How to use Directional Movement Index in trading
The Directional Movement Index (DMI) determines the direction in which the trend is headed, while also providing an idea about the strength and momentum of the trend. In fact, J. Welles Wilder had invented this indicator in order to understand the direction of stocks or indexes.
All you wanted to know about candlestick charts
There are various chart types available for technical analysis, including line charts, renko charts, bar charts, among others, but none is more popular than the candlestick chart form. Traders and analysts prefer candlestick charts as they are relatively easier to read. Each candlestick represents a trading session and gives information about the open, high, low, and close in a more precise manner than other chart types.
Here're the top technical analysis mistakes traders must avoid at all costs
Learning technical analysis is a tedious task which takes years of practice and study to master. Traders undergo a whole lot of emotions till they can get a fair idea about the structure and skills involved in technical analysis. And, because of this, a few market participants tend to deviate from the core ideology of technical analysis. However, doing so may lead to losses which in turn, destroys the trading morale.
Here's why pivot points are a must for any profitable trading model
Pivot points are the price levels that help traders determine directional movement and potential support/resistance levels of a stock/index. These are calculated considering the open, high, low, and close of the previous sessions. Market participants consider pivot levels as turning points, besides looking at support and resistance.
All you wanted to know about channel patterns
A channel is a combination of trendlines that helps traders identify the price move and even assists in determining the target levels to optimise profitability. It is a line drawn on respective highs or lows of trendlines to exhibit the price movement. Over the years, trendlines have facilitated in showing the support and resistance levels to build a profitable trading model.
Here's your guide to trading with the Ichimoku Cloud indicator
Ichimoku Cloud is a widely used indicator, built by Japanese journalist Goichi Hosoda, and published in the late 1960s. This indicator uses moving averages to identify support and resistance levels. Moreover, it also throws light on price momentum and trend direction. With all these combinations, the indicator has acquired a 'cloud' methodology to identify reversal, support, and resistance levels while also facilitating the prediction of future directions. The Ichimoku Cloud comprises five lines among which two demonstrate a cloud. These include Conversion line, Base line (confirmation line), lagging line, and the cloud (includes two lines -- 'Span A' and 'Span B').
Here's how to read and use the standard deviation indicator in tradings
Standard Deviation measures the volatility of securities. It is computed as the square root of variance with respect to the mean price. In simple language, it helps one identify the spread or deviation of a price from the mean by considering the historical price data. Higher Standard Deviation means the price has deviated considerably from the mean price, while lower deviation signifies minor variation from the mean. Generally, blue-chip / large-cap stocks have a lower Standard Deviation compared to illiquid or small-cap stocks. When it comes to choosing a risky investment, market participants opt for stocks with higher standard deviation that provides volatility, which can be used for quick profits. As such, deviation is a key aspect of fundamental analysis, which determines risks involved in various stocks, funds, and other assists.
All you wanted to know about the Average Directional Index in trading
The Average Directional Index (ADX) helps one understand the strength of a trend. It is a momentum indicator that is derived from the moving average of the 14-day period. It is well supported by two other indicators -- Positive Directional Indicator (+D) and the Negative Directional Indicator (-D) that are derived from moving averages and true range. The ADX is read on the scale of 0-100; ADX trading above 25 value is considered as a bullish signal and below 25 as negative strength. The ADX determines the strength of a trend, whereas the +D and –D identify the trend direction. The crossover of +D and –D provides signals for trading and understanding the overall movement. When +D makes a positive crossover, it is believed to possess an upward direction, whereas the negative crossover reflects downward weakness. When +D trends above the 50 value, it is considered as bullish and as it continues to scale towards the 80 levels, the stock is said to be in an upward trend. (ITC chart)
Here's why moving averages are a must for your trading model
One of the simplest techniques to gauge the trend of a stock/market is Moving Average. It is classified as the average value of a security over a specified period. Usually, when the price trades above the average, the trend is considered as bullish and when the price falls below the average, the sentiment is said to be bearish.
How to identify and trade the Triple Top reversal pattern
Triple top is a trend reversal pattern that depicts buying weakness and a failure to absorb selling pressure, resulting in a sell-off. This chart pattern depicts three distinct peaks, called resistance, inside a price zone that the stock price has failed to conquer. As the price gradually starts showing weakness, and eventually breaks the lower reversal levels, called the support, the asset is said to have a triple top breakdown. One of the important aspects is to acknowledge the weakness. If the three peaks show weakness at higher levels, the price needs to carry forward the weakness near the breaking point called 'the neckline'.
