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What is India VIX? Meaning, Range, Implications & More!

Understanding what is India Vix, its meaning & importance: Ever heard of India Vix? If you’re involved in the market for some time and particularly active in the share market during the COVID19 Pandemic, then I’m sure that you would definitely have come up with this term “India Vix” at least a couple of times mentioned on different financial news channels and websites.

In this post, we are going to discuss, what exactly is India Vix, its meaning, and how exactly it is important for the traders and investors to understand this term. Let’s get started.

What is India Vix?

India VIX is a short form for India Volatility Index. It is the volatility index that measures the market’s expectation of volatility over the near term. In other words, it explains the volatility that the traders expect over the next 30 days in the Nifty50 Index.

The India VIX value is derived by using the Black & Scholes (B&S) Model. The B&S Model uses five important variables like strike price, the market price of the stock, time to expiry, the risk-free rate, and volatility. India VIX was introduced by NSE in the year 2008, but the concept of VIX is quite old and is a trademark of CBOE (Chicago Board Options Exchange).

One simple way of understanding India VIX is that it is the expected annual change in the NIFTY50 index over a period of 30 days. For example, if the India VIX is currently at 11, this simply means that the traders expect 11% volatility for the next 30 days.

Further, for example, if the current index is trading at 9,000 and India VIX trading at 20. Then, expected volatility over next year over 30 days will be:

Index spot: 9,000
India Vix: 20
The expected downside for the year = 9000 – 20% of 9000 = 7200
The expected upside for the year = 9000+ 20% of 9000 = 10,800

Here, the expected range for the year is between (7,200 and 10, 800) for that index.

Quick Note: Before moving further, let me mention that one should not confuse India VIX with Market Index. Market Index gives information about the direction of the market. However, on the other hand VIX measures the volatility of the market.

Why is India VIX so important?

All the major directional moves in the market are usually preceded by a lot of choppiness or a lot of range play in the market. India VIX plays a very major role in understanding the confidence or fear factor amongst traders.

A lower VIX level usually implies that the market is confident about the movement and is expecting lower volatility and a stable range.
A higher VIX level usually signals high volatility and lower trader confidence about the current range of the market. A major directional move can be expected in the market and a quick broadening of range can be expected.

For example, during the sub-prime crisis, India VIX was trading at 55-60 (high of 90) levels and the market was in a state of panic and indecisiveness and hence the moves were erratic and hostile. Volatility and India VIX have a positive correlation. High volatility indicated high India VIX and vice-versa.

Similarly before COVID-19. India VIX had stayed below 30 (Since 2014). But since the epidemic disease broke out, the VIX has crossed the 30 level and is trading near 50 levels (trading above 80 for few days) and we have seen the Indian equity Index losing nearly 40 percent of its value and is trading near 8000 levels.

Overall, India VIX plays a major role in understanding the sentiment of the market.

But be aware of the fact, India VIX does not give any indication of the directional move in the market, it simply indicates the volatility in the market. So, anyone with a huge investment in Equities should keep a close eye on the movement of India VIX coz a similar movement in the shares of his portfolio cannot be ruled out.

Is there an ideal range for India VIX?

Theoretically speaking, VIX ranges between 15-35. But there have been outliers case of as low as 8 (very tight range) and as high as 90 (extreme volatility). If VIX moves close to Zero, then theoretically either the index can double or come to 0. However, usually, VIX has a tendency to revert back to mean.

(Source: Tradingview)

The figure above is the India Vix chart for the last 10 years. During the break of the global crisis of COVID-19 (March-April 2020), the global markets have faced a lot of heat and extreme volatility, and all the major global indices have lost nearly 35% from their recent highs and Indian equity market was no exception. With this level of volatility, India VIX had climbed up to all-time high levels of 90 for those couple of days.

Later, it seemed to stabilize after June-July 2020. For stability to return, the global factors will have to improve and the India Vix level should ideally come around 20 levels. The Current VIX level is 22 (March 2021) and the market seems to be stabilizing for now. But for the long-term stability of the market, sub 20 levels of VIX is desired.

What do these extreme Vix levels mean for Options Writers?

India VIX also plays a very major role in the pricing of Options. A higher India Vix levels usually signal more volatile prices for options and a stable range would mean that the options are priced reasonably cheaper.

Simply put, high VIX levels expose option writers to unlimited risk with limited rewards (Premium). A deep in out of money Put/Call option can become at the money or even In the money option in a matter of a couple of trading sessions.

Summary

To summarize, India Vix is the volatility index that measures the market’s expectation of volatility over the near term. It can be said that India Vix is a silent yet very effective indicator to gauge the range play for Index, which in turn gives us a clear view of the expected movement of the share price.

Historically, large Vix levels have always been followed by a large movement in the indexes and share prices. Even the option pricing, the premiums charged also increase or decrease because of the Vix level changes.

Hitesh Singhi

Hitesh Singhi is an active derivative trader with over +10 years of experience of trading in Futures and Options in Indian Equity market and International energy products like Brent Crude, WTI Crude, RBOB, Gasoline etc. He has traded on BSE, NSE, ICE Exchange & NYMEX Exchange. By qualification, Hitesh has a graduate degree in Business Management and an MBA in Finance. Connect with Hitesh over Twitter here!

www.linkedin.com/in/hitesh-singhi-46564a11/

March 15, 2021 Hitesh Singhi Options Trading, Technical Analysis, Trading 8 comments

How to Start FUTURES TRADING in India - How to Trade Futures in India cover

How to Trade Futures in India? A Step-by-Step Guide (Basics)!

A Beginner’s Guide on How to Trade Futures in India: Essentially, trading is nothing but an art to be able to foresee the future. There is joy (of profits) if we can foresee it right, and a sense of grief (losses) if our views and conviction go wrong. In simple terms, a trader is an individual or entity who buys or sells financial instruments like shares, bonds, derivatives, etc intending to make profits or to hedge the existing position.

In this post, we are going to discuss how to trade futures in India. However, before we dwell deeper into the world of futures trading, let us try and understand the mechanism of the Cash market and Forwards market, which builds the basic foundation of futures trading. Here, we try and draw their relevance to the futures market. Then, we’ll dig into the main topic of this article on the basics of how to trade futures in India. Let’s get started.

What is the cash market?

The cash market is an equity market where the buying and selling of the shares of the company listed on the exchange takes place. While trading via the cash market, the buyer of the shares of the company is essentially the part-owner of the company. He/she takes delivery of the shares of the company when they buy it from the cash market. These are regulated by exchanges.

Anyways, here, we can only buy that number of shares that our margin/capital in the trading account allows. There is no concept of leverage while trading via the cash market. The most import aspects of the cash market are delivery of the shares, ownership of the company, and no leverage allowed for delivery of the shares.

What are Forwards Market?

The concept of the forward market essentially came into the picture to protect the interest of farmers. Under this method, the agricultural produce of the farmers was pre-booked at a specified price to be delivered for a specified quantity and on a fixed date in the future.

Therefore, the forwards market is essentially a contract between two parties to buy the underlying asset at a specified price, in the specified quantity, and at a fixed price in the future. These instruments have lost their popularity because of certain glaring limitations, but are still used by banks and other financial institutions.

Some of the limitations of the Forward contracts include:

There is no third party (exchange or legal body) governing the forward contracts. So legality becomes a drawback while trading forward contracts.
Lack of liquidity is another major limitation that is plaguing the forward contracts. It can sometimes become difficult to find a counterparty willing to take opposite positions.

What are Futures Market?

The futures market are financial derivatives that derive their value from the underlying asset. The underlying asset here could be Shares, bonds, commodities, etc.

The futures market are a standardized contract that has a certain fixed quantity of shares (in the case of the equity market) per lot and they have a fixed expiry (three different expiry contracts run simultaneously) period. They are just like buying shares in the equity market but with a fundamental difference that in the case of futures contracts there is no delivery of the shares.

Another major difference between them is the leverage that one receives while trading futures contracts. In the case of the cash market, the leverage is to the tune of the amount of margin the trading account. But while trading futures, the amount of margin required varies between 20-60% of the total contract value in the case of shares and about 10-12% of the total contract value while trading index futures. So financial leverage becomes a major consideration for a futures trader.

In addition, one major advantage of trading via futures contracts is that these contracts are regulated via exchange (SEBI in India) and legality is never a factor with futures contracts. And the futures contracts are very liquid by nature i.e., it is very easy to find a counterparty willing to take opposite positions.

Now, having understood the basic premise of futures trading, let us try and understand how are futures contracts traded in India.

How to Trade Futures in India?

Futures trading in India is mainly in two forms – Stock futures and Index futures. All the futures contracts in India have three contracts running simultaneously – the near month, middle month, and the far month.

Whenever the near month expires, a new far month contract is added. The monthly contracts expire on the last working Thursday of the month. And if the last working Thursday is a holiday, then it expires the preceding day.

— Stock Futures

Stock futures are a financial derivative instrument that derives their value from the value of the underlying asset (shares of the company). The contracts have a specific size, fixed price, and specified date. Once the contract is entered, it will have to be honored. Following are some of the characteristics of Stock futures:

The size of the contract: All the stocks trading in the futures market, have a different number of shares in each lot. Partial lot trading is not permitted. A minimum of one lot has to be traded. For example, one lot of futures contract of Reliance industries has 250 shares, one lot of Maruti has 100 shares, one lot of ICICI bank has 1375 shares etc.
Expiry: All the stock futures contract has pre-decided fixed maturity. They expire on the last trading Thursday of the month. And if the last Thursday is a holiday, then they expire on the previous trading day. The stocks have three expiring contracts – near month (1-month), middle month (2-month), and far month (3-month).
Margin: The margin required to trade stock futures contract is very high to cover for Mark to Market (M2M) losses. This is basically done to protect the interest brokers and the exchange. And with the prevalence of margin, while trading futures in India, there is no chance of default in trading via futures contracts. Margin has two components – Exposure margin and SPAN margin. SPAN Margin is the minimum requisite margins required as per the exchange’s mandate and ‘Exposure Margin’ is the margin required over and above the SPAN to account for any MTM losses

— Index Futures

An index is a representation of the broader sector of the economy. In India, there are two major index which are actively traded in the futures market – Nifty Index and Bank Nifty Index. On Jan 12, 2021, SEBI also allowed trading of Nifty Financial services in the derivatives segment.

If one were to express their view on the economy then one should express their view views by trading Index futures as it shows the overall sentiment of the market. Trading Nifty futures would mean that one is expressing his views on the overall economy as Nifty 50 is a composition of the top 50 companies listed on NSE.

A few KEY Factsheets for Index Futures

— Nifty Futures Trading

Underlying Asset: Nifty 50 Index
Total Stocks in the Nifty 50 Index: 50
Total Active Contracts anytime : 3 (Near Month, Mid Month, Far Month)
Shares in 1 futures lot: 75
Expiry: Last Thursday of Every Month (Previous day if Thursday is a holiday)

For example, if the present value of one lot of Nifty futures for near month expiry is 14476, then the total value of the contract will be – Contract value = 14476 * 75 = Rs. 10,85,700

The margin required will be equal to:

— Bank Nifty Futures Trading

Underlying Asset: Bank Nifty
Total Stocks in the Bank Nifty Index: 12
Total Active Contracts anytime : 3 (Near Month, Mid Month, Far Month)
Shares in 1 futures lot: 25
Expiry: Last Thursday of Every Month (Previous day if Thursday is a holiday)

For example, if the present value of one lot of Bank Nifty futures for near month expiry is 331628.05, then the total value of the contract will be – Contract value = 31628.05 * 25 = Rs. 790701.25

Here, the margin required will be equal to:

— Nifty Financial Services Future Trading

Underlying Asset: Nifty Financial Services
Total Stocks in the Nifty Financial Services Index: 20
Total Active Contracts anytime: 4
Shares in 1 futures lot: 40
Expiry: Last Thursday of Every Month (Previous day if Thursday is a holiday)

For example, if the present value of one lot of Bank Nifty futures for near month expiry is 15308.30, then the total value of the contract will be – Contract value = 15308.30*40 = Rs. 612332

Here, the Margin required will be equal to:

How are Futures contracts Priced?

