to admit that they are stubborn, so recognizing that stubbornness is causing problems with their trading can be difficult. Stubbornness usually causes several different trading mistakes, with the following mistakes being the most common. If you are making any of these mistakes in your trading, it is probable that you have some degree of stubbornness in your personality, and that it is affecting your day trading:
Refusing to use targets and stop losses, and certainly refusing to actually place target and stop loss orders
Choosing not to follow a trading system, because you know what the market is going to do
Holding losing trades until the pain is just too much to bear (or even until your brokerage exits the trade for you, because you no longer cover the required margin)
For any other reason, these mistakes are actually easy to overcome, but not when they are being caused by stubbornness. In order to overcome these mistakes, stubborn traders first need to recognize that the mistakes are being caused by a natural human emotion, and that there is nothing wrong with admitting this. As being stubborn is a form of control, it may help to think that by recognizing the cause, you can have more control over yourself, and hence over your trading.
Once the cause has been recognized, trading in simulation will provide time to correct the trading mistakes without risking any real money. Trade in simulation until you are consistently profitable (by consistently, I mean several weeks, not just one day), and then move to live trading.
In order to be a successful day trader as you need to have the right tools, right market direction, and the right trading systems in the same you also need to have control on your emotions because the buy and sell orders initialize from your emotions.
It is totally true that it is not possible to get rid of your emotions completely but managing at some extent will prove beneficial.
According to our experience emotions pals a major role in day trading.
If you have bad or sad mood then your trading may not be too successful.
If you are happy and cheerful then your trading will see its positive effects.
Following are few emotions which play a major role during taking decisions :
Fear and greed
Increasing Targets
Moving from Paper Trading to Live Trading
Patience and Discipline
Patience, Decisiveness, and Calmness
Recognizing and Overcoming Stubbornness
Fear and Greed :
The two main emotions that day traders experience are fear and greed, and while you will probably not be able to remove these emotions completely, you will need to manage them for some extent.
Fear :
Fear is the emotion that stops us from doing things that might be too risky. In the right quantity, fear is obviously an emotion that we need, but when fear becomes too great then we can be prevented from doing things that might be necessary.
In day trading, the main fear a trader has is that they are going to lose money. This is a normal fear as no trader wants to lose money, but it is illogical if it prevents the trader from taking any trades.
As an example, a trader might make loose an initial trade, and then be too fearful to make the next trade which should not happen in day trading.
The emotion of fear can be overcome by acknowledging that all day traders have losing trades occasionally, but as long as they are less frequent than the winning trades, there is nothing to be afraid of as there will still be in a net profit.
Greed :
Greed is the opposite emotion to fear.
The right amount of greed is necessary because it gives us the motivation to work at something, but when we are too greedy we will start doing things even when we know that we should not.
In day trading, greed can make traders to make unnecessary trades, or hold on to positions which are in loss, wait for big profit in single trade and so on.
The emotion of greed can be overcome by following the “Analyze, wait, watch and trade” principle which is mention in our next subsections
Increasing Targets :
Day traders should put their exit (square off) order which is nothing but limit order once they buy or short sell their trade.
This is the right method for winning strategy.
Because traders keep increasing the targets once the share price start moving in their favor but this can be risky. This happens due to greed factor to get more and more profit in single trade.
So book your profits on your already decided targets.
While shifting from paper trading to Live Trading :
When you are planning to start actual day trading, once you successfully complete the paper trading practice, then you may get fear while trading because you are using you actual money
Fear of Losing Money :
The reason that your trading system suddenly stops working because the additional emotion that comes while using own real money. The fear of losing one's own money is a very strong emotion, and can cause even experienced traders to make mistakes. Hesitating before entering a trade, moving their stop loss to break even too early, or taking a smaller profit than they would normally, are all common mistakes that are made because of the emotion of fear.
Overcoming the Fear :
If you are experiencing these problems then you have keep faith in practice trading practice what you did before doing your actual day trading.
If you would have made profits consistently in paper trading then you need to have faith in your trading system, and follow it exactly and on the other side still if you are not feeling confident then you should go back to paper trading practice.
Patience and Discipline :
Professional traders know that their emotions are going to affect their trading whether they like it or not. As a result, they develop personalities that allow them to overcome their emotions and trade profitably. Two of the most important personality traits are patience and discipline, because they allow you to handle one of the most difficult aspects of trading.
Possibly the most emotional time for a trader is when their profit / loss is negative, and they are waiting for their next trade to come along. During this time they will be impatient and anxious, and they will be desperate to take their next trade in order to make back the money that they have lost. Most new traders (and also many experienced traders) will start taking trades that are not part of their trading system. As soon as this happens, their loss will increase, and will continue to do so until they realize what they are doing and correct their behavior.
By developing a personality that counteracts your emotions you will be able to continue making logical decisions.
Patience and discipline are vital personality characters for professional traders.
Being patient allows you to wait for your next trade regardless of your current profit / loss, and being disciplined allows you to take only trades that are part of your trading system and not making unnecessary trades.
Maintain trading Log :
One method of learning how to be patient and discipline is to keep a detailed log of every trade that you take. At the end of the day (or week, or month), replay every trade, and compare the replayed trades to your trading log. If there are any differences, you should be able to determine what caused them, and hopefully know what you need to avoid the next time.
Another method of becoming patient and disciplined is to have absolute confidence in your trading system. Knowing that your trading system will make money over the long term can be enough to overcome the negative emotions that occur when you are experiencing a negative profit / loss. The only way to build confidence is to test your trades repeatedly in paper trading. If you have tested your trading system over a significant length of time, and it is consistently profitable, there is no reason to question that it will continue to be profitable
Patience, Decisiveness, and Calmness :
The idea of making a living as a day trader appeals to a large number of people, but not everybody has a personality suitable for day trading. Even people that are successful in other fields (even related fields), often find that they are not compatible with day trading.
Day trading is a flexible profession but there are few qualities that all day traders need to have in their personalities, in order to be successful (profitable) and those are
Patience
Decisiveness
Calmness
Patience :
Day trading is performed by sitting quietly in front of a computer, waiting anywhere from a few minutes, to several hours for the trade to come along.
Being able to wait patiently is a necessity; otherwise you will find yourself taking trades that are not part of your trading system and most likely losing money on them.
Decisiveness :
Deciding when to enter and exit trades is one of the most basic functions of a day trader, and it is important that these decisions are made as efficiently as possible. Being decisive is vital to successful day trading, otherwise you will only sit and watch trades that you should have actually taken. Being decisive does not mean being bold, and taking trades that you are not sure about, but it does mean acting promptly when a trade does come along.
Calmness :
Remaining calm during trading is one of the most important personality character for a day trader, but it is also one of the most difficult to obtain and practice.
As humans, the natural reactions to a winning trade are excitement and joy, and the natural reactions to a losing trade are panic and sadness, but day traders need to control these emotions, otherwise they will adversely affect their trading decisions (particularly the negative emotions).
For example, the panic that occurs after a losing trade might make you take a new trade almost immediately in an attempt to make the money back, even though there was no trade according to your trading system.
Paper trading practice :
It is a good way to practice your patience, decisiveness, and calmness during trading, without risking any real money.
After many hours, days, or weeks of practice you will have a good idea of how your personality and your emotions will affect your day trading, but even then, there will still be an emotional response when you start trading live.
Recognizing and Overcoming Stubbornness :
A large part of being a successful day trader is having the right personality character, or if not, at least being able to control the opposing personality traits. Human traders will always be influenced by their personalities and their resulting emotions, but professional traders have learned to overcome the emotions that are counter productive to their trading.
Stubbornness (inflexibility) :
One such personality characteristic is stubbornness.
Stubbornness (inflexibility) causes people to become attached to their decisions regardless of the consequences.
Day traders need to be decisive in order to make their trading decisions promptly, and then act upon those decisions without any hesitation, but they also need to be flexible and able to react when a decision was incorrect.
In order to be successful, day traders need to find the right combination of decisiveness and flexibility for their personality
Overcoming Stubbornness :
Stubborn people usually refuse to admit that they are stubborn, so recognizing that stubbornness is causing problems with their trading can be difficult. Stubbornness usually causes several different trading mistakes, with the following mistakes being the most common. If you are making any of these mistakes in your trading, it is probable that you have some degree of stubbornness in your personality, and that it is affecting your day trading:
Refusing to use targets and stop losses, and certainly refusing to actually place target and stop loss orders
Choosing not to follow a trading system, because you know what the market is going to do
Holding losing trades until the pain is just too much to bear (or even until your brokerage exits the trade for you, because you no longer cover the required margin)
For any other reason, these mistakes are actually easy to overcome, but not when they are being caused by stubbornness. In order to overcome these mistakes, stubborn traders first need to recognize that the mistakes are being caused by a natural human emotion, and that there is nothing wrong with admitting this. As being stubborn is a form of control, it may help to think that by recognizing the cause, you can have more control over yourself, and hence over your trading.
Once the cause has been recognized, trading in simulation will provide time to correct the trading mistakes without risking any real money. Trade in simulation until you are consistently profitable (by consistently, I mean several weeks, not just one day), and then move to live trading.
Some Important Tips for Trading in Futures Derivatives
Futures derivatives trading :
Future trading can be done on stocks as well as on Indices like IT index, Auto index, Pharma index etc.
Stock future trading -
Let’s first understand what the meaning of futures trading is. In simple language one future contract is group of stocks (one lot) which has to be bought with certain expiry period and has to be sold (squared off) within that expiry period.