Here's how you can tell if a stock is under consolidation
Consolidation is a phase in the markets in which a stock or an index trades within a specific range, between the 'support' and resistance' levels. The price reverses from specific lower levels-- the support--and faces selling pressure at higher levels -- the resistance. This scenario, by and large, defines consolidation. During consolidation, the price trades in a certain range with subdued volumes. It faces selling pressure on the upside, near the same levels where supply was witnessed earlier. Similarly, when the price corrects, it rebounds from the levels where buying emerged earlier. Volumes stay low, barring a few swings that can be overlooked.
Here's how trendlines can help traders catch that perfect breakout
A trendline indicates a broad trend, especially when considered on a bigger scale and aids helps in developing a trading strategy. A trendline is drawn considering the “lower lows” in terms of support and “higher highs” as resistance points to identify the next influential levels. This could take a horizontal form as well. The idea is to recognize whether the price is holding the trendline or not. Nowadays, most day-traders use trendlines to get a sense of the trading sentiment. Basically, they consider the trendline as a support or resistance on the chart. Any breach of the same signals a major turnaround in the sentiment and thus affects the price movement.
Here's how to gauge support and resistance reversals for consistent profits
Support and resistance are two distinct aspects of price, but together they represent the importance of significant levels that have a major impact on the trend. Support is the area that facilitates buying momentum, whereas resistance is the roof level that the price is unable to conquer or go beyond. A number of market participants trade only on the basis of support and resistance zones. This seems risky, but over the years, this theory has proven to be a reliable trading model. A perfect determination of a support or resistance indicates “when to enter and when to exit” the trade. A good trading system needs to have these characteristics to make consistent profits.
Must-know chart patterns for intra-day traders
Intra-day trading is tough. It demands the trader be on his/her toes all day long. Nevertheless, there are a few simple techniques one can employ while analysing a stock for intra-day trading. To begin with, determining a trend is of utmost importance in intra-day trading. Entering a stock without considering the trend could lead to a heavy monetary loss and even affect the morale. Besides identifying volumes and moving averages, intra-day moves also need to be considered on the basis of favourable chart patterns. One should build his/her trading model after giving equal consideration to all these aspects. Chart patterns help one identify potential moves with the help of key support levels and certain predefined patterns. Chart patterns also eliminate the lag during sudden negative developments or in an abrupt market, allowing the trader to react faster. These chart patterns are categorised as: Continuation pattern, Reversal pattern, and Gap pattern.
Is it just a retracement or a reversal? Here's how to tell the difference
Retracement and reversal are two diverse aspects of trading. While the former depicts the occasional correction in stock prices or indices, which are considered healthy, the latter means a deeper decline and change in sentiment. In order to identify them, the foremost requirement is the trader's ability to determine the trend of a stock, which requires knowledge of fundamental and technical analysis.
Top technical indicators that every rookie trader should know about
To be a successful trader, one should first be able to read a chart with conviction. Secondly, there is nothing called a 'perfect' method of trading. It evolves with experience and consistent efforts to enhance and rectify the trading model. A trader's psychology is to benefit from the price move which is trending or is on the reversal. Technical analysis can assist traders in that process. Technical analysis revolves around three major indicators: the price indicator, volume, and basic technical indicators that determine strength, oscillation, and momentum.
Here's how to avoid getting caught in a 'Bear Trap' while trading
Simply put, a bear trap is a technical pattern that occurs when the performance of a stock or an index wrongly signals a reversal of a rising price trend. At times, such reversals instead turn into follow-up buying, thus trapping the sellers in their short positions. The psychology behind this whole process is called a “Bear Trap”.
Here's how to use Golden Ratio and Fibonacci sequence in trading
The Golden ratio--1.618--is derived from the Fibonacci sequence, named after its Italian founder, Leonardo Fibonacci. In the sequence, each number is simply the sum of the two preceding numbers (1, 1, 2, 3, 5, 8, 13, and so on). When further translated into percentages, this ratio can be used in the stock analysis and mainly uses four techniques: Fibonacci retracement, arcs, fans, and time zones. In technical analysis, the golden ratio is typically translated into three percentages: 38.2 per cent, 50 per cent, and 61.8 per cent, which are considered key retracement levels for a stock or an index. However, more multiples can be used when needed, such as 23.6 per cent, 161.8 per cent, 423 per cent, and so on.