Futures contract derive their value from the value of the underlying assets. There is always a variation/difference in the prices of the cash segment and derivatives segment. There are basically two methods of pricing the futures contract: The Cost of Carry Method & The Expectancy Method.

— The Cost Of Carry Model

Under this method, the market is assumed to be perfectly efficient. So, the profit made by trading the cash segment or futures segment is the same, as the movement in the prices are aligned. Following is the process of calculating the prices under the Cost of Carry model

Futures Price = Cash Price + Cost of Carry

The cost of carry here refers to the cost of holding the futures contract till maturity.

— The Expectancy Method

Under this method, the futures prices are the expected cash price of the underlying asset in the Future. So, if the market is positive/conducive for the underlying asset, then the futures price will be higher than the cash price. If the market has a weak sentiment towards the underlying asset, then the futures price will be lower than the underlying asset.

Quick Note: If you want to learn more about futures trading, we have launched a FREE Futures Trading Course for Beginners on Trade Brains Academy. Enroll for FREE here.

Why Trade Futures?

The following are some of the benefits of futures trading:

The contracts are well regulated: As the futures market are well regulated, there is no risk of legality and all the contracts are settled at the time of expiry
Leverage: Leverage is perhaps one of the most important reasons for which futures trading is one of the most popular derivative instruments.
Highly liquid: Liquidity is never a factor while trading via futures as there are hordes of players who are willing to trade futures or hedge their existing position in the market.

Closing Thoughts

In this article, we discussed How to Trade Futures in India for beginners. Here are a few key takeaways from this post:

Futures contract derive their value from the value of the underlying assets.
Because of the low margin requirement, futures trading is very popular amongst traders
The futures contract are exchange regulated, there is never the question of trust amongst the traders
One can exit their existing futures contract position anytime from the market by taking an opposite position in the futures market.
The Index futures are cash-settled
There are two methods of calculating the futures contract value – The cost of carry method or the Expectancy method

That’s all for today’s article on How to Trade Futures in India. We hope it was useful for you. We’ll be back tomorrow with another interesting market news and analysis. Till then, Take care and Happy investing!

Hitesh Singhi

www.linkedin.com/in/hitesh-singhi-46564a11/

February 11, 2021 Hitesh Singhi Market, Technical Analysis 1 comment

Basics of Hedging – What is Hedging in Stock Market?

Understanding Basics of Hedging and How it can be used to reduce stock market risk: If you are an investor in the capital markets, I am sure you have across days where your portfolio has shown wild moves up or down. These fluctuations in the stock market are always something that creates a lot of anxiety and stress for the investors, Although the pundits advise ignoring such fluctuations, for a layman, it is hard to look away when things are bumpy. It is easy to become obsessive when things are on a downward slide.

In times like these, many of us may wish there was a way to insure our investment in a downturn in the same way we insure other assets like a car or a house. Hopefully, there may be some sort of an agreement where we stand to be compensated in case something bad happens. In this case, a large monetary loss in our investment amount due to some factor that was totally out of our control.

Well, the truth is that sort of thing does exist in the real world, only that it is known by a different name – Hedging. When we hedge an investment, we reduce or eliminate certain risks including but not limited to stock market crashes as a whole. It is a popular practice in investment management and some funds, known as hedge funds, even purport offering such investments through which investors can totally eliminate certain kinds of risk.

Even though globally most hedge funds tend to underperform the broader market, the allure of avoiding certain known risks from their portfolios have not stopped big and wealthy investors from loosening their purse strings for investment in these hedge funds.

But Buyer Beware! Although these are pretty handy when it comes to protecting your investment in a crash, a poorly managed hedge or a hedge fund can lead to investors losing more money than taking on the complete risk themselves. So let’s learn about hedging and it’s pros and cons in today’s article.

Basics of Hedging – What is Hedging?

When you hear the word hedging, you probably imagine your neighbor pruning his brushes in his backyard. But, the name actually originates from an older meaning for the word. The Hedge is actually synonymous with a fence, as in we are trying to contain a herd of cows or perhaps the downside of our investments within a limited space.

While the term is now commonly used to refer to financial strategies, the truth is we practice its principles on day to day basis. As mentioned earlier, a car insurance hedges your financial risk since you pay a premium to avoid a larger cost that you might incur in the case of a car accident. While a seat belt might hedge your risk of having a serious injury. Heck!, this is what you do when you adjust the time on your watch so that you leave early to work by ten minutes ( you are hedging against your impunctuality )

In each case, you are taking some sort of cost or nuisance to avoid or prevent a greater problem, be it financial or otherwise. When it comes to investing, however, the practice refers to reducing some sort of risk or exposure in our portfolio. It can be the risk of a specific stock or industry experiencing a decline, or perhaps against the interest rate rising and sometimes against inflation rising higher than expected.

How does a Hedge work and How do we employ it?

Hedging is done by adding investments in our portfolio that move in the opposite direction to the risk that we are trying to manage. In the language of mathematics, we are trying to achieve a correlation of -1 to exposure, although technically we are looking for something called the erudite quants would call a negative delta.

Negative delta is just a measure of how one asset moves whenever the other changes by a unit price. This ensures that if a risky event were to happen and our holdings lose value the hedge we invested in should appreciate in value to offset the loss.

As an oversimplified example, an investor could hedge their exposure to a specific stock by shorting the same position. By doing this, they offset their downside. If the stock falls in value then the short position will gain value and hence canceling out the loss.

Now, investors rarely prefer to have perfect hedges like this, after all, you protected yourself from any downside but you have also prevented the portfolio from gaining any profits either. This fact alone certainly might convince you why it’s not the smartest move when you are investing in the market.

So instead of taking protection against every single down move in the market, smart investors instead focus on only protecting themselves against specific risks in a way that doesn’t completely eliminate their upside but they are still protecting themselves from losses they don’t want exposure to.

As an example, assume the case of an Indian mutual fund that invests stocks in the US stock exchange. Any investor who parks their money in a foreign stock would also by default expose themselves to differences in interest rates, inflation, and currency exchange rates between the two countries.

Since differences in interest rates and inflation are usually reflected in the currency, an investor may choose to buy certain investments that will appreciate in value when the exchange rates fall. This particular arrangement would now enable them to earn returns similar to what they would gain if they were investing as Americans.

How to do Intraday Trading for Beginners In India?

What are Investments/Tools most commonly used for hedging?

While technically it is possible to hedge a portfolio through traditional techniques such as diversification or investment in alternate assets, explicit hedges in the market are performed through the extensive use of instruments called derivatives.

On a high level, a derivative is simply a contract whereby you as an investor enters into a bet or an arrangement with another investor to buy or sell an asset at a fixed price in the future.

There are lots of interesting things you could do with derivatives. For example, at the time of writing the article the market is significantly overvalued and there is a lot of uncertainty about the budget in the coming weeks. An investor who has exposure to equities could theoretically buy a put option that expires in two or three weeks for a premium paid upfront and could hedge against a market fall while also standing to gain from his stock holdings.

While these seem to be very simple tactics an individual could make use of, it would surprise many to learn that these are exactly the same strategies that hedge funds employ for their wealthy clients. Among other things, hedge funds also frequently use derivatives to long certain assets while shorting certain others with the intent of making a profit regardless of market conditions.

What are the cons of hedging?

While the pros of the industry may espouse hedging as some holy grail in investing, the truth is this is not without any downsides.

Firstly, the hedge most often requires an upfront investment which is lost if the market goes up. This is something that eats up your returns in a market that is trending upwards or is moving sideways, a possible implication of this is that it becomes much harder for you as an investor to beat the benchmark index in the long term.

Secondly, hedging is an imperfect science. Professionals in the industry may tell you that it is something that requires a lot of skill and experience. But truth be told, they will also agree that hedging at the end of the day is an “educated guess” based on probabilities.

Thirdly, even if you have a hedge it may still not protect you. Imagine if you bought a put (an option that gives insurance against downside) to hedge your investment if the asset were to fall by 10%. Now, if the market were to fall by 8% by your expiry date, the option would expire worthlessly and your investment in buying the hedge would be entirely lost.

For these factors, many conservative fund managers prefer to stay away from complex hedging and instead focus more on long term returns than short term losses. In their view, if you are a long-term investor short term market crashes are only an opportunity to buy more stock into your holdings and hence it doesn’t make sense to spend extra cash on a crash that may or may not happen.

Basics of Hedging – Key Takeaways

In this post, we covered the basics of hedging and how investors can employ it. While Hedge funds may not be accessible for many individuals, investors can theoretically carry out the same strategies, but the performance of their portfolios may depend a lot on the individual’s ability to make active calls and evaluate the market.

Hence, Any investor hoping to venture into actively being involved in the markets would do well to acquaint themselves with erudite concepts of hedging before employing them. However daunting it may seem, the fruits of such labor have rewarded market players with immense wealth and success.

Levin Jenson

Levin is a former investment banker and a hedge fund analyst. He is an NIT Warangal graduate with around 5 years experience in the share market.

January 27, 2021 Levin Jenson Options Trading, Technical Analysis No comments yet

4 Most Common Technical Indicators for Beginners

Most Common Technical Indicators -Trading Basics for Beginner!

A Guide to Most Common Technical Indicators for Beginners: The most common problem for anyone willing to use the technical indicators, is to select the indicator which is the easiest and commonly used. This problem also arises because of the availability of hundreds of indicators.

Through this article, we aim to solve this problem. Here, we try and understand the two most common technical indicators that are comprehensive yet easy to use. We will be understanding the concept of moving averages and Bollinger bands. By the end of this article, we are sure that you would have a clear understanding of these indicators. Let’s get started.

Most Common Technical Indicators for Beginner

1) Moving Averages

Moving average is the most simple and commonly used technical indicators. If we read any research report or any article on technical analysis, the most commonly used technical indicators is the Moving average. There are generally two types of Moving averages – Simple Moving average and Exponential Moving average, which we’ll discuss later in this article.

In simple terms, a moving average creates a series of averages of different subsets of the full data set in order to analyze data points. To illustrate it with the help of an example:

In a game of cricket, if we were to analyze the performance of a batsman, consistency is the most common parameter. And the best way to analyze the consistency is the average number of runs scored by the batsman in each innings. For example, if the batsman scores 1,000 runs in the 20 innings, then the average number of runs scored by him in each innings is 50. This simple method of calculating the average is also known as the Simple Moving Average.

Moving Average is said to be a lagging indicator as is it is constructed with the help of the data, which is the End of day prices. Let us understand the concept with the help of a simple example:

Consider the following closing prices of shared of ITC limited:

Date	Closing Prices
14/09/2020	192
15/09/2020	188
16/09/2020	180
17/09/2020	182
18/09/2020	178
Total	920

Therefore, the average price of shares of ITC limited over 5 days will be = 920/5 = Rs. 184.

The average price changes as the closing price the next day changes. Imagine if the closing price of ITC on the next day changes to 185, then the 5 days simple moving average of ITC limited will also change.

The moving averages can be calculated for any timeframe. It could be 5 minutes, 15 minutes, hours, days, weeks, and so on. Depending on one’s trading style and trading objective, one can choose the charting pattern. If we are using 13 observations within the selected time frame, it is called 13 SMA, and if we are using 34 observations within the selected time frame, it is called 34 SMA and so on.

The daily chart shown below is that of Infosys limited and the red line plotted is 50 SMA.

If we carefully look at the chart above, 50 SMA clearly divides the chart into two halves. Till the end of April, the bears were having a higher say and 50 SMA was acting a resistance of the market. Any move till the red line was seen as an opportunity to short.

However, once the market closed above 50 SMA on daily basis, it started acting as a support to the market. Any move towards 50 SMA was seen as an opportunity to buy in the market. So, it can be summarized that if the market is trading below SMA, it is taken as an opportunity to sell or short in the market and if the market is trading above it, can be seen as an opportunity to go long.

