MBA summer project..............of mine............

                                                   Chapter I

 

  Introduction

The Stock Market is a market for the trading of company stocks. It is an organized market place where members of the organization gather to trade company stocks and other securities. The stock market is one of the most significant source for the companies to raise money. This allows their business for growth and expansion  .

1.2 The Indian Stock Market

            The Indian Stock Market is oldest among other contemporary stock markets in Asia. The working of stock exchanges in India is started in 1875.BSE (Bombay stock exchange) is the oldest stock market in India. The history of Indian stock trading starts with 318 persons taking membership in native shares and stock brokers association, which is now known as Bombay stock exchange or BSE.

            In 1965,BSE got permanent recognition from the government of India and NSE (National stock exchange) comes second to BSE. The 30 stock sensitive index or Sensex was first compiled in 1986. The Sensex is compiled based on the performance of the stocks of 30 financially sound benchmark companies. In 1990 the BSE crossed the 1000 mark for the first time. It crossed 2000, 3000 and 4000 in 1992.Now the BSE sensex was near close to 14000.

            The NSE was incorporated in the year 1992 as soon as it is incorporated the NSE has become the largest stock exchange in India. In 1996, NSE has launched S&P CNX Nifty and CNX Junior Indices that make up 100 most liquid stocks in India. CNX Nifty is a diversified index of 50 stocks from 25 different economy sectors.

Indian Stock Exchanges

Stock Exchanges are structured marketplace where affiliates of the union gather to sell firm's shares and other securities. India Stock Exchanges can either be a conglomerate/ firm or mutual group. The affiliates act as intermediaries to their patrons or as key players for their own accounts.

(a) National Stock Exchange (NSE) of India

Integrated in November 1992, the National Stock Exchange of India (NSE) was initially a tariff forfeiting association. In 1993, the exchange was certified under Securities Contracts (Regulation) Act, 1956 and in June 1994 it started its business functioning in the Wholesale Debt Market (WDM). The Equities division of NSE began its operations in 1994 while in 2000 the corporation incorporated its Derivatives division.

(b) Bombay Stock Exchange (BSE) of India

The oldest stock market in Asia, BSE stands for Bombay Stock Exchange and was initially known as "The Native Share & Stock Brokers Association." Incorporated in the 1875, BSE became the first exchange in India to be certified by the administration. It attained a permanent authorization from the Indian government in 1956 under Securities Contracts (Regulation) Act, 1956.

. (c) Regional Stock Exchanges (RSE) of India

The Regional Stock Exchanges in India started spreading its business operation from 1894. The first RSE to start its functioning in India was Ahmedabad Stock Exchange (ASE) followed by Calcutta Stock Exchange (CSE) in 1908.

• Bangalore Stock Exchange
• Bhubaneshwar Stock Exchange
• Calcutta Stock Exchange
• Cochin Stock Exchange
• Coimbatore Stock Exchange
• Delhi Stock Exchange
• Guwahati Stock Exchange
• Hyderabad Stock Exchange
• Jaipur Stock Exchange
• Ludhiana Stock Exchange
• Madhya Pradesh Stock Exchange
• Madras Stock Exchange
• Magadh Stock Exchange
• Mangalore Stock Exchange
• Meerut Stock Exchange
• OTC Exchange Of India
• Pune Stock Exchange
• Saurashtra Kutch Stock Exchange
• Uttar Pradesh Stock Exchange
• Vadodara Stock Exchange
• Ahmadabad stock Exchange

SEBI

In 1988 the Securities and Exchange Board of India (SEBI) was established by the Government of India through an executive resolution, and was subsequently upgraded as a fully autonomous body (a statutory Board) in the year 1992 with the passing of the Securities and Exchange Board of India Act (SEBI Act) on 30th January 1992. In place of Government Control, a statutory and autonomous regulatory board with defined responsibilities, to cover both development & regulation of the market, and independent powers have been set up. Paradoxically this is a positive outcome of the Securities Scam of 1990-91.

The basic objectives of the Board :

• to protect the interests of investors in securities;
• to promote the development of Securities Market;
• to regulate the securities market and
• for matters connected therewith or incidental thereto.

• It acts as a barometer for market behavior;
• It is used to benchmark portfolio performance;
• It is used in derivative instruments like index futures and index options;
• It can be used for passive fund management as in case of Index Funds.

Trading Methods

1) Intraday Trading

2) Swing Trading

3) Trend Trading

Intraday Trading

Buying and Selling of stocks with less profit at multiple times in day is called as Intraday Trading.
Intraday Trading is done with very less profit and done multiple times in a day.

Swing Trading

·          Swing trading combines the best of two worlds -- the slower pace of investing and the increased potential gains of day trading.

·         swing traders hold stocks for days or weeks playing the general upward or downward trends.

