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Category: Trading

  • Top Indicators Used By Intraday Traders In Scalping

    Top Indicators Used By Intraday Traders In Scalping

    Scalping

    Ever heard of the term “Scalping”? What is it, how traders use it, etc? Don’t worry, we will unwind all these questions in this blog.

    Top Indicators Used By Intraday Traders

    Scalping is a trading strategy that involves buying / selling securities in large amounts but for a very short time frame. The time frame can be as short as a few seconds. The ideology behind this strategy is that people think it is easier to make quick profits in a shorter time than to get stuck in long periods.

    Illustration of a Scalp Trade:

    Illustration of scalping

    Traders who do scalping are often known as “scalpers.” Scalpers use a combination of technical indicators for quick decisions and the identifying entry and exit points. In this blog, we will learn about the technical indicators that scalpers often use.

    Key Features of Scalping

    1. The time frame used by most scalpers ranges from 1 minute to 15 minutes. In a few cases, it can be as low as a few seconds.

    2. Generally, scalping is considered less risky than long or multiple-time frame strategies such as swing trading or positional trading.

    3. High Frequency Traders (HFTs) indulge in scalping and generally use Algorithmic trading.

    4. Scalpers often trade with pre-determined entry and exit levels and are quick to take off profits or book losses.

    Benefits of Scalping

    1. Less risky: As discussed, scalpers trade in a very short time frame with pre-defined entry and exit levels, eliminating the potential risk of significant losses.

    2. Only technical, no fundamental: Scalpers operate in a short time frame where decisions are purely based on technical indicators and no fundamental analysis (stock news, events, financial analysis) is used.

    3. All-weather strategy: Scalping is an all-weather strategy that can be used in bullish as well as bearish markets.

    Drawbacks of Scalping

    1. Transaction Costs: Scalpers indulge in multiple trades during the day, which results in very high transaction costs, including but not limited to: Brokerage, STT, Stamp duty, Exchanges fees, etc. In cases of low margins, transaction costs often eat up entire profits.

    Check out our blog: Different Types of Charges in Online Trading

    2. Tech Issues: Scalping means buying or selling in a very short time frame, and scalpers often use algorithmic trading. Even a few seconds of delay can significantly hamper the outcome of a trade and tech issues are common in India, including broker-related glitches, internet connectivity, etc.

    3. May not be suitable for illiquid securities: Scalpers generally prefer trading in highly liquid securities, as to buy / sell in large quantities, liquidity is a must requirement. In certain markets, liquidity is not enough, which shortens the horizons of scalpers, and they end up trading in scattered markets.

    4. Shorter time frames are less reliable: As explained above, they trade in a very short time frame. However, there is a general phenomenon: the longer the period, the more reliable the indicator. Therefore, scalpers are prone to false signals which increases their challenges.

    Read Also: What is Scalping Trading Strategy?

    Technical Indicators Used in Scalping

    Technical Indicators

    So far, we have discussed scalping, its key features, merits, and demerits. Let’s deep dive into the most commonly used intraday technical indicators used by scalpers for trading in equity, commodities, and forex markets:

    1. Moving Averages

    Moving averages are price-based indicators, meaning they combine current and historical prices. It is the average of the price of security over a specified number of periods. The most popular moving average periods used by traders are the 20, 60, 100, and 200 periods. A widely followed moving average crossover signal is between 50 and 200 periods, often referred to as the “Golden Cross”.

    Moving averages can be of multiple types and are less volatile than the price of a security. The most popular averages used by traders are: Simple Moving Average (SMA) and Exponential Moving Average (EMA). The key difference between the two is that SMA uses equal price weights while EMA gives more weight to the recent prices. 

    Moving averages are often used to identify potential buy or sell levels. When a moving average of a particular time frame, say 20 periods, crosses another moving average of another time frame, say 50 periods, it is a bullish crossover. They are also used to identify support and resistance levels; the longer the timeframe, the stronger the support or resistance level.

    2. MACD Indicator

    Moving Average Convergence Divergence (MACD) is a momentum technical indicator formed by the difference between short-time frame and long-time frame moving averages. It is formed by the two lines:

    1. MACD Line: It is the difference between two EMA of different time frames (generally 26 and 12 periods).
    2. Signal Line: It is the EMA (9 periods) of the MACD line.

    It is often used to identify potential buy or sell signals.  When the MACD line crosses above the signal line, it indicates a buying signal, or vice versa.

    3. Bollinger Bands

    Renowned trader John Bollinger developed Bollinger bands. Bollinger bands provide an approximate range of security that is expected to trade within. It consists of three bands: the upper, middle, and lower bands. While the middle band is the moving average of a particular time frame, say 20 periods, the upper and lower bands are decided based on the standard deviation.

    The more volatile the security, the higher the standard deviation and wider the range of upper and lower bands.

    4. Relative Strength Index

    It measures the level of recent price change in a security computed over a rolling time period. It is used to evaluate overbought or oversold zones. It can also be used to identify potential reversal points. It moves in a range of 0 to 100.

    Generally, an RSI above 70 is considered an overbought zone, while an RSI below 30 is considered an oversold zone.

    5. Stochastic Oscillator

    The stochastic oscillator is a momentum indicator developed in 1950 and used to identify overbought or oversold zones. It is formed by comparing the closing price of a security to a range of its prices, say the 14-day moving average.

    It ranges from 0 to 100, and generally, above 80 means security is in overbought zone and below 20 means security is in oversold zone.

    Relative Strength Index (RSI) and Stochastic Oscillator are both used to measure momentum. RSI is widely used in directional markets, and stochastic oscillators are widely used in sideways markets.

    6. Fibonacci Retracement

    The Fibonacci sequence, discovered by an Italian mathematician, has applications in various aspects of life, including technical analysis in the financial markets. It is a set of steadily increasing numbers where each number is equal to the sum of the preceding two numbers. Example: 0, 1, 1, 2, 3, 5, 8,…

    Fibonacci Retracement is a popular tool used in technical analysis to identify potential levels of support and resistance and has great relevance in the technical analysis world. The most common “Fibonacci Retracement” levels are 23.6%, 38.2%, and 61.8%

    Analysing the potential level of retracement using “Fibonacci levels” offers great insights to a trader.

    Checkout our blog: Fibonacci Retracement: Complete Guide on How to Use and Strategy

    7. Parabolic SAR

    Parabolic SAR (stop and reverse), or PSAR, is a technical indicator developed by American engineer J. Wells Wilder. The “Parabolic SAR” indicator is a series of dots plotted either above or below the price of the security. When a security is in a bullish trend, a dot is positioned below the price; in a bearish trend, it is positioned above the price.

    It is often used to identify the trend’s direction and potential buy / sell signals. Further, it is used by traders to determine the range of trailing stop-loss orders.

    The de-merit of PSAR is that sometimes it may generate false signals, which results in poor earnings for scalpers.

    Read Also: How to Choose Stocks for Intraday the Right Way?

    Conclusion

    In this blog, we have unwinded scalping and widely used technical indicators by scalpers. However, it’s essential to remember that technical analysis is subjective and should be used along with other tools and indicators for more comprehensive decision-making.

    Although it is not suggested to new traders, if one wants to start scalping trading, making quick decisions, proper strategy, and risk management are must-haves to become a successful scalper.

    Further, the indicators that we have discussed above are useful for traders, but it’s essential to remember that no analysis method guarantees 100% prediction and prudent risk management is crucial in trading whether it is scalping or positional trading.

    Frequently Asked Questions (FAQs)

    1. What is the time frame used by scalpers?

      Generally, scalpers trade in the 1 minute to 15 minute range.

    2. What are the most common Fibonacci Retracement levels?

      23.6%, 38.2%, and 61.8%

    3. Can scalpers trade in bearish markets?

      Yes, scalping is a all weather strategy.

    4. Is there a need for Fundamental analysis in scalping?

      No, scalping is purely based on technical analysis

    5. Does an RSI of 90 indicates an overbought or an oversold zone?

      Traditionally, an RSI above 70 indicates an overbought zone.

  • What Are The Challenges Traders Face When Trading In The Stock Market?

    What Are The Challenges Traders Face When Trading In The Stock Market?

    The stock market is dynamic, and traders face a range of challenges even though the Indian market carries unique characteristics that help them function accurately. The market offers an opportunity to earn higher returns, but with some bitter challenges. Traders should be aware of such challenges.

