Category: Trading

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.

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

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 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.

November 15, 2023

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 20^th 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:

Construction of a 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:

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

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.

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)

Is Gann Box a Leading or Lagging Indicator?
Gann Box is a lagging indicator.
Who founded Gann Box?
It was founded by W.D. Gann
What is the accuracy level of Gann Box?
Accuracy level of Gann Box is 92%
What is the most important angle of Gann Box?
The most important angle of the Gann box is 45 degrees.
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.

November 15, 2023

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

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

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.

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.

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)

Do I need to pay charges for trading?
Yes, you need to pay charges for trading.
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.
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.
Is STT paid on mutual funds?
Yes, STT is payable on mutual funds also.
Explain DP charges.
Charges levied by DP for holding the securities in your demat account.

November 7, 2023

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.

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 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

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

Traders commonly value the following advantages of Fibonacci retracement

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.
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.
Fibonacci retracement is used by traders to identify stop-loss orders range as per their risk levels.
Fibonacci retracement can be used to identify potential profit targets. Traders often use the levels as reference points for setting profit targets.
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

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.
Relying solely and completely on Fibonacci retracement may lead to false buy or sell signals or missed trading opportunities.
Even though traders use this indicator widely, there is no assurance that the price will precisely bounce at the estimated Fibonacci retracement levels.
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.
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.

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)

Which are the most popular Fibonacci retracement levels?
The most popular Fibonacci levels are 0.236, 0.382, 0.618.
Is Fibonacci a leading or lagging indicator?
Fibonacci is a leading indicator.
Can I use Fibonacci in intraday trades?
Yes, Fibonacci can be used on various timeframes including intraday.
Who discovered the Fibonacci series?
Leonardo Pisano discovered the Fibonacci series in the 12^th century.
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.

October 25, 2023

Cost of Carry in Futures Contract

What is Derivative Trading?

Before understanding what is derivative trading, let’s first understand what are derivatives in the stock market. So, derivatives are basically contracts that do not have any monetary value of their own but derive it from the underlying asset. Now, derivative trading involves the buying and selling of these contracts through your demat account. These derivatives derive their value from an underlying asset, which can be a commodity, stock, currency, interest rate, or market index. The main purpose of derivative trading is to speculate on the price movements of the underlying asset or to hedge against price fluctuations.

Here are some key concepts and aspects of derivative trading:

Futures are standardized contracts to buy or sell an underlying asset at a predetermined price and future date. They are commonly used in commodities, currencies, and financial markets
Options give the holder the right (but not the obligation) to buy (call option) or sell (put option) an underlying asset at a specified price and within a defined time frame.
Swaps involve the exchange of cash flows or liabilities between two parties based on a notional principal amount. Common types of swaps include interest rate swaps and currency swaps.
Forwards are similar to futures contracts but are not standardized and are typically traded over-the-counter (OTC). They involve an agreement between two parties to buy or sell an asset at a future date and an agreed-upon price.
It’s important to note that derivative trading can be complex and carries a higher risk level than traditional stock trading. As such, it’s vital for traders to carefully understand the derivative products they are trading and have a clear trading strategy to manage market risk effectively.

Before diving deep into the cost of carry in the futures contract, here is a detailed overview of what are future contracts.

Future Contracts

A futures contract is a standardized financial agreement between two parties to buy or sell a specified quantity of an underlying asset at a predetermined price on a future date. These contracts are traded on organized exchanges and serve various purposes, including hedging against price fluctuations and speculating on future price movements.

Here are the key components and characteristics of futures contracts:

Futures contracts are highly standardized, with predefined terms and conditions, including the quantity of the underlying asset, the contract’s expiration date (delivery month), and the contract’s price, which is known as the futures price or strike price.
Futures contracts are marked to market daily. This means that any profit or loss on the contract is realized and settled daily. If the contract has moved in your favour, you receive a gain; if not, you incur a loss.
Many market participants use futures contracts to hedge against price fluctuations in the underlying asset. For example, a wheat farmer can use wheat futures to lock in a selling price and protect against a potential price drop. This is known as Hedging.
There are certain opportunity costs linked with futures contracts. These costs in the context of futures contracts refer to the gains or losses that a trader or investor foregoes by choosing to enter into a specific futures contract and allocate their capital to that contract. The missed opportunity to invest in other assets or strategies that might have offered a better return.
In the context of futures contracts, the terms “near month” and “far month” refer to the different dates of expiry of futures contracts within the same underlying asset.

The “near month” refers to the futures contract with the closest expiry date relative to the current date. It is the contract that will expire soonest.
Traders and investors often use the near-month contract to establish short-term positions or to respond to forthcoming market developments. Near-month contracts generally have greater trading activity and volume.
The “far month” refers to futures contracts with expiry dates in the future compared to the current date.
·Traders and investors may use far-month contracts for longer-term trading or investment strategies. Far-month contracts typically have lower trading volumes.

Determination of Price in Future Contracts

The price of future contracts is determined by various key factors, including supply and demand dynamics, the current price of the underlying asset which is also known as Spot Price, interest rates, carrying costs, etc.

Here’s an overview of the primary factors that influence the pricing of futures contracts:

1. The current market price of the underlying asset, known as the “spot price,” is one of the most fundamental factors affecting the price of a futures contract. The futures price typically coincides with the spot price as the contract’s expiry date approaches.