·         swing trading is not high-speed day trading. some people call it momentum investing, because you only hold positions that are making major moves.

·         by rolling your money over rapidly through short term gains you can quickly build up your equity.

Trend Trading

• Trend trading is one of the most effective and easy to use methods for making money in the market. Trend trading success depends on identifying and catching the trend after it has started and getting out of the trend as soon as possible after the trend reverses.
   
• Trend Trading involves taking a position in the markets with a view of holding that position for weeks to months for larger than normal gains. Trend traders or investors generally trade the long term or secular trends and are not concerned with the day to day market volatility.

Intraday Trading

           intraday Trading involves taking a position in the markets with a view of squaring that position before the end of that day.A day trader typically trades several times a day looking for fractions of a point to a few points per trade, but who close out all their positions by day's end.The goal of a day trader is to capitalize on price movement within one trading day.Unlike investors, a day trader may hold positions for only a few seconds or minutes, and never overnight.

Types Of  Intraday Trading

• Scalpers: This style of day trading involves the rapid and repeated buying and selling of a large volume of stocks within seconds or minutes. The objective is to earn a small per share profit on each transaction while minimizing the risk.
  
  
• Momentum Traders: This style of day trading involves identifying and trading stocks that are in a moving pattern during the day, in an attempt to buy such stocks at bottoms and sell at tops.

Advantages Of  Intraday Or Day Trading

1. For day trading or intraday trading you get margin on your capital amount.Suppose for    example, if you have Rs.10, 000 then you may get Rs.40, 000 extra amounts to do day trading. This is called Margin Trading. Margin amount depends on your brokerage firm.

2. Very importantly brokerage is less for intraday trading as compare to delivery trading

3. No risk of overnight holding. Suppose if you buy some stocks for delivery then there are chances that tomorrow market may go down but in intraday trading you are not bothered of what is going to happen tomorrow to any stocks.You have to buy and sell only on daily basis, no need to take any delivery.

4. Excellent returns in day trading if done properly and systematically.

5. As you have to pay the low brokerage so no need to wait to book huge profit. You can book very small profit and can do multiple trades in a day so that you can book good profit at the end of the day.

Disadvantages Of  Intraday Or Day Trading

1. Its very risky - Only experienced traders can do intraday trading, if you are new to share market then you should avoid doing intraday or day trading.

2. Time limit in day trading - You have to square off your trade before market hours. Some brokers like ICICIdirect.com squares off your order automatically at 3.15 p.m.

3. Huge risk - If done without knowledge and experience then there are chances of huge loss.

Do And  Donts Of Intraday Trading

Ø  It seemingly looks to be the simplest and the most rewarding. But in intraday trading one has to be very fast and quick and have to be on your toes always, so there are certain rules which one has to keep in mind.

Ø  If index is in positive from yesterday and the share you are holding is in minus then it should be cut and if intraday trend of index is in buy then one should buy a stock in which is in plus.

Ø  If index is in minus then one should look to short stocks which are minus and not stocks which are in plus.

Ø  It is not necessary that a stock which is weak today during intraday trading might be weak tomorrow also, simultaneously if a stock is strong today might not be strong tomorrow

Ø  If US Markets have gone up overnight, the markets here in all probability will open strong, so one should be quite careful when buying stocks as the general psychology of public is to buy when good news is there.

Ø  Being a contrarians is very important while trading intraday.

Ø  Stop loss is a must while trading intraday.

Ø  Always trade in very liquid stocks i.e. which have very high volume because entry and exit can be very fast in such stocks.

Ø  Do paper trading before you actually start trading so that when you start making paper profits, then shift to actual trading.

Ø  Keep your volume constant e.g.: if you trade in five lots of nifty future then trade in five lots only. This position can be increased only when you are satisfied with your trading for a month. It should not be that one day you buy five lots and next day you trade in ten lots and third day you get a loss and stop trading for two days.

Ø  Fear and Greed are at maximum levels while trading intraday so always have less position when you are new to intraday trading as otherwise you will be mostly under tension.

The Basic Rules of Trading

Ø  Never risk more than 10% of your trading capital in a single trade.

Ø  Always use stop loss orders.( Here you should know your loss you can give in a situation where the trade starts going against you.)

Ø  Never do overtrading.

Ø  Never let a profit run into a loss.

Ø  Don't enter a trade if you are unsure of the trend.

Ø  When in doubt, get out, and don't get in when in doubt.

Ø  Only trade active markets.

Ø  Distribute your risks equally among different markets.

Ø  Never limit your orders. Trade at the markets.

Ø  Extra monies from successful trades should be placed in a separate account.

Ø  Never trade to scalp a profit.

Ø  Never average a loss.

Ø  Never get out of the market because you have lost patience, or get in because you are anxiously waiting.

Ø  Avoid taking small profits and large losses.