    Difficulties are common in a country like India, where financial literacy is 27%, implying that only one out of every five people understands finances and how to manage them. People in India trade not only to manage their finances but also because they are afraid of missing out. Investors and traders who are aware of market risks do not attempt to build curated portfolios based on their risk tolerance; instead, they invest in a basket of stocks with an overexposure to micro-cap companies for quick gains.

    In this blog, we shall be discussing the biggest challenges that traders face while trading in the Indian markets.

    What Are The Challenges Traders Face

    Challenges in the stock market can be classified into three main categories:

    1. Market-related challenges
    2. Regulatory challenges
    3. Technical challenges

    Below is a detailed explanation of these three challenges.

    Market risk
    1. Volatility in the stock market
      We all know that markets, be they Indian or global, can be highly volatile and fluctuating. These fluctuations are unpredictable and can be rapid, thereby creating a risk for intra-day as well as positional traders.
    2. Lack of Liquidity
      Some stocks have lower volumes when compared to other stocks, which makes it difficult for the trader to create a position in such stocks at the desired prices.
    3. Asymmetric Information
      Traders in India compete in an environment where information is skewed. The flow of information in the Indian market is asymmetric, meaning that there is an imbalance in the information that the buyer and the seller have. Institutional traders and retail traders may not have equal access to market-moving information, which can create disparities in trading strategies.

    Regulatory Challenges

    Regulatory challenges
    1. Complex Framework
      The regulatory framework of the Indian stock market is complex and can be challenging to comply with, and this includes regulations from SEBI (Securities & Exchange Board of India). Although SEBI has been doing a really good job protecting market participants.
    2. High Transaction Cost
      Costs such as brokerage and security transaction tax (STT) are generally high, especially in the case of derivatives trading, which can significantly impact the realised profit. Check out our blog on different types of charges in online trading.
    3. Compliance
      Traders need to be aware of tax regulations, including capital gains tax, and ensure proper compliance. Tax implications can hamper trading decisions and profitability.
    4. Limit Imposed on Foreign Investments
      International investors or traders may find it difficult to invest in Indian businesses because of certain restrictions imposed by the RBI. The upper limit of overall investment for FII (Foreign Institutional Investors) in any particular Indian company is 10%, subject to the overall limit of 24% on investments by all FIIs and NRIs (Non-Resident Indian). It can only be changed if suggested by the concerned authority.

    Technology-based Challenges

    technology and framework worth.
    1. Internet issues
      It becomes challenging for people who reside in rural areas to trade. Connectivity issues can disrupt trading during market hours and lead to unnecessary delays in the execution of trades. At times, advanced trading platforms might not be accessible to these traders.
    2. Cybercrime
      Cybersecurity threats, such as hacking and fraud, are a concern for online traders since these are very common.
    3. Broker-related tech issues
      At times, while trading in the stock market, the trading platforms may not function smoothly, and trades get stuck in between, which could result in losses for the traders. Even the most tech-savvy brokers in India are not immune to this.

    Read Also: Trading For Beginners: 5 Things Every Trader Should Know

    A few other difficulties that a trader can face while buying or selling in the Indian stock market.

    Accessing Data and Discrepancy 
    1. The psychological aspect of trading is that people unwillingly involve themselves in emotional trading. This happens because of a lack of discipline and proper education. They don’t make logical and informed trading decisions, and then eventually they are trapped in the wrong trades.
    2. Due to a lack of information and literacy in India, traders frequently rely on advice and tips given to them by others. This could be disastrous because it is easy to follow others, but for managing and exiting on time, your own expertise is needed.
    3. It is difficult for traders to trade in the market if they do not analyze the risks involved and do not practice proper risk management.

    Also, check out our blog- Top 10 Highest Leverage Brokers in India

    Conclusion

    Addressing the Risk Factors

    To conclude, trading and investments in the Indian stock market are rewarding but still carry their own set of risks. If you want to avoid such risks, do proper research and align it with your investments. Start trading with a small amount and increase the capital invested gradually over time.

    Remember that trading is a zero-sum game, which means that your loss is someone else’s gain or vice versa. Even after gaining a wealth of knowledge, proper execution, risk management, patience, and perseverance are required. Despite these challenges, the Indian market provides traders with appealing opportunities.

    FAQs (Frequently Answered Questions)

    1. Are there psychology-related challenges in India?

      Yes, traders in India do trade with emotions like fear and greed.

    2. How do global market conditions pose a challenge to the Indian economy?

      Various economic conditions and geopolitical events can affect the Indian market.

    3. Is liquidity the same across sectors?

      No, liquidity varies across different instruments because of various factors involved in it.

    4. Who frames the regulations of the stock market in India?

      SEBI (Securities & Exchange Board of India) regulates Indian stock market.

    5. Can broker-related technical risk be eliminated?

      One can reduce this risk to a certain extent by opening accounts with other brokers.

  • Value Investing Vs Intraday Trading: Which Is More Profitable?

    Value Investing Vs Intraday Trading: Which Is More Profitable?

    Value Investing Vs Intraday Trading

    Value investing and Intraday trading are two different aspects of the stock market. Both of them carry their own set of characteristics and challenges. In today’s blog, we bring you an in-depth analysis of these concepts. If you are the one who is always confused about which is better for you, explore our blog to get answers to all your questions.

    What is Value Investing?

    value investing

    Value investing is an investment strategy that involves buying securities at a price lower than their intrinsic value with the purpose of holding them for an extended period, often years or decades. The main objective of value investing is to create wealth over time. Value investors believe that the market does react to good and bad news that results in movements in stock price, but these movements are temporary and do not leave any impact in the long run. Value investors majorly focus on fundamental analysis of the company, such as earnings quality, dividends, and financial statements. They are of the view that the market will recognize the true worth of the stocks that are trading below their intrinsic value over time.

    Rakesh Jhunjhunwala and Dolly Khanna are the biggest examples of value investors in India.

    Read Also: Top 10 Intraday Trading Strategies & Tips for Beginners

    Key features of Value Investing

    Margin of Safety

    Long-term investors seek to purchase stocks at a discount to their intrinsic value, creating a margin of safety and avoiding potential losses.

    Long-Term Perspective

    Value investors typically purchase stocks with the intention of holding them for extended periods of time, which calls for patience and self-control.

    Contrary Approach

    Value investors often take a contrarian approach. This approach includes doing the reverse of what the majority is doing. Contrarian investors believe that the majority of the participants act in a herd because of fear, greed, etc., which results in securities being temporarily overvalued or undervalued. This approach can be highly rewarding, but keep in mind that it can be a risky one, which may result in hefty losses.

    Interesting Fact: Warren Buffett is a famous Contrarian Investor

    Advantages of Value Investing

    pros of value investing

    Better Returns

    Value investing has historically achieved superior and stable returns when compared to other investing strategies. By buying undervalued stocks and waiting for them to generate returns, long-term investors can benefit from the market’s eventual recognition of the company’s true value.

    Lesser Risk

    The margin of safety reduces the risk of the investors and protects them from losses if the valuation of the stock that they are holding is slightly off.

    Disciplined Approach

    Value investing focuses on a long-term perspective and encourages a disciplined and planned approach to investment, preventing investors from making impulsive decisions.

    Challenges of Value Investing

    1. Identifying undervalued stock is a challenging task, as analyzing the financials of the company and calculating its true value can be complex.
    2. A contrarian approach to value investing can sometimes lead to holding stocks that are unpopular with the market and will not be able to generate potential gains over time. Not all the stocks trading at a seemingly low valuation are good investment opportunities.
    3. Timing the market, i.e., identifying the right time to enter the market or buy a stock, can be challenging.
    4. Psychological biases, such as overconfidence or anchoring, can influence investors and lead to poor decision-making.
    5. Value investors may face challenges when industries evolve and companies fail to adapt to new trends or technologies, leading to value destruction.

    What is Intraday Trading?

    intraday trading

    Intra-day trading is a financial approach where stocks, currencies, and commodities are bought and sold within the same trading day. Intra-day traders aim to earn profits from very short-term price fluctuations in the market, and they do not carry their positions overnight.