— Exponential Moving Average

This is the more advanced and more trusted form of moving average. The main difference between EMA and SMA is the weightage given to values. In a simple moving average, all the values are given equal weightage. But in the case of Exponential Moving Average, the more recent values are given more weightage.

The chart below is the daily chart of Kotak Bank and the red line plotted is the 50 EMA.

If we carefully analyze the chart above, 50 EMA gives a better signal of buying and selling. If the market is trading above the EMA, it can be taken as an opportunity to buy and the level below this line can be kept as a point of stop loss for this trade.

Similarly, if the market is trading below EMA, it can be used as an opportunity to short in the market and the level above it can be kept as a point of stop loss.

Why EMA is more preferred?

The simple answer to this question is that EMA gives comparatively less false signals (than SMA), as the more recent values are given higher weightage.

2) Bollinger bands

The concept of Bollinger bands was introduced by John Bollinger in 80’s. This is the most common technical indicator and widely used by traders while making day to day trading decisions. With the help of Bollinger bands, we can understand if the price of an asset is trading at overbought or oversold levels.

When the price is overbought, it is generally an indication to sell and when the price is oversold it is generally an indication to buy.

Components of Bollinger bands:

The Middle line, which is a 20 day Simple Moving Average
The Upper Band which is a 2 Sigma (i.e. 2 Standard Deviation of the middle line)
The Lower Band which is a 2 Sigma (i.e. 2 Standard Deviation of the middle line)

Note: The upper and the lower band can also be 3 Sigma i.e. 3 standard deviation of the middle line.

But before understanding the Bollinger bands, it is important to have a brief understanding of the concept of Standard deviation.

What is Standard Deviation?

The Standard Deviation is a statistical pillar, which measures the Variance from the mean/average price. The standard deviation in the equity/stock market represents volatility. A 10% standard deviation would mean a 10% volatility in the stock. In Bollinger Bands, the standard deviation is applied on the middle line i.e., the 20 SMA

Let us understand:

The 2 Sigma upper and lower band means 2 SD
Say, if the 20 SMA of nifty is 9500
And say the Standard Deviation is 1%
Then the Upper band SD = 2*95 = 190
The Lower SD = -2*95 = -190
So, the three components of BB will be
SMA = 9500
Upper Band= 9500+190 = 9690
Lower Band = 9500 – 190 = 9310

In the Last Example-

If the Market it trading near 9700, then a short/sell position can be initiated, by keeping a target of 9500
If the Market it trading near 9300, then a long/buy position can be initiated, by keeping a target of 9500

Let us understand it with the help of an example. The image below is the daily chart of Axis bank.

If we carefully analyze the image above, all the trade opportunities have been circled. The circles near the upper band give us an opportunity to sell in the market and the circles near the lower band give us an opportunity to buy in the market.

If we were to take the example of the circle near the lower band, it gave an opportunity to buy near the lower band, and trade gave a return of nearly 20% (i.e., Rs. 50). And similar returns were achieved while shorting near the upper band circles.

Additional read for Beginners:

Conclusion

In this article, we covered two of the most common technical indicators for beginners. Here are the key takeaways from this post:

Moving Average gives us a lot of buying and selling signals
When the price is trading above a certain MA, it usually signals strength in the market and buyers are having more say. On the other hand, When the price is trading below a certain MA, it usually signals weakness in the market and sellers are dictating in the Market
The Bollinger bands capture the volatility. The Upper bands and lower bands help us to understand the overbought or oversold levels
Bollinger bands work in all types of markets but they are better suited for Rangy markets
The most important thing is to have a predefined loss for every trade entered in the market.

That’s all for this post on common technical indicators for beginners. Happy Trading and making money!

Hitesh Singhi

www.linkedin.com/in/hitesh-singhi-46564a11/

October 22, 2020 Hitesh Singhi Investment Basics, Technical Analysis 1 comment

4 Best Intraday Trading Strategies for Beginners!!

A Guide on Best Intraday Trading Strategies for Beginners: There are hundreds of Intraday Trading Strategies for traders apply to make money in the stock market. However, not all are simple enough for beginners to implement and make money.

In this article, we are going to cover four of the best Intraday Trading Strategies for beginners. Let’s get started.

What is Intraday Trading?

As the name would suggest, the Intraday is that event which completes within the same day. Similarly, Intraday trading is that form of trading, in which the buying and selling of the shares or assets are completed within the same trading session. Intraday trading is one of the most sought after (and one with maximum volume) form trading amongst traders in the market. With proper analysis and execution, it has the potential of generating very handsome returns.

The General MYTH with Intraday Trading

It is a general Myth among many, that Intraday trading is all about buying and selling throughout the day. And one has to be on the go, all the time. No doubt, that intraday trading requires more focus and attention than investing or delivery based trading. But the level of planning which goes about in finding the stock or move for intraday trading is second to none.

About 85-90 % of day traders’ time goes into analysis and planning of trade opportunity, and the rest 10-15% of the time goes in trade execution.

Therefore, the whole world of day trading is entirely based on proper planning and execution. It has the potential of making 20-30% returns on the investment amount, but intraday trading can never be a part-time avenue of making quick money. One has to devote a lot of time and to be a successful intraday trader, it is advised to be in front of your trading screen throughout the market trading hours.

Intraday trading Factors

Choosing the shares for intraday trading is no Rocket Science. One needs to keep certain parameters, which if met, can a share/stock be chosen for Intraday trading. Following are some of the parameters which should be given due importance while choosing stocks for intraday trading:

Liquidity: This is the single most important factor in choosing shares for intraday trading. Illiquid shares/assets should be avoided. Even while trading commodities for Intraday trades, liquid commodities like Gold, Silver, crude oil, etc. should be traded.
Volatility: As the sole purpose of Intraday trading is to earn quick returns. And for this objective to be fulfilled, the stocks need to have a broader range i.e., high beta stocks should always be preferred while doing intraday trading.
Volume: This tells us about the quantity of stocks that have traded within the specified time frame. The higher the volume, it generally means that there is more interest in that particular share that day. And any move which happens in the share price, with volume in the market is more trusted than the moves with low volume.
Consistency: It is a general rule while doing intraday trading that one should be consistent in his/her approach while doing trading. One should not let emotions take over while doing intraday trading. The decisions should be based on logic, maths, and price action.
Patience: This is very important is all forms of trading, let alone intraday trading. One should not expect wonder trades (i.e., the hope of making all the money in one trade). One needs to bide his time and grind it out if one expects to have a long and fruitful trading career.

Intraday Trading Strategies for Beginners

Now, having understood the basics of Intraday trading the various facets which should be kept in while choosing the shares to intraday trade. One thing which should always be kept in mind that these strategies do not guarantee to make money. Let us try and understand a few intraday trading strategies:

Intraday Trading Strategy 1: Momentum Strategy

As the name suggests, the whole premise of this strategy is to catch the momentum in the market. It is imperative to track these stocks before the actual momentum starts in the market. If spotted at the right time, these stocks have the potential of generating returns of 20-30% within one session.

These movements could be because of Fundamental (Overnight news, Quarterly earnings, some big order procurement, new projects, etc.) and Technical (breakout) factors.

Img 1: 15 mins Chart of ESCORTS (source: www.zerodha.com)

Now, if you look at the picture above, the market opened near the previous day high, but the momentum soon fizzled out and we saw selling pressure coming in the market. And we saw a series of lower highs and lower lows in the market. And it ended the day near the lows of the day. So, this is a classic case of momentum intraday trade in the market.

Intraday Trading Strategy 2: Breakout Strategy

As the name would suggest, this strategy focuses on finding the trade which is going to trade in a new territory or has broken out of its usual territory. One thing should be kept in mind that the breakout has happened with volume (thin volume breakouts generally tend to be false breakouts).

If the breakout is on the upside, then we go long and if the breakout is on the downside, then we go short. One should always mark the supports and resistances, so as to have right stop losses for the breakout trades.

Image 2: 15 Mins chart of Maruti (source: www.zerodha.com)

Now, if you carefully look at the image above, we see a classical breakout trade. These trades when spotted, have the potential of generating significant returns. The Stop loss for this kind of trades is always the low of the range prior to the breakout.

Intraday Trading Strategy 3: Scalping Strategy

This strategy is the most beneficial strategy for a day trader. The whole idea to constantly keep scalping in the market for small profits. This strategy is a very common method of trading while trading commodities. This kind of trading is generally done by high-frequency traders in the market. The overall technical and fundamental setup does not have a major bearing on this trade. Price action plays a very important role while selecting the trade for scalping.

The stocks or commodities chosen for purpose of scalping should be liquid and volatile. And one important thing to always keep in mind is to have a stop loss for every trade. One should not let the position drift away. The scalping strategy is best suited when the market is stuck in a tight range. Liquidity and tighter range are two friends of scalpers.

Img 3: 15 Mins chart of TCS (source: www.zerodha.com)

If we look at the image above, the market is stuck in a tight range and it provides a great opportunity for scalpers.

Intraday Trading Strategy 4: Moving Average Strategy

This Strategy can also be called as the moving average crossover strategy. This is generally a trend reversal strategy in the market.

When the price of the underlying asset goes above or below the moving average, it generally signals a change of momentum in the market. When the crossover happens from bottom to top, it is called Bullish crossover and when the crossover happens from top to bottom, it is called a Bearish crossover.

Image 4: 30 Mins chart of ICICI Bank (source: www.zerodha.com)

The image above is a 30 minutes chart of ICICI Bank. We see an obvious weakness in the market when its price is trading below the two moving averages (13 EMA and 34 EMA). And when the market starts trading over the moving average, the dips are being bought back in the market.

Therefore, when the market is trading over MA, it is advised to go long and when the market is trading below MA, it is recommended to initiate a sell position. For a long position, the stop loss is below the Moving Averages (MA) and for a short position, the stop loss is above the MA’s.

Also read: How to do Intraday Trading for Beginners In India?

Conclusion

In this article, we covered the four best Intraday Trading Strategies for beginners. Here are a few key takeaways from this post:

Intraday trades are those trades for which the activity of buying and selling is completed within the same day.
About 90% of the time in intraday Trading goes for planning and the remaining 10% goes in execution.
Liquidity, Volatility, Volume, Patience, and Consistency are the key ingredients of Intraday trading.
One has to devote complete time and dedication if one wants to be a successful intraday trader.
Traders need to always have good Risk management. Always place stop loss for all orders while taking intraday trades.

That’s all for this post on Intraday Trading Strategies for beginners. I hope it was useful for you. Happy Trading and Money Making.

Hitesh Singhi

www.linkedin.com/in/hitesh-singhi-46564a11/

October 13, 2020 Hitesh Singhi Technical Analysis, Trading 9 comments

What is Open Interest (OI)? How to interpret it?

Understanding Open Interest: The term open interest (OI) is one of the most popular terminologies used among stock market traders. In this article, we are going to discuss what exactly is Open Interest. Here, we’ll discuss it’s definition, what does an increase or decrease in open interest implies, the difference between open interest vs volumes, and how one should interpret open interest. Let’s get started.

Open Interest Definition

Open Interest is the total number of the futures contracts (or Options) held by market participants at any given point of time. The total number of open interest contracts keeps on changing with every transaction executed. The open interest is said to be the best indicator to gauge the market sentiment and understand the reliability of the price movements.

Therefore, for an open interest to exist, there must be a buyer for every seller and vise-versa. Here, the relationship between buyer and seller creates one open interest. So, when buyers and sellers come together and initiate one new position, then open interest is increased by one unit. And when the same buyer and seller decrease their position, an open interest is reduced. But, if a buyer and seller passes their position to a new buyer and seller, then the Open interest remains unchanged, its just a transfer of position.

What does the Increase/Decrease in Open Interest Imply?

An increase in Open Interest means that new money is flowing in the market. And it generally indicates that the present trend (Bullish, Bearish, or sideways) is expected to continue.

A decline is an open interest usually implies, that the current trend is expected to halt and we could see a reversal in the market. To know the current open Interest, we just need to know the total from the buyer or seller side and not both.