Ø  Never cancel a stop loss after you have placed it.

Ø  Avoid getting in and out of the market too soon.

Ø  Be willing to make money from both sides of the market.

Ø  Never buy or sell just because the price is low or high.

Ø  Never hedge a losing position.

Ø  Never change your position without a good reason.

Ø  Avoid trading after long periods of success or failure.

Ø  Don't try to guess tops or bottoms.

Ø  Don't follow a blind man's advice.

Ø  Avoid getting in wrong and out wrong; or getting in right and out wrong. This is making a double mistake.

Ø  When you lose don't blame it on luck.

  Technical

      Investors come to the stock market and buy and sell the stocks eyeing the future. The future valuations they arrive at by either calculating the fundamental factors  on  the basis of technical they take their positions. In the short term it is always the technical factors that is demand and supply of the stock which gives us the directions of the movement of the stock.

Assumptions

We believe that every trader passes through three stages:

Every trader loses initially

We strongly believe that every investor who comes for trading initially gives losses as he/she is unable to have control over his greed and fear. At times with all the information and luck in his favour, he makes profit, and then because of his new over confidence, trades more which results in his profit gone and also sometimes a portion of his capital gone, This cycle of fear of the losses and greed to earn more makes him initially give losses

The trader begins to make no profit no loss

Out of the total investors who enter the first stage, 80% of them finish off at the first stage only and after an year or two find that the stock market is not their cup of tea. So in the 2nd stage only the 20% investors try to break even in their trading and quite a lot of them are able to have control over their fear and greed with a result that they stop giving losses. Now these traders are ready for the 3rd stage

The trader starts to make profits

This stage where a trader makes consistent profit i.e. he does not give loss cheque to the broker. In fact this is the stage which everyone wishes to have in the stock market. But we strongly believe that anybody who wishes to come to the 3 rd Stage has to pass through the above 2 stages

Before start trading

Important Factors to watch
If you want to earn good money in intraday then you have to be very alert and keep watch on following points to become successful intraday trader.
News
Share market always reacts for appropriate news.
If possible watch financial news channels to keep updated yourself all the time.
Acquisition Announcement
Takeover of some part (or whole) of companies, especially those having larger capacity/turnover or foreign company’s.
Expansion Plan
Announcement like major expansion plan of a company or entering into other sectors or opening new plants, branches, turnover increase announcement, new product launch etc. These announcements will have a positive impact.
Political News
News like elections in the country or in any particular state, news of any major change in political upfront or in any change in rules will also have major impact on Indian share market. Political news related to any particular State will have major impact on companies located in that state.
Sector News
The shares of Indian share market have different sectors and if any announcement by Government for any particular sector will have major impact on shares of that sector.
Impact of Other Asian Market
Most of the time it has been observed and studied that Indian Market (Nifty/Sensex) follows other Asian markets and USA markets.
Asian markets like China - Shanghai’s market, Japan - Nikkei market, Hong Kong - Hang Sung market.
Above all Asian markets “open” early in the morning than Indian market.
Most of the time Indian market will follow this Asian markets. If these Asian markets open in positive and lead to positive direction than the Indian markets may react accordingly provided that there is no major news in India.
USA market - USA markets like NASDAQ and DOW will also have major impact on Indian market. So, in short in the morning around 9.30 am get all news above USA markets and Asian markets and then plan your trades accordingly.

Quarterly Results
Quarterly results declared by all Indian Companies will have major impact on that company and hence on their shares in Indian share market..
Fundamental News
Fundamental news means companies future turnover announcements, any change in director body, future product releases etc.
.Inflation Rate

Inflation rate is wholesale prices of consumer goods.
This rate is declared by Government for every week at Friday..
So keep a watch. Inflation rate declare by Indian Government at every friday and trade accordingly.
“Indian share market reacts to inflation rate”.
Future/Derivative Expiry - (Very important)
Future/Derivatives have expiry period of one month. Derivatives get expired on last Thursday of every month.
If you watch the share market carefully this selling movement starts before one or two days of expiry. So be cautious and plan your trade accordingly.
During this expiry period you may see shares prices coming down then you can plan your buying and selling accordingly.

                                                                                 

 

           

                                             Chapter III

 

Equity market

The Indian equity market has become the third biggest after China and Hong Kong in the Asian region. According to the latest report by ADB, it has a market capitalization of nearly $600 billion. As of March 2009, the market capitalization was around $598.3 billion (Rs 30.13 lakh crore) which is one-tenth of the combined valuation of the Asia region. The market was slow since early 2007 and continued till the first quarter of 2009.

A stock exchange has been defined by the Securities Contract (Regulation) Act, 1956 as an organization, association or body of individuals established for regulating, and controlling of securities.