    Key facts about Intra-day trading

    1. Intraday trading is carried out on short-time frames on technical charts like 1 minute, 5 minutes, 15 minutes, 1 hour, and 4 hours.
    2. Intraday traders design their strategies based on technical analysis. (Read our blog, Best Options Trading Chart Patterns, to know more about technical analysis)
    3. Intraday traders get an option to leverage their trading positions. This allows them to buy more stocks with a lesser amount of capital. However, do remember that leverage is a double-edged sword.
    4. Intra-day traders are generally quick decision-makers because market timing and executions are crucial factors for them.
    5. Intra-day trading can be speculative since traders try to catch short-term market movements.

    Benefits of Intra-day Trading

    pros of intraday trading

    Quick profits

    Intraday traders can earn quick profits within a single trading day because they aim for short-term price movements, which involve multiple trades in a day. At the end of the day, these multiple small trades can significantly influence the overall P&L.

    Lesser risks.

    Intraday traders do not carry positions overnight and square off their positions within the same trading day. This eliminates the risk of gap-up and gap-down openings, as well as random market news.

    Leverage

    Intraday traders can significantly benefit from taking high leverage in intra-day trades, which can significantly influence their P&L. However, keep in mind that leverage is a double-edged sword, and it is advisable to trade with less leverage while carrying out intra-day trades.

    Challenges of Intraday Trading

    1. Excessive market volatility can lead to unpredictable swings, thereby causing losses and increasing market risks.
    2. Day traders can face constant fear of loss of capital, and the mental pressure to make instant decisions can be stressful. Fear and greed can lead to impulsive decisions.
    3. Intraday traders can end up paying higher transaction costs (brokerage, STT, stamp duty, etc.) because they might execute multiple trades on the same day.
    4. Day traders get a limited time window to execute trades, and they may face technological issues since they rely heavily on real-time data provided by the broker.
    5. Sticking to your strategy in real-time markets can be a tough task since it requires a lot of patience and discipline.

    Value Investing vs Intra-day Trading

    Since both come with their own merits and demerits, choose what aligns best with your financial goals and investment horizon. We have created a table of differences for you. Let’s have a look:

    BasisValue InvestingIntra-day Trading
    Time HorizonLong-term (generally >5 years)Within a day
    Investment PhilosophyMajor focus on fundamental analysisIntra-day traders focus on technical analysis
    Stock SelectionUndervalued stocksHighly liquid and volatile stocks are preferred
    RiskValue investing generally carries lower risk.Carries higher risk than Value investing

    Read Also: Difference Between Intraday Trading and Delivery Trading

    Conclusion

    conclusion

    To wrap it up, it completely depends on the individual preferences, risk tolerance, and time that he or she is willing to give. Value investing is considered suitable for long-term investors, while intraday trading is for short-term traders who are looking to make quick bucks. Keep in mind that intraday trading is a zero-sum game, while value investing is a positive-sum game. Both strategies carry inherent risks, and careful evaluation is required.

    Frequently Answered Questions (FAQs)

    1. Which is riskier? Value investing or intra-day trading

      Intraday trading is considered riskier.

    2. Is it suggested for beginners to be involved in intraday trading?

      No, intra-day is speculative in nature and is generally not suggested to beginners.

    3. Which investment approach uses fundamental analysis?

      Value investing uses fundamental analysis and reading financial statements.

    4. Mention two value investors in India.

      Rakesh Jhunjhunwala and Dolly Khanna.

    5. What is the intrinsic value of a stock?

      The inherent value or true worth of the stock is known as intrinsic value.

  • Option Chain Analysis: A Detail Guide for Beginners

    Option Chain Analysis: A Detail Guide for Beginners

    What are the Options?

    Option Chain Analysis

    Options are defined as financial derivatives that provide the buyer with the right, but not the obligation to buy or sell an underlying asset at a predetermined rate within a fixed period of time. Options Trading involves a contract between buyer and seller. These underlying assets include stocks, commodities, indices, or currencies. There are various strategies to trade options. Some of the widely used strategies include straddle, strangle, butterfly spread, covered call, etc. which we will discuss later. Options can be used for speculation, hedging, and generating income.

    options

    What is an option Chain?

    An option chain is a kind of list or a matrix that displays call options and puts options their expiration dates, strike price other information related to the contract for a particular underlying asset. The asset can either be a stock or an index. It can be a valuable tool for those who are looking forward to staying invested in the market for a longer time period. In today’s blog, we will be discussing the terminologies linked with option contracts and how a beginner can analyze the option chain and assess various contract details at a glance.

    option chain

    Read Also: What is Implied Volatility in Options Trading

    Terminologies linked with option chain

    1. Call options

    Options may be categorized into Call options and put options. Call options are contracts that give the holder the right to buy the underlying asset at a particular strike price before or on the date of expiry.

    2. Put options

    Contracts give the holder the right to sell an underlying asset at a fixed price before or on the date of expiry. 

    3. Strike Price

    It is the price per share for which the underlying security may be purchased by the call option holder (or sold by the put option holder)

    4. Spot price

    It is the price at which the underlying asset is trading in the spot market.

    5. Open Interest

    Open interest is the total number of options contracts outstanding for an underlying asset.

    6. Change in open interest

    Change in OI is the number of contracts that are closed, open, or squared off.

    7. Implied Volatility (IV)

    It is a measure of the market’s expectation of future volatility in stock prices.

    8. Volume

    Volume represents the total number of option contracts traded for a particular strike price and expiry date.

    9. LTP

    LTP is the last traded price of an option.

    10.  Premium

    It is the price that an investor pays to buy an option contract. The premium of the contract is influenced by various factors including the strike price, volatility, expiry date and market sentiment.

    11. Lot Size

    Lot size or contract size is the number of units of underlying assets in a contract. For example, the lot size of the Nifty option is currently fixed at 50.

    12. Expiration Date

    The day on which a derivative contract ceases to exist is known as the expiration date. Option contracts expire on the last Thursday of the month.

    13. In-the-money (ITM) option

    A call option is said to be in ITM when the spot price is higher than the strike price. A put option is said to be in the ITM when the spot price is lower than the strike price.

    14.  At-the-money (ATM) option

    This leads to zero cash flow if exercised immediately, and for this option both call and put, the strike price is equal to the spot price.

    15. Out-of-the-money (OTM) option

    This leads to negative cash flows if exercised immediately. A call option is said to be in the OTM when the spot price is lower than the strike price and a put option is said to be in the OTM when the spot price is higher than the strike price.

    16. Intrinsic value and Time value of an option

    The intrinsic value of an option refers to the amount an option buyer will realize, before adjusting for the premium paid. Only in-the-money (ITM) options have intrinsic value whereas at-the-money and out-of-the-money options have zero intrinsic value. The intrinsic value of an option can never be negative.

    Intrinsic value = current stock price – strike price

    Time value is the difference between the premium and intrinsic value. ATM & OTM options have only time value because their intrinsic value is zero.

    17. Bid & Ask Prices

    A bid is the price a buyer is willing to pay and ask is the price sellers are asking for an option.

    18. Option Greeks

    Option premiums change with changes in the factors that decide the price of the option i.e., factors such as strike price, volatility, etc. The sensitivities captured in the market are collectively known as Greeks represented by Delta, Gamma, Theta, Vega, and Rho.

    • Delta – It measures the sensitivity of the option value to a given small change in the price of the underlying asset.
    • Gamma– it measures the change in delta with respect to the change in price of the underlying asset. It signifies the speed at which an option will go either in-the-money or out-of-the-money.
    • Theta– This measures an option’s sensitivity to time decay.
    • Vega- this measures the sensitivity of an option to changes in the volatility of the market.

    Analysis of option chain

    The above image is an example of an option chain that anyone can find on the official website of NSE. The option chain is divided into 2 parts. Calls on the left side and puts on the right side. As you can see there are different strike prices mentioned in the image at which these options are traded. For example, 17350, 17400, 17450, etc. We have already explained the terms that are displayed in the above image as headings. To analyse the option chain first and foremost thing that you need to do is select an underlying asset (Stock, ETF, index)

    After choosing the underlying asset determine the expiration date that matches with your trading strategy. Then start reviewing call and put options and select your strike price i.e., the price at which you wish to purchase the underlying asset. Having known the strike price, examine the bid and ask prices i.e., the premiums for the call or put options whichever you want to trade. Check the trading volumes and open interest for the call and the put option whichever you want to trade. Higher volume and open interest indicate more active trading and do not forget to track changes in OI to measure market movement. For example, if the OI of a particular strike price is increasing, chances are likely that traders are predicting NIFTY to be at that level. Recognize if the call or put options are at-the-money, in-the-money, or out-of-the-money. ATM strike prices are the closest to the current level of NIFTY. Suppose the current level of NIFTY is 19670 so our ATM would be 19750. OTM & ITM have generally lesser volumes and OI than ATM options.