2. Interest rates play a significant role in futures pricing. If interest rates are high, it becomes more expensive to hold a futures position because traders have to finance their positions. The relationship between interest rates and futures prices is known as the cost of carry.

3. For assets like stocks, dividends and income generated by the asset can impact futures pricing. In the case of stock index futures, for example, expected dividends can influence the futures price.

It’s important to note that the pricing of futures contracts aims to remove the arbitrage opportunities, meaning the futures price should converge with the spot price by the contract’s expiration. This process is known as the “cost-of-carry model.” If futures prices deviate significantly from the spot price, it can create opportunities for arbitrage traders to profit by buying low and selling high (or vice versa). To learn trading from scratch check out this blog.

Cost Of Carry in Future Contracts

The “cost of carry” in the context of futures contracts refers to the costs associated with holding a position in a futures contract until its expiration date. These costs primarily include

Interest cost

If you buy a futures contract, you are essentially agreeing to buy the underlying asset at a specified future date. To do this, you may need to borrow money or use your own funds to pay for the contract. The interest or financing costs associated with borrowing this money represent a significant part of the cost of carrying.

Carrying Costs

These are costs related to holding the physical underlying asset if you intend to take delivery upon the contract’s expiration. These costs might include storage fees, insurance, and maintenance costs for the asset.

Dividends & Income

If the underlying asset pays dividends or generates income during the holding period, you might have to factor these into the cost of carry. The cost of carry is essential to consider while trading in futures because it can impact the profitability of a position & convenience yield which you are able to earn especially in situations where the cost of carry exceeds the gains from the futures contract.

Formula for Cost of Carry in Futures Contract

Cost of Carry (CoC) = (Futures Price – Spot Price) + Financing Costs – Income

Here’s what each component represents:

Futures Price

This is the current price of the futures contract you are trading.

Spot Price

The spot price is the current market price of the underlying asset that the futures contract represents.

Financing Costs

This component accounts for the interest costs associated with borrowing the money to trade the futures contract. For long positions, this cost is usually positive and for short positions, it can be negative, as you may earn interest on the money received from the sale.

Income

Refers to any benefits generated from holding the futures contract. For example, if you are holding a stock index futures contract, you may receive dividends.

Conclusion

In conclusion, the cost of carry is a critical concept in futures trading. It plays an essential role in determining the pricing and profitability of futures contracts and the above-mentioned formula takes into account various factors, including the difference between the futures and spot prices, financing costs or benefits, and any income generated from holding the contract. It also helps in analysing the financial implications of holding futures positions.

FAQs (Frequently Asked Questions)

Define Future Contracts.
A futures contract is a standardized financial agreement between two parties to buy or sell a specified quantity of an underlying asset at a predetermined price on a future date.
What is the cost-of-carry model?
The pricing of futures contracts aims to eliminate arbitrage opportunities, meaning the futures price should converge with the spot price by the contract’s expiration. This process is known as the “cost-of-carry model.
Mention the formula of cost-of-carry in futures contracts.
The formula for the same is mentioned belowCost of Carry (CoC) = (Futures Price – Spot Price) + Financing Costs – Income
What is near month & far month in futures contract?
The “near month” refers to the futures contract with the closest expiry date relative to the current date and the far month is referred to futures contracts with expiry dates in the future compared to the current date.
Explain Carrying costs.
These are costs related to holding the physical underlying asset if you intend to take delivery upon the contract’s expiration. These costs might include storage fees, insurance, and maintenance costs for the asset.

October 20, 2023

Trading For Beginners: 5 Things Every Trader Should Know

What Is Trading?

Trading refers to the buying and selling of financial assets, such as stocks, bonds, currencies, commodities, and derivatives, with the aim of earning profits from either short-term or long-term price movements. Trading can take many forms, and it is conducted by a diverse group of market participants, including individual retail traders, institutional investors, and financial institutions.

Investors use fundamental analysis (evaluating an asset’s underlying value based on economic and financial data) and traders use technical analysis (examining historical price and volume data) to make informed trading decisions. (For your information there is a significant difference between trading and investing).

Trading can be pursued as a full-time profession or as a part-time endeavour, depending on individual goals and resources. It requires a strong understanding of market dynamics. After knowing what is trading let us understand stock exchanges in India and how they have evolved over time.

Stock Exchanges in India

The two major and most prominent stock exchanges in India are

National Stock Exchange (NSE)

The NSE is one of the leading stock exchanges in India. It was established in 1992 and is located in Mumbai. The NSE is known for its electronic trading platform and is considered the largest stock exchange in India in terms of daily trading volume. It lists a wide range of financial instruments, including equities, derivatives, exchange-traded funds (ETFs), and more.

Bombay Stock Exchange (BSE)

The BSE is one of the oldest stock exchanges in Asia, dating back to 1875. It is also located in Mumbai and is sometimes referred to as the “BSE Sensex” because it is home to the Sensex, one of India’s most widely followed stock market indices. BSE lists various financial products, including equities, fixed-income securities, derivatives, and mutual fund units.

In addition to the NSE and BSE, India has several other stock exchanges, including regional stock exchanges and commodity exchanges. However, the NSE and BSE dominate the Indian financial markets and serve as the primary platforms for trading and investment.