Here's why Three Black Crows are an ominous sign for the stock market
The 'Three Black Crows' is a candlestick pattern which, when it occurs at the top of any trend, suggests a negative reversal and possible profit-booking in a particular stock or the market in the subsequent sessions. Such a scenario depicts a change in trend, provided higher levels are not conquered in due process. Simply put, this pattern signals a bearish sentiment and one should be cautious once this pattern is visible on the charts.
All you wanted to know about a 'pullback' in trading
A pullback is a healthy correction in the long-term upward trend for a stock or the market / index. This is looked upon as an opportunity to enter a trade that provides a window for bigger return over the long ter. When a chart portrays a rally on breakout, it does provide intermittent corrections that traders use to buy. Such rallies give intraday moves wherein one can make quick bucks with a well-versed strategy. Although, while trading on a pullback strategy, one's risk appetite must be acknowledged, or else, the risk may be severe and can damage the overall performance. Failure to exit a trade may create disparity on the breakout strategy. To ascertain that the stock or the index is in a pullback mode or a reversal, one must check the following three parameters.
Three white soldiers can help you make money in the stock market
In stock market trading, "three white soldiers" is a candlestick pattern that indicates a reversal in the downtrend. It consists of three continuous green candles with a strong close. Every next candle closes above the previous green candle high, signifying a likely change in the sentiment. On the charts, such a scenario reveals bulls getting aggressive with every weakness being bought into. Though the trading volume plays a crucial role in building and defining a trend, the volume structure may be kept aside if the strength in price is visible. This pattern is viewed as an extremely bullish as continuous three positive closes indicate the beginning of a strong buying, which began with the first day’s move and got carried forward to the next two sessions. If this buying continues or holds the upward bias, the volume and investor interest also start to pick up pace.
How to use technical analysis to spot overbought and oversold stocks
Overbought and oversold conditions, categorised as such according to the position of a stock price / market level with respect to a certain threshold, can be a psychological trigger for traders to either enter or exit the security and even markets. The categorisation can be on the basis of either fundamental or technical analysis. The basic idea of fundamental analysis is to determine the intrinsic or 'fair value' of a stock. In a fundamental study, the corporate / business development or similar incidences may lead to an enormous change in price, which investors may feel is either over/under priced. This study revolves around price – earnings ratio (PE ratio), cash flow analysis and financial results or estimates that affect the price movement in various ways. Other developments pertaining to the industry / sector a company operates in and the prevalent tax laws also have an impact on the performance of the company, which in turn is reflected in the stock price. Using these metrics, an investor can identify fair, undervalued and overvalued stocks, and take positions accordingly.
Here's how to use the Aroon Indicator to determine trend for a stock
Aroon Indicator helps identify change in market trend. Developed by Tushar Chande in 1995, it measures time taken for the price to climb a new high and low to determine trend change. In simple words, the Indicator is used to identify trend changes in the price of an asset, as well as the strength of that trend. In essence, the Indicator measures the time between highs and the time between lows over a period. In a bullish sentiment, the price needs to scale fresh / successive highs in a short span of time.
All you wanted to know about the ADX indicator
The Average Direction Index (ADX) is a widely used technical analysis indicator that helps one gauge the strength of a trend, be it upward or downward. It determines the core strength of a trend. The ADX is derived from two accompanying indicators, known as the Positive Directional Indicator (+D) and the negative Directional Indicator (-D). Therefore an ADX indicator has three lines on the chart: +D,-D, and the ADX line.
Here's how you can identify entry and exit points in trading for max profit
The entry and exit levels play a crucial role in the success of a trade. And as such, no trading strategy can be built without a proper entry and exit model. To ascertain these crucial points, one needs to be well-versed with all the tools, indicators, and time frames of technical analysis so that one can develop his/her own remote model that should be able to achieve over 80 per cent accuracy.
Gravestone, Dragonfly: Use Doji Candlestick patterns to maximise profits
A Doji candlestick is formed when the open and close prices of a stock or index are nearly the same, which represents indecision among traders. The different forms of a doji candlestick are: long-legged doji, Gravestone doji, and Dragonfly doji. In simple terms, such a candle indicates that the bulls and bears are uncertain about the trend. The strength and momentum for both seems to be at par, resulting in the price settling at the equal level. One can use this candle to make a buy or sell decision.