    For ATM options, the uncertainty is highest as compared to ITM & OTM options because even a small price movement in either direction can change the option from ATM to ITM OR OTM. Premiums are generally higher for ITM options as compared to the ATM or OTM options. Before choosing an option to trade, a trader should consider the intrinsic value and time value. Do have a glimpse over the volumes of option contracts because high trading volumes can indicate increased interest in a particular option. Consider implied volatility (IV). A high or increased IV reflects uncertainty and higher premiums in the market.

    The last step is the analysis and proper usage of option Greeks. This can help you analyze the sensitivity of options prices to changes in strike price, volatility, etc. Also, if you look at the option chain you will notice that some part of it is shaded while the other part is white in colour. The upper left shaded part and the lower right shaded part are ITM options while the part which is not shaded is OTM options.

    Also, check out our blog about the different charges you have to bear while trading.

    Read Also: What is Options Trading?

    Conclusion

    conclusion

    Analyzing an option chain involves a combination of technical analysis, understanding option pricing, and formulating trading strategies. By systematically going through the information presented in the option chain, you can make more informed decisions in options trading. Additionally, continuous learning and staying updated on market conditions are key elements of successful option chain analysis.

    Frequently Answered Questions (FAQs)

    1. What is an option chain?

      An option chain is a list of all available contracts for a security or index that displays the call and put options with different strike prices.

    2. What are the Greeks in option chain analysis?

      The Greeks (Delta, Gamma, Theta, Vega) are measures that specify the sensitivity of options price to change in various factors.

    3. What role does risk management play in options trading?

      Risk management in options trading helps in capital preservation.

    4. What is implied volatility?

      It is a measure of the market expectations for price fluctuations in the future.

    5. What is the formula for intrinsic value?

      Intrinsic value = current stock price – strike price.

  • How does the Price of Oil affect the Stock Market?

    How does the Price of Oil affect the Stock Market?

    Oil prices can significantly impact the stock market and are closely inter-related. Oil is an important commodity that contributes to the growth or downfall of an economy and is extensively applied in various industries. Oil prices are defined by a complex interplay of supply and demand dynamics, geopolitical events, production decisions by major oil-producing countries, and changes in the global economy. When the price of oil rises or falls, it can cause various effects that leave footprints throughout the financial markets.

    How Does The Price Of Oil Affect The Stock Market

    In today’s blog, we will be discovering the ways in which changes in the price of oil can affect the stock market. Whether you’re an investor, or simply interested in knowing about the theories of the financial world, understanding the relationship between oil prices and the stock market is crucial for making sound trading decisions and analyzing the current economic trends that are prevailing in the market. The relationship between oil prices and the stock market is complex and intricate.

    How does the Price of Oil affect the Stock Market                                                                    

    Below listed are some of the key points which depict the relationship between the stock market and oil prices

    1. The direct impact of the change in oil prices is on the energy sector stocks which include oil producers and exploration companies. Increased oil prices will have a positive impact on the profitability of these companies. As a result, the stock prices of all the oil companies will soar high.
    2. Oil prices can have a noteworthy impact on inflation. An increase in the price of oil can lead to high production and transportation costs which will increase the general price level of the economy.
    3. Any kind of change in oil prices can also affect other sectors. For example, companies like manufacturing and chemicals that use oil as the key input can have negative effects on their production capacity and their profit margins will be reduced significantly.
    4. Changes in oil prices can also affect the spending capacity of consumers because they will have to pay more money for oil-related products and will be forced to think before buying.
    5. Geopolitical events in major oil-producing regions can disrupt oil supplies and lead to price spikes. These events can increase market uncertainty.
    6. Oil prices are generally denominated in foreign currency i.e., the U.S. dollar. Any kind of increase in the oil price will strengthen the dollar and weaken the Indian currency.

    Read Also: How Interest Rate Changes Affect the Stock Market

    Companies that are majorly affected by the change in oil prices

    Companies that are majorly affected by the change in oil prices

    1. Airlines & Transportation

    Fuel cost comprises one of the most important parts of the operating expenses of the aviation sector. If oil prices are low then the profit margin of these companies will automatically increase. Consumers, in such a case, may get a chance to enjoy lower airfares.

    2. Paint companies

    A fall in the price of oil can reduce the production costs of paint companies. Derivatives of crude oil are important in the production of paints.

    3. Automobile companies

    If there is a sustained increase in prices customers’ choice of fuel-efficient vehicles may change which in turn may affect the demand of some vehicles.

    4. Oil refineries & Marketing Companies

    Oil refineries are meant to convert crude oil into useful products like gasoline and diesel. A spike in oil prices can affect the input costs of these companies.

    5. Agriculture

    Geopolitical events in major oil-producing regions can disturb oil supplies and lead to an increase in prices of oil. These events can increase market uncertainty.

    Oil Crisis

    One of the most famous examples of oil crisis in history is the 1973 oil crisis. This had a deep impact on the global economy and energy policies. Here’s a brief overview of the 1973 oil crisis:

    The oil crisis of 1973 was the end result of some geo-political events. In the year 1973, Egypt and Syria attacked Israel. The U.S. provided military aid to Israel which Arab countries did not like. In reaction, the OPEC countries applied an Oil Embargo on the United States. An Oil Embargo is defined as an economic situation where the transportation of petroleum is limited by some entities to or from an area). This led to a reduction in the global supply of oil. Oil prices at that time were at sky-highs and this caused inflation and higher energy costs. The crisis resulted in increased investment in the development of alternative energy sources, such as nuclear, solar, and wind energy. The purpose of giving the reference to the oil crisis in today’s blog was to give a historical example of how geopolitical conflicts can impact the energy sector. For our readers’ knowledge let us have some basic ideas about OPEC countries.

    1. OPEC stands for the Organisation of the Petroleum Exporting Countries. This organization was formed in the year 1960
    2. OPEC countries are a group of countries that collaborate to coordinate and control the pricing policies of petroleum products.
    3. Currently, there are 13 OPEC countries.
    4. India imports 84% crude oil to fulfill its requirements from countries like Saudi Arabia, Iraq, Iran, and UAE.

    Read Also: How to Trade in the Commodity Market?

    Conclusion

    The relationship between oil prices and the stock market is not always the same and aligned. To conclude, some companies may take advantage of lower oil prices while others may suffer if their core business is dependent on the energy sector. The investor should take note of ongoing oil prices and news updates if any before investing in oil-related companies because chances are likely that oil prices may change and these fluctuations are unavoidable. By now you must have understood that oil prices do have a major impact on the stock market.

    FAQs (Frequently Answered Questions)

    1. How does the price of oil affect the stock market?

      Oil prices affect sectors across the stock market in different ways energy company benefits if the stock prices increase and other companies might suffer losses.

    2. What is the full form of OPEC?

      OPEC stands for the Organisation of the Petroleum Exporting Countries.

    3. From which country India imports maximum oil?

      India imports 84% oil from U.A.E.

    4. What affects the oil prices?

      Any kind of change in supply-demand dynamics and geopolitical events can lead to a change in the price of oil.

    5. How can investors navigate the impact of oil price changes?

      Investors can lower their risk of loss by diversifying their portfolios and concentrating their investments in oil-related stocks.

  • How Interest Rate Changes Affect the Stock Market

    How Interest Rate Changes Affect the Stock Market

    What is Interest Rate?

    Interest rate is defined as the price that you pay when you borrow money from someone or it can also be known as income that you earn on your investments like bonds, FDs, and government securities. We will talk about interest rates in the context of lending and borrowing money. Interest rates in India are managed and regulated by RBI and play an important role in the economic growth of a country.

    How Interest Rate Changes Affect The Stock Market

    RBI manages various types of interest rates. Let’s have a glimpse at these rates.