Trading Platforms

Trading platforms are software applications or online interfaces that facilitate the execution of financial transactions in various asset classes, including stocks, bonds, commodities, currencies, and derivatives. These platforms provide traders and investors with the tools and resources to analyse financial markets, place orders, and manage portfolios. There are various types of trading platforms available, each catering to specific needs and preferences. Many brokerage firms offer mobile apps that allow traders to trade on the go using smartphones and tablets. Mobile trading apps provide essential features for executing trades and monitoring portfolios.

When selecting a trading platform, traders and investors should consider their specific trading objectives, experience level, preferred asset classes, and budget. Additionally, they should evaluate factors such as user interface, charting tools, order types, technical analysis features, and customer support. Most platforms offer demo accounts for users to practice and explore the platform’s functionality before commencing real trading.

What is a Demat Account

A Demat account, or “Dematerialized account,” is an electronic or digital account that allows individuals to hold, store, and manage their financial securities and investments in electronic form. It is equivalent to a physical share certificate, eliminating the need for paper-based records and transactions. Demat accounts are commonly used for purchasing various types of securities, including stocks, bonds, exchange-traded funds and mutual fund units. The purchased securities are credited to or debited from the Demat account. Demat accounts generally offer a high level of security and protection for investors’ holdings. Transactions and securities are recorded and stored electronically, reducing the risk of fraud or loss. These accounts come in various types, including individual, joint, corporate, and minor accounts, catering to different types of investors.

To open a Demat account, an individual needs to approach a Depository Participant (DP), which could be a bank, financial institution, or brokerage firm. The DP facilitates the account opening process, verifies documents, and provides the account holder with a unique Demat account number.

Open your Demat account today with Pocketful.

Types of Trading

Trading encompasses a variety of approaches and strategies to buy and sell financial instruments with the goal of making a profit. Different types of trading cater to different time frames, risk profiles, and strategies. Here are some common types of trading:

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.

Swing Trading

Swing traders aim to capture price swings or “swings” in the market over a period of a few days to several weeks. They rely on technical and fundamental analysis to identify potential entry and exit points.

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.

Scalping

Scalpers make a large number of small, rapid trades, often holding positions for just seconds to minutes. They profit from small price movements and aim to capitalize on liquidity and order flow.

Algorithmic Trading (Algo Trading)

Algorithmic traders use computer algorithms to execute high-frequency trades based on predefined criteria, such as technical indicators, news sentiment, and market patterns.

Each type of trading has its own advantages and challenges, and traders often choose the approach that aligns with their risk tolerance and trading strategy. It’s important to thoroughly understand the chosen trading style and to practice risk management to minimize losses.

Now let us understand about price movements and technical analysis of stocks.

Price Movement

Price movement, in the context of financial markets, refers to the changes in the price of a particular financial instrument, such as a stock, bond, commodity, currency, or cryptocurrency, over a given period of time. Monitoring and analysing price movements is a fundamental aspect of trading and investing, as it provides valuable information for making informed decisions.

Price movement can be observed and analysed over various time frames, ranging from intraday (minutes or seconds) to longer-term (daily, weekly, or monthly). Traders and investors often choose their time frames based on their trading or investment strategies.

Candlestick charts are commonly used to visualize price movement. Each candlestick represents a specific time period and includes information about the opening, closing, and high, and low prices during that period. The patterns and shapes of candlesticks can provide insights into market sentiment.

Price movement can exhibit trends, which are sustained directional movements. Trends can be classified as bullish (upward), bearish (downward), or sideways (in consolidation). Traders often seek to identify and follow trends.

Support levels are price levels where an asset tends to find buying interest and reverse upward, while resistance levels are where it finds selling interest and reverses downward. Identifying these levels can help traders make decisions.

A breakout occurs when the price moves above a significant resistance level, while a breakdown occurs when it falls below a key support level. Breakouts and breakdowns can signal potential changes in trend direction.

With the help of price movements, we can technically analyse a particular stock and for that, we need to learn technical analysis.

What is Technical Analysis?

Technical analysis is a method of analysing financial markets and making investment or trading decisions based on the historical price and volume data of assets, primarily stocks, bonds, currencies, and commodities. It relies on the premise that past price movements and trading volumes can provide valuable insights into the future direction of an asset’s price. Technical analysts use various tools and techniques to study price charts, identify patterns, and make predictions about future price movements.

Technical analysts identify key price levels where an asset tends to find buying interest (support) and selling interest (resistance). These levels can influence trading decisions.

Chart patterns, such as head and shoulders, double tops and bottoms, flags, and triangles, are formations that appear on price charts. Analysts look for these patterns to make predictions about future price movements.

Technical analysts use a wide range of technical indicators, such as moving averages, Relative Strength Index (RSI), and Moving Average Convergence Divergence (MACD), to provide quantitative measures of price movements, trend strength, and overbought or oversold conditions.

It’s important to note that technical analysis is based solely on historical data and patterns, and it does not consider fundamental factors like earnings, economic indicators, or company financials.

Read Also: What is Options Trading?

Conclusion

To conclude, as a beginner every trader must have some basic idea of the above explained points before starting his/her investment journey for several safety concerns otherwise chances are likely that he/she may commit errors.

As a beginner, you must start educating yourself by reading books or taking online courses and should start practising with a demo account and implement risk management strategies like setting a stop-loss.