Suppose if you buy futures of Wipro of one month expiry then you have to sell it within that one month period.
Important - Future contract get expires at every last Thursday of every month.
If you buy October month expiry future contract then you have to sell it within last Thursday of October month. Likewise you can buy two months and three months expiry period future contract.
You can buy maximum of three month expiry period.
For example - suppose this is month of October then you have to buy till maximum month of December expiry and you have to sell it within last Thursday of December month. You can sell anytime between these periods.
Lot size (group of stocks in one future contract) varies from future to future contract.
For example Reliance Industries future lot size has 150 quantities of shares while a Tata Consultancy service has 250 shares.
In the same manner all futures have different lot sizes decided by SEBI (Securities Exchange Board of India).
The margin (in other words price of one lot size) varies on daily basis based on its stocks closing price.
Future trading can be done on selected stocks listed under Nifty and Jr. Nifty and not on all stocks.
The price of future contract is determined by its underlying stock.
Important - You can’t buy future contract of expiry period of not more than 3 months.
Indices future trading :
As you can do future trading on stocks likewise you can do trading on different indices like Nifty index, IT index, Auto index, Pharma index etc.
Successful trading in futures :
Future or derivative trading is the process of buying or selling stock future or index future for a certain period of time and squaring off before the expiry date.
Expiry period can be of one month, two month and three month and not more then of three month.
Its not compulsion that you have to square off your positions on the expiry date or wait till the expiry period but in fact you can square off at any time even, at the same day, or you can hold as long as you want but remember to square off before expiry date.
Most of the times on 3rd month expiry future you may see very less trading volumes.
Generally most of the traders/investors trade or invest on current month future or second month future contract and you may see very low volumes on last month means third month expiry .
But on Nifty index contract or on other index contract you may see good trading volumes even on 3rd month expiry future also.
You can also buy and sell or sell and buy future contract on the same day of any expiry month. This is called as day trading or intraday in futures.
Selling future contract before buying is called short selling. Short selling is allowed in futures trading.
Major Advantages of Futures Trading over Stock Trading :
Margin is available:
In future trading you get margin to buy (but can hold only up to maximum of 3 months), while in stock trading you must have that much of amount in your account to buy.
For example - If you plan to buy stock XYZ at Rs. 100 and quantity 1000 shares then you have to pay 1 lakh rupees (RS 100 x1000 qty). But if you plan to buy XYZ future contract and that contract
lot size has 1000 quantity of shares then instead of paying 1 lakh rupees you have to pay just 20% to 30% of whole amount which comes to 20 thousand to 30 thousand rupees.
In short in future trading you have to pay just 20% to 30% of the whole amount what you pay if you buy stock of that price. But limitation for this is your expiry period. Means if you bought future of one month expiry then you have to square off within that one month likewise you can buy maximum of three months expiry.
Possible to do short selling :
You can short sell futures- You can sell futures without buying them which is called short selling and later buy within your expiry period, to cover up your positions.
This is not possible in stocks. You can’t sell stocks before buying them in delivery (you can do in
intraday). You can short sell futures and can cover off within your expiry period.
For example - If expiry period of your future contract is of 1 month then you have time frame of one month to cover off your order like wise if your future expiry period is of two months then you have
time frame of two months and this continues till three months and not more then three months.
In short selling of futures also you get margin as you get in buying of futures.
Brokerages are low :
Brokerages offered for future trading are less as compared to stock delivery trading.
Disadvantages of Future Trading over Stock Trading:
1) Limitation on holding
If you buy or sell a future contract then you have limitation of time frame to square off your position before expiry
date.
For example - If you buy or sell future contract of one month expiry period then you have to square off your position
before your expiry date of that month, so in this example you got one month period. So likewise if you go for two
month expiry period then you get 2 months and if you go for three month expiry then you will get 3 month expiry
period to square off your position.
2) Level of Risk
Due to margin facility in future trading you may earn huge profit by investing fewer amounts but at the contrary side
if your trade goes wrong then you may have to suffer huge loss.
3) Limitation on stocks
You can’t do future trading on all stocks. You can only do on listed stocks on Nifty and Jr. Nifty.
Important points to Remember while doing future trading :
1) First up all you have to decide whether you want to buy stock derivatives or index derivative. After this you have to
select the expiry period. Once you buy certain expiry period then you have to sell (cover off) your order before that
period.
Its no need to wait till the expiry period, you can even square off on the same day (if you are getting profit) or
anytime whenever you feel to book profit, no compulsion to cover off your order on the last day of expiry.
2) Check out for Futures current market price.
3) Futures Lot Size (number of shares in that particular Lot).
4) Futures Lot price (this is the amount you must have in your account to buy one lot of future) also called as margin
amount.
5) Selection of expiry period - you want to trade on expiry of one month, two month or last 3rd month.
6) No need to wait till expiry period can book profit wherever applicable.
Future trading can be done on stocks as well as on Indices like IT index, Auto index, Pharma index etc.
Stock future trading -
Let’s first understand what the meaning of futures trading is. In simple language one future contract is group of stocks (one lot) which has to be bought with certain expiry period and has to be sold (squared off) within that expiry period.
Suppose if you buy futures of Wipro of one month expiry then you have to sell it within that one month period.
Important - Future contract get expires at every last Thursday of every month.
If you buy October month expiry future contract then you have to sell it within last Thursday of October month. Likewise you can buy two months and three months expiry period future contract.
You can buy maximum of three month expiry period.
For example - suppose this is month of October then you have to buy till maximum month of December expiry and you have to sell it within last Thursday of December month. You can sell anytime between these periods.
Lot size (group of stocks in one future contract) varies from future to future contract.
For example Reliance Industries future lot size has 150 quantities of shares while a Tata Consultancy service has 250 shares.
In the same manner all futures have different lot sizes decided by SEBI (Securities Exchange Board of India).
The margin (in other words price of one lot size) varies on daily basis based on its stocks closing price.
Future trading can be done on selected stocks listed under Nifty and Jr. Nifty and not on all stocks.
The price of future contract is determined by its underlying stock.
Important - You can’t buy future contract of expiry period of not more than 3 months.
Indices future trading :
As you can do future trading on stocks likewise you can do trading on different indices like Nifty index, IT index, Auto index, Pharma index etc.
Successful trading in futures :
Future or derivative trading is the process of buying or selling stock future or index future for a certain period of time and squaring off before the expiry date.
Expiry period can be of one month, two month and three month and not more then of three month.
Its not compulsion that you have to square off your positions on the expiry date or wait till the expiry period but in fact you can square off at any time even, at the same day, or you can hold as long as you want but remember to square off before expiry date.
Most of the times on 3rd month expiry future you may see very less trading volumes.
Generally most of the traders/investors trade or invest on current month future or second month future contract and you may see very low volumes on last month means third month expiry .
But on Nifty index contract or on other index contract you may see good trading volumes even on 3rd month expiry future also.
You can also buy and sell or sell and buy future contract on the same day of any expiry month. This is called as day trading or intraday in futures.
Selling future contract before buying is called short selling. Short selling is allowed in futures trading.
Major Advantages of Futures Trading over Stock Trading :
Margin is available:
In future trading you get margin to buy (but can hold only up to maximum of 3 months), while in stock trading you must have that much of amount in your account to buy.
For example - If you plan to buy stock XYZ at Rs. 100 and quantity 1000 shares then you have to pay 1 lakh rupees (RS 100 x1000 qty). But if you plan to buy XYZ future contract and that contract
lot size has 1000 quantity of shares then instead of paying 1 lakh rupees you have to pay just 20% to 30% of whole amount which comes to 20 thousand to 30 thousand rupees.
In short in future trading you have to pay just 20% to 30% of the whole amount what you pay if you buy stock of that price. But limitation for this is your expiry period. Means if you bought future of one month expiry then you have to square off within that one month likewise you can buy maximum of three months expiry.
Possible to do short selling :
You can short sell futures- You can sell futures without buying them which is called short selling and later buy within your expiry period, to cover up your positions.
This is not possible in stocks. You can’t sell stocks before buying them in delivery (you can do in
intraday). You can short sell futures and can cover off within your expiry period.
For example - If expiry period of your future contract is of 1 month then you have time frame of one month to cover off your order like wise if your future expiry period is of two months then you have
time frame of two months and this continues till three months and not more then three months.
In short selling of futures also you get margin as you get in buying of futures.
Brokerages are low :
Brokerages offered for future trading are less as compared to stock delivery trading.
Disadvantages of Future Trading over Stock Trading:
1) Limitation on holding
If you buy or sell a future contract then you have limitation of time frame to square off your position before expiry
date.
For example - If you buy or sell future contract of one month expiry period then you have to square off your position
before your expiry date of that month, so in this example you got one month period. So likewise if you go for two
month expiry period then you get 2 months and if you go for three month expiry then you will get 3 month expiry
period to square off your position.
2) Level of Risk
Due to margin facility in future trading you may earn huge profit by investing fewer amounts but at the contrary side
if your trade goes wrong then you may have to suffer huge loss.
3) Limitation on stocks
You can’t do future trading on all stocks. You can only do on listed stocks on Nifty and Jr. Nifty.
Important points to Remember while doing future trading :
1) First up all you have to decide whether you want to buy stock derivatives or index derivative. After this you have to
select the expiry period. Once you buy certain expiry period then you have to sell (cover off) your order before that
period.
Its no need to wait till the expiry period, you can even square off on the same day (if you are getting profit) or
anytime whenever you feel to book profit, no compulsion to cover off your order on the last day of expiry.