    1. Repo Rate
      The rate at which the RBI lends money to commercial banks. Any kind of change in repo rate can affect the cost of borrowing for banks as well as retail consumers. The repo rate is considered a key tool to control inflation and stimulate economic growth.
    2. Reverse Repo rate
      The rate at which RBI borrows money from commercial banks. This rate is comparatively lower than the repo rate.
    3. Cash Reserve Ratio
      CRR, or cash reserve ratio, is the amount that commercial banks need to maintain with RBI in the form of cash. Banks do not receive any kind of interest on this from RBI.
    4. Statutory Liquid Ratio
      SLR is the minimum amount in percentage that a bank needs to keep either liquid or as investments in government securities.

    The RBI uses these interest rates and tools to manage monetary policy, control inflation, and maintain financial stability. Our major focus today will be on the repo rate and how even a slight change can have wide-ranging effects on the broader economy.

    Why interest rates are changed?

    why interst rate changes

    RBI changes these repo rates as a part of its monetary policy so that it can achieve its financial objectives. Now, what is monetary policy? Policy framed by the RBI to control and manage the supply of money in the economy. Monetary policy can either be contractionary or expansionary. When the money supply is increased and interest rates are reduced. This is known as the expansionary monetary policy. The vice-versa is known as the contractionary monetary policy. Coming back to our topic RBI changes the repo rate because of the following reasons,

    1. To control inflation in the economy.
    2. To focus on the economic growth of the economy.
    3. Situations prevailing in the global economy

    The decisions related to the repo rate are made during the RBI’s monetary policy meetings, which occur at regular intervals. Before moving further, we will give you some basic idea about the concept of inflation and deflation. Inflation is the general increase in the price level of goods and services in an economy. Consumers tend to pay more than the actual value of the good. The purchasing power of consumers decreases. In such a case under the monetary policy, the government of India increases the interest rate to fight inflation. This will decrease the flow of money in the economy.

    Deflation is the opposite concept of inflation. A general decrease in the price level of goods and services is called deflation. The purchasing power of the consumer is increased. RBI, in this situation, will lower the interest rate in order to increase the flow of money in the economy. We all know that the stock market of any economy is a true indicator that signals the pace of economic growth. So, we need to analyze the fact of how a change in repo rate can impact the markets.

    Read Also: How to Start Stock Market Trading With Low or Limited Capital

    Impact of rate change on the Indian stock market.

    The impact depends on the direction and magnitude of the interest rate changes, as well as the broader economic context.

    Interest rates can be changed in two ways

    • Interest rate hikes
    • Interest rate cuts

    When it comes to interest rate hikes, the cost of borrowing money increases which will make it difficult for the companies to avail loans and this will eventually reduce the profitability of the businesses. This will lead to lower earnings of the companies and decreased prices of the stock.

    Any sort of increase in the rate of interest can make other investment options more attractive. From the consumer’s point of view, there can be a significant change in his spending habits since there we be lesser disposable income in his hand thereby affecting his savings and investments. Interest Rate cuts, on the opposite side, lead to a decline in the cost of borrowing making it easier for the investor to grow which will lead to higher earnings and higher stock growth.

    The immediate impact of interest rate changes on the stock market may vary. Short-term interest rate changes might lead to short-term stock market volatility, while long-term rate trends can have a more lasting effect on the stock market.

    Impact of change in rate by the US Federal Reserve on the Indian stock market

    Impact of interest rate change

    Federal Reserve, since we all know is the central bank of the United States, can either increase or decrease the interest rate depending on the situation and needs of the economy. A change in the rate of the U.S. Federal Reserve affects the economy globally. The relationship between the actions of the Fed and the Indian stock market is influenced by several factors. Some of these factors are listed below.

    1.  If the Fed increases the rate of interest, foreign investors will find the U.S. markets more lucrative to invest in. They will withdraw their funds from the Indian stock market and deploy it in the U.S. so that they can enjoy higher returns.
    2. A slight change in the rate of interest by the Fed can have a significant impact on the exchange rates of currency. If the interest rate increases the U.S. dollar will strengthen and the Indian rupee will weaken.
    3. If U.S. rates rise substantially, it may lead to higher interest costs for Indian companies that have borrowed in U.S. dollars or have exposure to foreign currency debt.

    Read Also: Impact of Interest Rate Change on Financial Markets

    Conclusion

    To conclude interest rate and stock market share an inverse relationship. If you wish to receive consistent returns investing for a longer horizon is suggested. These short-term stances of rate change will create many complications. However, an investor should be well aware of the consequences of the rate change on the market so that he can make informed decisions. They should adopt a diversified investment strategy and take into account their own financial goals, and risk tolerance.

    Frequently Answered Questions (FAQs)

    1. How does interest rate affect bond prices?

      Bond prices and interest rates have inverse relationships i.e., when the central bank increases the interest rates, bond prices decrease, and vice versa.

    2. Do all stocks react to interest rate changes in a similar way?

      No, stocks across sectors react differently to interest rate changes.  

    3. Who regulates and manages the interest rate in the stock market?

      Reserve Bank of India controls and manages the interest rates.

    4. Why does RBI increase the interest rate?

      RBI increases the interest rates in order to control inflation and for the overall growth of the economy.

    5. What happens to borrowing costs when RBI increases the interest rates?

      Borrowing cost for the companies increases if RBI increases the rates.

  • How to Start Stock Market Trading With Low or Limited Capital

    How to Start Stock Market Trading With Low or Limited Capital

    Financial markets are a place where financial assets or instruments are bought and sold. It acts as an intermediary between someone who needs money and someone who wants to invest money. In India, Financial Markets can be classified into two types i.e., money market and capital market. Let us understand the concept of these two markets. 

    How To Start Stock Market Trading With Low Or Limited Capital

    Money market

    money market

    The money market is a place where financial instruments with high liquidity and short-term maturities are traded. It is used by participants as a means for borrowing and lending in the short term, and maturity in this market usually ranges from overnight to just under a year. Instruments of the money market are low-risk investments because the government of India issues them. Examples of these instruments in the money market include T-bills, commercial papers or certificates of deposits.

    Capital market

    capital market

    The capital market is a part of the financial market that facilitates the buying and selling of various financial assets such as stocks, bonds, debentures, and foreign exchange. These markets are controlled by the government and it is meant for both retail and institutional investors.

    The capital market is divided into 2 parts

    • Primary market where new shares are listed for the first time in the market through IPOs.
    • A secondary market where the already issued stocks are bought and sold. The secondary market provides liquidity to investors.

    The secondary market is further classified into various segments like stock market, debt market, commodity market, derivatives market, forex market etc. In today’s blog, we will be discussing about how to start your journey in the stock market with low or limited capital since in a country like India people are not aware of financial planning and there is a constant fear of losing capital which resists them from investing. Due to this people still choose traditional methods of savings like Fixed Deposits.

    Trading- a brief introduction

    trading

    Trading refers to the process of buying and selling financial assets, such as stocks, bonds, commodities, currencies, or derivatives, to profit from price movements.

    Types of trading

    1. Intra-day trading                                                                                                       
      Day traders open and close positions within the same trading day, often making numerous small trades to profit from intraday price fluctuations. They do not hold positions overnight.
    2. Swing trading                                                                                                                                    Swing traders aim to capture price swings or “swings” in the market for a few days to several weeks. They rely on technical and fundamental analysis to identify potential entry and exit points.
    3. Positional Trading                                                                                                                   
      Position traders take a longer-term approach, holding positions for weeks, months, or even years. They often rely on fundamental analysis to make investment decisions and are less concerned with short-term price fluctuations.

    Why should one trade or invest in the stock market?

    Investing in stocks can provide the opportunity to build wealth over the long term. Historically, the stock market has delivered attractive returns that have outpaced inflation whereas traders aim to profit from short-term price movements in stocks. Many people invest in stocks as part of their retirement planning. Investing in equities can potentially grow your retirement savings over time whereas some traders engage in trading as a primary source of income, while others use it as an alternative source of earnings.

    Investing means diversifying your portfolio of stocks and this can not only spread risk but also reduce the impact of poor-performing assets whereas trading can be done either in one stock or in multiple stocks depending upon the choice of the trader. Now chances are likely that a person with an average income may find it difficult to trade due to a lack of funds and financial stability.  