FAQs (Frequently Asked Questions)

What is trading?
Trading refers to the buying and selling of financial assets, such as stocks, bonds, currencies, commodities, and derivatives, with the aim of earning profits.
Name two stock exchanges in India.
Two stock exchanges of India are the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE).
What is a demat account?
A Demat account is an electronic or digital account that allows individuals to hold, store, and manage their financial securities in electronic form.
Define intra-day trading.
When traders open and close positions within the same trading day before the closing of the market i.e., 3:30 p.m.
How an individual can do risk management in the securities market?
Any individual can manage his/her risk by setting stop losses according to his capital.

October 18, 2023

What is MACD: Definition, Meaning, Uses and Strategy

What is MACD?

MACD stands for Moving Average Convergence Divergence. It is a popular and versatile technical indicator used in trading and technical analysis. MACD is used to identify potential trends, momentum shifts, and trading signals in financial markets, particularly in stocks, forex, and commodities. Here’s an overview of MACD and how it works:

The MACD indicator consists of three key components:

The MACD line is the main component of the indicator. It is calculated by taking the difference between two Exponential Moving Averages (EMAs): a shorter-term EMA and a longer-term EMA. The most common settings are a 12-period EMA and a 26-period EMA. The MACD line represents the momentum of the stock’s price.
The signal line is a 9-period EMA of the MACD line. It helps smooth out the MACD line and generate trading signals. When the MACD line crosses above the signal line, it may be a bullish signal, and when it crosses below, it may be a bearish signal.
The MACD histogram is created by plotting the difference between the MACD line and the signal line. The histogram visually represents the convergence or divergence of the two lines. When the histogram is above the zero line and increasing, it indicates bullish momentum. When it is below the zero line and decreasing, it indicates bearish momentum.

The Moving Average Convergence Divergence (MACD) indicator was developed by Gerald Appel, an American trader and technical analyst. He introduced the MACD in the late 1970s and published it in his book “The Moving Average Convergence-Divergence Method” in 1979. The MACD has since become one of the most widely used and recognized technical indicators

How MACD is used?

Traders and technical analysts use MACD in various ways to analyse price data and make trading decisions:

When the MACD line is above the signal line and both are above the zero line, it indicates a potential bullish trend. On the contrary, when the MACD line is below the signal line and both are below the zero line, it suggests a potential bearish trend.
Traders use MACD to confirm the strength of a trend. For example, if a stock is in an uptrend and the MACD is also rising, it represents strong bullish momentum.
The divergence between the MACD line and the stock’s price can provide early signals of trend reversals. A bullish divergence occurs when the price is making lower lows, but the MACD makes higher lows. Bearish divergence is the
MACD crossovers between the MACD line and the signal line can generate trading signals. A bullish crossover (MACD line crossing above the signal line) suggests a buy signal, while a bearish crossover (MACD line crossing below the signal line) suggests a sell signal.
Traders often focus on the MACD histogram. Rising histograms indicate strong momentum in the current trend while falling histograms suggest weakening momentum.
When the MACD line crosses above the zero line, it can indicate a shift from bearish to bullish momentum. On the other hand, a cross below the zero line can signal a shift from bullish to bearish momentum.
MACD is a useful indicator that can be used in combination with other technical tools and techniques. It provides valuable insights into a stock’s trend, momentum, and trading opportunities. However, it is necessary to understand that no single indicator should be used in isolation, and traders should consider other factors and indicators when making trading or investing decisions.

Limitations of MACD

MACD is a lagging indicator, which means it reacts to price movements that have already occurred. It may not provide timely signals in instantly changing or volatile markets.
Like other technical indicators, MACD can generate false & fake signals, especially in choppy or consolidated markets. It’s important to use additional indicators or tools for confirmation of the trend.
Quick reversals in price can result in false MACD crossovers and misleading signals.
The MACD’s effectiveness is highly dependent on the choice of parameters, such as the number of periods for the EMAs. Different settings can result in different signals.
MACD is solely based on price data and doesn’t consider fundamental factors. For a comprehensive analysis, combining it with fundamental analysis is sometimes necessary.
The concept of MACD and its calculations can be complex for beginners. Understanding how to use MACD efficiently may require some time and practice.

Strategies for MACD

MACD Crossover Strategy

Buy Signal:

When the MACD line crosses above the signal line, it generates a bullish (buy) signal. Traders often enter long positions at this point.

Sell Signal:

When the MACD line crosses below the signal line, it generates a bearish (sell) signal. Traders often enter short positions at this point.

Zero Line Cross Strategy

Buy Signal

When the MACD line crosses above the zero line, it indicates a shift from bearish to bullish price movement. This can be a buy signal.

Sell Signal:

When the MACD line crosses below the zero line, it indicates a shift from bullish to bearish momentum. This can be a sell signal.

Other Strategies for MACD

Combine MACD with other technical indicators, such as support and resistance levels, moving averages, or chart patterns, for more robust trading signals.

Use MACD on multiple timeframes to confirm signals. For example, Traders may use a longer-term MACD on a daily chart to identify the primary trend and a shorter-term MACD on an hourly chart for entry and exit signals.

It’s essential to back-test any MACD strategy on historical data and use proper risk management. No single strategy works perfectly in all market conditions, so be prepared to adapt and refine your approach based on changing market dynamics. Additionally, consider combining MACD analysis with other forms of technical and fundamental analysis for a better trading strategy.