Here's how you can identify and avoid 'bull traps' while trading
A 'bull trap' is a classic case of a false breakout. In general, buyers enter a trade with strong conviction of an upside. However, at times, the stock fails to deliver the upward move and instead hits the trader's stop loss or support levels. Such instances not only affect the trader's morale, but they also start to doubt their trading strategies. Every other triggered stop loss then induces “fear of uncertainty” in the trader and the feelings of “staying away” enters his/her system.
What is 'market capitulation' and how you can identify such a move
Techn'Capitulation' refers to a phenomenon where investors liquidate their positions during periods of extended decline in the stock price for the fear of incurring a bigger loss. This panic selling may even emerge due to margin calls and increase in futures & options (F&O) margins, etc. On the other hand, some believe that capitulation can lead to exhaustion of selling pressure and hence provide a fresh buying opportunity.
Types of charts used in technical analysis and how to interpret them
Technical charts help traders take an informed decision while making a financial commitment in the markets. They are a graphical representation of historical price, volume, and time intervals. Over the years, several researches have co-related chart with technical tools like moving average, trendlines, and technical indicators.
Confused about when to buy a stock? Here's what you need to know
'Buy' signals are cues for a trader to enter/purchase a stock once the technical setup meets their condition to go long. In order to spot such opportunities, one needs to first gauge the overall trend by correlating different indicators and chart patterns with price momentum. Trend analysis is, thus, the core of identifying the momentum of a stock, and hence, any potential 'buy' or ‘sell’ opportunity. The analysis differs for intra-day, short-term, medium-term and long-term investments.
Here's how you can use Bollinger Bands to spot trading opportunities
Bollinger Bands are a type of statistical chart characterizing the prices and volatility over time of a financial instrument or commodity and were invented by John Bollinger, who charted two standard deviation lines around the simple moving average (SMA) to identify the deviation in price. The line above the SMA is denoted as upper Bollinger line and the line below as lower Bollinger band. Normally, the simple moving average is 20-day SMA and acts as a middle level between the two bands.
All you wanted to know about support and resistance levels
Support and resistance are two points that indicate positive and negative reversals, respectively, in trading. Support shows the level where traders or investors are ready to buy, causing the buying momentum to emerge while selling pressure diminishes. In resistance, the buying strength starts to peter out, exhibiting buyers' exhaustion at that level and sellers' entry into the market.
How to use Morning and Evening Stars to make money in stock market
Morning Star and Evening Star are two candlestick patterns that symbolize major trend reversal ahead that can shift the market sentiment. The Morning Star is considered as a positive indicator, whereas Evening Star denotes a negative turnaround.
What is the ‘Hanging Man’ pattern and what is its significance in trading?
In technical analysis, Hanging Man is a candlestick pattern that indicates a bearish reversal trend with selling pressure emerging at higher levels. The pattern involves a small real body and a long lower shadow with an upper shadow staying low. This suggests that the sellers are entering the markets and the bulls are getting tired as the prices start showcasing weak close.
What is the Death Cross pattern and how to make use of it while trading?
The "Death Cross" pattern is one of the most effective technical instruments in identifying a major trend reversal in any stock/index. Simply put, it explains how the negative convergence of moving averages impacts the upward trend and pushes prices into a bearish phase.
Key sell signals you should be aware of while trading
One needs to examine several elements in order to determine a negative reversal, or a 'sell signal', for a stock or index. The most relevant is the price movement, followed by price indicators like candlestick patterns, chart formations, moving averages, trend line, gap up or gap down, etc.
How to identify which timeframe suits your trading behaviour?
Technical analysis helps in developing trading strategies for various timeframes. This could be for a week, fortnight or a month. Depending on the analysis, one can take a long or short position for various time schedules. Broadly, a trader who looks for short-term gains hold positions for a week or fortnight, whereas those eyeing bigger gains hold positions for a month.
What's consolidation in stock market and how it can help you spot breakouts
Consolidation is a phase when a stock or an index trades within a range. The trend is said to be sideways and may vary depending on the circumstance. Once this range is broken, it may lead to bigger moves, but until the range is intact, the movement cannot be clearly predicted.
Five ways to manage market volatility
India VIX, a measure of volatility and investors’ perception about the risk of sharp swings based on options prices, rose to its highest level since the 2008 global financial crisis (GFC) last week, as fear gripped markets worldwide after COVID-19 was declared a ‘pandemic’.
How to ascertain a stock or the market is close to bottoming out?
Stock markets around the globe have had a painful start to 2020. Already slowing growth on account of trade wars were jolted by the sudden spread of coronavirus that further dented economic growth. The start bas been the worst since 2011.