The Indian equity market depends on three factors -

• Funding into equity from all over the world
• Corporate houses performance
• Monsoons

The stock market in India does business with two types of fund namely private equity fund and venture capital fund. It also deals in transactions which are based on the two major indices - Bombay Stock Exchange (BSE) and National Stock Exchange of India Ltd. (NSE).

Market Segments

The Exchange operates the following sub-segments in the Equities segment:

• Rolling Settlement
• Limited Physical Market
• Institutional Segment
• Trade for Trade Segment

Rolling Settlement

In a rolling settlement, each trading day is considered as a trading period and trades executed during the day are settled based on the net obligations for the day.
At NSE, trades in rolling settlement are settled on a T+2 basis i.e. on the 2nd working day. For arriving at the settlement day all intervening holidays, which include bank holidays, NSE holidays, Saturdays and Sundays are excluded. Typically trades taking place on Monday are settled on Wednesday, Tuesday's trades settled on Thursday and so on.

Limited Physical Market
Pursuant to the directive of SEBI to provide an exit route for small investors holding physical shares in securities mandated for compulsory dematerialised settlement, the Exchange has provided a facility for such trading in physical shares not exceeding 500 shares. This market segment is referred to as 'Limited Physical Market' (small window). The Limited Physical Market was introduced on June 7, 1999.

Institutional Segment
The Reserve Bank of India had vide a press release on October 21, 1999, clarified that inter-foreign-institutional-investor (inter-FII) transactions do not require prior approval or post-facto confirmation of the Reserve Bank of India, since such transactions do not affect the percentage of overall FII holdings in Indian companies. (Inter FII transactions are however not permitted in securities where the FII holdings have already crossed the overall limit due to any reason).

Trade for Trade Segment
The securities in Trade for Trade segment will be available for trading under BE or BT series. The settlement of securities available in this segment will be done on trade for trade basis and no netting off will be allowed. It may also be noted that the transfer of security for trading and settlement on trade to trade basis (series: BE) is purely on account of market surveillance and it should not be construed as an adverse action against the concerned company.
The neat system has four types of market. They are:
Normal Market
All orders which are of regular lot size or multiples thereof are traded in the Normal Market. For shares that are traded in the compulsory dematerialised mode the market lot of these shares is one. Normal market consists of various book types wherein orders are segregated as Regular lot orders, Special Term orders, Negotiated Trade Orders and Stop Loss orders depending on their order attributes.

Odd Lot Market
All orders whose order size is less than the regular lot size are traded in the odd-lot market. An order is called an odd lot order if the order size is less than regular lot size. These orders do not have any special terms attributes attached to them. In an odd-lot market, both the price and quantity of both the orders (buy and sell) should exactly match for the trade to take place. Currently the odd lot market facility is used for the Limited Physical Market as per the SEBI directives.

Auction Market
In the Auction Market, auctions are initiated by the Exchange on behalf of trading members for settlement related reasons. There are 3 participants in this market.

• Initiator - the party who initiates the auction process is called an initiator
• Competitor - the party who enters orders on the same side as of the initiator
• Solicitor - the party who enters orders on the opposite side as of the initiator

Spot Market
Spot orders are similar to the normal market orders except that spot orders have different settlement periods vis-à-vis normal market. These orders do not have any special terms attributes attached to them. Currently the Spot Market is not in use.

Market Timings

Trading on the equities segment takes place on all days of the week (except Saturdays and Sundays and holidays declared by the Exchange in advance). The market timings of the equities segment are:
Normal Market Open : 09:00 hours
Normal Market Close : 15:30 hours

Circuit Breakers

In case of a 10% movement of either of these indices, there would be a one-hour market halt if the movement takes place before 1:00 p.m. In case the movement takes place at or after 1:00 p.m. but before 2:30 p.m. there would be trading halt for ½ hour. In case movement takes place at or after 2:30 p.m. there will be no trading halt at the 10% level and market shall continue trading.

In case of a 15% movement of either index, there shall be a two-hour halt if the movement takes place before 1 p.m. If the 15% trigger is reached on or after 1:00p.m. but before 2:00 p.m., there shall be a one-hour halt. If the 15% trigger is reached on or after 2:00 p.m. the trading shall halt for remainder of the day.

In case of a 20% movement of the index, trading shall be halted for the remainder of the day.

Clearing & Settlement

NSCCL carries out the clearing and settlement of the trades executed in the equities and derivatives segments of the NSE. It operates a well-defined settlement cycle and there are no deviations or deferments from this cycle. It aggregates trades over a trading period, nets the positions to determine the liabilities of members and ensures movement of funds and securities to meet respective liabilities.

Shortages Handling

On the settlement day NSCCL accepts pay-in of securities made by members through depositories and identifies the shortages. The members are debited by an amount equivalent to the securities not delivered and valued at a valuation price. This is known as valuation debit. For all such short deliveries NSCCL conducts a buying-in auction on the day after the pay-out day (T+3 day) through the NSE trading system.