Difference between Open Interest (OI) and Volumes

There is generally a common misconception that both OI and volumes mean one and the same thing. However, they are two different concepts, giving out two different sets of data. But, both the data can be used in conjuncture. Let us understand the concept of Open Interest with the help of an example.

Say, there are five traders (A, B, C, D, E) trading the Nifty futures contract. Let us understand, as to how their trading has an impact on the open interest and its calculation.

On Monday: ‘A’ buys 20 Nifty futures contract and ‘B’ also buys 10 Nifty futures contract. While ‘C’ sells 30 Nifty futures contract in the market. Therefore, we have a buying activity of 30 futures contracts and a selling activity of 30 futures contracts. Hence, the total Open Interest is 30.

Trader	Buy (L = Long)	Sell (S = Short)	Contract held
A	20		20L
B	10		10L
C		30	30S
D
E
Total			30

On Tuesday: C wants to get rid of half the position and ‘D’ comes into the market and takes 15 short contacts from C. Here just the mere transfer of position happened and no new contracts were added. So, the open Interest will still stand at 30.

Trader	Buy (L = Long)	Sell (S = Short)	Contract held
A
B
C	15		15L
D		15	15S
E
Total			30

On Wednesday: D wants to add 15 more short contracts. And both A & B want to add 5 long contracts each, to their existing long positions. And C wants to exit 5 more short contract position form here existing position of 15 short contracts. Therefore, 10 more long contracts (both A & B) are added in the market. And the contract between C and D would be just a mere transfer of positions. In short, the table on Wednesday would look like this:

Trader	Buy (L = Long)	Sell (S = Short)	Contract held
A	5		5L
B	5		5L
C	5		5L
D		15	15S
E
Total			30

On Thursday: Trader E decides to enter the market. And wants to sell 50 Nifty futures contracts. Therefore, trader D decides to exit his 30 lots position and transfers his position to E. While trader A & B add position so 10 lots each to their existing positions. Overall, 20 new lots get added to the system and the final table at the end of Thursday looks like:

Trader	L	S	Contracts	L	S	Contracts	L	S	Contracts	L	S	Contracts
A	20		20L			20L	5		25L	10		35L
B	10		10L			10L	5		15L	10		25L
C		30	30S	15		15S	5		10S			10S
D					15	15S		15	30S	30		0
E											50	50S

If we carefully analyze and look at the table above, it gives us a fair sense that open interest is eventually a zero-sum game. If we add all the longs and subtract them with all the shorts in the market. The end result is eventually zero.

Figure 1: Open Interest data (Moneycontrol.com)

Now, if we look at the snapshot above (Fig 1), it is the data showing the shares with the highest change in the open interest for the day. With the change in the open interest, the share price has also gone up and which is usually an indication that the buying momentum is expected to continue in these ten shares.

— Open Interest and Volume interpretation

From the discussion above it is clear that OI tells us information about the contract which are open and live in the market. But, the volume gives us information about the number of trades executed in the market.

The volume data is reset at the end of the day and the new counter starts at the beginning of the next day, but the data of the OI is a continuation from the previous day. 10 lots bought and 10 lots amount to 10 volume and 10 OI for the day.

— Interpreting Open Interest

Price	Open Interest (OI)	Expectation from market
Increase	Increase	The buying momentum is most likely expected to continue
Decrease	Decrease	Long unwinding can be seen i.e., buyers are exiting from the market
Increase	Decrease	Short covering can be seen in the market.
Decrease	Increase	We could be a reversal in buying momentum as we can see more shorts than longs in the Market.

Conclusion

In this article, we tried to simplify the concept of open interest in share market and what it interprets. Here are a few of the top takeaways from this post:

Open interest gives you information about the total number of contracts which are outstanding in the market.
It is an excellent indicator to understand the market sentiment and expected momentum in the market.
When the contract switches hands, it’s just a transfer of positions and Open interest does not change.
The data of volume refreshes every day but Open Interest is a continuous data.

That’s all for this post. I hope it was useful for you. If you still have any queries related to open interest in the share market, please comment below. I’ll be glad to help you out. Happy trading.

Hitesh Singhi

www.linkedin.com/in/hitesh-singhi-46564a11/

September 2, 2020 Hitesh Singhi Technical Analysis, Trading No comments yet

Fibonacci Retracements: How to use it in Technical Analysis?

Understanding what are Fibonacci Retracements and how to use it while trading: The concept of Fibonacci was introduced by Italian Mathematician called Fibonacci (also known as Leonardo Bonacci or Leonardo of Pisa). This concept was primarily introduced to solve the problem of understanding the population growth of Rabbits. And it has now become one of the most interesting and sought after concepts in Mathematics and Trading.

In this article, we’ll cover what is a Fibonacci Series, the implication of Fibonacci on trading, and how exactly to use Fibonacci while Trading. Let’s get started.

What is Fibonacci Series?

The Fibonacci is a series of numbers starting from zero and arranged in such a way that the next number is a summation of the previous two numbers.

Therefore, the Fibonacci series is as follows: 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377………

Here are the calculation involved while finding the numbers in the Fibonacci series:

0 + 1 = 1
1 + 1 = 2
1 + 2 = 3
3 + 5 = 8
5 + 8 = 13
8 + 13 = 21
13 + 21 = 34 and so on.

A Few Fun Facts about Fibonacci series

Before moving forward, here are a few fun facts about Fibonacci series that you should know:

If we divide any number by the previous number, then the ratio is always equal to 1.618 (233/144 or 144/89 or 89/55 or 55/34, etc.)
Second, if we divide the number by the next number, then the ratio is always equal to 0.618 (21/34 or 34/55 or 55/89 etc.)

Needless to that the number 0.618 (or 61.8%) holds a lot of significance while calculating Fibonacci.

If we divid any number in the series by a number which is two places higher, then the ratio is always equal to 0.382 (21/55 or 34/89 or 55/ 144, etc.)
And if we divide any number in the series by a number which is three places higher, then the ratio is always equal to 0.236 (21/89 or 34/144 or 55/233, etc.)

From the above facts, we get the percentage series for Fibonacci to be 61.8%, 38.2%, 23.6%

The implication of Fibonacci on trading

The Fibonacci series of 61.8%, 38.25, and 23.6% have a very impactful presence in all the charts of the share price of any company. It is applied regularly when we see movement in the prices of the shares. And it can be applied in all the time frames.

It is a known fact that the share price of the company does not move in one direction. The prices always have a zig-zag pattern. If the share price of the company has gone up from 100 to 150, then before having another leg up, it is most likely to retrace back. But to find the level of retracement, Fibonacci retracement levels come in very handy.

For example, if the share price of the company before going up = Rs. 100. In, the first leg of the move, the share price goes up to = Rs. 150

Therefore, if the share price retraces to 38.2% then it will fall to = 150 – 38% of 50 = 131. And if the share price retraces to 61%, then it will fall to = 150 – 61 % of 50 = 119 (approx.)

Fig 1: Daily chart of Maruti (www.zerodha.com)

If we look at the above figure above, Maruti looks strong in the move up from Rs. 4000 to Rs. 5500. And looks poised to go up more. But before going up, the market makes a correction and it’s till the projection range of 38.2% to 61.2%. And after consolidating in that range, it makes a fresh move up and makes new recent high.

Therefore, if someone is looking for a correction in the market, Fibonacci retracements are a very useful tool and it also helps in entering the market if someone had missed the first move in the market.

Fig 2: Daily chart of BajajFinsv (www.zerodha.com)

In fig 2, If we look at the figure above, the share price of BajajFinsv is on a downward trend. And looks poised to fall more.

However, before falling, the market has made a small correction rally and is consolidating around a 38% retracement level. And now we see, that the share price is making lower highs and lower lows. Therefore, we could see the bearish momentum coming back and market breaking or re-testing previous lows.

Uses of Fibonacci while Trading

Assume, if we are looking to buy the stocks of a particular company but because of the strong momentum in the price, the share price has gone up substantially and it is very expensive to buy the shares at the current price. Here, we wait for a correction in the share price of the company and wait for it to retrace around 61.8%, 38.2%, or 23.6% levels.

Anyways, before picking the right retracement levels, the following factors also need to be considered: The candlesticks formation near the retracement levels, The price action around the level, The support and resistances around it, The volume at these retracement levels, And the overall fundamental picture.

Conclusion

In this article, we tried to explain what are Fibonacci Retracements and how to use it while trading. Here are a few conclusions from this post to take away:

The Fibonacci should be used when one is looking to plot the retracement or projection levels.
Then Fibonacci is useful when one has missed the entry at first instance but is still interested in buying the shares of a particular company.
The important levels of Fibonacci are 61.8%, 38.2%, and 23.6%
Just the Retracement levels of Fibonacci should not be the only basis of entering the trade. Overall, fundamental and technical factors should also be considered.

That’s all for this article. I hope it was helpful to you. If you have any doubts related to Fibonacci Retracements, feel free to comment below. I’ll be happy to help. Happy trading.

Hitesh Singhi

www.linkedin.com/in/hitesh-singhi-46564a11/

August 4, 2020 Hitesh Singhi Technical Analysis, Trading 1 comment

How to use Volume Profile while Trading? – Technical Analysis Basics

Understanding Volume Profile for Technical Analysis: In today’s day and age, the success of any movie depends on the number of people viewing it. If the movie has a large audience anticipating it, then we can be assured that it will have a large audience watching it and which in turn garners success for the movie. Here, the number/volume of the audience plays a very key role in the success of the movie.

Further, if we were to take the example of television series or any online series, its success is measured by the number of viewers. Game of Thrones (GoT) is a classic example of it. It has one of the largest numbers of viewership in online content history. Therefore, eventually, it all boils down to the volume or number of people watching.

Similarly, in trading also, the volume is the number of shares traded on a day to day basis. If there is no volume, then the price of shares won’t move. In short, volume plays a key role in deciding the movement. In this article, we are going to discuss what is Volume Profile, how is volume calculated, the correlation between volume and price, and the Correlation between Candlesticks, Supports & Resistances with Volume. Let’s get started.

What is Volume Profile?

In simple terms, volume simply signifies the number of shares traded of a particular company within a specified time. If a move in prices of shares happens with high volume then, it is considered to be more reliable. And the move can be expected to continue. But if the move happens on low volume, then the authenticity of the move is always questionable.

To confirm any pattern or to apply any technical indicator on the market, the Volume profile plays the most critical role. It plays an important role in confirming the trends or patterns in the market. It also plays a very big role in understanding the buyers’ or the seller’s perspectives. Without sizable volume, even the strongest of technical indicator or pattern might not hold much significance.

Quick note: Market Profile or MKTP is the synonym for volume profile. They are used interchangeably.

How is Volume calculated?

From the above explanation, we understood that Volume simply signifies the number of shares bought or sold within a specified time-frame. The more active the share is, the higher the volume and vice-versa.

For example, in the case of RIL, if for the price of Rs. 1,900, a total of 50 share been bought and 50 share being sold, then the volume here is 50 (and not 100). For the correct volume calculation, there has to be a buyer for every seller to complete a transaction. We should not consider the volume to be 100 (50 buys + 50 sell). Let us understand it with the help of an example:

So, from the table above, we can notice different buying and selling activities for the security for the different levels of time. The buyers and sellers meet to create volume for the share. And the cumulative volume is a summation of all the volume traded for the day.

The following tables show the volume change in the market for the most active securities on NSE with a time gap of 40 minutes.

Figure 1: Most active share at 11.42 am (21/07/2020, NSE India)

Figure 2: Most active share at 12.22 pm (21/07/2020, NSE India)

Now, if we were to compare to the tables above, we can see the volume table of most active security and the change in them with a gap of 40 minutes.

If we take the example of Bajaj Finance from Table, we see the change in price by Rs 8 (reduced) and the volume has increased by nearly 50% in 40 minutes. So, the move with this volume can be said to be genuine and not artificial. Any move with sizable volume helps the technical charts and indicators to take shape.