The formula for MACD

The Moving Average Convergence Divergence (MACD) is calculated using the following formula:

MACD Line (12-day EMA – 26-day EMA)

1. Calculate the 12-day Exponential Moving Average (EMA) of the stock’s closing prices.

2. Calculate the 26-day EMA of the stock’s closing prices.

3. Subtract the 26-day EMA from the 12-day EMA to get the MACD line.

(12-day EMA – 26-day EMA) = MACD line

Signal Line (9-day EMA of MACD Line)

Calculate the 9-day EMA of the MACD line.

2. This 9-day EMA becomes the signal line.

MACD Histogram (MACD Line – Signal Line)

1. Subtract the signal line (9-day EMA of the MACD line) from the MACD line to get the MACD histogram. (MACD line – Signal line) = MACD Histogram

In summary, the MACD is derived by taking the difference between two Exponential Moving Averages (EMAs) of the stock’s closing prices. The MACD line is the primary component, while the signal line and the MACD histogram are derived from the MACD line.

Conclusion

To conclude, MACD is a valuable tool for trend identification, momentum confirmation, and generating trading signals. However, it should be used in combination with other technical indicators and analysis methods to improve signal quality and accuracy. Additionally, recognizing its limitations, that it is a lagging indicator and its sensitivity to parameters, is essential for informed trading decisions.

Also, read about mutual funds and ETF

FAQs (Frequently Asked Questions)

What is the full form of MACD?
MACD stands for Moving Average Convergence and Divergence.
Who developed MACD?
MACD was developed by Gerald Appel, an American trader.
Is MACD a leading or lagging indicator?
MACD is a lagging indicator.
Mention three components of MACD.
Three components of MACD are the MACD line, signal line and MACD histogram.
Why is MACD beneficial?
MACD helps us identify the strength of the momentum and the current trend of stock price.

October 18, 2023

Best Options Trading Chart Patterns

In this blog, we will be discussing the technical trading chart patterns that are used by investors and traders to analyse the price movement of the stock.

To explain,
You must have heard the quote “History repeats itself”. In the same way, when it comes to the stock market, chart readers analyse the history of price movement on technical charts which are made up of certain red and green candlesticks in order to predict the future target price of that particular stock. This is known as technical analysis.

Now technical analysis comes with various chart patterns which are made up of candlesticks.
One can use these patterns while trading either in cash or in the options segment.
These patterns can help someone discover some of the best trading opportunities.

First, we need to understand the meaning of cash and option segments.

Cash Trading

Refers to the buying and selling of financial instruments, such as stocks, bonds, commodities, or currencies, for immediate delivery and settlement.

Options Trading

It is a financial strategy that involves buying and selling options, which are derivative contracts that give the holder the right (but not the obligation) to buy or sell an underlying asset at a specified price (strike price) on or before a specified expiration date. There are two primary types of options: call options and put options.

The next question that would come to your mind would be, how patterns are formed on stock charts? So, the answer to this is, that patterns are made up of candlesticks. A candlestick consists of a rectangular area, known as the “body,” and two “wicks” or “shadows” extending from the top and bottom of the body. Candlesticks can be coloured to represent whether the price of the asset increased or decreased during the time frame. There are basically two types of candlesticks:

Read Also: Ascending Triangle Chart Pattern

Bullish And Bearish Candlesticks

A “bullish” or “up” candlestick is typically white or green and indicates that the closing price is higher than the opening price, signifying a price increase.

A “bearish” or “down” candlestick is typically red or black and indicates that the closing price is lower than the opening price, signifying a price decrease.

Traders often look for specific candlestick patterns, such as “doji,” “hammer,” “engulfing,” and “morning star,” to make trading decisions. These patterns can provide insights for upcoming trend reversals in the market.

After having some basic idea about the technical analysis, it is important to go through some terminologies that are linked with chart patterns.

First and foremost, one must identify the support and the resistance lines in order to understand the basic price movement.

A resistance level is a price level at which a stock encounters selling interest, preventing it from rising further. It acts as a “ceiling” for the price, where the supply of the stock increases, and buying interest diminishes.
A support level is a price level at which an asset tends to find buying interest, preventing it from falling further. It’s like a “floor” for the price, where demand for the stock increases, and selling interest diminishes.

Support and resistance are fundamental concepts of technical analysis and play a crucial role in the same.

Reversal Patterns

Reversal patterns in technical analysis are chart patterns that suggest a potential change in the direction of an existing price trend. These patterns are valuable for traders and investors seeking to identify points at which an asset’s price may reverse from an uptrend (bullish) to a downtrend (bearish) or vice versa. Reversal patterns can help in making informed decisions about buying or selling a stock.

Read Also: Triple Top Reversal Chart Pattern

Continuation Patterns

Continuation patterns are technical chart patterns that suggest a temporary consolidation or pause in an existing price trend, followed by the continuation of the prior trend. Some of the examples of continuation patterns are listed below

This is the most basic and widely used flag pattern in trading. The pattern above that you are seeing is known as the bullish flag pattern

The pattern begins with a strong and sharp upward price movement called the pole of the flag. Following the flagpole, there is a period of consolidation or sideways price movement. This consolidation takes the form of a rectangular or parallel channel as one can see in the image, sloping downward slightly. This is the flag portion of the pattern. Then comes a bearish flag pattern. The bearish flag pattern is characterized by a flagpole that continues in a consolidation phase. The pattern is considered complete when the price breaks out to the downside, indicating a trend reversal.