    So here are some tips on how you can start investing with low capital.

    • Understand that with limited capital, your goal should be consistent, small gains rather than quick riches. 
    • Identify how much of your capital you’re willing to risk on a single trade. A common rule is not to risk more than 1-2% of your total capital on a single trade.
    • You can use stop-loss orders to avoid excessive loss. Stick to your predefined stop-loss levels to prevent capital erosion.
    •  Diversification can help minimise your risk. try investing in different asset classes or stocks from various sectors to reduce the impact of a single poor-performing asset on your capital.
    • Begin with a small position size. Invest in a limited number of shares or contracts to minimize the impact of individual trades on your capital.
    • Choose low-cost financial instruments, such as exchange-traded funds (ETFs) or stocks that have low share prices. 

    (ETFs are exchange-traded funds that are tradable on stock exchanges and track a specific index)

    • Go for intra-day and swing trades and buy small quantities of shares. This will boost your confidence and will help you analyse how much water are you in when it comes to live trading.
    • Start learning through online videos or enrol yourself in a trading education programme. Keep yourself updated on market news.
    •  If you have low capital, trading can be emotionally exhausting since it requires a lot of patience. Stay disciplined and don’t let emotions drive your decisions. Maintain a clear and focused mindset.
    •  Opt for a brokerage firm with low fees to reduce your trading as well as transaction costs.
    • Avoid aggressive trading. Overtrading can lead to higher transaction costs and increased risk. You should focus more on quality trades rather than quantity.
    • Make your own trading strategies and start with paper trading. Practice your trading strategies and learn about the trading platform

    Read Also: What is Options Trading?

    Investing in Mutual Funds

    Still, if there is a fear that you might end up losing your capital, no worries you can invest in mutual funds with a small and minimum amount of Rs.500. There are various benefits of investing in mutual funds as well.

    Some of them are listed below,

    1. Professionally Managed Funds                                                                                                         Mutual funds are professionally managed by fund managers. AMCs appoint an eligible manager who then prepares a curated portfolio as per your risk appetite and financial goals.
    2. Diversification                                                                                                                                   AMCs dealing in mutual funds offer a wide variety of schemes in various categories like in large-cap companies, mid-cap companies and small-cap companies. You can choose as per your capital and investment horizon.
    3. Low-cost investment                                                                                                        
      Investment into mutual funds can be started with a minimal amount. You must be thinking how? Well, the answer to this question is, by starting with a monthly SIP of Rs.500.

    (SIP stands for systematic investment plan wherein a fixed amount is deducted from your bank account as part of your investment journey in mutual funds).

    1. Transparency
      Fund managers provide their investors with a transparent environment. You will be told beforehand where your capital is being invested. This increases the trust and harmony between the investor and the manager.
    2. Liquidity                                                                                                           
      Mutual funds are generally open-ended funds, which means you can buy or sell your shares on any business day at the fund’s net asset value (NAV).
    3. Tax Benefit                                                                                                                                            Some mutual funds offer tax advantages, such as tax-efficient funds designed to minimize capital gains distributions for eg. ELSS funds. 

    Read Also: Trading For Beginners: 5 Things Every Trader Should Know

    Conclusion

    Trading with limited capital requires a disciplined approach and a focus on risk management. It’s important to prioritize saving your capital and gradually growing it over time. As you gain experience and build your capital, you can consider more advanced trading strategies.

    FAQs (Frequently Answered Questions)

    1. What are ETFs?

      ETFs are exchange-traded funds that are tradable on stock exchanges and track a specific index. 

    2. Define the money market.

      The money market is a place where financial instruments with high liquidity and short-term maturities are traded. Examples of these instruments in the money market include T-bills, commercial papers or certificates of deposits.

    3. What is SIP?

      SIP stands for a systematic investment plan. You can start SIP with a minimum amount of Rs.500.

    4. Can you do intra-day trading with low capital?

      Yes, you can do intra-day trading with low capital since brokers provide you margin facility i.e., extra funds.

    5. Can I invest 1000 in the stock market?

      There is no minimum amount of capital required since there are also stocks that are low-priced. They will help you trade with low capital and less quantity. 

  • What is Gann box: How to use, meaning and strategy

    What is Gann box: How to use, meaning and strategy

    A Gann Box which is also known as a Gann Square or Gann Grid, is an indicator of technical analysis which is used in financial markets to analyse price and time relations. It was founded by W.D. Gann in the 20th century and was named after him. He was a famous trader and analyst known for his innovative and inventive market analysis strategies. W.D. Gann observed that the market was cyclical and based on these ideologies he formed the Gann theories using various mathematical and geometrical concepts which included tools like Gann angles, Gann fans, Gann box and Gann squares of nine.

    Gann square of nine is a circular chart, the Gann box is a series of diagonal lines and the Gann Fan consists of a series of angled lines, which are generally drawn from a pivot point on a price chart. In today’s blog, we will dive deep into the concept of the Gann box. The Gann Box studies price trends, support and resistance levels, and reversal points that are formed on candlestick charts. Here’s how a Gann Box works:

    What Is Gann Box

    Construction of a Gann Box

    Gann box

    A Gann Box contains a series of lines that are formed at certain angles and levels. These angles and levels are based on geometric principles and ratios which commonly include 45 degrees, 1×1, 2×1, 1×2, 3×1, and so on. The Gann box mainly comprises the following,

    The 45-Degree Angle:

    The main diagonal line in the Gann Box represents a 45-degree angle and is known as the 1×1 line.

    Other Angles:

    Additional diagonal lines are drawn at different angles, such as 2×1, 1×2, 3×1, and so on, and this completely depends upon the type of analysis being performed.

    Uses of Gann Box:

    Gann Boxes are used to identify and analyse trends in financial markets. The 45-degree angle represents a 1:1 relationship between price and time, so it can be used to identify the strength and direction of a trend.

    The angles and lines in a Gann Box can be used as support and resistance levels. Traders look for price reactions at these levels to make trading decisions.

    Gann Boxes are often used by traders to predict future price levels and the time that it might take to reach the price target.  

    Gann Boxes are used to identify potential reversal points in the market. Traders try to find the intersection of diagonal lines as a signal and assume that a reversal from the analysed price level is likely.

    Some traders use Gann Boxes in combination with other technical analysis tools to identify geometric patterns and potential trading opportunities.

    Read Also: Index Derivatives in India

    The formula for Gann Box

    The formula for calculating other Gann Box angles involves ratios of price to time. 

    The important ratios used in Gann analysis are as follows:

    1×1 Angle – Denotes a 1:1 relationship, which means that one unit of price change corresponds to one unit of time change.  

    2×1 Angle –  Denotes a 2:1 relationship, which means that for every two units of price change, there is one unit of time change.  

    1×2 Angle – Denotes a 1:2 relationship, which means that for every one unit of price change, there are two units of time change.

    3×1 Angle – Denotes a 3:1 relationship, meaning for every three units of price change, there is one unit of time change.

    These lines create a grid on the price chart, and traders use them to identify potential support and resistance levels, time projections, and trend analysis.

     Just like other indicators, Gann Box has its own set of advantages and disadvantages. Some of them are listed below

    Advantages of Gann Box:

    ADVANTAGES
    • Gann Boxes helps traders and investors to plan both time and price levels on a chart which eventually leads to a better and clearer understanding of support and resistance zones and prediction of future price movements of the stock market.
    • Gann analysis is based on geometric and mathematical rules. The angles and lines drawn with Gann Boxes are exact and constant which provides traders with an organized and methodical approach to understand the prevailing trend of the market.
    • Gann Box analysis can be used in combination with other technical and fundamental analysis techniques to expand a trader’s logical approach.

    Disadvantages of Gann Box

    DISADVANTAGES
    • Gann Box analysis as a technical analysis tool can be highly subjective. 
    • Traders may take Gann angles and lines differently, which can lead to different conclusions about support and resistance levels or identification of trend directions.
    • Gann analysis can be confusing at times, with multiple angles and lines on a candlestick chart. Traders may face difficulty in determining which lines are the most appropriate for a market time frame.
    • Focusing and relying heavily on Gann angles can lead to missed opportunities or bad trading decisions.
    • Rapid technological advancements and changes in market dynamics may limit the applicability of Gann analysis to modern trading environments.