Correlation between Volume and Price

While trading with keeping volume in mind, the prior price and volume trend is of high significance. If the move happens, with the volume near its average volume or more than average volume, then that move holds more significance, than the move with thin or low volume.

Now, let us understand the correlation between volume and price with the help of the following table:

If the price increases with an increase in volume, then the expectation from the market is that the bullishness or strength is expected to continue. And if the same move were to happen with low volume, we can say that one needs to be cautious and be careful about forecasting the next move.

Similarly, if the price of the share reduces, with increased volume, we can expect the bearishness to sustain and continue. And if the same move happens on less volume, we need to be careful with the next leg of this move. And similar interpretation can be done for Rangy markets.

Participants on Low and High Volume days

If the market is trading with low volume, we can say that there is a lot of retail player’s participation in the market.

However, if the market is trading on high volume, we can say that there is a lot of institutional buying and selling in the market. Higher volume moves have better conviction and a higher chance of a continuation of the move, in the near future.

Correlation between Candlesticks, S&R and Volume

If the candlestick pattern gives certain trade patterns and if the signal were to come near the supports and Resistances and to top it off if the volume profile were aligned with the technical signals, then the trade can be said to have a very high probability of being successful.

In other words, a marriage of technical factors along with volume goes a long way in generating strong trading signals. Traders can benefit significantly from it if spotted at the right time.

Also read: Introduction to Candlesticks – Single Candlestick Patterns

Conclusion

Let us quickly conclude what we discussed in this article:

Volume is one of the most important indicators in understanding the trend of the market.
It provides a very strong impetus to our technical view on the market.
If the market is trading on low volume, we can say that retail traders are participating in the move.
If the price increases with an increase in volume, we can expect the bullishness or strength to continue (and vice versa).
And, if the market trades on high volume, it generally is a signal that institutional players are participating in the market

That’s all for this post on Volume Profile. I hope it was useful for you. If you have any doubts regarding volume while trading in stocks, feel free to comment below. I’ll be happy to help. Happy trading.

Hitesh Singhi

www.linkedin.com/in/hitesh-singhi-46564a11/

July 22, 2020 Hitesh Singhi Investment Basics, Stocks, Technical Analysis, Trading 2 comments

technical analysis Cup and Handle Pattern

Cup and Handle Pattern: Technical Analysis

Understanding Cup and Handle Pattern: Technical Analysis can be used by both traders and investors for entering into any trade. It provides a means to have a stronger conviction about the trade. Candlesticks are the most common form of Technical analysis tool used by the traders globally.

We have several types of candlestick patterns that are used by traders in their day to day trading. One such form of candlestick pattern, that gives trades with a high level of conviction is the “CUP AND HANDLE FORMATION”. In this article, we are going to cover what is a Cup and Handle Pattern and how to use them for your trades.

What is a Cup and Handle Pattern?

A cup and handle pattern is a formation that resembles the cup. The main body of the formation is like a “U shape” and further, we have a small body or a downward drift, which resembles a handle attached to the cup. This pattern is generally a bullish pattern as it follows a series of bearish sessions.

From the perspective of the long term, this formation pattern may take from a few weeks to a year. And for a short term view, we can see this formation in a minute, hourly, etc., time frame.

How is Cup and Handle Formed?

The market trend is generally bearish at the start of formation. We see new lows being formed, followed by a period of consolidation/stabilization, and then we have a move up, similar to initial move down. Therefore, the chart formation is like a cup. Afterward, the price then moves sideways or comes down within a channel, forming the handle for the cup.

The handle can have the shape of “Reverse C” or “A Triangle” or “A sideways zone”. Ideally, for a valid Cup and Handle formation, the handle should not have a depth of more than 50% of the size of the cup. Let us understand the formation with the help of a few examples.

— Cup and handle formation on DMart

Figure 1: D’mart Chart (Source: www.zerodha.com)

In Figure 1, we see a formation of Cup and Handle and the formation, which took nearly four months to complete. The first phase is a part where the market sees bearish momentum. Then, in the 2^nd phase, we see consolidation at the bottom of the cup.

Next, in the third phase, we see buying momentum coming back and market-moving back up to the high of the first phase. And in the final phase, we see a formation of the handle.

— Cup and handle formation on TATA Motors

Figure 2: TATA Motors’s Chart (Source: www.zerodha.com)

In Figure 2, the pattern formation is very similar to the pattern formation on the D’MART chart. There are four phases of fall, consolidation, rise, and the handle formation. The trade for TATA Motors after the formation gave a very decent return of nearly 90%.

When to Enter the Trade using Cup and Handle Pattern?

Before entering the trade, one has to wait for the formation of the handle. During the formation of the handle, the market is often in a sideways trading mode. But when then market breaks the top of the sideways channel, the Cup and handle formation is complete and the market is expected to rise from there.

There is no guarantee of the trade making money after the completion of the formation. The market could again come back in the sideways zone and the pattern might fail. And that is why, we should always have a stop loss for the trade, entered by using this pattern.

— How to set a Stop Loss for the Trade?

Stop-loss while trading is a point beyond which the trader does not want to lose money. It is a point to exit the existing trade. So, while trading using this formation, the stop loss for the trade is the low of the handle.

This low point is chosen because the price might again comeback in the sideways territory and then make a move up. And in case the market starts to go in favor, one can keep on trailing the stop loss and rise the move.

— What is the Exit Point for the trade?

As a rule, the height of the cup should be the profit target for the trade, from the point of breakout.

Say, for example, the price at the bottom of the candle is Rs. 100 and the height of the candle is 10 units. Therefore, Rs. 110 is the breakout point for the trade. The target for this trade should be Rs.120 (Breakout price = 110 + the depth of cup = 10). The other way to keep a target for the trade would be using Fibonacci Projections.

The stabilization period at the bottom of the cup is very important for this formation, as it forms a base for the cup. The stronger the base, the better the quality of the trade. The volume at the formation of the pattern also plays a very important role in the authenticity of the trade. If formed on low volume, the pattern might not be as reliable as the one formed with higher volumes.

Quick Note: If you new to stock trading and want to learn how to read charts, candlesticks, and technical indicators, you can enroll in our “Technical Analysis Course” for beginners. Click here to check out this course! Happy learning.

Conclusion

The Cup and handle formation takes some time to spot and trade upon. Constant practice is the best way to spot this pattern. But once if we get a hang of the pattern, it provides trades with very good risk-reward.

One should ideally enter the trade at the confirmation of the pattern as it provides trades with better conviction. And always have a stop loss for every trade which we enter in the market. Happy trading and Money making.

Hitesh Singhi

www.linkedin.com/in/hitesh-singhi-46564a11/

July 20, 2020 Hitesh Singhi Technical Analysis, Trading No comments yet

What are Moving Averages And how to use them

What are Moving Averages (MA)? How to Use Them?

Simplifying what are Moving Averages – SMA & EMA: Moving averages are one of the simplest yet most frequently used technical analysis tools by traders. Every time you read any technical or research report, on any Index or shares of a particular company, you must have come across terminologies like the Simple Moving Average (SMA) or Exponential Moving Average (EMA). These are the two types of Moving Averages.

In this post, we discussed the basics of Moving Averages in the technical analysis of stocks. Here, we covered what are Simple Moving Averages (SMA) and Exponential Moving Averages (EMA) and how to use them correctly. Let’s get started.

An Example to Understand Moving Averages

In mathematics (or statistics), a moving average creates a series of averages of different subsets of the full data set in order to analyze data points.

For example, imagine in a game of Cricket, we want to analyze the performance of a bowler. Here, the parameter that we can use for our judgment is the number of runs conceded against every wicket picked. Let’s assume that we have the following data available for the bowler:

Innings	Runs Conceded	Wickets
1	45	2
2	39	3
3	60	2
4	48	1
5	50	4
6	38	1
7	40	5
8	75	0
9	50	2
Total	445	20

From the table above, the total runs conceded by the bowler over 9 innings is 445. Further, he has got 20 wickets against his name. Therefore, the average number of runs conceded per wicket will be equal to 445/20 = 22.25 runs conceded per wicket This is the simplest method that we can use for calculating the average.

A similar concept can be used while looking at the price movements of the shares. Through this article, we will try to understand the concept of the moving average and its implication while trading.

What are Moving Averages?

Moving averages are the most common and sought after form of technical analysis tools used while trading. These indicators are said to be lagging indicators, as is it is constructed with the help of the data presented as the end of day prices.

In order to understand this concept easily, let us take another example. Consider the following closing prices for the shares of Reliance Industries limited:

Date	Closing Prices
03/07/20	1788
06/07/20	1852
07/07/20	1823
08/07/20	1798
09/07/20	1824
Total	9085

Now, a simple moving average (SMA) is a calculation that considers the average or arithmetic mean of a given set of prices over a specific time period. For example, the SMA or average price of shares of RIL over these five days will be equal to 9085/5 = Rs. 1,817

Next, imagine if the share price of RIL at close on 10/07/2020 is 1,800. Now, if the calculate the moving average again for the last five days, its value will change as the average price changes after accounting for new data. In other words, the average price changes as and when the value of underlying asset changes on day to day basis.

Further, the moving averages can be calculated for any time frame. It could be 5 minutes, 15 minutes, hours, days, weeks, and so on. Depending on one’s trading style and trading objective, one can choose the Moving Average charting pattern. If we are using 5 observations within the selected time frame, it is called 5 SMA, and if we are using 9 observations within the selected time frame, it is called 9 SMA and so on.

Now, the chart below is the daily chart of Airtel Limited. And we have plotted 50 Day Simple Moving Average on it.

Fig: 50 DMA of Airtel Limited (Source: www.kite.zerodha.com)

Now, if you carefully analyze, the 50 SMA clearly bifurcates the chart in two halves. When the market is trading over 50 SMA, we see continuous buying momentum in the market and the bulls are having a tight grip on the market. And as and when the market comes below 50 SMA, we see selling pressure in the market and the bears are having higher say in the market. Overall, in simple words, it can be said that prices above SMA are considered to be bullish and below it are bearish.

Exponential Moving Average (EMA)

Exponential Moving Average (EMA) are slightly advanced and more trusted form of moving average. The main difference between EMA and SMA is the weightage given to each and every value under consideration.

Under EMA, the more recent values are given higher weightage, but in SMA, all the values are given equal weightage. For this simple reason, EMA is sometimes said to be a better parameter for trading than SMA. We will not be going to explain the calculation methodology of EMA in this article.

The chart below is the daily chart for HDFC Bank and the yellow line plotted is the 50 EMA

Fig: 50 EMA of HDFC Bank (source: www.kite.zerodha.com)

Now, before explaining the chart, the following rule has been set for the entry and exit of the trade. A position is entered when the current price crosses over 50 EMA and the position is held till the share price down not crossover or come below 50 EMA.

If we look at the chart, the 50 EMA in the chart above has given multiple entry and exit signals based on EMA. For example, if we look at Trade 1, the chart gave a long trade as the market came close to the EMA and it bounced back and gave a return of about 15% (not bad by any standards). And similarly, Trade 2 gave an entry near EMA and upon exit, it gave a return of near 7%.

Also read: What are Supports and Resistances? And How to identify them?

Moving Averages: Key understandings

In this post, we tried to simplify the concept of moving averages. Let’s quickly summarize what we discussed here:

Moving Average gives us simple and traceable buying and selling signals
When the price is trading above a certain MA, it usually signals strength in the market and buyers are having more say
When the price is trading below a certain MA, it usually signals weakness in the market and sellers are dictating in the Market

Moving averages are considered to be a reliable indicator while understanding the trend and market sentiment. One has to continuously keep using them to get a better hang of them and find a moving average that suits their trading style. One Golden rule which every trader must follow: “Always have a stop loss for your trades” Happy trading and Happy Learning!

Hitesh Singhi

www.linkedin.com/in/hitesh-singhi-46564a11/

July 15, 2020 Hitesh Singhi Technical Analysis, Trading 1 comment

What are Supports and Resistances? And How to identify them?