Now, our readers must be aware a bit about the target and stop loss. We will also explain through this blog how you can set your estimated target and stop loss while using chart patterns and for this, you need to understand the meaning of target and stop loss. Traders typically place a stop-loss order just below the lower boundary of the flag pattern. This helps protect against potential losses if the price unexpectedly changes its direction.

The price target is usually calculated by measuring the length of the flagpole and adding it to the breakout point.

Descending Triangle

This is a continuation pattern with a flat support level and a declining resistance line. The price is expected to break down below the support level, leading to a bearish trend continuation.

Symmetrical Triangle Pattern

Symmetrical triangles do not have a specific bullish or bearish bias by themselves. The breakout direction provides the bias for the pattern. It is considered a continuation pattern, indicating that the price is likely to continue the existing trend after a period of consolidation.

Head And Shoulders

The head and shoulders pattern consists of three peaks. The middle peak (the head) is higher than the two outer peaks (the shoulders). This pattern suggests a potential trend reversal from bullish to bearish.

Wedge Pattern

It is a technical chart pattern used in technical analysis to identify potential trend reversals or trend continuations in the price of a stock, currency pair, or commodity. Wedge patterns are named for their shape, as they resemble a narrowing or converging pattern on a price chart. There are two primary types of wedge patterns: rising wedges and falling wedges.

The above figure displays the falling and rising wedge chart patterns respectively.

Conclusion

It is better to trade with chart patterns since they provide the trader with better market insights and a competitive advantage over those who use technical analysis tools while trading. Chart patterns represent a comprehensive approach and its analysis can help in a deep understanding of market psychology.

FAQs (Frequently Asked Questions)

What is Options Trading?
Options trading involves buying and selling options, which are derivative contracts that give the holder the right (but not the obligation) to buy or sell an underlying asset.
Is Cash Trading different from Options Trading?
Yes, Cash trading is different from option trading.
What is the resistance level?
A resistance level is a price level at which a stock price faces difficulties in continuing its trend.
What is a candle stick?
A candlestick consists of a rectangular area, known as the “body,” and two “wicks” or “shadows” extending from the top and bottom of the body.
What is a reversal pattern?
Reversal patterns in technical analysis are chart patterns that suggest a change in the direction of an existing price trend.

October 18, 2023

What is ATR (Average True Range): Calculation, Advantages & Disadvantages Of ATR

In our previous blogs, we have discussed about stocks and technical analysis.

For reference, here are some insights into technical analysis.

Technical Analysis

Technical analysis is a method of analysing financial markets and making trading or investment decisions based on the historical price. It is primarily focused on studying past price movements and chart patterns to predict future price direction. Technical analysts identify support and resistance levels, which are price levels where an asset tends to find buying or selling pressure, respectively. Various technical indicators, including moving averages, Relative Strength Index (RSI) and Moving Average Convergence Divergence (MACD), provide quantitative measures of price momentum. The average true range is one such technical indicator. Let us go through an in-depth analysis of ATR.

What is ATR?

The Average True Range (ATR) is a technical indicator used in the analysis of stocks, primarily for estimating the volatility and price range of an asset. Developed by J. Welles Wilder in his book “New Concepts in Technical Trading Systems.” ATR is a valuable instrument for traders and investors to measure market conditions and manage risk.

Here are the key points about the Average True Range:

The ATR is designed to measure the volatility of an asset, representing the average range between the daily high and low prices. A higher ATR value indicates greater volatility, while a lower value indicates lower volatility.
The ATR is derived from the True Range, which is the greatest of the following three values:

The current day’s high minus the current day’s low.
The absolute value of the current day’s high minus the previous day’s close
The absolute value of the current day’s low minus the previous day’s close.

To calculate the Average True Range, a moving average is taken of the True Range values over a specified period. The most commonly used period is 14 days, but traders can adjust this period as per their preferences.
Higher ATR values imply that the asset is going through greater price fluctuations, which can be understood as increased uncertainty or risk. Lower ATR values indicate relatively stable or less volatile market conditions.
A rising ATR can confirm the strength of a trend, especially when in combination with other technical indicators. It suggests that the market is experiencing strong price movement.
The choice of the ATR’s look-back period depends on the trader’s goals and time period. Shorter periods provide more responsive values, while longer periods offer a smoother, more stable measure of volatility.

The Average True Range is a multipurpose tool of technical analysis that when used in combination with other indicators and strategies can help in making informed trading decisions. It helps traders better analyse and manage the risks linked with market volatility, allowing for more precise stop-loss and position sizing.

Calculation of ATR.

The Average True Range (ATR) is calculated by following a specific formula. It involves several steps and the use of True Range values for a selected number of periods.

Here’s the formula and a step-by-step explanation of how to calculate the ATR:

Step 1:

Calculate True Range (TR)

True Range represents the greatest of the following three values for a given trading period.

The difference between the current day’s high and the current day’s low.
(Current Day’s High – Current Day’s Low)
The absolute value of the difference between the current day’s high and the previous day’s close
(Current Day’s High – Previous Close)
The absolute value of the difference between the current day’s low and the previous day’s close. (Current Day’s Low – Previous Day’s Close)

Step 2:

Calculate the Average True Range (ATR)

The ATR is calculated as a moving average of True Range values over a specified number of periods (usually 14 days is the default period).

Here’s how to do it:

1. Select the number of periods (e.g., 14).

2. For the first True Range value (TR1), simply take the TR of the first period.

3. For the next ATR calculations, use the following formula:

ATR = [(Prior ATR x 13) + Current TR] / 14
Where “Prior ATR” is the ATR value calculated for the previous period, “Current TR” is the True Range value for the current period, and “14” represents the selected number of periods.