If the buy-in auction price is more than the valuation price, the CM is required to make good the difference. All shortages not bought-in are deemed closed out.

Custodians Clearing Members

Custodians are clearing members but not trading members. They settle trades on behalf of their clients that are executed through other trading members. A trading member may assign a particular trade to a custodian for settlement. The custodian is required to confirm whether he is going to settle that trade or not. If the custodian confirms the trade, NSCCL assigns the obligation to the custodian. If the custodian rejects the trade, the obligation is assigned back to the trading member.

Depositories

In order to promote dematerialisation of securities, NSE joined hands with leading financial institutions to establish the National Securities Depository Ltd. (NSDL), the first depository in the country with the objective of enhancing the efficiency in settlement systems as also to reduce the menace of fake/forged and stolen securities. The second depository in the country, CDSL, promoted by the BSE and a few commercial banks, was granted certificate of commencement of business in February 1999.

  

                                                                             

                                                                                         Chapter IV

 

                                        Technical analysis

Technical Analysis

Stock market analysis has been classified into two major categories - FUNDAMENTAL ANALYSIS AND TECHNICAL ANALYSIS.

A person following fundamental analysis, studies P&L accounts, balance sheets, sales data, production data, market conditions, macro economic factors and so on.

On the other hand, Technical analysis (TA) is the study of the market and not of the goods traded in the market. A PURE technical analyst is least bothered about the business a company is in.

It is the study of recording market behaviour (Price, Volume etc) in the form of charts and trying to forecast the future based on past actions.:

Technical analysis assumptions:
The field of technical analysis is based on three assumptions:
1.     The market discounts everything.
2.     Price moves in trends.
3.     History tends to repeat itself.

1. The Market Discounts Everything
A major criticism of technical analysis is that it only considers price movement, ignoring the fundamental factors of the company. However, technical analysis assumes that, at any given time, a stock's price reflects everything that has or could affect the company - including fundamental factors. Technical analysts believe that the company's fundamentals, along with broader economic factors and market psychology, are all priced into the stock, removing the need to actually consider these factors separately. This only leaves the analysis of price movement, which technical theory views as a product of the supply and demand for a particular stock in the market.

2. Price Moves in Trends
In technical analysis, price movements are believed to follow trends. This means that after a trend has been established, the future price movement is more likely to be in the same direction as the trend than to be against it. Most technical trading strategies are based on this assumption.

3. History Tends To Repeat Itself
Another important idea in technical analysis is that history tends to repeat itself, mainly in terms of price movement. The repetitive nature of price movements is attributed to market psychology; in other words, market participants tend to provide a consistent reaction to similar market stimuli over time. Technical analysis uses chart patterns to analyze market movements and understand trends. Although many of these charts have been used for more than 100 years, they are still believed to be relevant because they illustrate patterns in price movements that often repeat themselves.

DOW THEORY - The Foundation of TA

Charles Dow wrote a series of articles in The Wall Street Journal, which later formed, what we call the “Dow Theory”.  

 IN 1897 Dow separated the railroads and industrials into two different indices – 12 stock industrial average and 20 stock rail index. The industrial average is used even today by the New York Stock Exchange (NYSE) and is known as DJIA (Dow Jones Industrial Average). DJIA has comprised of 30 stocks since 1928 and is world’s best known Index today.  

Dow theory comprises of some basic tenets:  

1.The Averages Discount Everything:  

There are millions of investors involved in the markets. All with different opinions and abilities. The prices of stocks are sum total of opinions of all the people involved in the markets.   The markets already discount all factors that can affect prices of stocks.   In short, prices of Averages and Individual Stocks include the opinions of all involved in the markets and there is no need to consider individual opinions. Price tells the entire story.  

2.The three trends:  

Prices of stocks move in three trends – Primary (Major), Secondary (Intermediate) and Minor trends.   You must have heard analysts use Long term, Medium term and short term while referring to trends. The Primary or Long Term Trend usually last a year to many years. Bulls markets are the periods when the Primary trend is up and most stocks move up together.  On the other hand Bear Markets are the periods in which the Primary trend is down and most stocks are moving lower.  

Intermediate or medium term trends are periods of correction lasting few weeks to few months that go against the Major trend. In bull markets we can intermediate trends as corrections and in bear markets we call them recoveries.  

Minor or short term trends are very brief, lasting only a few days (sometimes 2-3 weeks) and are of little use to the Investor.  

The chart given above is of NSE Nifty from Feb 2000 (End of IT Led Bull Market) to Sept 2001 (Post WTO Attacks Sell Off).   During this period the Stock Markets were in a Bear Phase – that is- the main trend of the market was down. The Blue line indicates the Major Trend.   The Green line indicates an Intermediate up trend and the White line indicates a minor trend.