Understanding what are Supports and Resistances: One of the most elementary concepts while trading in stocks that every trader should know is, “Supports and Resistances”. If you’re already involved in the market, you might have heard or read terms like “Nifty50 has got a big resistance at 10,800 points” or “Stock XYZ has a support line at Rs 105”. So, what exactly do the traders mean by these terms in their analysis? We are going to discuss that through this article.

In this article, we are going to discuss what are supports and resistance, their characteristics, and how exactly to use them. By the end of this article, you will have a good idea about these concepts and use them in your trading. Let’s get started.

What are Supports and Resistances?

The Synonym for the word support is “Reinforce”. Basically, support can be said to be a point of reinforcement. In other words, supports are those points which act as a barrier for the prices, when they start to come down. They can also be said as points, where the downtrend is expected to be paused. And we should see a new surge in buying and demand. In short, supports are those points, where buyers are more forceful than sellers.

On the other hand, Resistances are said to be the point where the supply increases or the longs start getting out of their positions from the market. Therefore, if we were to carefully analyze, supports and resistances can be said as the point of friction or tussle between buyers and sellers. And Resistances, are those points where sellers have higher say than buyers.

Now, once the level of Supports and Resistances (S&R) are identified, they become the point of entry or exit for the trade. The prices either bounce back or correct back, from S&R level or breach these levels and go to the next S&R.

Characteristics of Supports

Here are the key characteristics of Supports while looking into the charts:

Supports are those points or levels, below which the market finds difficult to fall. They can also be said as a point of infliction between buyers and sellers.
Supports are also the point of Maximum demand from buyers, and even the sellers exit their selling positions from the market.
The buyers have a higher say in deciding the levels of support in the market. These levels can also be said to be the mainstay for buyers.
Supports, if breached, sees a quick sell-off in the market, and then the next level of support becomes a point of contention.
If the levels of support hold in the market, then fresh longs can be initiated, and generally, these trades have good risk to reward ratios.

— Understanding Supports with an Example

The figure below shows the daily chart of HDFC Bank. Through this chart, we get a clear illustration of the concept of supports and the impact on the market, if the supports are respected or breached.

Figure 1: Daily HDFC Bank chart (Source- Kite Zerodha)

Now, if we carefully look, the market finds very strong support in the range between Rs. 1030 and 1075. The sellers continuously try to breach these levels but to no avail. And after forming a base at these levels, the market starts going up.

And, we see continuous buying momentum in the share price of HDFC Bank. Trend line support is formed in the market by joining three points from where the market is bouncing. In this rally, the share price of HDFC bank moved up from 1030 levels to almost 1250 levels (a near 20 % gain).

And the moment, the price of the shares of HDFC bank breaks the Trend line support, we see an increased selling pressure and the longs unwind from the market. Following this, the share price reaches the initial support levels near dotted lines (Figure 1). And after finding support at these levels, the market starts to rally back and we see continuous buying in the market and it nearly makes a move of 25% from there.

So, if we were to just use simple supports patters while trading the above chart, we would have got a minimum of three trades with a minimum of 15% returns

Characteristics of Resistances

Here are the key characteristics of Resistances while looking into the charts:

Resistances are the levels that are defended by sellers. And the market finds it difficult to go beyond that level. It is a tussle point between buyers and sellers.
Maximum selling pressure comes from sellers at this point and even the buyers start to exit their long positions at these levels
If the levels of Resistance are breached in the market, we could see a massive short covering in the market, up to next resistance levels.
Resistances can also be called as points where fresh short positions can be initiated in the market, with good risk to reward ratio.

— Understanding Resistances with an Example

The figure above is a weekly chart of Airtel Limited. Through this chart, we get a clear illustration of the concept of Resistances, and the impact on the market if the resistances are breached.

Figure 2: Weekly Airtel chart (Source- Kite Zerodha)

The Share price of Airtel Limited had made a new high in the year 2007 and after that, the market had corrected nearly 50% from its highs. And then again, the market made a move up and went up till near 500 levels and started correcting again. And by joining these two points, of the initial high and the recent high, we could form a trend line.

So, now this trend line forms an important resistance in the market. As and when the market made a move up, this trend line acted as an important barrier and the market started to correct back. And the market was able to breach this resistance in Mid-2014 and the share price had a massive short covering. And the market made a move till the initial swing highs of 570 levels. Therefore, this is the power of Resistances, when an important level is breached.

Now, let us understand the concept of swing trades. If we look at Figure 2, we have marked swing trade. Swing trades are those trades that we hold for a longer duration of time, usually for the completion of one full cycle. These are the trades that have a longer holding period. And we generally don’t have a profit target in place, we just keep trailing the Stop losses and ride the wave.

Watch this video to understand the concept of Supports and Resistances better:

Closing Thoughts

In this article, we tried to simplify the concept of Supports and Resistances while looking into the charts. Let’s quickly conclude what we discussed today.

Supports and Resistances are important points of significance on charts as we get good entry or exit points for our trades. On one hand, Supports are defended by bulls/buyers and on the other hand, Resistances are defended by bears/sellers. These levels of Supports and Resistances can be used to identify targets for the trade and also for keeping Stop losses for existing trades. As a thumb rule, for a longer trade, look for the immediate resistance level as the target. On the contrary, for a short trade, look for the immediate support level as the target.

Hitesh Singhi

www.linkedin.com/in/hitesh-singhi-46564a11/

July 10, 2020 Hitesh Singhi Technical Analysis, Trading 2 comments

Futures vs Options Trading What is More Profitable

Futures vs Options Trading: Which is More Profitable?

Futures vs Options Trading – before we dwell deeper into this debate, let us first understand what each of these financial instruments implies. However, before that, it is important that you understand what does owning an equity share implies –

“Owning an Equity is like owning an ownership stake in the company. The holders of Equity shares have voting rights and have ownership say in the management and working of the company. Equity shareholders are partners in the growth and tough times of the company. They are entitled to receive dividends”

Now that you know the meaning of owning equity, let me define the basics definition of futures vs options trading:

“Futures are like a forward contract whose value is derived from the value of the underlying asset. In the case of companies, the underlying asset is equity share values and in the case of Index, the spot price of Index. The futures contract owners don’t have an ownership right on the asset they are underlined with”

“Options, as the name suggests, gives an option to the buyer, if wants to buy (Call option) or sell (Put option) on or before the expiry of the contract. He buys this right from the option seller by paying a fee (Premium) and the seller is obligated to honor his promise”

Read more: Options Trading 101: The Big Cat of Trading World

Benefits of Futures Contract

Here are a few key benefits of future contracts:

Since Futures derive its value directly from an underlying asset, so any movement in the underlying price has equally proportionate movement in the value futures contract.
The futures contract can be rolled over to next month contract at the same price as the expired contract expiry price.
Futures contract do not face time decay problems as the value is direct proportional to the value of underlying and expiry does not affect its pricing.
Liquidity is one of the most important factor in futures trading. The standing bids and offers make it easier for interested parties to exit and enter positions.
The margin required for trading via futures haven’t changed much in years. They are changed a little bit when the market becomes volatile. So, a trader is always aware of the margin required before taking positions.
The pricing is easier to understand as the values are based on Cost to carry model i.e., the futures price should be the same as the current spot price plus the cost of carry.

Benefits of Options Contract

Here are a few key benefits of Options contracts:

As the name would suggest, the Options contract gives the right to option buyer to exercise his contract if he wishes to. If the Spot price doesn’t go in favor of the buyer of the contract he does not have to exercise his right, he stands to lose just the premium.
One time premium is the only fee that option buyer has to pay to ride the momentum of underlying price and be a part of a bigger game.
If an option seller is of the opposite view to that of option buyer, he can just sell the option contract and pocket premium income.
The options are less risky than equities. Say for example if a trader wants to buy 1000 shares of Reliance, then at CMP (Rs 1400 per share), one has to shed out Rs 14,00,000 (fourteen lakhs). But one can express the same view by buying 2 Call option contracts (500 shares each). Say if he buys At the Money contract of 1410 CE by paying a premium of 35 per lot. Then, his total cost would be = (500*35*2)= Rs. 35000 only. So, now If option were to expire Out of Money for option buyer, he just stands to lose premium only. But, if the share price of Reliance Industries comes down to Rs. 1300, then total loss of equity shareholders will be Rs. 1,00,000 (1000*100).
Return on investment for an option buyer is very high because the cost paid is just the premium and the potential return is unlimited.

Also read: Options Trading Definitions – Must Know Terms for Beginners

Futures vs Options Trading: Which strategy is better?

There is no right answer as to which instrument is better. It all depends on one’s risk appetite, and view on the market. However, here are a few key points to compare which strategy is better:

Options are optional financial derivatives whereas Futures are compulsory derivatives instruments.
The seller of an option is exposed to unlimited risk but the buyer’s risk is limited to the premium paid. But in the case of Futures, both buyer and seller have equal risk associated with their trades.
The options although they can be rolled but have a different premium for different expiry, but in case of futures, they are rolled over at the same price in the next contract.

For example, if someone has bought the Future contract of XYZ Company at Rs. 110 and if upon expiry the price of XYZ is Rs. 105, he can simply roll over the position to next expiry at Rs. 105 and his entry price is not changed. But in case of Option, if an investor bought 110 call options of XYZ Company by paying a premium of Rs. 5 and it expires worthless, then he again has to buy next expiry contract by paying a fresh premium (Say Rs. 7). So to reach the breakeven, the spot price of XYZ Company has to go above Rs. 122(110+5+7).

From the discussion above it is clear that both financial derivatives instruments, Futures vs Options Trading, have their own advantages and disadvantages. One has to be rational, bias-free, use his/her judgment, and have proper risk management to survive long in the trading World. Happy Investing and Happy Money making.

Hitesh Singhi

www.linkedin.com/in/hitesh-singhi-46564a11/

May 1, 2020 Hitesh Singhi Options Trading, Technical Analysis, Trading 2 comments

Understanding Candlesticks – Multi Candle Patterns

Multi Candlesticks Patterns: Hi traders! In the previous article, we discussed the various single candlestick patterns and their importance in understanding the pricing patterns. Here, in this article, we will be talking about various multi candlesticks patterns.

These are patterns generated by a series of prior candles. Single candlesticks patterns along with multiple candlestick study goes a long way in understanding and giving better trade signals in the market.

Here is a list of Multi candlesticks patterns we will be having a discussion on in this chapter: The Engulfing Patterns (Bullish Engulfing pattern and Bearish Engulfing patterns), The Piercing pattern, The Dark cloud cover, The Harami Pattern (Bullish Harami & Bearish Harami), The Candles Gaps, The Morning star, The Evening star, Three White soldiers & Three Black crows.

The Engulfing Pattern

The Engulfing pattern is the most basic two candlestick pattern. The first candle is a relatively small one and the second candle is a bigger one as it engulfs the first candle. If this pattern happens at the bottom of a trend, then it’s called bullish engulfing and if this happens at the top of a trend then it’s called bearish engulfing.

— Bullish Engulfing

Here are a few characteristics

The Bullish engulfing pattern shows Long (buy) trade
The prior trend should be bearish.
The prior candle should be Red.
The engulfing candle should be bigger than previous and covering the whole body of a red candle and should be green.

In the figure above we see bearish trend prior to the engulfing green candle. Once the engulfing pattern took over, we saw a long bullish trend. One important point to observe here is that the engulfing candle attempts to continue bearish pattern but constant buying and rejection at lows brings in more buyers and ultimately the candle closes green.

The trades to be taken here depends on one’s risk appetite. A risk-taker will execute the trade on the day the trend is made but the risk-averse will wait for confirmation and execute his trade the next day. The Stop loss for this trade has to be below the body of the engulfing candle. In the figure above, the trader with both kinds of a risk appetite would have made a substantial profit.

— Bearish Engulfing

As the name suggests, the bearish engulfing pattern gives an opportunity for short trades. The prior pattern here has to be a bullish one and the engulfing pattern candle should also give an indication of continuing bullish pattern but due to constant selling pressure, the sellers eventually take over and the candle closes red. The engulfing red candle has to bigger than the prior green candle.