2) Check out for Futures current market price.
3) Futures Lot Size (number of shares in that particular Lot).
4) Futures Lot price (this is the amount you must have in your account to buy one lot of future) also called as margin
amount.
5) Selection of expiry period - you want to trade on expiry of one month, two month or last 3rd month.
6) No need to wait till expiry period can book profit wherever applicable.
Golden Rules Tips for Successful Smart Trading
Stock markets are driven by greed and fear.
- Fear of losing money
Simple basic rules to tame the Fear Factor
* Always paper trade before putting in your own money.
A new trader should first learn trading through paper trade.
It is the better way to learn trading in stock market. Here there is no is involved and hence no fear of losing money, but one a beginner will experience the entire trading process.
* Only trade with money you can afford to lose
Trade only with money you can afford to lose.
Never trade with the money which is meant for your basic needs, such as food, rent, and other necessary expenses.
* Identify you risk threshold
Never exceed your individual fear threshold.
When the market goes against your trading, try to stay cool and have clear precise exit plans. Implement your trades with logic and common sense.
* Diversification
Never try to put all of your eggs in one basket.
Never invest a major amount of money in just one stock. Diversify your positions by investing in more than 5 stocks.
Investment Strategy
* Get Information Before You Invest, Not After
* Set a well defined objective for each individual investment.
* Be specific
* Be reasonable in expectations
* Consider Risk
* Be measurable
* Buy Low, Sell High. Buy High, Sell Higher
* Buy on the Rumor, Sell on the News
* Buy the Stock That Splits
* Never Buy a Stock Only Because It Has a Low Price
* Avoid Over trading
* Always paper trade before putting in your own money.
A new trader should first learn trading through paper trade.
It is the better way to learn trading in stock market. Here there is no is involved and hence no fear of losing money, but one a beginner will experience the entire trading process.
* Only trade with money you can afford to lose
Trade only with money you can afford to lose.
Never trade with the money which is meant for your basic needs, such as food, rent, and other necessary expenses.
* Identify you risk threshold
Never exceed your individual fear threshold.
When the market goes against your trading, try to stay cool and have clear precise exit plans. Implement your trades with logic and common sense.
* Diversification
Never try to put all of your eggs in one basket.
Never invest a major amount of money in just one stock. Diversify your positions by investing in more than 5 stocks.
Investment Strategy
* Get Information Before You Invest, Not After
* Set a well defined objective for each individual investment.
* Be specific
* Be reasonable in expectations
* Consider Risk
* Be measurable
* Buy Low, Sell High. Buy High, Sell Higher
* Buy on the Rumor, Sell on the News
* Buy the Stock That Splits
* Never Buy a Stock Only Because It Has a Low Price
* Avoid Over trading
Friday, May 28, 2010
Risk management for Smart Traders
There is one big difference between traders, who make money and traders who don’t. It is called risk management. Even if you blindly pick your stocks, in the long-term you will make money as long as you cut your losses short. Add to risk management a proper equity selection model and then you are in top 5% in the world. The 5% that actually make money, consistently. This is the biggest secret of successful traders – cutting losses short. It saves capital and it saves your piece of mind.
If you browse on the internet, you will find thousands of articles that preach that losses should be cut short. It is well known fact and yet you’ll be surprised how few people actually utilize it, even those who write about it. Words are free. You can say whatever you want. Many people don’t practice what they preach and this is why the biggest edge someone could have is called discipline.
There are two types of traders: the ones that cut losses short and the ones that lose everything and go out of business. If you can’t define your risk in advance and most importantly if you can’t accept it, you should not be trading at all. Reading about cutting losses short will never be enough. It is human to believe that you are different and that you know better and that it will never happen to you. You have to experience it to realize it. It is part of the learning curve. I knew about this rule long before I committed serious money to trading and yet I didn’t practice it until I had my portion of outsized losses. Today, the thought of how and where I’ll exit a trade, is the most important.
I know that there are many people who preach that they don’t use stop losses and yet they are successful. Well, if they are successful doing that, then they are not really traders. They are investors and they limit their risk by hedging, which is a whole new chapter.
Tips for Successful Trading
* Successful traders have absolute control over their emotions, they never get too elated over a win and too depressed over a loss.
* Successful traders seldom think of prices too high or low.
* Successful traders do not panic, they make adjustments rather than revolutionary changes to their trading style.
* Successful traders do not flinch at making the decision to take a loss, they never let loses ride and never add to loosing trades. (One old trader told me he thought his positions like stock in a store. If something sells it’s making you money and you add to that line, if something does not sell it is losing you money so you discount and unload it).
* Successful traders treat trading as a business not a hobby.
* Successful traders stay physically fit.
* Successful traders are prepared for all eventualities on any given trading day. they come to work with a plan that includes many contingencies and not what they just hope will happen.
* In your trading program you should therefore have answers to the following what if:prices open sharply higher or lower?
the market is quiet?
the market is very volatile?
the market makes new highs?
the market makes new lows?
the market goes up early then reverses later?
the market goes down early then reverses later?
* The successful trader only trades with money he/she can afford to loose.
* Trading can result in substational looses. It is also exciting, exhilarating and can be very ADDICTIVE. The more you are emotionally involved in your money, the harder it will be to make objective decisions about market entry and exit.
* Successful traders spend as much time focussing on money management as they do on trading methods.
YOU DO NOT HAVE THE PROFILE OF A SUCCESFUL TRADER IF YOU DO NOT HAVE AT LEAST SOME OF THE ABOVE TRAITS.
* Successful traders keep a low profile.
* Successful traders listen to the markets. Unsuccesful traders try to impose thier will on the market.
Watch Important Share Trading Rules
Have patience to sit through your positions with discipline
Be like the devout chanting lord's name steadfastly - Be with the flow of the markets.
Trade only in Nifty, if you must in others, then trade in highly liquid scrips.
Live to fight another day - Risk management by position sizing & stop losses.
Don't pick the tops & bottoms but the major 75% of any wave.
Know your targets/exit points when you initiate a position and trade by it
When in doubt, reduce your position size by 50% or exit..
Your emotional slate of mind need to be balanced for a trading day.
Go to alpha state of mind with "Pranayama" to stay focussed & excel in your trades.
Saturday, May 22, 2010
Basics of the Share Market Trading | Demat Account | Brokerage
What is a stock ?
A stock is a partial ownership in a company or an industry, with rights to share in its profits. When an investor buys a stock of a company, he is called a shareholder or a stockholder of that company. The benefit of buying a share is that when the company profits, the shareholders also profit. The company distributes the profit among its shareholders, which is called the ‘dividend‘.
How do you make profits with stocks ?
But many traders make real profit in stocks using the market price of the stocks. Stocks are traded in the stock markets. The face value is the nominal value of the stock that is determined by the issuer of the stock. ‘Market price‘ of a stock is the price at which currently a stock is traded in the market. This price may be at premium or lesser than the ‘face value’ of the stock, depending on the company’s performance and prospects, investors’ interests in the company and a lot of other factors.
Market price of a stock keeps varying as traders trade the stock in the market. Traders often make money using these variations in the market price of the stock. Stocks are bought at lower market prices and sold at higher prices later. This is referred to as ‘long‘ positions in market terms. Similarly stocks can be sold at a higher market price and bought at a lower price later. Thiis is referred to as ‘short‘ positions in market terms. In these cases, the difference in the market prices at the time of buying and selling will be seen as profit by the traders.
What is the Stock Market ?
Basically it is an exchange place or a market that facilitates the trading of stocks. People participating in the stock markets range from some casual traders and investors who trade as a hobby, to large fund traders.
In India the most famous exchanges or markets are the Bombay Stock Exchange(BSE) and the National Stock Exchange (NSE). Globally there are many markets including the famous New York Stock (NYSE), NASDAQ, London Stock Exchange, Hong Kong Stock Exchange etc..
Any market can be thought of with two functionalities:
Primary Market: Here the companies and industries raise long term funds for their operations by issuing shares. Companies come up with an initial price, mostly with premium for the face value of the shares, which will be distributed to the investors. This is called the Initial Public Offer or the IPO.
Secondary Market : After a Company has finished its IPO, it is listed in the markets. After getting listed and issued shares to investors, the shares can then be sold to other investors in the stockmarket. Here the people can buy the shares at a current price as determined by other investors in the market.
What is the Demat Account ?
Like opening a bank account for doing your personal financial transactions, you have to open a Demat account to trade in the stock market. Demat account refers to Dematerialized account. This account helps you to buy and sell stocks without the need for physical paper shares.
A Demat Account is a must for trading the stocks these days. To open a demat account, you should select a Depository Participant (DP). These days most of the banks are also DPs. So you can contact any of the DPs with your identity, address proof and PAN documents for opening a demat account for a prescribed fee by the DP. The registered DPs are also listed in NSDL (http://www.nsdl.co.in/) and CDSL (http://www.cdslindia.com/) websites.
Who is the Stock Broker ?
Stock Brokers are members of the Stock Exchanges. Only these members can conduct transactions in the exchange on behalf of the individuals and companies. So if you want to buy or sell shares in the exchange, you have to contact a stock broker for doing so. This normally requires the individuals to open an account with the Stock Broker. So the individual becomes a client for the stock broker.
Once the client wishes to buy a stock, the broker would place the order in the stock exchange on behalf of the client. When the transaction is done, the broker places the price to the client. The client pays for the stocks he bought and the broker transfers the stocks into the demat account of the client by following the transaction and settlement procedures.