How to recognise the main trend?

  Dow had observed that in Up trends rallies always went higher than peaks of previous rallies and corrections always stopped at lows higher than lows of previous corrections. In short all Major up trends are characterised by higher tops and higher bottoms.  similarly all major down trends are characterised by lower tops and lower bottoms

3.Three phase of Major trends:  

Dow had observed that all Bull Markets have three phases: In the first there is gloom and doom everywhere. Financial reports are negative and people are sure that stocks markets will close down.  No one wants to talk stocks.  Slowly the economic activity begins to improve but people still believe it is temporary and worst is still to come. Farsighted and Shrewd players start getting in. Slowly markets pick up speed.  

In the second phase economy is growing.  People now think stocks are less risky than they were when markets were down and start getting in. Good news keeps coming and earnings keeping increasing. This is the phase when a technical trader gets in as he is now sure the Major trend is up.  

In the last phase everyone is buying stocks. Economy is in overdrive and people buy as if there is no tomorrow. Your Paanwala recommends you stocks and every stock is going up- doesn’t matter if the company doesn’t exists. DSQs and Pentamedias start hitting upper circuits. No one cares what the company does. Volumes reach their peak and more and more stocks make new highs. Smart money starts to get out here. First-time investors rush into the markets having heard stories of profits made overnight.

This is when the peak comes. Suddenly investors are trapped. There are no buyers at higher levels. Few start selling. A correction begins.

Three Phases of Bear Markets:  

The first phase appears to be just a correction. Most people are still bullish and are willing to buy at lower levels. After an initial correction markets rise again. But somehow they fail to cross the previous highs. News flow slowly turns negative. Bulls now start getting nervous. Another phase of selling begins.  

The second phase starts. Buyers keep vanishing as news flow grows worse and earnings disappoint. More and more of investors want to sell and prices keep falling. Every rise is short lived and selling comes again.  

The final phase is of total panic (Remember Post Sept 11 Selling). Many times triggered by some event. People get totally frustrated with stocks and sell at what ever price they get. All are scared to buy. “Stock Market” becomes the most hated word.  

In midst of all doom and gloom another bull market starts and the cycles continue.

 4.Two averages must confirm:  

At the time Dow studied the markets, the markets were divided into two main averages Industrial and Railroad. Thus Dow concluded that Bull and Bear markets can only be confirmed when both indices signal them i.e. both are making higher tops and higher bottoms or both are making lower tops and lower bottoms.  

At present in India we have two Major Indices too - Sensex and Nifty. Thus roughly we can apply the same principle to Indian markets too. But unlike DJIA and Railroad average which consisted of different stocks Sensex and Nifty have more or less same composition, thus in most cases they will confirm each other.  

5.Volume goes with the trend:  

See the chart below. It is the chart of BSE Sensex 2003 Rally. Concentrate in regions between Thick Blue lines (The rectangles). According to Charles Dow, Volumes always increases when prices move in the direction on the main trend. See the first rectangle. Note how volumes were high when prices moved up and volumes were low when prices moved down.  

After the 6250-index peak, in January 2004,a correction came. Again price started moving up again. but this time volumes didn’t pick up. this was the first signal that something was wrong. the uptrend had reversed.  

In downtrends volume is more when prices are decreasing and volume is less when price goes up. This is what was happening in rectangle 2.

6.A trend is assumed to be in effect until it gives definite signals that it has reversed:   This tenet is simple to understand.It only says don’t assume a trend reversal unless supported by facts. that’s is don’t assume a top just because according to you, prices are too high. after a bull run, a bear market can only be assumed if a lower top and lower bottom are seen.  

As seen in above chart the actual Bear Market was signalled when prices went below the green line – that is after a series of higher tops and higher bottoms, a new series of lower top and lower bottom was formed.

Dow theory: why do we have higher tops, higher bottoms?  

Think of how a stock (stock price) behaves when people start noticing that the company is doing well. First the price starts rising.  

After prices rise for a while, people get doubtful whether their assessment of the stock is true and if facts justify the rise. Few start selling. Also short-term traders start booking profits. People are hesitant to buy as they think prices are too high.  

Correction starts.  

After the correction proceeds for a while, again buying emerges as people waiting for lower levels buy and sellers stop selling thinking prices have fallen too far. New up trend emerges and short-term traders again rush in.

 

 

in bull markets buying stops corrections midway and new highs are again made.  

(in bear markets recoveries are stoped by selling pressure and new lows are made.)  

Thus a series of higher tops ands higher bottoms is formed. (For more on higher tops and bottoms refer earlier article.)

Use of closing prices:  

Dow considered the closing prices most important. He believed that intra day fluctuations were just result of extreme emotions of the day. The closing prices are still considered most important as they are the prices on which traders agree to take positions home.   closing prices are the prices that all traders agree to, after a day of trading.thus in dow theory an intra day high is not a new high. only a new high closing is a new high.  