The buying pressure gets exhausted by constant selling. It is advisable to exit long trades when this pattern happens and enter fresh short trades. The risk-taking trader enters short trade on the same day while the risk-averse trade waits for the pattern confirmation and enters into trade the next day. The figure shown below is a classic example of Bearish Engulfment with the engulfing body bigger than previous green candle and substantial bearish trend post that.

The Piercing Pattern

The Piercing pattern is very similar to a bullish pattern with a minor difference. In the case of the piercing pattern, the size of the green candle should be between 50-100 % of the red candle. Say if the size of the red candle is of 100 points, then the piercing candle length should be more than 50 points but less than 100 points. This candlestick pattern has a similar characteristics like Bullish engulfing but the confidence level on trades via piercing pattern is little lesser compared to bullish engulfing.

The Dark Cloud Cover

A mini version of the Bearish Engulfing pattern. A bearish pattern indicator and uptrend halter. Here, unlike the bearish engulfing pattern, the red candle size should be between 50-100 % of the previous green candle. Say, if the size of the green candle is 150 points, then the dark cloud candle should be anywhere between 75-150 points.

The Harami Pattern

I know what comes to mind when you hear the word ‘Harami”. But Harami here is a Japanese word meaning Pregnant. This is generally a trend reversal pattern. The first candle is a big one followed by a candle with a small body. And the color of the second candle is generally different from the first candle. If the second candle turns out to be a Doji candle, the chances of reversal increases.

— The Bullish Harami

In the figure above, we see a bullish Harami encircled. It is a two-day pattern. Following are some of its characteristics:

The prior trend of the market is bearish and on the previous day, the market has made a new low.
On the next day, the candle opens in green as against the expected red candle and hence the panic and shorts start to get covered and the day ends with a green or a Doji candle.
The idea here is to go long at the formation of this pattern.
The risk-taking trader can go long near the close of the day and the risk-averse trader can wait for pattern confirmation and go long the next day.
The Stop Loss for the trade is below the low of blue or Doji candle.
In an ideal scenario, it is always best to keep trailing stop loss and ride the reversal move.

— The Bearish Harami

In the figure above, we can notice that the bearish Harami in a squared box. It is a trend reverser. The strong bullish trend is halted and a new bearish trend starts. Few characteristics of this pattern:

The prior trend is a strong bullish trend.
The prior candle makes a new high and the next candle opens low against an expectation of new high and hence the panic selling.
One should look to exit his existing longs and enter fresh short trades.
The risk-taker will execute the trade close to the end of the day and the risk-averse trader will wait for the confirmation and enter a trade on the next day.
The stop loss for the trade will be the high of the first red candle.
Here also one should keep trailing the stop losses and ride the full move.

The Candle Gaps

The Gaps are formed when the candle for the next day opens significantly opens up or below the previous day closing.

If the market gap ups, it shows buyers enthusiasm. They are willing to pay a higher price. The Image above shows Nifty gaps up and buyers are willing to pay a higher price and the momentum continues. This pattern emerges when we see some overnight positive news and the markets react with a gap up. If the share price of some company gap ups, it usually means some positive management news or good quarterly results or firm receiving some substantial orders, etc.

Similarly, in the case of a Bearish Gap down, we see the market opening below the previous day’s close and selling pressure. In the figure above we see a bearish gap down in nifty index and continued negative momentum post that.

One important thing to keep in mind is that candle gaps are more news-driven or event-based but it has a strong bearing on changing the technical set up of the market.

The Morning Star

The Morning star is a bullish candlestick pattern. It’s a three candlestick pattern. This pattern usually indicates a trend reversal. A sustainable bullish trend is on cards.

Following is the pattern setup:

The market is in a bearish trend and it’s continuously making new lows.
In the image above, we can see the first candle in the circle is a red candle and a new low is formed.
The next candle starts by making new lows and looks set to go down. But with regular buying, the candle closes by making Doji. It starts to set panic amongst the bears.
The next candle starts above the close of the Doji candle (Gap up opening) and shorts start to exit their position and fresh long positions re-initiated in the market.
The best way to trade this pattern is by entering the market near the close of the third day and by then the trend reversal confirmation is also given by the market. The Stop Loss for this trade is the low of the third candle. Trailing Stop losses is the best strategy to ride this move.

The Evening Star

The evening star is the exact opposite of Morning star. It’s a strong bearish reversal pattern. Similar to the morning star, evening star is also a three candlestick pattern.

The market is in a bullish trend and it’s continuously making new highs.
In the image above, we can see the first candle in the circle is a green candle and a new high is made.
The next candle starts by making new high and looks set to go higher. But with regular selling, the candle closes by making Doji. It starts to set panic amongst the bulls.
The next candle starts below the close of the Doji candle (Gap down opening) and longs start to exit their position and fresh short positions are initiated in the market.
The best way to trade this pattern is by entering the market near the close of the third day and by then the trend reversal confirmation is also given by the market. The Stop Loss for this trade is the high of the third candle. Trailing Stop losses is the best strategy to ride this move.

Three White Soldiers

The three white soldiers is a bullish reversal candle. The trend prior to the formation of this pattern is bearish. This trend has three green candles formed. The opening of every candle is slightly below the previous days close and it closed above the previous day’s high. One can exit their existing short positions and enter fresh longs to initiate a new trade.

A risk-taking trader can execute trade before the close of the third candle and a risk-averse can execute his trade after the confirmation of the trend. The stop loss for this trade is the low of the first candle.

Three Black Crows

Three black crows is a bearish reversal pattern. The prior trend is a bullish trend with new highs been made every day. The opening of the candle is slightly above the previous day but the closes is lower than the previous day low. Fresh shorts can be initiated with stop loss over the high of the first candle. One should keep trailing his stop losses as the trade starts to move in their favor.

Conclusion

From the discussion above, we see various multi candlesticks patterns which can be useful barometers in the trade execution. There are some patterns that are frequent and followed more regularly and other not so frequent but very reliable patterns.

But by no means, these technical indicators to be followed blindly. One should see the technical factors going around and use informed judgment in executing their trade. “Happy Trading and Money Making!”

Hitesh Singhi

www.linkedin.com/in/hitesh-singhi-46564a11/

April 28, 2020 Hitesh Singhi Options Trading, Technical Analysis, Trading 2 comments

Introduction to Candlesticks – Single Candlestick Patterns

A Guide to Single Candlestick Patterns: If you want to become a successful stock market trader, it is very important that you learn to read and understand candlesticks or candles. These candlesticks are basically a style of technical chart used to describe price movements of a stock, derivative, or currency. Understanding candlesticks and their patterns can help you to decide the entry and exit points for your trades.

“I just wait until there is money lying in the corner, and all I have to do is go over there and pick it up. I do nothing in the meantime.” – Jim Rogers

In this article, we are going to discuss what are candlesticks and then look into the popular single candlestick patterns that every trader should know. Let’s get started.

What are Candlesticks or Candles?

Candlesticks are the most common form to gauge the market trends, historical analysis, forecasting future. They are the most potent form of technical indicators. Just like a burning candle throws light to present and future, candlesticks with their patterns throw light on the present and goes a long way in understanding the future trends.

A simple candlestick shows the events which transpired within the selected timeframe. It shows us the open, high, low, close of the day (within the timeframe selected). The length of the candle helps us in understanding the volatility of the day. The longer the length of the candle, the more volatile the day and shorter the candle, the less volatile the day.

The candlestick can be said to be a historical indicator as the candlesticks are formed on the already happened market action. But the candlesticks formed goes a long way in understanding the future trends and price patterns.

Before we start understanding the various candlesticks patters, I would recommend keeping the following factors in mind:

“Trend is your friend.” Avoid going against the trend.
One should be very flexible with his views. Stubbornness generally leads to disasters.
Historical data analysis goes a long way in understanding future price patterns.
Avoid taking directional trades on small size candles. Generally, trends are formed after substantially long sized candles.

Single Candlestick Patterns

In simple words, a single candlestick pattern is formed by just one candle. Here, we do not look into multiple or group of candles and the trading signal is generated based on a single day’s trading action. The following are some of the popular Single candlestick patterns we would be discussing in this article: The Spinning top, The Marubuzo, The Doji, The Hammer, The Hanging Man, The Shooting Star.

— The Spinning Top

The Spinning Top unlike any other candlestick formation does not give any clear direction of the trend but has a lot of price action associated with it. A Spinning candle looks like the candle shown below:

Following are the initial observation looking at the candle:

The body of the candle is very small compared to upper and lower wicks.
The wicks on both sides are generally of similar size.

The spinning although looks like a plain candle but has a lot of price action associated with it. The small main body would imply that the open and close of the candle are very close to each other. Because the open and close are so close to each other, the colour of the candle usually does not signal any trend.

The upper body shows the high for the day. This simply signifies that the bulls did make an attempt to go up but to no avail.

The lower body has similar characteristics like the upper body. This simply signifies that the bears tried to push the market down but were not successful in doing it.

— The Marubuzo

The Marubuzo is again a single candlestick pattern. It is probably the only candlestick pattern in which the prior trend is not given much importance. Only the last candle is given importance.

The green line above explains Bullish Marubuzo and the red line represents Bearish Marubuzo.

— Bullish Marubuzo

In Bullish Marubuzo, the open of the candle is low for the day and the close of the candle is high for the day. There are no wicks in this candlestick pattern. This candlestick can also be said to be a trend changing one. The intensity of the buying is so high that the traders are willing to buy the stock at the high of the day. This candlestick patterns simply implies that the buying will continue for the days to come. The recommended buying price is the closing price of the Marubuzo candle.

Theoretically, the open should be low and the close should be high. But in reality, a little bit of variation is allowed.

Let us understand it with the help of a hypothetical example: The XYZ company share price has formed a Marubuzo candle with: Open = 403, High = 450, Low = 400, Close = 449.

Now the trader’s risk profile defines the time of execution of the trade. A Risk-taker would be taking the trade on the day the Marubuzo is formed. So how does this Risk-taking trader gets confirmation about the formation of Marubuzo? The trader basically does that by taking the trade very close to the end of the day.

On the other hand, a Risk-averse trader would be taking the trade the next day once the trend is confirmed. So, a risk-averse trader entry price might be higher than the risk-taking trader but has a better assurance about the pattern formation.

One very important thing to be kept in mind is that one has to be very mindful of the fact that the trade has to be executed with a stop loss in mind. Stop loss helps the trader to minimize the losses because of the inherent risks associated with the trade.

— Bearish Marubuzo

In a Bearish Marubuzo, the open of the candle is high for the day and the low of the candle is close for the day. A bearish Marubuzo indicates that the selling pressure is so high that the trader is willing to sell the share at the lows of the day expecting more negativity in the price of the share. This candle indicates a change in momentum and this changed momentum is set to last over some time.

One should bear in mind that this kind of trades are generally not meant for scalping purposes, they are to held until the trade reaches its desired price. Trailing stop losses is the best strategy.

— The Doji

The Doji is a candle formation that does not have a real body. It just has wicks on either side. So, the opening and closing price of the candles are one and same.

The Doji pattern can sometimes be similar to a spinning top except for the fact that Doji does not have any real body. Dojis are generally momentum changer or momentum halter. These candles clearly show the indecisiveness amongst the traders about the momentum and the direction of the market. Let’s examine it with the help of the following situation.

Say the market is in a bullish momentum and has had green candles over a series of days. So, if a Doji candle is formed, it could simply imply the dwindling momentum in the market or could mean an end in current momentum and signal trend reversal. Therefore, it is advisable in this scenario to be cautious and exit the long position or at least one should have stop losses in place. This is generally a time to wait and watch before entering new trades.

Also read: Options Buying vs Selling: Which Strategy to Use?

— The Hammer

The Hammer pattern is one of the most convincing trading patterns simply because of its formation pattern.

The hammer pattern occurs when the candle opens at high but is not able to sustain there and it falls considerably but with continuous buying interest is able to recover and the candle closes in green and near the opening price. The length of the wick here has to be at least twice the size of the body.