A stock is a partial ownership in a company or an industry, with rights to share in its profits. When an investor buys a stock of a company, he is called a shareholder or a stockholder of that company. The benefit of buying a share is that when the company profits, the shareholders also profit. The company distributes the profit among its shareholders, which is called the ‘dividend‘.
How do you make profits with stocks ?
But many traders make real profit in stocks using the market price of the stocks. Stocks are traded in the stock markets. The face value is the nominal value of the stock that is determined by the issuer of the stock. ‘Market price‘ of a stock is the price at which currently a stock is traded in the market. This price may be at premium or lesser than the ‘face value’ of the stock, depending on the company’s performance and prospects, investors’ interests in the company and a lot of other factors.
Market price of a stock keeps varying as traders trade the stock in the market. Traders often make money using these variations in the market price of the stock. Stocks are bought at lower market prices and sold at higher prices later. This is referred to as ‘long‘ positions in market terms. Similarly stocks can be sold at a higher market price and bought at a lower price later. Thiis is referred to as ‘short‘ positions in market terms. In these cases, the difference in the market prices at the time of buying and selling will be seen as profit by the traders.
What is the Stock Market ?
Basically it is an exchange place or a market that facilitates the trading of stocks. People participating in the stock markets range from some casual traders and investors who trade as a hobby, to large fund traders.
In India the most famous exchanges or markets are the Bombay Stock Exchange(BSE) and the National Stock Exchange (NSE). Globally there are many markets including the famous New York Stock (NYSE), NASDAQ, London Stock Exchange, Hong Kong Stock Exchange etc..
Any market can be thought of with two functionalities:
Primary Market: Here the companies and industries raise long term funds for their operations by issuing shares. Companies come up with an initial price, mostly with premium for the face value of the shares, which will be distributed to the investors. This is called the Initial Public Offer or the IPO.
Secondary Market : After a Company has finished its IPO, it is listed in the markets. After getting listed and issued shares to investors, the shares can then be sold to other investors in the stockmarket. Here the people can buy the shares at a current price as determined by other investors in the market.
What is the Demat Account ?
Like opening a bank account for doing your personal financial transactions, you have to open a Demat account to trade in the stock market. Demat account refers to Dematerialized account. This account helps you to buy and sell stocks without the need for physical paper shares.
A Demat Account is a must for trading the stocks these days. To open a demat account, you should select a Depository Participant (DP). These days most of the banks are also DPs. So you can contact any of the DPs with your identity, address proof and PAN documents for opening a demat account for a prescribed fee by the DP. The registered DPs are also listed in NSDL (http://www.nsdl.co.in/) and CDSL (http://www.cdslindia.com/) websites.
Who is the Stock Broker ?
Stock Brokers are members of the Stock Exchanges. Only these members can conduct transactions in the exchange on behalf of the individuals and companies. So if you want to buy or sell shares in the exchange, you have to contact a stock broker for doing so. This normally requires the individuals to open an account with the Stock Broker. So the individual becomes a client for the stock broker.
Once the client wishes to buy a stock, the broker would place the order in the stock exchange on behalf of the client. When the transaction is done, the broker places the price to the client. The client pays for the stocks he bought and the broker transfers the stocks into the demat account of the client by following the transaction and settlement procedures.
Thursday, May 20, 2010
Analyzing Chart Patterns: Head And Shoulders
Analyzing Chart Patterns: Head And Shoulders
Head and Shoulders Top
The head-and-shoulders pattern is one of the most popular and reliable chart patterns in technical analysis. And as one might imagine from the name, the pattern looks like a head with two shoulders.
Head and shoulders is a reversal pattern that, when formed, signals the security is likely to move against the previous trend. There are two versions of the head-and-shoulders pattern. The head-and-shoulders top is a signal that a security's price is set to fall, once the pattern is complete, and is usually formed at the peak of an upward trend. The second version, the head-and-shoulders bottom (also known as inverse head and shoulders), signals that a security's price is set to rise and usually forms during a downward trend.
Both of these head and shoulders have a similar construction in that there are four main parts to the head-and-shoulder chart pattern: two shoulders, a head and a neckline. The patterns are confirmed when the neckline is broken, after the formation of the second shoulder.
The head and shoulders are sets of peaks and troughs. The neckline is a level of support or resistance. The head and shoulders pattern is based on Dow Theory's peak-and-trough analysis. An upward trend, for example, is seen as a period of successive rising peaks and rising troughs. A downward trend, on the other hand, is a period of falling peaks and troughs. The head-and-shoulders pattern illustrates a weakening in a trend where there is deterioration in the peaks and troughs.
Head and Shoulders Top
Again, the head-and-shoulders top signals to chart users that a security's price is likely to make a downward move, especially after it breaks below the neckline of the pattern. Due to this pattern forming mostly at the peaks of upward trends, it is considered to be a trend-reversal pattern, as the security heads down after the pattern's completion
This pattern has four main steps for it to complete itself and signal the reversal. The first step is the formation of the left shoulder, which is formed when the security reaches a new high and retraces to a new low. The second step is the formation of the head, which occurs when the security reaches a higher high, then retraces back near the low formed in the left shoulder. The third step is the formation of the right shoulder, which is formed with a high that is lower than the high formed in the head but is again followed by a retracement back to the low of the left shoulder. The pattern is complete once the price falls below the neckline, which is a support line formed at the level of the lows reached at each of the three retracements mentioned above.
Again, there are four steps to this pattern, starting with the formation of the left shoulder, which occurs when the price falls to a new low and rallies to a high. The formation of the head, which is the second step, occurs when the price moves to a low that is below the previous low, followed by a return to the previous high. This move back to the previous high creates the neckline for this chart pattern. The third step is the formation of the right shoulder, which sees a sell-off, but to a low that is higher than the previous one, followed by a return to the neckline. The pattern is complete when the price breaks above the neckline.
The Breaking of the Neckline and the Potential Return Move
As seen from the above, the head-and-shoulders pattern is complete when the neckline is broken; the trend is then considered reversed, and the security should be heading in a new direction. The point of breakout is when most traders following the pattern would enter the security.
However, the security will not always just continue in the direction suggested by the pattern after the breakout. For this reason it's important to be aware of what is known as a "throwback" move. This situation occurs when the price breaks through the neckline, setting a new high or low (depending on the pattern), followed by a retreat back to the neckline.
Analyzing Chart Patterns: Double Top And Double Bottom
Analyzing Chart Patterns: Double Top
Analyzing Chart Patterns: Double Bottom
The double top and double bottom are another pair of well-known chart patterns whose names don’t leave much to the imagination. These two reversal patterns illustrate a security's attempt to continue an existing trend. Upon several attempts to move higher, the trend is reversed and a new trend begins. These chart patterns formed will often resemble what looks like a “W” (for a double bottom) or an “M” (double top).
Double Top
The double-top pattern is found at the peaks of an upward trend and is a clear signal that the preceding upward trend is weakening and that buyers are losing interest. Upon completion of this pattern, the trend is considered to be reversed and the security is expected to move lower.
The first stage of this pattern is the creation of a new high during the upward trend, which, after peaking, faces resistance and sells off to a level of support. The next stage of this pattern will see the price start to move back towards the level of resistance found in the previous run-up, which again sells off back to the support level. The pattern is completed when the security falls below (or breaks down) the support level that had backstopped each move the security made, thus marking the beginnings of a downward trend.
It's important to note that the price does not need to touch the level of resistance but should be close to the prior peak. Also, when using this chart pattern one should wait for the price to break below the key level of support before entering. Trading before the signal is formed can yield disastrous results, as the pattern is only setting up the possibility for the trend reversal and could trade within this banded range for some time without falling through.
This pattern is a clear illustration of a battle between buyers and sellers. The buyers are attempting to push the security but are facing resistance, which prevents the continuation of the upward trend. After this goes on a couple of times, the buyers in the market start to give up or dry up, and the sellers start to take a stranglehold of the security, sending it down into a new downtrend.
Again, volume should be an important focus as one should look for an increase in volume when the security falls below the support level. Also, as in other chart patterns, do not be alarmed if there is a return to the previous support level that has now become a resistance level in the newly established trend.
Double Bottom
This is the opposite chart pattern of the double top as it signals a reversal of the downtrend into an uptrend. This pattern will closely resemble the shape of a "W".
The double bottom is formed when a downtrend sets a new low in the price movement. This downward move will find support, which prevents the security from moving lower. Upon finding support, the security will rally to a new high, which forms the security's resistance point. The next stage of this pattern is another sell-off that takes the security down to the previous low. These two support tests form the two bottoms in the chart pattern. But again, the security finds support and heads back up. The pattern is confirmed when the price moves above the resistance the security faced on the prior move up.
Remember that the security needs to break through the support line to signal a reversal in the downward trend and should be done on higher volume. As in the double top, do not be surprised if the price returns to the breakout point to test the new support level in the upward trend.
Price Objective and Adjustments
It's important to get an idea as to the size of the resulting move once the signal has been formed. In both the double top and double bottom, the initial price objective can be measured by taking the price distance between the support and resistance levels or the range that chart pattern trades.
For example, assume in a double top that the upward trend peaks at $50 and retraces to $40 to form the support level. Assuming everything follows through on the chart pattern and the support level is broken at $40, the initial price objective should be set at $30 ($40-$10).
Often in technical analysis and chart patterns, we're presented with an ideal chart setup; but in reality the pattern doesn't always look as perfect as it's supposed to. In double tops and double bottoms one thing to remember is that the price on the second test does not always need to reach the same distance as the first test.