Types Of Charts

 Line Chart

  A line chart is a simple representation of ONLY THE CLOSING PRICES of a stock.If we connect all closing prices by a line we get a line chart.  

   

 Bar Chart

  Bar Chart is next step into charting. A bar in a bar chart shows not only the closing prices, but also the open, high and low. Obviously it is more useful to a technician than a simple line chart. In a bar, a vertical line represents the day’s trading range. The opening price is indicated by a tic on the left of the bar and the closing price is indicated by a tic at the right of the bar.  

See the chart below and things will become clear. The three bars represent trading activity of three days in Usha Martin.

 

  Note how in second bar the opening price is also the low price and thus the left tick is at the bottom of the bar. On first and third day, the close was less then open and on second day the close was higher than the open.

 

  Note how bar chart gives us better understanding of intra day price movement, which is absent in simple line chart. 

Candlestick Charts

Candlestick Charts – Unlike the other common TA tools, Candlestick charting developed in Japan and not the western world. Therefore they are also known as Japanese candlesticks. Candlesticks are NOT JUST A TYPE OF CHART BUT ALSO A TRADING GUIDANCE SYSTEM. Japanese futures traders used candlesticks for decades for futures trading, before the western world noticed and accepted them.

Just like the bar charts, candlesticks require O, H, L, and C of the stock.  

The open and close make up the “Body“ of the candlestick. In the figure below the boxes are made between the O and C prices of the stock for the day. The height of the candlestick represents the trading range (high and low) of the price.  

  The line above the body (Open –Close box) is called the upper shadow (hair) and the line below the body (Open –Close box) is called the lower shadow (tail).

  Notice on the second day the Open and Low are same and thus there is no lower shadow (tail) of the candlestick.

  The body of candlestick is solid (black) when open > close i.e. Close is less than open and the body of the candlestick is hollow (white) when close > open i.e. Close is more higher then open.

  Thus Day 2 has Hollow (White) body, as the close is higher than the open. Day 1 and Day 3 have Solid (Black) bodies, as the close is lower than the open.

  The Nifty candlestick chart for period of Nov, Dec and Jan 2005 is shown below. Today’s close was higher than open and thus today’s candlestick has a white (hollow) body.

Point and Figure Charts

The point and figure chart is not well known or used by the average investor but it has had a long history of use dating back to the first technical traders. This type of chart reflects price movements and is not as concerned about time and volume in the formulation of the points. The point and figure chart removes the noise, or insignificant price movements, in the stock, which can distort traders' views of the price trends. These types of charts also try to neutralize the skewing effect that time has on chart analysis..

When first looking at a point and figure chart, you will notice a series of Xs and Os. The Xs represent upward price trends and the Os represent downward price trends. There are also numbers and letters in the chart; these represent months, and give investors an idea of the date. Each box on the chart represents the price scale, which adjusts depending on the price of the stock: the higher the stock's price the more each box represents. On most charts where the price is between 20 and 100, a box represents 1, or 1 point for the stock. The other critical point of a point and figure chart is the reversal criteria. This is usually set at three but it can also be set according to the chartist's discretion.

Chapter V

                                                                       

Intraday techniques in cash market

Day Trading in Stock Markets is a highly profitable Business if you have definite plans and pre-determined strategies. As a Day trader you can earn profits regularly on every day in both rising and falling markets.

This is possible because almost all actively traded stocks registers four price levels every day i.e., the opening price, intra day high price, intra day low price and the closing price. The difference within these price levels in any market whether rising or falling will be around 2 % to 12 % giving lot of opportunity for day traders to earn profits daily by entering into both long trades and short trades.

Trading strategies

Morning 30-minutes strategy
This strategy is based on understanding the moves of the BROKER. ( sentiments )
If you track the Close price you will wonder the Open price of the trade day is not always the same as that of the previous days Close price. It is because the major brokers (BIG TRADERS)

according to the sentiments lay a trap in which small traders get trapped and run into losses. If we understand the brokers mind we can make profits 90 % times in normal market in the first 3 to 30 minutes of trading.( Remember you should close your positions in this time frame )
Take the following figures and trade plan with you on the basis of calculations given below. We will call it Brokers Strategy ( BS )
Difference between HIGH & LOW of previous day i.e.: D = ( H – L )

Now BS = D / 3

BUY PRICE = ( Pr. Close – BS )

SELL PRICE = ( Pr. Close + BS )

STRONG SHARE or STRONG CLOSE (close price is higher than previous close) &
WEAK SHARE or WEAK CLOSE ( close price is lower than previous close )
Now on the basis of above calculations you are ready with the figures i.e.: BUY PRICE,

Pr. CLOSE & SELL PRICE of STRONG SHARE & WEAK SHARE separately.
Now on trade day if STRONG share opens anywhere between Pr. Close & BUY PRICE you can BUY first & keep for sell and SELL PRICE as your target.