In the diagram above, a bullish hammer has formed at the bottom of the bearish trend and the momentum changes significantly after the hammer formation. One Important thing to be kept in mind is that the hammer can be of any colour (green to red) as long as it meets the body to wick ratio. Few characteristics of hammer trade:

The hammer formation generally gives a bullish or a long trade.
The execution time of trade depends on the risk appetite. A risk-taker would execute the trade on the same day and a risk-averse will wait for the confirmation of the trade.
The Stop loss for this trade is generally below the low of the hammer candle.

— The Hanging Man

According to Investopedia, “A hanging man uptrend and warns that prices may start falling. The candle is composed of a small real body, a long lower shadow, and little or no upper shadow. The hanging man shows that selling pressure is starting to increase”.

One important criterion for a candle to be called as a hanging man is that the market has to be in a bullish trend. Just like Hammer, a Hanging man can be of any colour as long as it meets the body to wick criteria. The Stop Loss for the short trades executed via hanging man pattern is the high of the candle.

— The Shooting Star

As the saying goes, save the best for the last. Probably the most influencing of the single candlestick pattern. The shooting star just looks like an inverted hammer or hanging man. It gives very strong trend reversal signals.

The basic characteristics of the Shooting star are:

The shooting star candle has a long upper wick. Generally, the size of the wick is twice the size of the candle body. The longer the wick, the stronger the pattern.
The shooting star is a bearish reversal pattern, so the preceding trend is bullish.
In general, the shooting star happens on the day when the existing bullish trend is expected to continue.
Once a shooting star candle is formed, it is advisable to exit the long trades or at least put a stop loss and if possible reverse the long positions.
One has to be bias-free when trading this type of formation.

Closing Thoughts

In conclusion, the above discussion should give us a clear picture of the various single candlestick patterns. All the patterns have their individual strengths. One has to be very aware of the basic mantra in the market: “Trend is your friend, always trade bias-free and always trade with a proper stop loss to be a long survivor in this marathon of trading”.

In the next article, we will be talking about Multi candlesticks patterns along with examples. “Happy Trading and Money Making”

Hitesh Singhi

www.linkedin.com/in/hitesh-singhi-46564a11/

April 27, 2020 Hitesh Singhi Options Trading, Technical Analysis, Trading No comments yet

What is Algorithmic Trading (Algo Trading)? And how it works?

Technological developments help define the future and we tend to rely on them more and more everyday. Investors are no exception to this rule as they use of technology to take advantage of optimal market conditions and earn high returns.

One such technology is algo trading or algorithmic trading which is a type of stock trading that uses statistical models and equations to run trades on a program designed by the user. Algo trading has become more popular in the last few years as it has been made more accessible to investors. It currently comprises of 35-40 per cent of turnover in Indian Stock Exchanges.

What is algorithmic trading?

An Algorithm is a code that is designed to carry out a certain process. Algorithmic trading uses computer programs to initiate trades at high speeds based on preset conditions such as the stock prices or the current market conditions.

The algorithms can include a level of manual intervention or can be fully electronic also known as zero-touch algos. The trades are initiated based on pre-set quantitative factors, arbitrage opportunities and the client’s preference. In India, the most commonly used algo is the Application Program Interface (API) that lets investors choose their strategy and enter in their requirements. The trades are then executed by the brokers.

For instance, algorithmic trading can be used by a trader who might want to implement trades when the stock price reaches a certain point or falls below a certain level. Based on the current market conditions, the algorithm can recommend how many shares to buy or sell. Once the trader enters the program requirements, they can sit back and relax as the trades automatically take place based on the preset conditions.

What are the benefits of algorithmic trading?

Algorithmic trading automates the trading function which is incredibly advantageous to traders. This makes sure that the trades are carried out at the right time during optimal market conditions which increases the chances of high returns. The traders does not face the risk of missing out on important opportunities in the market.

Another key advantage of algorithmic trading is that it removes human emotion from the trading equation as the trades are defined by preset conditions. This is advantageous because human emotions can cause investors to make irrational decisions based on fear and greed.

Algorithmic trading also allows you to backtest. This essentially means that the algorithms can be tested on past data to see if they have worked in the past or not. This is helpful because it lets the user identify any flaws in the trading system before they run the algorithm on live data.

In addition to this, algo trading reduces the time spent analyzing markets and lowers the associated transaction costs. The numerous benefits have made it a popular tool among investors in many stock exchanges today.

Strategies used in algorithmic trading

Although the computer initiates the trades, the user still has the ability to input the strategy they wish to use. They can decide the volume, the price and at what time the trade should happen. Therefore the algo strategies used by the investors can have a large impact on their earnings. Here are the most common strategies used in algorithmic trading:

Trend based strategies:

One of the most commonly used algo strategies used is trend-based strategies. The involves following the current trends in the market and executing trades based on that. The trader uses technical indicators such as the moving average and the price level of the stock to assess the market and the system generated recommendations to buy or sell required to fulfill the conditions entered by the trader. This is one of the easiest strategies to implement as the figures are based on historical and current trends with no requirement for complex predictions.

Arbitrage strategy:

An arbitrage opportunity exists in the market when there is a difference in the price of securities on two stock exchanges which can result in a risk-free profit. In algo trading, the arbitrage strategy algorithm is used by the computer program to identify the differences in prices and make use of the opportunity in an efficient way.

The speed and accuracy of algo trading comes into play here because the price difference in the stock may not be high but the high volume of trade can lead to a considerable amount of profit. This arbitrage strategy is most commonly used in forex trading.

(Image credits: Corporatefinanceinstitute)

Trading Range or Mean Reversion strategy:

Also known as the counter-trend or reversal, this strategy is based on the principle that although prices go up or down, it is only temporary and they eventually come back to their average price. In this strategy, the program identifies the upper and lower limit of the stock and carries out trades when the price goes above or below this range. The algorithm calculates the mean price of the stock based on historical data and when the price goes out of bounds the trade is executed with the expectation that the stock will come back to its average price.

However, this strategy may not always work as the price may not come back to its average price as quick as expected and the moving average can catch up to the price leading to a lower risk to reward ratio.

Also read: How to read stock charts for beginners?

Conclusion

Algorithmic trading was introduced in India in around 2009 and has been growing in popularity due to its low cost and the availability of skilled resources, especially with traders who trade on proprietary books. SEBI (Securities and Exchange Board of India) has also played a positive role in the adoption of algorithmic trading in India which will help further its acceptance and incorporate the trading on a larger scale in stock markets.

Although algorithmic trading is automated, the user still has the authority to choose which strategy to follow depending on various factors. It is especially beneficial for small-time investors who want to increase liquidity in the market making it easy to enter and exit the market while decreasing price inefficiencies in trading stocks.

January 28, 2019 Divya Premkumar Technical Analysis 1 comment

How to read stock charts for beginners?

For anyone looking to actively trade in the stock market, it is essential to know how to read stock charts. A stock chart is a chart that shows the price of a stock plotted on a time-frame that can range from minutes to many years. It serves as an important tool for picking the right stocks and easy to find on websites such as Yahoo Finance or Google Finance.

The ticker symbol of a company can help you find its stock chart. The ticker is a series of letters found in a company’s name (Apple= AAPL). Stock charts can help you identify stock price movements and make decisions on whether to enter, buy, sell or exit the trade.

When you first look at the chart

Stock charts come in various forms, they can be candle charts, bar charts or line charts.

In addition to the view of a stock chart, you also get to pick the time frame. The most commonly used ones are intraday, weekly, monthly, year-to-date (YTD), 5 years, 10 years or even a complete history of the stock.

(Stocktrader.com)

Once you have picked the chart view and time-frame, it is now time to understand the various features of a chart. For demonstration purposes, we can look at a candlestick chart.

On a candlestick chart, the red candles show downward price movement, while the white (or green) candles show an upward price movement. The chart has numerous technical indicators such as the moving average index (MA), the relative strength index (RSI) and the moving average convergence divergence index (MACD). These technical indicators are used to analyze future price movements.

Support and Resistance lines

(Image credits: BabyPips)

The next step is to look for the support and resistance lines. As the name suggests, the resistance line indicates a point which resists the price from rising further. It shows the maximum supply for a stock where the level is always above the current market price. There is a great probability that the stock would rise up to the resistance level, absorb the supply and then decline. For traders, the resistance line is an indicator to sell.

Alternatively, the support line indicates a point that stops a price from falling lower. It shows the maximum demand for a stock in the market. There is a high chance that a stock price will reach the support line, absorb all the demand and then bounce back. The support line is a signal to buy stock.

Below the stock chart is a window that shows the trading volume of the stock. The volume shows how much of the stock has been traded over a period of time. The green bars show the greater buying volume days and the red bar shows the greater selling volume days.

(Image credits: Investors Underground)

Why is the volume important?

The volume of a stock is an important indicator of whether or not to invest in a stock. This is because the trading volume is influenced by the buying and selling of stocks done by big traders, large investment banks, mutual funds or exchange-traded funds (ETFs). It can be the high-value trading done by these large firms that causes the price of a stock to go up or down.

An individual investor can use the volume as an indicator of buying or selling stock, forecasting future price trends and identifying the support and resistance level. When there is a bullish market- that is investors are optimistic and expect the prices to rise- there is high volume trading on up days and low volume trading on low days. However, during a bear market- when investors are less optimistic- there is high volume trading on down days and low volume trading on up days.

(Investopedia)

Other technical indicators

In order to better understand the price movements and trends in a stock chart, investors use a variety of technical indicators. One such indicator is the 200-day moving average which is a stock’s average closing price in the last 200 days. A high 200-day average signifies a bullish market while a low 200-day average shows a bearish market. In reality, however, when the 200-day average is extremely high it is a sign that the market may soon go down and that investors are far too optimistic and when the 200-day average is low it signifies the reverse. The shorter the moving average, the greater the change in the market.

The 200-day average indicates whether a stock is healthy or not and is often compared to the 50-day moving average. When a stock in the 50 day moving average crosses the 200-day moving average, it achieves the ‘golden cross’ status. That is the stock may go up to a much higher price. On the flip-side, if a stock in 50-day moving average goes below the 200-day moving average, it is known as the ‘death cross’. This means there is a good chance the price of the stock will go down in the future. Technical indicators are used in conjunction with momentum indicators to analyze the direction and strength of a stock’s price movement.

Understand the overall trend of the stock

When looking at a stock chart it is important to understand the upward and downward trend of a stock but you also need to analyze the background of the stock as well. This involves understanding how a particular stock usually trends- does it have low price movements or is it constantly volatile?

Another factor to consider is the possibility of the trends reversing. Momentum indicators such as Relative Strength Index (RSI) or MACD can help identify if a stock has reached its peak giving investors the opportunity to exit the market. Understanding these trends can help you make better decisions about what stocks to purchase.

Also read: Fundamental vs Technical Analysis of Stocks

Conclusion

Knowing how to read stock charts is important for any trader. It provides perspective on the price movements of stocks and will help you make better decisions to improve profitability. Hopefully, this guide gives you a better understanding of how to read stock charts before you start trading. Always remember, by failing to prepare, you are preparing to fail.

January 25, 2019 Divya Premkumar Technical Analysis 3 comments

Trader	L	S	Contracts	L	S	Contracts	L	S	Contracts	L	S	Contracts
A	20		20L			20L	5		25L	10		35L
B	10		10L			10L	5		15L	10		25L
C		30	30S	15		15S	5		10S			10S
D					15	15S		15	30S	30		0
E											50	50S

Trader	L	S	Contracts	L	S	Contracts	L	S	Contracts	L	S	Contracts
A	20		20L			20L	5		25L	10		35L
B	10		10L			10L	5		15L	10		25L
C		30	30S	15		15S	5		10S			10S
D					15	15S		15	30S	30		0
E											50	50S

Trader	L	S	Contracts	L	S	Contracts	L	S	Contracts	L	S	Contracts
A	20		20L			20L	5		25L	10		35L
B	10		10L			10L	5		15L	10		25L
C		30	30S	15		15S	5		10S			10S
D					15	15S		15	30S	30		0
E											50	50S