Another problem that can occur is the second testing point, where the top or bottom actually breaks the level that the first top or bottom test created. If this occurs, it can give a signal that the previous trend will continue - instead of reverse - as the pattern suggests. However, don’t be too quick to abandon the pattern as it could still materialize.
If the price does, in fact, move above the prior test, look to see if the move was accompanied by large volume, suggesting a trend continuation. For example, if on the second test of a double bottom the price falls below the support line on heavy volume, it is a good sign the downward trend will continue and not reverse. If the volume is very weak, it could just be a last attempt to continue the downward trend, but the trend will ultimately reverse.
The double tops and double bottoms are strong reversal patterns that can provide trading opportunities. But it is important to be careful with these patterns as the price can often move either way. Consequently, it's important that the trade is implemented once the support/resistance line is broken.
Analyzing Chart Patterns: Triangles
Symmetrical triangle :
Ascending Triangle :
As you may have noticed, chart pattern names don't leave much to the imagination. This is no different for the triangle patterns, which clearly form the shape of a triangle. The basic construct of this chart pattern is the convergence of two trendlines - flat, ascending or descending - with the price of the security moving between the two trendlines.
There are three types of triangles, which vary in construct and significance: the symmetrical triangle, the descending triangle and the ascending triangle.
Symmetrical triangle
The symmetrical triangle is mainly considered to be a continuation pattern that signals a period of consolidation in a trend followed by a resumption of the prior trend. It is formed by the convergence of a descending resistance line and an ascending support line. The two trendlines in the formation of this triangle should have a similar slope converging at a point known as the apex. The price of the security will bounce between these trendlines, towards the apex, and typically breakout in the direction of the prior trend.
If preceded by a downward trend, the focus should be on a break below the ascending support line. If preceded by an upward trend, look for a break above the descending resistance line. However, this pattern doesn't always lead to a continuation of the previous trend. A break in the opposite direction of the prior trend should signal the formation of a new trend.
Above is an example of a symmetrical triangle that is preceded by an upward trend. The first part of this pattern is the creation of a high in the upward trend, which is followed by a sell-off to a low. The price then moves to another high that is lower than the first high and again sells off to a low, which is higher than the previous low. At this point the trendlines can be drawn, which creates the apex. The price will continue to move between these lines until breakout.
The pattern is complete when the price breaks out of the triangle - look for an increase in volume in the direction of the breakout. This pattern is also susceptible to a return to the previous support or resistance line that it just broke through, so make sure to watch for this level to hold if it does indeed break out.
Ascending Triangle
The ascending triangle is a bullish pattern, which gives an indication that the price of the security is headed higher upon completion. The pattern is formed by two trendlines: a flat trendline being a point of resistance and an ascending trendline acting as a price support.
The price of the security moves between these trendlines until it eventually breaks out to the upside. This pattern will typically be preceded by an upward trend, which makes it a continuation pattern; however, it can be found during a downtrend
As seen above, the price moves to a high that faces resistance leading to a sell-off to a low. This follows another move higher, which tests the previous level of resistance. Upon failing to move past this level of resistance, the security again sells off - but to a higher low. This continues until the price moves above the level of resistance or the pattern fails.
The most telling part of this pattern is the ascending support line, which gives an indication that sellers are starting to leave the security. After the sellers are knocked out of the market, the buyers can take the price past the resistance level and resume the upward trend.
The pattern is complete upon breakout above the resistance level, but it can fall below the support line (thus breaking the pattern), so be careful when entering prior to breakout.
Descending triangle
The descending triangle is the opposite of the ascending triangle in that it gives a bearish signal to chartists, suggesting that the price will trend downward upon completion of the pattern. The descending triangle is constructed with a flat support line and a downward-sloping resistance line.
Similar to the ascending triangle, this pattern is generally considered to be a continuation pattern, as it is preceded by a downward trendline. But again, it can be found in an uptrend
The first part of this pattern is the fall to a low that then finds a level of support, which sends the price to a high. The next move is a second test of the previous support level, which again sends the stock higher - but this time to a lower level than the previous move higher. This is repeated until the price is unable to hold the support level and falls below, resuming the downtrend.
This pattern indicates that buyers are trying to take the security higher, but continue to face resistance. After several attempts to push the stock higher, the buyers fade and the sellers overpower them, which sends the price lower
There are three types of triangles, which vary in construct and significance: the symmetrical triangle, the descending triangle and the ascending triangle.
Symmetrical triangle
The symmetrical triangle is mainly considered to be a continuation pattern that signals a period of consolidation in a trend followed by a resumption of the prior trend. It is formed by the convergence of a descending resistance line and an ascending support line. The two trendlines in the formation of this triangle should have a similar slope converging at a point known as the apex. The price of the security will bounce between these trendlines, towards the apex, and typically breakout in the direction of the prior trend.
If preceded by a downward trend, the focus should be on a break below the ascending support line. If preceded by an upward trend, look for a break above the descending resistance line. However, this pattern doesn't always lead to a continuation of the previous trend. A break in the opposite direction of the prior trend should signal the formation of a new trend.
Above is an example of a symmetrical triangle that is preceded by an upward trend. The first part of this pattern is the creation of a high in the upward trend, which is followed by a sell-off to a low. The price then moves to another high that is lower than the first high and again sells off to a low, which is higher than the previous low. At this point the trendlines can be drawn, which creates the apex. The price will continue to move between these lines until breakout.
The pattern is complete when the price breaks out of the triangle - look for an increase in volume in the direction of the breakout. This pattern is also susceptible to a return to the previous support or resistance line that it just broke through, so make sure to watch for this level to hold if it does indeed break out.
Ascending Triangle
The ascending triangle is a bullish pattern, which gives an indication that the price of the security is headed higher upon completion. The pattern is formed by two trendlines: a flat trendline being a point of resistance and an ascending trendline acting as a price support.
The price of the security moves between these trendlines until it eventually breaks out to the upside. This pattern will typically be preceded by an upward trend, which makes it a continuation pattern; however, it can be found during a downtrend
As seen above, the price moves to a high that faces resistance leading to a sell-off to a low. This follows another move higher, which tests the previous level of resistance. Upon failing to move past this level of resistance, the security again sells off - but to a higher low. This continues until the price moves above the level of resistance or the pattern fails.
The most telling part of this pattern is the ascending support line, which gives an indication that sellers are starting to leave the security. After the sellers are knocked out of the market, the buyers can take the price past the resistance level and resume the upward trend.
The pattern is complete upon breakout above the resistance level, but it can fall below the support line (thus breaking the pattern), so be careful when entering prior to breakout.
Descending triangle
The descending triangle is the opposite of the ascending triangle in that it gives a bearish signal to chartists, suggesting that the price will trend downward upon completion of the pattern. The descending triangle is constructed with a flat support line and a downward-sloping resistance line.
Similar to the ascending triangle, this pattern is generally considered to be a continuation pattern, as it is preceded by a downward trendline. But again, it can be found in an uptrend
The first part of this pattern is the fall to a low that then finds a level of support, which sends the price to a high. The next move is a second test of the previous support level, which again sends the stock higher - but this time to a lower level than the previous move higher. This is repeated until the price is unable to hold the support level and falls below, resuming the downtrend.
This pattern indicates that buyers are trying to take the security higher, but continue to face resistance. After several attempts to push the stock higher, the buyers fade and the sellers overpower them, which sends the price lower
Analyzing Chart Patterns: Flags And Pennants
Analyzing Chart Patterns: Flags
Analyzing Chart Patterns: Pennants
The flag and pennant patterns are two continuation patterns that closely resemble each other, differing only in their shape during the pattern's consolidation period. This is the reason the terms flag and pennant are often used interchangeably. A flag is a rectangular shape, while the pennant looks more like a triangle.
These two patterns are formed when there is a sharp price movement followed by generally sideways price movement, which is the flag or pennant. The pattern is complete when there is a price breakout in the same direction of the initial sharp price movement. The following move will see a similarly sharp move in the same direction as the prior sharp move. The complete move of the chart pattern - from the first sharp move to the last sharp move - is referred to as the flag pole.
The flag or pennant is considered to be flying at half-mast, as the distance of the initial price movement is thought to be roughly equal to the proceeding price move. The reason these patterns form is that after a large price movement, the market consolidates, or pauses, before resuming the initial trend.
The Flag
The flag pattern forms what looks like a rectangle. The rectangle is formed by two parallel trendlines that act as support and resistance for the price until the price breaks out. In general, the flag will not be perfectly flat but will have its trendlines sloping.
In general, the slope of the flag should move in the opposite direction of the initial sharp price movement; so if the initial movement were up, the flag should be downward sloping.
The buy or sell signal is formed once the price breaks through the support or resistance level, with the trend continuing in the prior direction. This breakthrough should be on heavier volume to improve the signal of the chart pattern.
The Pennant
The pennant forms what looks like a symmetrical triangle, where the support and resistance trendlines converge towards each other. The pennant pattern does not need to follow the same rules found in triangles, where they should test each support or resistance line several times
Also, the direction of the pennant is not as important as it is in the flag; however, the pennant is generally flat.
General Ideas
While the construct of the pause in the trend is different for the flag and pennant, the attributes of the chart patterns themselves are similar. It is vital that the price movement prior to the flag or pennant be a strong, sharp move.
Typically, these patterns take less time to form during downtrends than in uptrends. In terms of pattern length, they are generally short-term patterns lasting one to three weeks, but can be formed over longer periods.