The process is repetitive for each subsequent period. Then continue to calculate the ATR by using the prior ATR and the current True Range.

Here’s an example to illustrate the calculation of the ATR:

Let’s say we want to calculate the 14-day ATR of a stock:

Day 1:

ATR1 = 2 (True Range for the first day)

Day 2:

ATR2 = [(2 x 13) + 4] / 14 = 2.07

Day 3:

ATR3 = [(2.07 x 13) + 3] / 14 = 2.01

Day 4:

ATR4 = [(2.01 x 13) + 6] / 14 = 2.06

The ATR value provides an indication of the average price range and volatility over the selected number of periods. Traders use it to assess the level of price volatility, set stop-loss levels, and determine position sizes based on their risk tolerance.

Advantages & Disadvantages Of ATR

The Average True Range (ATR) is a widely used technical indicator in trading and investing. Like most tools, it comes with its own set of advantages and limitations.

Here are the advantages and disadvantages of using the ATR:

Advantages of ATR:

ATR is a purely mathematical indicator, which means it provides objective data. It’s not influenced by subjective opinions or emotions, making it a reliable tool for risk management.
Traders can adjust the look-back period for the ATR to match their specific trading strategies and time horizons. Common periods include 14 days, but you can choose longer or shorter periods based on your needs.
A rising ATR often indicates increased price volatility, which can confirm the strength of a trend. This is especially useful for trend-following traders.

Disadvantages of ATR:

ATR is based on historical price data, and it doesn’t predict future price movements. It provides information about past volatility, which may not always reflect current or future market conditions.
Like many technical indicators, the ATR is a lagging indicator, which means it reacts to price movements that have already occurred. This lag may limit its effectiveness in rapidly changing or highly volatile markets.
ATR can generate false signals, especially in choppy or sideways markets. Traders need to use it in conjunction with other indicators or tools to minimize false signals.
For beginners, the concept of ATR and its calculations can be complex. Understanding how to use ATR effectively may require some time and practice.
ATR provides information on volatility but doesn’t offer insights into other important factors like trend direction, market sentiment, or the potential impact of news events.

Conclusion

To conclude, the ATR is a valuable tool for traders and investors looking to measure and manage volatility and risk. However, it’s essential to use it in combination with other indicators and analyse it carefully to create a comprehensive trading or investment strategy. Additionally, identifying its limitations can help the investor to use it effectively and in a much better way.

Read Also: Rising Window Candlestick Pattern

FAQs (Frequently Asked Questions)

What is the full form of ATR?
ATR stands for Average True Range.
What is prior ATR?
Prior ATR” is the ATR value calculated for the previous period.
Who developed ATR?
ATR was Developed by J. Welles Wilder in his book “New Concepts in Technical Trading Systems”.
What is the default period of true range for calculating ATR?
The default period of the true range for calculating ATR is 14 days.
Is ATR a leading or lagging indicator?
ATR is a lagging indicator.

October 18, 2023

What Is The Gap Up And Gap Down Strategy?

Stock markets are very volatile, and people who actively trade in the stock markets know it well. Traders generally try to ride the trend or take advantage of the large price movements in the market to make profits. Every trader in the stock market uses their own set of strategies to trade the market. Some use chart patterns, price action, indicators etc. Among all these, one of the most famous strategies that traders use is the Gap up and Gap down strategy. Here, they try to book profits based on the gap up and gap downs in the market. Mostly gap up and gap down are seen, during the start of the trading sessions in the market.

The given article gives a broad framework of the Gap up and Gap down strategy. After reading this article you will be thorough with what is in the stock market, why they occur, the types of gaps and the perfect strategy to trade the market using the Gap ups and Gap downs.

What Are Gaps In The Stock Market?

Gaps are the area of discontinuity in the price chart of a security. Gaps are the impact on the price of a stock because of the overrun activities in the previous day, seen in the next trading session. Gaps can be of two types in the stock market. One is Gap up and the other is Gap down.

Gap-up:

When the opening candle of the day has opened above the closing of the previous day then it is called a Gap up in the market. The candle could be a bulling or bearish candle. The colour of the candle signifies its type. A red candle is a bearish candle and a green candle is a bullish candle.

Gap down:

When the opening candle of the day has an open, below the closing of the previous day’s last candle, then it is called a Gap down in the market. The same rule applies to the Gap up. The candle could be bearish or bullish. A red candle is a bearish candle and a green candle is a bullish candle.

Why do Gaps Occur In The Markets?

Gaps generally occur because of the bidding in the pre-open markets. So, accordingly, we see Gap ups and Gap downs in the market. The actual trading in the stock market begins at 9:15 but, before that, there is a pre-open market session of 15 minutes wherein you can place your orders depending upon the pre-open prices in the market.
Earlier what people used to do was in case if the market opened with a Gap down they would make buy positions there, with the possibility that this gap would be filled in the coming market hours as the market always corrects itself. And in case of a Gap people generally make sell positions with the possibility that this gap will be filled in the coming market hours, as the market always corrects itself and the trend will reverse.
Another reason for Gaps in the markets could be, companies disclosing their quarterly earnings. For instance, if the results of a company are declared in off-market hours, in case of good results the probability is high, that in the next market session, the stock will surely give a Gap up opening and vice versa in case of poor quarterly results.
Algo trading or automated program trading is also a new factor that affects or influences the Gaps in the market. For easy understanding let’s say, that the trading algorithm might indicate a large buy order because a prior high or the resistance level is broken. The volume of an algo trade might be such that it triggers a price gap in the market, breaking the recent resistance levels indicating other traders to the directional movement.