What is Elliott Wave theory and how can you benefit from it?
One of the most renowned theories in technical analysis is “Elliott Wave Theory”, which was developed by Ralph Nelson Elliot. This theory speaks about Waves (patterns). Elliot believed that the mass psychology depicts the same recurring patterns in the financial markets. He speaks about waves in 5-3 moves, wherein five waves move in an upward direction of the main trend, known as impulse and three waves move in the corrective phase. These 3 moves are also referred to as ABC.
Five basic tools to spot bearish reversals or downtrend in trading
Markets move in waves, thus forming peaks and troughs. From a long-term perspective, corrective moves are said to be healthier and effective for a smoother trend. While one can capitalise on an upward rally by going long, identifying corrective moves can help in booking profits and entering short trades.
What is Stop-loss and how you can use it to limit losses in trading
Stop-loss is a technique with which a trader can mitigate or stem their losses, if any. While placing a buy/sell order, the trader can choose a “stop-loss order” with a certain price -- just in case the trade goes against the individual's assessment -- and when the stock price arrives at that certain level, the order gets executed as a market order, thus saving the trader from extensive losses.
Want to start trading as a beginner? Learn these Candlestick patterns
As a beginner in stock market, one should always look for trades that can give a decent return with limited risk. The price itself denotes the basic movement, which can be analysed basis the structure and formation of the candlestick on the technical charts.
What are Moving Averages and how to use them to make money in stocks
Moving Average is an indicator that helps avoid the uncertain price fluctuations. It acts as an instrument to smoothen the significance of the price to determine the trend. It does lag in some cases, however, the overall scenario helps define the direction.
On the charts: Understanding the Head and Shoulders pattern
A head and shoulder pattern indicates bullish to bearish trend or vice-versa. In simple words, this trend depicts change from positive to negative. The pattern consists of shaping of three peaks that are categorised into the left shoulder, head and the right shoulder. The left shoulder is formed at the end of a sharp up move on high volumes. After the peak of the left shoulder is formed, there is a subsequent reaction and prices slide on low volume. The right shoulder is formed when prices move up again but remain below the central peak called the 'head' and fall nearly equal to the first valley between the left shoulder and the head or at least below the peak of the left shoulder.
Chart Check: Four small-cap stocks that gave decent returns in last 6 months
In the calendar year 2019 (CY19), benchmark indices scaled new peaks while mid and small-cap indices continued to reel under pressure and gave negative returns for the second consecutive year. The slide was even sharper in the small-cap as the S&P BSE SmallCap index fell around 7 per cent whereas the S&P BSE MidCap index slipped 3 per cent. The S&P BSE Sensex, on the other hand, advanced over 14 per cent during the period. That said, there were some outliers in the small-cap index which bucked the broader market trend and rewarded investors handsomely.
Here's how you can make money in the stock market using a cup and a handle
In technical analysis, there are various chart patterns—both bullish and bearish that one can use to analyse stock price movement over a period of time. Some of the bullish chart patterns are Head and Shoulder, Double Bottom, Cup and Handle, Flag pattern, Falling channel, Ascending triangle, among others. Of these, Cup and Handle pattern is one of the commonly used technical indicators by the trading community.
What technical analysts can learn from Airtel, ICICI Bank stocks
The benchmark S&P BSE Sensex advanced 14.6 per cent in CY19, while the Nifty50 and Nifty Bank indices added 12.2 and 18.5 per cent, respectively. But it is the individual stocks that teach us important lessons. Take for example the ICICI Bank and Bharti Airtel stocks. Their share prices showcased 5 classic technical formations.
Candlestick pattern, trendline: Charting tools you can use to your advantage
In trading, timing is everything. This is one thing savvy traders who buy and sell stocks based on technical chart patterns swear by. While most market pundits and investors give out tips on what and when to buy, the ‘sell calls’ are often missed. Both the components – the time to buy and time to exit a position - are significant and have a bearing on the money / return you make.
Understanding double top and bottom patterns
A double top pattern is formed from two consecutive rounding tops. The first rounding top forms an upside-down ‘U’ pattern. Rounding tops can often be an indicator for a bearish reversal, as they often occur after an extended bullish rally. If a double top occurs, the second rounded top will usually be slightly below the first rounded tops peak indicating resistance and exhaustion. Their formation suggests that investors are seeking to obtain final profits from a longer bullish trend.