The volume, as with most breakout signals, should be seen as strong during the breakout to confirm the signal. Upon breakout, the initial price objective is equal to the distance of the prior move added to the breakout point. For example, if a prior sharp up movement was from $30 to $40, then the resulting price objective from a price breakout of $38 would be $48 ($38+$10).
Analyzing Chart Patterns: Gaps and examples
Analyzing Chart Patterns: Gaps
A gap in a chart is essentially an empty space between one trading period and the previous trading period. They usually form because of an important and material event that affects the security, such as an earnings surprise or a merger agreement.
This happens when there is a large-enough difference in the opening price of a trading period where that price and the subsequent price moves do not fall within the range of the previous trading period. For example, if the price of a company’s stock is trading near $40 and the next trading period opens at $45, there would be a large gap up on the chart between these two periods, as shown by the figure below.
Gap price movements can be found on bar charts and candlestick charts but will not be found on point-and-figure or basic line charts. The reason for this is that every point on both point-and-figure charts and line charts are connected.
It is often said when referring to gaps that they will always fill, meaning that the price will move back and cover at least the empty trading range. However, before you enter a trade that profits the covering, note that this doesn’t always happen and can often take some time to fill.
There are four main types of gaps: common, breakaway, runaway (measuring), and exhaustion. Each are the same in structure, differing only in their location in the trend and subsequent meaning for chartists.
A gap in a chart is essentially an empty space between one trading period and the previous trading period. They usually form because of an important and material event that affects the security, such as an earnings surprise or a merger agreement.
This happens when there is a large-enough difference in the opening price of a trading period where that price and the subsequent price moves do not fall within the range of the previous trading period. For example, if the price of a company’s stock is trading near $40 and the next trading period opens at $45, there would be a large gap up on the chart between these two periods, as shown by the figure below.
Gap price movements can be found on bar charts and candlestick charts but will not be found on point-and-figure or basic line charts. The reason for this is that every point on both point-and-figure charts and line charts are connected.
It is often said when referring to gaps that they will always fill, meaning that the price will move back and cover at least the empty trading range. However, before you enter a trade that profits the covering, note that this doesn’t always happen and can often take some time to fill.
There are four main types of gaps: common, breakaway, runaway (measuring), and exhaustion. Each are the same in structure, differing only in their location in the trend and subsequent meaning for chartists.
Analyzing Chart Patterns: Triple Tops And Bottoms
Analyzing Chart Patterns: Triple Tops
Analyzing Chart Patterns: Triple Bottom :
The triple top and triple bottom are reversal patterns that are formulated when a security attempts to move past a key level of support or resistance in the direction of the prevailing trend.
This chart pattern represents the market's attempt to move a security in a certain direction. After three failed attempts, the buyers (in the case of a top) or sellers (in the case of a bottom) give up, and the opposing group in the market takes a hold of the security, sending it downward (sellers) or upward (buyers).
Triple Top
This bearish reversal pattern is formed when a security that is trending upward tests a similar level of resistance three times without breaking through. Each time the security tests the resistance level, it falls to a similar area of support. After the third fall to the support level, the pattern is complete when the security falls through the support; the price is then expected to move in a downward trend.
The first step in this pattern is the creation of a new high in an uptrend that is stalled by selling pressure, which forms a level of resistance. The selling pressure causes the price to fall until it finds a level of support, as buyers move back into the security. The buying pressure sends the price back up to the area of resistance the security previously met. Again, the sellers enter the market and send the security back down to the support level.
This up-and-down movement is repeated for the third time; but this time the buyers, after failing three times, give up on the security, and the sellers take over. Upon falling through the level of support, the security is expected to trend downward.
This pattern can be difficult to spot in the early stages as it will initially look like a double-top pattern, which was discussed in a previous section. The most important thing here is that one waits for the price to move past the level of resistance before entering the security, as the security could actually just end up being range-bound, where it trades between the two levels for some time.
In the triple-top formation, each test of resistance at the upper end should be marked with declining volume at each successive peak. And again, when the price breaks below the support level, it should be accompanied by high volume.
Once the signal is formed, the price objective is based on the size of the chart pattern or the price distance between the level of resistance and support. This is then deducted from the breakout point.
Triple Bottom
This bullish reversal pattern has all of the same attributes as the triple top but signals a reversal of a downward trend. The triple-bottom pattern illustrates a security that is trading in a downtrend and attempts to fall through a level of support three times, each time moving back to a level of resistance. After the third attempt to push the price lower, the pattern is complete when the price moves above the resistance level and begins trading in an upward trend.
This pattern begins by setting a new low in a downtrend, which is followed by a rally to a high. This sets up the range of trading for the triple-bottom pattern. After hitting the high, the price again comes under selling pressure, which sends it back down to the previous low. Buyers again move back into the security at this support level, sending the price back up again, usually to the previous high.
This is repeated a third time, but after failing again to move to a new low, the pattern is complete when the security moves above the resistance level to begin trading in an uptrend.
In this pattern, volume plays a role similar to the triple top, declining at each trough as it tests the support level, which is a sign of diminishing selling pressure. Again, volume should be high on a breakout above the resistance level on the completion of the pattern.
The price objective will also initially be calculated as the distance of the chart pattern added to the price breakout. So if the chart pattern is formed between $50 and $30 at a price breakout of $50 the price objective is $70 ($50+$20).
Meaning Behind Triple Tops and Bottoms
The significance of these two formations is that an established trend has hit a major section of support/resistance, which stops the trend's ability to continue. This is an indication that the buying or selling pressure that is supporting the trend is beginning to weaken. It also is an indication that the opposite pressure is gaining strength.
The chart pattern is signaling that there is a shift in the supply and demand of the security and of the balance between buyers and sellers. When a reversal signal is formed in a triple top, there is a shift from buyers moving the security upward to sellers moving the security downward
This chart pattern represents the market's attempt to move a security in a certain direction. After three failed attempts, the buyers (in the case of a top) or sellers (in the case of a bottom) give up, and the opposing group in the market takes a hold of the security, sending it downward (sellers) or upward (buyers).
Triple Top
This bearish reversal pattern is formed when a security that is trending upward tests a similar level of resistance three times without breaking through. Each time the security tests the resistance level, it falls to a similar area of support. After the third fall to the support level, the pattern is complete when the security falls through the support; the price is then expected to move in a downward trend.
The first step in this pattern is the creation of a new high in an uptrend that is stalled by selling pressure, which forms a level of resistance. The selling pressure causes the price to fall until it finds a level of support, as buyers move back into the security. The buying pressure sends the price back up to the area of resistance the security previously met. Again, the sellers enter the market and send the security back down to the support level.
This up-and-down movement is repeated for the third time; but this time the buyers, after failing three times, give up on the security, and the sellers take over. Upon falling through the level of support, the security is expected to trend downward.
This pattern can be difficult to spot in the early stages as it will initially look like a double-top pattern, which was discussed in a previous section. The most important thing here is that one waits for the price to move past the level of resistance before entering the security, as the security could actually just end up being range-bound, where it trades between the two levels for some time.
In the triple-top formation, each test of resistance at the upper end should be marked with declining volume at each successive peak. And again, when the price breaks below the support level, it should be accompanied by high volume.
Once the signal is formed, the price objective is based on the size of the chart pattern or the price distance between the level of resistance and support. This is then deducted from the breakout point.
Triple Bottom
This bullish reversal pattern has all of the same attributes as the triple top but signals a reversal of a downward trend. The triple-bottom pattern illustrates a security that is trading in a downtrend and attempts to fall through a level of support three times, each time moving back to a level of resistance. After the third attempt to push the price lower, the pattern is complete when the price moves above the resistance level and begins trading in an upward trend.
This pattern begins by setting a new low in a downtrend, which is followed by a rally to a high. This sets up the range of trading for the triple-bottom pattern. After hitting the high, the price again comes under selling pressure, which sends it back down to the previous low. Buyers again move back into the security at this support level, sending the price back up again, usually to the previous high.
This is repeated a third time, but after failing again to move to a new low, the pattern is complete when the security moves above the resistance level to begin trading in an uptrend.
In this pattern, volume plays a role similar to the triple top, declining at each trough as it tests the support level, which is a sign of diminishing selling pressure. Again, volume should be high on a breakout above the resistance level on the completion of the pattern.
The price objective will also initially be calculated as the distance of the chart pattern added to the price breakout. So if the chart pattern is formed between $50 and $30 at a price breakout of $50 the price objective is $70 ($50+$20).
Meaning Behind Triple Tops and Bottoms
The significance of these two formations is that an established trend has hit a major section of support/resistance, which stops the trend's ability to continue. This is an indication that the buying or selling pressure that is supporting the trend is beginning to weaken. It also is an indication that the opposite pressure is gaining strength.
The chart pattern is signaling that there is a shift in the supply and demand of the security and of the balance between buyers and sellers. When a reversal signal is formed in a triple top, there is a shift from buyers moving the security upward to sellers moving the security downward
Analyzing Chart Patterns: Round Bottoms
Analyzing Chart Patterns: Round Bottoms
The time distance from the initial peak to the long-term low is considered to be half the distance of the rounding bottom. This helps to give chartists an idea to as to how long the chart pattern will last or when the pattern is expected to be complete, with a breakout to the upside. For example, if the first half of the pattern is one year, then the signal will not be formed until around a year later.
In terms of the chart pattern's quality, the two stages of the rounding bottom should be similar in length. If the price were to rise too quickly from the low to the prior peak, the strength of the chart pattern would be diminished. This does not mean that they must be equal, but the trend should illustrate a cup shape on the chart.