Types Of Gaps In The Market

There are 4 main types of Gaps in the stock market which are listed below:

Common Gap

A common gap shows the area on the chart where the price gets discounted. Mostly when a gap is formed within the market range then it is called a common Gap. when the fluctuation is going on in the market common gaps are formed within the range of the supply and the resistance levels in the market.

Breakaway Gap

When the markets open the first candle of the day forms at the resistance or the support levels of the market, then this gap is called the Breakaway Gap.

Runaway Gap

It is generally seen in a trending market either in a bullish trend or a bearish trend. Suppose that the market is going in an uptrend and the next day the the stock price shows a gap up following the previous day’s trend.

Traders check for volume at these levels. And if volumes are good they make a buy position here. The same thing applies in the case of the downward trend.

Exhaustion Gap

This type of Gap is also mostly seen in a trending market but here you got to see a gap the next day. If you see a Gap in the trending market, then you have to check the volume. If volumes are less, then you can use a strategy.

You saw that the market opened a Gap up, volume is low, the next candle is bearish then it is an exhaustion Gap.

Island Cluster Gap

When the Gap up and Gap down are adjacent to each other, a reversal pattern is observed here. This type of gap is called an Island Cluster Gap.

Read Also: Upside Tasuki Gap Pattern

A Strategy To Play The Gaps

Below are some very simple ways that you can take into account to develop a trading strategy based on Gaps.

A gap-up stock in an uptrend provides a good opportunity to buy and hold a long position. A gap-down stock experiencing a decline in price in an uptrend provides a good opportunity to buy. A gap-down stock in a downtrend provides a good opportunity to short-sell.

The most effective Gap stocks to trade in the share market are those that are volatile and thus have more price fluctuations. Therefore, you should consider the sector that you would like to trade in. For example, oil and gas, pharmaceutical and retail stocks are considered particularly volatile sectors to trade, especially in the face of adverse economic conditions or a national recession.

FAQs (Frequently Asked Questions)

How to predict Gap up and Gap down?
Gap up and Gap down generally depend on various technical and fundamental factors.
How to trade Gap up and Gap down?
In case of a gap down, traders generally set a buy position with the assumption that this gap will be filled by the market correction.
What is meant by gap-filling?
Gap filling is when the price closes as the previous day closes.
How to start trading in the stock market?
To start trading in the stock market, you need to have a Demat account. You open a Demat account using Pocketful.
What is the Gap pattern Trading Strategy?
It is a simple and disciplined approach for buying and shorting stocks in the stock market.

September 25, 2023

Category: Trading

Money market

Capital market

Trading- a brief introduction

Types of trading

Why should one trade or invest in the stock market?

Investing in Mutual Funds

Conclusion

FAQs (Frequently Answered Questions)

What are ETFs?

Define the money market.

What is SIP?

Can you do intra-day trading with low capital?

Can I invest 1000 in the stock market?

Construction of a Gann Box

The 45-Degree Angle:

Other Angles:

Uses of Gann Box:

The formula for Gann Box

Advantages of Gann Box:

Disadvantages of Gann Box

Conclusion

FAQs (Frequently Answered Questions)

Is Gann Box a Leading or Lagging Indicator?

Who founded Gann Box?

What is the accuracy level of Gann Box?

What is the most important angle of Gann Box?

What is Gann Fan?

What is Online Trading

A Brief Introduction to Brokerage Firms

Types of Brokerage Houses

1. Full-Service Broker Houses:

2. Discount Broker Houses

Different Types of Charges in Online Trading

1. Brokerage charges

2. The Securities Transaction Tax (STT)

3. GST (Goods & Services tax)

4. Depository Participant Charges

Conclusion

FAQs (Frequently Asked Questions)

Do I need to pay charges for trading?

What are brokerage charges?

What is Discount Broker?

Is STT paid on mutual funds?

Explain DP charges.

What is Fibonacci Retracement?

Calculation Of Fibonacci Retracement

Advantages of Fibonacci Retracement

Disadvantages of Fibonacci Retracement

Relation between Fibonacci Series and Fibonacci Retracement

Conclusion

FAQs (Frequently Asked Questions)

Which are the most popular Fibonacci retracement levels?

Is Fibonacci a leading or lagging indicator?

Can I use Fibonacci in intraday trades?

Who discovered the Fibonacci series?

What is the Fibonacci Series?

What is Derivative Trading?

Future Contracts

Here are the key components and characteristics of futures contracts:

Determination of Price in Future Contracts

Cost Of Carry in Future Contracts

Interest cost

Carrying Costs

Dividends & Income

Formula for Cost of Carry in Futures Contract

Futures Price

Spot Price

Financing Costs

Income

Conclusion

FAQs (Frequently Asked Questions)

Define Future Contracts.

What is the cost-of-carry model?

Mention the formula of cost-of-carry in futures contracts.

What is near month & far month in futures contract?

Explain Carrying costs.

What Is Trading?

Stock Exchanges in India

National Stock Exchange (NSE)