    Read Also: Price Action Analysis: An Easy Explainer

    Conclusion

    Traders must understand, that the concept of Gann Boxes can be complex and involves a good understanding of the fundamental principles and how to use them efficiently. The Gann box is a lesser-used tool of technical analysis since it includes mathematical calculations and is not as widely used as RSI, MACD and other indicators. Traders and analysts use Gann analysis in combination with other technical and fundamental analysis techniques to make more informed trading decisions.

    FAQs (Frequently Answered Questions)

    1. Is Gann Box a Leading or Lagging Indicator?

      Gann Box is a lagging indicator.

    2. Who founded Gann Box?

      It was founded by W.D. Gann

    3. What is the accuracy level of Gann Box?

      Accuracy level of Gann Box is 92%

    4. What is the most important angle of Gann Box?

      The most important angle of the Gann box is 45 degrees.

    5. What is Gann Fan?

      Gann fan is a technical concept that consists of a series of diagonal lines that are drawn on a price chart to identify support and resistance levels.

  • Different Types of Charges in Online Trading

    Different Types of Charges in Online Trading

    The process of buying and selling financial assets, such as stocks, bonds, commodities, currencies, and derivatives, through your demat account in electronic form is known as online trading. Individuals and institutional investors trade and invest in various financial markets from the comfort of their homes to earn and generate good returns over time. The online trading platforms provide their customers with hassle-free trading facilities, thereby increasing the popularity of online trading. These platforms offer user-friendliness, convenience, and real-time access to financial markets. Later in this blog, we will be discussing these platforms in detail.

    Before we proceed further, here is an overview of some characteristics of trading online

    Different Types of Charges in Online Trading

    What is Online Trading

    What is Online Trading

    The platforms involved in online trading allow traders to execute their buy/sell orders whenever they want to help them access & analyze market data, and manage their holdings of stocks.

    Traders can place various types of orders while trading online, such as market orders, limit orders, and stop-loss orders, which help traders decide their entry and exit points.

    Investors can have access to different financial instruments, including stocks, bonds, options, futures, foreign exchange, etc. This allows the investor to diversify their portfolio and minimize risk since Warren Buffet once said “Don’t keep all your eggs in one basket”.

    Online trading is often cost-effective and has lower transaction fees and charges when compared to traditional brokerage services.  

    Proper rules and encryption followed by broker houses, provide a guarantee to the client about the safety of personal and financial information of the investor when he/she trades online.

    Online trading platforms provide real-time market data, including current market prices, candlesticks charts, news, and analysis. Traders can make informed and sound decisions since these platforms provide them with accurate information about the market.

     A Brief Introduction to Brokerage Firms

    Broker houses also known as brokerage houses or brokerage firms, are financial companies that enable easy buying and selling of stocks, bonds, commodities, and currencies for traders and investors. These institutions play a vital role in financial markets by connecting buyers and sellers and helping them in trade execution.

    Some of the important functions of broker houses or brokerage firms are listed below

    • Brokerage firms execute buy and sell orders from their clients in various financial markets, including stock exchanges, commodity markets, and foreign exchange markets.
    • Many broker houses provide research reports, market insights, and analysis services to their clients, which eventually helps them build investment portfolios that align with their financial goals and risk tolerance.
    • Many broker houses offer their clients margin trading facilities, allowing clients to trade with extra funds, which can increase profits and losses.
    • These firms also provide educational resources and training either through social media or their websites to help clients have a clear understanding of the stock market.

    Types of Brokerage Houses

    types of broker houses

    Broker houses can differ in terms of the services that they are offering, the markets they specialize in, and their fee structures. There are two main types of brokerages:

    1. Full-Service Broker Houses:

    These houses offer a variety of services, including investment advice, research, mutual funds etc. They charge higher fees and help their clients in managing their portfolios, retirement planning, and wealth management. They help their clients in choosing the investment option as per his/her risk appetite and time horizon.  

    •  HDFC Securities: It is a subsidiary company of HDFC Bank, and offers a range of trading and investment services, including equities, derivatives, mutual funds, and more.
    •  ICICI Direct: ICICI Direct is the retail trading and investment company of ICICI Bank. It provides online trading services for equities, derivatives, commodities, mutual funds, etc.

     2. Discount Broker Houses

    These broker houses offer fewer services as compared to full-time brokerage houses and their main focus is on order execution. They are generally cost-efficient and are popular among self-reliant investors and traders. A few examples of the same are as follows:

    •  Zerodha – It is one of the leading and well-recognized discount brokerage firms in India and is famous among traders for the services it provides. It offers trading not only in equities but also in commodities, currencies, and derivatives.
    •  Pocketful – It is also a discount brokerage firm that provides online trading services for equities, derivatives, and commodities.

    Full-service brokerages are befitting for clients who wish to have personalized assistance and are willing to pay higher fees, while discount brokerages are meant for independent investors looking for cost-efficient trading options.

    Having known the benefits of online trading and types of broker houses let us go through the detailed explanation of various charges that an investor needs to pay to the broker while trading online.

    Read Also: Demat Account Charges Comparison 2025

    Different Types of Charges in Online Trading

    1. Brokerage charges

    These charges also known as brokerage fees or commissions, are the fees that investors pay to brokerage firms for executing buy and sell orders for various financial instruments, such as stocks, bonds, options, futures, and more. These charges can differ from company to company depending upon the type of brokerage and the specific services offered.

    These charges apply to buying and selling stocks in the equity markets as well as futures and options.

    2. The Securities Transaction Tax (STT)

    STT is a tax which is levied on the value of securities transactions in India. It was introduced in 2004 and is applicable to various securities, including equities, derivatives, and equity-oriented mutual funds. The STT helps the Government of India to collect revenue and to regulate financial markets. It is borne by the investor or trader and is collected by the stock exchange on behalf of the government.

    The STT rates may change based on the type of transaction

    If you carry stocks on delivery i.e., for next day STT applicable is 0.1% of the transaction value.  

    For intraday STT applicable on securities is 0.025% of total value

    The STT is collected by the stock exchanges from the brokers, who, in turn, collect it from their clients.

    3. GST (Goods & Services tax)

     When you pay brokerage charges or service charges to your brokerage firm a GST of 18% is already included.

    4. Depository Participant Charges

    A Depository Participant (DP) is an entity that acts as an intermediary between the investors and the central depository or CDSL. DPs facilitate the holding and transfer of securities from one brokerage firm to another in electronic form.  

     Below mentioned are some common DP charges in India:

    • Account Opening Charges: DPs may charge an account opening fee when you open a Demat account with them. The account opening fee is a one-time payment made by the client and may differ from DP to DP.
    •  Annual Maintenance Charges (AMC): DPs generally levy an annual maintenance charge for maintaining your Demat account. This fee is paid annually that is once a year.
    •  Account Closure Charges: When you decide to close your Demat account with a DP, you need to pay a certain amount as charges and also you have to clear your debit balance if any.

    The charges of Mutual Funds are described below

    • Expenses Ratio/Management Fees – When you invest in mutual funds, the Asset Management Company will charge a fee to manage your portfolio. This is called the expense ratio or management fees. The expense ratio ranges from 0 to 2.5%. These charges are deducted from your investment.
    •  Entry Load – Earlier in 2009, investing in mutual funds attracted an entry load, which meant when you invest in mutual funds, you will end up paying some amount to the asset management company that too at the time of investment. However, this was abolished by SEBI in the year 2009.
    •  Exit Load – This charge is payable by the customer on the redemption made by them before the prescribed investment period. This exit load may vary from 0.5% to 3%, depending on the fund. The exit load is deducted before the proceeds are paid out.

    Read Also: What is a Stock Broker? Meaning, Features, Types, and Commissions Explained

     Conclusion

    conclusion

    It’s important for traders to carefully review the fee structure of their chosen broker and understand all the costs that are linked with their demat account and transactions before starting online trading. The fee structure and charges can significantly impact the profitability of the trader, so it’s essential to factor these costs into trading strategies and decisions. Additionally, traders should consider other aspects, such as the quality of services and trading conditions, when choosing a brokerage firm

    FAQs (Frequently Asked Questions)

    1. Do I need to pay charges for trading?

      Yes, you need to pay charges for trading.