The way in which the price moves from peak to low and from low to second peak may cause some confusion as the long-term nature of the pattern can display several different price movements. The price movement does not necessarily move in a straight line but will often have many ups and downs. However, the general direction of the price movement (either up or down) is important, depending on the stage of the pattern.
Volume is one of the most important confirming measures for this pattern where volume should be high at the initial peak (or start of the pattern) and weaken as the price movement heads toward the low. As the price moves away from the low to the price level set by the initial peak, volume should be rising.
Breakouts in chart patterns should be accompanied by a large increase in volume, which helps to strengthen the signal formed by the breakout. Once the price moves above the peak that was established at the start of the chart pattern, the downward trend is considered to have reversed and a buy signal is formed.
A rounding bottom, also referred to as a saucer bottom, is a long-term reversal pattern that signals a shift from a downtrend to an uptrend. This pattern is traditionally thought to last anywhere from several months to several years. Due to the long-term look of these patterns and their components, the signal and construct of these patterns are more difficult to identify than other reversal patterns.
A rounding-bottom pattern looks similar to a cup and handle, but without the handle. The basic formation of a rounding bottom comes from a downward price movement to a low, followed by a rise from the low back to the start of the downward price movement - forming what looks like a rounded bottom.
The pattern should be preceded by a downtrend but will sometimes be preceded by a sideways price movement that formed after a downward trend. The start of the rounding bottom (its left side) is usually caused by a peak in the downward trend followed by a long price descent to a new long-term low.
A rounding-bottom pattern looks similar to a cup and handle, but without the handle. The basic formation of a rounding bottom comes from a downward price movement to a low, followed by a rise from the low back to the start of the downward price movement - forming what looks like a rounded bottom.
The pattern should be preceded by a downtrend but will sometimes be preceded by a sideways price movement that formed after a downward trend. The start of the rounding bottom (its left side) is usually caused by a peak in the downward trend followed by a long price descent to a new long-term low.
The time distance from the initial peak to the long-term low is considered to be half the distance of the rounding bottom. This helps to give chartists an idea to as to how long the chart pattern will last or when the pattern is expected to be complete, with a breakout to the upside. For example, if the first half of the pattern is one year, then the signal will not be formed until around a year later.
In terms of the chart pattern's quality, the two stages of the rounding bottom should be similar in length. If the price were to rise too quickly from the low to the prior peak, the strength of the chart pattern would be diminished. This does not mean that they must be equal, but the trend should illustrate a cup shape on the chart.
The way in which the price moves from peak to low and from low to second peak may cause some confusion as the long-term nature of the pattern can display several different price movements. The price movement does not necessarily move in a straight line but will often have many ups and downs. However, the general direction of the price movement (either up or down) is important, depending on the stage of the pattern.
Volume is one of the most important confirming measures for this pattern where volume should be high at the initial peak (or start of the pattern) and weaken as the price movement heads toward the low. As the price moves away from the low to the price level set by the initial peak, volume should be rising.
Breakouts in chart patterns should be accompanied by a large increase in volume, which helps to strengthen the signal formed by the breakout. Once the price moves above the peak that was established at the start of the chart pattern, the downward trend is considered to have reversed and a buy signal is formed.
Wednesday, May 5, 2010
How to Analyze the Company Before Investing
How to analyze the company before investing
What is Fundamental analysis?
Fundamental analysis is basically done for long term and mid term investment which is also called as delivery based investment or trading.
The main important aim behind is to study and understand the company in which you are planning to invest your hard earned money and get excellent returns.
Generally hard core fundamental analysis is very and is out of the scope of this website, but if you are interested to learn then please contact us and we will provide you appropriate resources to study the same.
How to analyze the fundamentals of the company?
Basically one should be able to judge at least how the company has done in past years, its debit status, its current valuation, its future growth prospects, its earning capacity etc
So that based on these terms he can at least decide whether to invest in this company or not.
What you should look for in a company to invest?
1. About Company -
What the company is doing and what are its businesses?
How is the current demand for their products and how the demand will be in future like in next 3 to 5 years and so? (It is difficult to analyze the future demand yourself so you can visit financial websites or contact us)
2. Earnings -
This is very important parameter. Broadly look into its last 5 or 10 years earnings whether the company has posted profits or losses.
It’s all about earnings. The bottom line is investors want to know how much money the company is making and how much it is going to make in the future.
To find the earning status ratios used are EPS - Earning per share
3. Current valuation -
This is another very important factor which most of the investor forgets while doing their investments.
Generally most of the investors invest at higher valuations of shares and when share prices start coming down then they keep worrying, so this should not happen.
Before investing one should check the current valuation of the share price and invest only when the share price is at right price and not at over priced share.
This is what happened in January 2008. Most of the people invested at very high valuations and later on the share prices started to correct (falling down).
To find the current valuation of the stock the ratios used are
PE ratio - Price to earning ratio
Book value
PB ratio - Price to book value ratio
4. Future earnings growth -
It is very important to analyze how the company is going to do in future. How will be its returns or its profits etc?
Basically most of the investors invest in shares taking into consideration Company’s future growth prospects.
To find the future growth of the stock the ratios used are
PEG ratio - Price to earning growth ratio
Current EPS and Forward EPS
Price to sales ratio
5. Debit status -
For any company to perform well in the future it is very important to be debt free or less debit because if company is having large debits like borrowings, loans then it becomes difficult for it to plan for any acquisitions, expansion plans take over plans, dividend payout and very important its most of the net profit goes in paying the interest and loans and other debits.
So in other words if the company is having fewer debits or no debit then they are having lots of cash in hand and they are free to take any decision in coming future.
To find the debit status of the company the ratios used are
Debit ratio
So to accomplish above parameters fundamental analyst follow certain ratios which are mentioned below
Earnings
Earning Per Share - EPS
EPS plays major role in investment decision.
EPS is calculated by taking the net earnings of the company and dividing it by the outstanding shares.
EPS = Net Earnings / Outstanding Shares
(Nowadays you will get this ready made, no need for you to do calculation.)
For example -
If Company A had earnings of RS 1000 crores and 100 shares outstanding, then its EPS becomes 10 (RS 1000 / 100 = 10).
Second example -
If Company B had earnings of RS 1000 crores and 500 shares outstanding, then its EPS becomes 2 (RS 1000 / 500 = 50).
So what is that you have to look in EPS of the company?
Answer - You should look for high EPS stocks and the higher the better is the stock.
Note - You should compare the EPS from one company to another, which are in the same industry/sector and not from one company from Auto sector and another company from IT sector.
Before we move on, you should note that there are three types of EPS numbers:
Trailing EPS - Trailing EPS means last year’s EPS which is considered as actual and for ongoing current year.
Current EPS - Current EPS means which is still under projections and going to come on financial year end.
Forward EPS - Forward EPS which is again under projections and going to come on next financial year end
But the EPS alone doesn’t tell you the whole story of the company so for this information, we need to look at some more ratios as following.
It’s not advisable to make your investment decisions based on only single ratio analysis.
EPS is the base for calculating PE ratio.
Importance of Earnings -
Earnings are profits. Quarterly or yearly company’s increasing earnings generally makes its stock price move up and in some cases some companies pay out a regular dividend. This is Bullish sign and indicates that the company’s is in growth.
When the company declares low earnings then the market may see bearishness in the stock price and hence its share price starts deceasing and corrects further if the company doesn’t provide any sufficient justification for low earnings.
Every quarter, companies report its earnings. There are 4 quarters.
Quarter 1 - (April to June and earnings will be declared in July)
Quarter 2 - (July to Sept and earnings will be declared in Oct)
Quarter 3 - (Oct to Dec and earnings will be declared in Jan)
Quarter 4/final - Also called as financial year end - (Jan to Mar and earnings will be declared in April)
Now by this time you would have understood how earnings are important for a stock price to move up or down. But depending only on earnings one should not make investment or trading decision. To make decision more risk free you should look into more tools as mentioned below so that your investment decision becomes more solid and you should get excellent returns in future.
What is Fundamental analysis?
Fundamental analysis is basically done for long term and mid term investment which is also called as delivery based investment or trading.
The main important aim behind is to study and understand the company in which you are planning to invest your hard earned money and get excellent returns.
Generally hard core fundamental analysis is very and is out of the scope of this website, but if you are interested to learn then please contact us and we will provide you appropriate resources to study the same.
How to analyze the fundamentals of the company?
Basically one should be able to judge at least how the company has done in past years, its debit status, its current valuation, its future growth prospects, its earning capacity etc
So that based on these terms he can at least decide whether to invest in this company or not.
What you should look for in a company to invest?
1. About Company -
What the company is doing and what are its businesses?
How is the current demand for their products and how the demand will be in future like in next 3 to 5 years and so? (It is difficult to analyze the future demand yourself so you can visit financial websites or contact us)
2. Earnings -
This is very important parameter. Broadly look into its last 5 or 10 years earnings whether the company has posted profits or losses.
It’s all about earnings. The bottom line is investors want to know how much money the company is making and how much it is going to make in the future.
To find the earning status ratios used are EPS - Earning per share
3. Current valuation -
This is another very important factor which most of the investor forgets while doing their investments.
Generally most of the investors invest at higher valuations of shares and when share prices start coming down then they keep worrying, so this should not happen.
Before investing one should check the current valuation of the share price and invest only when the share price is at right price and not at over priced share.
This is what happened in January 2008. Most of the people invested at very high valuations and later on the share prices started to correct (falling down).
To find the current valuation of the stock the ratios used are
PE ratio - Price to earning ratio
Book value
PB ratio - Price to book value ratio
4. Future earnings growth -
It is very important to analyze how the company is going to do in future. How will be its returns or its profits etc?
Basically most of the investors invest in shares taking into consideration Company’s future growth prospects.
To find the future growth of the stock the ratios used are
PEG ratio - Price to earning growth ratio
Current EPS and Forward EPS
Price to sales ratio
5. Debit status -
For any company to perform well in the future it is very important to be debt free or less debit because if company is having large debits like borrowings, loans then it becomes difficult for it to plan for any acquisitions, expansion plans take over plans, dividend payout and very important its most of the net profit goes in paying the interest and loans and other debits.
So in other words if the company is having fewer debits or no debit then they are having lots of cash in hand and they are free to take any decision in coming future.
To find the debit status of the company the ratios used are
Debit ratio
So to accomplish above parameters fundamental analyst follow certain ratios which are mentioned below
Earnings
Earning Per Share - EPS
EPS plays major role in investment decision.
EPS is calculated by taking the net earnings of the company and dividing it by the outstanding shares.
EPS = Net Earnings / Outstanding Shares
(Nowadays you will get this ready made, no need for you to do calculation.)
For example -
If Company A had earnings of RS 1000 crores and 100 shares outstanding, then its EPS becomes 10 (RS 1000 / 100 = 10).
Second example -
If Company B had earnings of RS 1000 crores and 500 shares outstanding, then its EPS becomes 2 (RS 1000 / 500 = 50).
So what is that you have to look in EPS of the company?
Answer - You should look for high EPS stocks and the higher the better is the stock.
Note - You should compare the EPS from one company to another, which are in the same industry/sector and not from one company from Auto sector and another company from IT sector.
Before we move on, you should note that there are three types of EPS numbers:
Trailing EPS - Trailing EPS means last year’s EPS which is considered as actual and for ongoing current year.
Current EPS - Current EPS means which is still under projections and going to come on financial year end.
Forward EPS - Forward EPS which is again under projections and going to come on next financial year end
But the EPS alone doesn’t tell you the whole story of the company so for this information, we need to look at some more ratios as following.
It’s not advisable to make your investment decisions based on only single ratio analysis.
EPS is the base for calculating PE ratio.
Importance of Earnings -
Earnings are profits. Quarterly or yearly company’s increasing earnings generally makes its stock price move up and in some cases some companies pay out a regular dividend. This is Bullish sign and indicates that the company’s is in growth.
When the company declares low earnings then the market may see bearishness in the stock price and hence its share price starts deceasing and corrects further if the company doesn’t provide any sufficient justification for low earnings.
Every quarter, companies report its earnings. There are 4 quarters.
Quarter 1 - (April to June and earnings will be declared in July)
Quarter 2 - (July to Sept and earnings will be declared in Oct)
Quarter 3 - (Oct to Dec and earnings will be declared in Jan)
Quarter 4/final - Also called as financial year end - (Jan to Mar and earnings will be declared in April)
Now by this time you would have understood how earnings are important for a stock price to move up or down. But depending only on earnings one should not make investment or trading decision. To make decision more risk free you should look into more tools as mentioned below so that your investment decision becomes more solid and you should get excellent returns in future.
New Comers Should Follow to Share Market and Day Trading Tips
New comers to Share market and Day Trading
In the share market you can earn good amount of money provided you follow the principle “learn and then earn”.
Every field requires knowledge and experience to get success so is the share market.
So please don’t misunderstand that share market will make you millionaire or billionaire in one night.
Our website is especially designed for all newcomers to share market and for day trading
So please read, study and then start earning.
Broadly speaking basically there are two types of people in share market.
1. Investors - who buy shares and hold for weeks to months to years and they are called as
short term, mid term and long term investors respectively.
2. Traders - Traders do buying and selling of shares on very frequent basis mostly on day to
day basis and they are called as day traders or intraday traders.
We daily receives emails from new comers that they have made losses in day trading, in delivery , in future trading, option trading and so on, so we kindly advice to all new comers to strictly avoid especially trading unless you gain appropriate and specific knowledge.
After all it’s your hard earned money
Investors
1. Most of the time it has been observed that investor buy/invest in shares without checking its
valuations and when their share prices starts falling then they start worrying and get panic
and take wrong steps.
Because, basically profit booking takes place at shares having high valuations.
So it is always advisable to buy shares at lower valuations or at appropriate valuations.
So don’t invest or buy share without studying about company and their current valuations.
To read more about valuations and how to pick the right stock please Go here
We also provide free guidance and advice to everyone so write to us before buying or
investing in share market at
2. The up and down movement is the characteristic of share market so no need to worry if your
share price comes down from your buying price provided your buying price is at correct or
low valuations. So if you buy shares at low valuations then share price doesn’t fall much
from that level in bearish markets.
3. Once you buy good fundamentals shares at appropriate valuation then no need to change
your decision based on rumors.
Rumors are part of share market.
4. Always keep watching the performance of your shares. Every quarter company declares
their performance (financial results) and based on their performance the share price moves
up and down.
So it is advisable to track the performance of your shares.
5. Broadly speaking no need to sit and monitor you share price on daily basis especially if you
have invested for mid term to long term because the daily share price movement may
makes you to think and worry and at the same time you will keep guessing tomorrows
market direction and status and this may spoil your entire time and day. It is also possible
that this may lead to emotional trading due to which you may do wrong trading.
For more information about emotional trading and how to avoid them please
Traders
Traders are those you buy and sell shares on daily basis.
1. Many new comers do losses in day trading because of insufficient market knowledge.
2. New comers should avoid day trading unless and until they do paper trading practice.
Please Go here to read more abut paper trading practice.
3. Day trading requires alertness and promptness to enter and exit from the trade so it is advisable for day trades to be in front of the
trading terminal during market hours and avoid other activities during market hours.
4. Don’t do day trading just for sake of trading or just to earn few bucks for today’s expense. If you are looking to have success in day
trading then do it by dedication.
5. Don’t try to get profit everyday, because everyday is not trading day. But as you get lots of experience then you can do it everyday.
6. Huge losses can be avoided by not doing over trading.
Please read how to avoid risk by not using margin amount at www.daytradingshares.com/margin_trading_share_market.php
7. Day trading is not one day job or night education which you learn from any site and start trading. You need to get experience,
strategies, techniques and principles to follow to get success in day trading.
All these factors and parameters are mentioned our day trading section please visit and study and gain appropriate knowledge
Every field requires knowledge and experience to get success so is the share market.
So please don’t misunderstand that share market will make you millionaire or billionaire in one night.
Our website is especially designed for all newcomers to share market and for day trading
So please read, study and then start earning.
Broadly speaking basically there are two types of people in share market.
1. Investors - who buy shares and hold for weeks to months to years and they are called as
short term, mid term and long term investors respectively.
2. Traders - Traders do buying and selling of shares on very frequent basis mostly on day to
day basis and they are called as day traders or intraday traders.
We daily receives emails from new comers that they have made losses in day trading, in delivery , in future trading, option trading and so on, so we kindly advice to all new comers to strictly avoid especially trading unless you gain appropriate and specific knowledge.
After all it’s your hard earned money
Investors
1. Most of the time it has been observed that investor buy/invest in shares without checking its
valuations and when their share prices starts falling then they start worrying and get panic
and take wrong steps.
Because, basically profit booking takes place at shares having high valuations.
So it is always advisable to buy shares at lower valuations or at appropriate valuations.
So don’t invest or buy share without studying about company and their current valuations.
To read more about valuations and how to pick the right stock please Go here
We also provide free guidance and advice to everyone so write to us before buying or
investing in share market at
2. The up and down movement is the characteristic of share market so no need to worry if your
share price comes down from your buying price provided your buying price is at correct or
low valuations. So if you buy shares at low valuations then share price doesn’t fall much
from that level in bearish markets.
3. Once you buy good fundamentals shares at appropriate valuation then no need to change
your decision based on rumors.
Rumors are part of share market.
4. Always keep watching the performance of your shares. Every quarter company declares
their performance (financial results) and based on their performance the share price moves
up and down.
So it is advisable to track the performance of your shares.
5. Broadly speaking no need to sit and monitor you share price on daily basis especially if you
have invested for mid term to long term because the daily share price movement may
makes you to think and worry and at the same time you will keep guessing tomorrows
market direction and status and this may spoil your entire time and day. It is also possible
that this may lead to emotional trading due to which you may do wrong trading.
For more information about emotional trading and how to avoid them please
Traders
Traders are those you buy and sell shares on daily basis.
1. Many new comers do losses in day trading because of insufficient market knowledge.
2. New comers should avoid day trading unless and until they do paper trading practice.
Please Go here to read more abut paper trading practice.
3. Day trading requires alertness and promptness to enter and exit from the trade so it is advisable for day trades to be in front of the
trading terminal during market hours and avoid other activities during market hours.
4. Don’t do day trading just for sake of trading or just to earn few bucks for today’s expense. If you are looking to have success in day
trading then do it by dedication.
5. Don’t try to get profit everyday, because everyday is not trading day. But as you get lots of experience then you can do it everyday.
6. Huge losses can be avoided by not doing over trading.
Please read how to avoid risk by not using margin amount at www.daytradingshares.com/margin_trading_share_market.php
7. Day trading is not one day job or night education which you learn from any site and start trading. You need to get experience,
strategies, techniques and principles to follow to get success in day trading.
All these factors and parameters are mentioned our day trading section please visit and study and gain appropriate knowledge
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