    2. What are brokerage charges?

      Brokerage charges, also known as brokerage fees or commissions, are the fees that investors pay to brokerage firms for executing buy and sell orders of financial assets.

    3. What is Discount Broker?

      These broker houses offer fewer services, and their main focus is on order execution. They are generally cost-efficient and are popular among self-reliant investors.

    4. Is STT paid on mutual funds?

      Yes, STT is payable on mutual funds also.

    5. Explain DP charges.

      Charges levied by DP for holding the securities in your demat account.

  • Fibonacci Retracement: Complete Guide on How to Use and Strategy

    Fibonacci Retracement: Complete Guide on How to Use and Strategy

    The origin of the Fibonacci series can be traced back to the ancient Indian mathematic scripts. This series was first introduced by an Italian mathematician Leonardo of Pisa, who was also known as Fibonacci. He lived from the late 12th century to the 13th century. His seminal work, “Liber Abaci” (The Book of Calculation), which was published in 1202 helped him introduce the Fibonacci sequence to Europe. The Fibonacci sequence is a series of numbers in which each number is the sum of the two previous numbers, generally starting with 0 and 1. The Fibonacci series is a set of infinite numbers i.e., no matter how many numbers you add to the series, it never ends.  

    Fibonacci Retracement

    The Fibonacci series is as follows,

    (0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377)

    In the above set of numbers if you divide any number by the previous number; the ratio is always around 1.618. The Golden Ratio, approximately 1.618, also called Phi is a mathematical constant derived from the Fibonacci sequence. It has many applications in nature, art, and science. Our readers need to keep in mind that 0.618, when expressed in percentage is 61.8%. A number divided by the next highest number comes near to .6180

    (13/21=.6190, 21/34=.6176, 34/55=.6181, 55/89=.6179). The estimate nears 0.6180 as the numbers increase. This forms the base for the 61.8% retracement. A number divided by another two places higher comes near to .3820

    (13/34=.382, 21/55=.3818, 34/89=.3820, 55/=144=3819). This is the base for the 38.2% retracement

    A number divided by another three places higher comes near to .2360

    (13/55=.2363, 21/89=.2359, 34/144=.2361, 55/233=.2361).  

    What is Fibonacci Retracement?

    fibonacci retracemnet

    Fibonacci retracement is an indicator of technical analysis that is used in the stock market. The purpose of this tool is to recognize potential support and resistance levels in a candlestick chart of different financial assets. It is constructed on the Fibonacci sequence and the Golden Ratio, and it is a well-known indicator among traders and technical analysts.

    Calculation Of Fibonacci Retracement

    Calculation Of Fibonacci Retracement

    The commonly used retracement levels by analysts are 23.6%, 38.2%, 50.0%, 61.8%, and 76.4%.

    Any trader needs to follow these steps to calculate the retracement levels of a particular stock.

    Step 1. You need to identify a significant price move on your chart. This move can be either an uptrend or a downtrend. The starting point that a trader marks on the chart after applying the indicator should be a significant swing high or swing low.

    Step 2. Determination of the Fibonacci Ratios

    23.6% (0.236): we calculate this level by taking 23.6% of the pre-decided price range and adding it to the low point of an uptrend or subtracting it from the high point for a downtrend.

    38.2% (0.382): To Calculate 38.2% of the price range the trader needs to follow the same addition or subtraction technique as above.

    61.8% (0.618): To Calculate 61.8% of the price range use the same addition or subtraction method as above.

    Other levels of the Fibonacci Retracements like 50% or 76.4% are also calculated similarly.

    Step 3. Once you are done with the calculation of retracement levels start drawing horizontal lines at the calculated Fibonacci retracement levels. These lines represent the support and resistance levels for future price action that is expected to happen.

    Now, start observing how the price of the asset reacts to these retracement levels. Any kind of bounce or reversal near these levels may provide buyers and sellers with some good trading opportunities.

    Example of Fibonacci Retracement:

    Let us understand Fibonacci Retracement with an easy and simplified example

    Suppose you have identified a swing low of Rs.1000 and a swing high of Rs.1500 in an uptrend of a stock.

    After determining these points, you need to calculate the price range by subtracting the swing low from the swing high

    which implies that the price range will be (Rs.1500 – Rs. 1000) which equals Rs. 500

    Having found the difference between the price ranges you can now calculate the retracement levels

    Firstly, calculate 23.6% of the price range and add it to the swing low i.e., 23.6%*500=118+1000=1118

    Then calculate 38.2% of the price range and add it to the swing low i.e., 38.2%*500=191+1000=1191

    Now for the retracement level of 50%, divide the price range by 2 and add it to the swing low i.e., 500/2=250+1000=1250.

    Similarly, calculate the 61.8% of the price range and add it to the swing low i.e., 61.8%*500=309+1000=1309

    The values so derived (1118, 1191, 1250 and 1250) are the expected retracement levels.

    Since we all know that Fibonacci retracement is a leading indicator as well as a widely used and famous tool in technical analysis applied by traders, it also has some advantages and limitations that traders should keep in mind before making any sort of trading decision.

    Advantages of Fibonacci Retracement

    Advantages of Fibonacci Retracement

    Traders commonly value the following advantages of Fibonacci retracement

    1. Fibonacci retracement can be applied to various financial markets, including stocks, commodities, forex, and cryptocurrencies, on different timeframes like hourly, daily, weekly, and monthly, making it a multipurpose indicator for technical analysts.
    2. Traders use Fibonacci retracement in combination with other technical analysis tools, such as trendlines, moving averages, or oscillators. When different indicators give the same indication, like Fibonacci, chances are that the stock will move in the desired direction.
    3. Fibonacci retracement is used by traders to identify stop-loss orders range as per their risk levels.
    4. Fibonacci retracement can be used to identify potential profit targets. Traders often use the levels as reference points for setting profit targets.
    5. Fibonacci retracement is particularly useful for swing traders who often look for short- to medium-term price movements to earn from the stock market.

    Disadvantages of Fibonacci Retracement

    Disadvantages of Fibonacci Retracement
    1. Selecting the starting and ending points for the Fibonacci retracement analysis can be a tough task. It depends from trader to trader on what point they are choosing, which can eventually lead to varying retracement levels and trading decisions. This can lead to unnecessary confusion.  
    2. Relying solely and completely on Fibonacci retracement may lead to false buy or sell signals or missed trading opportunities.
    3. Even though traders use this indicator widely, there is no assurance that the price will precisely bounce at the estimated Fibonacci retracement levels.
    4. Fibonacci retracement may be difficult for beginner traders to understand since it might be confusing for them to choose the swing high or swing low.  
    5. Different timeframes can yield different retracement levels. Traders may face variations in levels on daily, weekly, or intraday charts.

    Relation between Fibonacci Series and Fibonacci Retracement

    The Fibonacci series and the numbers derived from it, such as the Golden Ratio (1.618), are used in the construction of Fibonacci retracement levels.

    The important retracement levels in Fibonacci retracement are ratios that are derived from the Fibonacci series. For example, the 61.8% retracement level corresponds to the inverse of the Golden Ratio (1/1.618).

    Fibonacci retracement is a real-world application of the Fibonacci series in technical analysis. Traders use the Fibonacci series and its ratios to find levels of support and resistance in financial markets for making sound trading decisions.

    Read Also: 5 Must-Read Best Swing Trading Books for Trader

    Conclusion

    conclusion

    Remember that the effectiveness of Fibonacci retracement levels varies, and they should be used in combination with other technical analysis indicators and risk management strategies to make informed trading decisions. Additionally, the choice of starting and ending points can be somewhat subjective, so practice and experience are essential when applying Fibonacci retracement in real trading sessions.

    FAQs (Frequently Asked Questions)

    1. Which are the most popular Fibonacci retracement levels?

      The most popular Fibonacci levels are 0.236, 0.382, 0.618.

    2. Is Fibonacci a leading or lagging indicator?

      Fibonacci is a leading indicator.

    3. Can I use Fibonacci in intraday trades?

      Yes, Fibonacci can be used on various timeframes including intraday.

    4. Who discovered the Fibonacci series?

      Leonardo Pisano discovered the Fibonacci series in the 12th century.

    5. What is the Fibonacci Series?

      The Fibonacci sequence is a series of numbers in which each number is the sum of the two preceding ones, typically starting with 0 and 1.

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