The Trap :- As the broker opens the share at a price lower than Pr. Close one gets the feeling as if the share has become weak and sells it, thus falling in the trap.
On trade day if WEAK share opens at or above SELL PRICE you can SELL first & buy later and BUY PRICE as your target.
The Trap :- As the broker opens the share at a higher price than the Previous Close one gets the feeling that the share has become strong and buys it thus falling in the trap.

For this strategy Preferably take shares with high volumes & less volatility(not operator driven stocks). This strategy will not work in GAP OPENINGS. This strategy requires you to be very fast in taking decisions and accordingly positions. Furthermore One should compulsorily come out or close the position in the mentioned time frame. Life is not that easy and if you find that your position was wrong immediately square it ( close it)

Strategies ( Formulae ) For Intraday Trading.
The intraday movements of share prices are generally governed by Support & Resistance levels. The intraday volume, OPEN, HIGH, LOW, CLOSE & previous CLOSE prices are very important & one should track these prices daily. Previous data of 3 to 5 days is what is to be maintained or tracked. And the intraday data prior to the trading day is important.

OPEN ( O ) : The opening price for the particular day.
HIGH ( H ) : The highest price for the particular day.
LOW ( L ) : The lowest price for the particular day.

CLOSE ( C ) : The closing price for the particular day.

We can calculate the support & resistance levels for the next trading day with the help of above prices. The basic formula to calculate the various support(S1,S2,S3) & resistance ( R1,R2,R3 ) levels is as follows :-
Support & Resistance Levels
R3 = H + 2 * ( B – L )
R2 = B + ( H – L ) or B + ( R1 – S1 )
R1 = ( B * 2 ) – L
BASE = B = ( H + L + C ) / 3
S1 = ( B * 2 ) - H
S2 = B – ( H – L ) or B – ( R1 – S1 )
S3 = L – { 2 * ( H – B ) }

Mostly traders’ worldwide use above formula of Support & Resistance both for intraday trading as well as Delivery based trading. The general intraday interpretation of these levels (also called as PIVOT POINTS ) is if the Share price(or market) is above the BASE one should take a Long ( i.e. Buy ) position with target of exiting (Selling) at R1, R2, R3 levels. Similarly if the Share price (or market ) is below the BASE one should take a Short ( i.e. Sell ) position with the target of exiting ( Buying ) at S1, S2, S3 levels.

You have to understand one more important aspect of these levels. As the price moves from one level to other the immediate lower level becomes support & immediate upper level becomes resistance. Suppose the price is above R1 than R1 becomes immediate support & R2 becomes immediate resistance of the price movement.
Before understanding the different Strategies, we will take a look at the results of a very long term study of more than 10 yrs.

1-Double Confirmed Minimum Profit Technique

Out of all the Day trading techniques given in this part, we strongly advise you to use this Double Confirmed Minimum Profit Technique every day as your regular day trading technique. Because this is the only technique in the entire world which guarantees and confirms your profits DOUBLE TIMES before entering into trade every time.

 If the real time price action (price movement) of your list of selected stocks or recommended stocks (which you are watching/monitoring to day trade) gives buy signal according to this Technique, the profit on that trade is 100 percent double confirmed and there will be no question of incurring loss.

This Technique, by analyzing and interpreting the real time price action (price movement) along with price level of your list of selected stocks or recommended stocks identifies double confirmed small upward movement in price and gives both buy signal and sell signal with confirmed and guaranteed minimum profit. In this technique the profits are small and the profits comes very fast.

Small and confirmed profit in a very short time is the theme behind this technique. By analyzing real time price action (price movement) of your stocks according to the formula of this technique, you can catch up double confirmed small up moves and take advantage of that confirmed up moves to earn profits consistently in day trading.

In this technique, you can enter and exit from a stock after booking profits within few minutes. In most cases you can finish trades in less than 10 minutes. In some cases you can even finish trades in less than 4 minutes. Another outstanding down to earth practical advantage of this technique is that , at the time of giving buy signal, this technique also gives you the exact sell signal (selling price level). So entry and exit price levels are clearly fixed before entering into trade in this technique.

This technique first identifies double confirmed small profit and gives both buy signal and sell signal before purchasing stocks for day trading. So according to that signals you should buy stocks and sell it immediately after few minutes for confirmed profits which is fixed before purchasing stocks.

This technique by minimizing profits, eliminates your risks and losses totally in day trading and by finishing trades very quickly within few minutes increases your day trading turnover to maximum levels by rotating your investment for quite number of times and gives very big profits at the end of every day.

Double Confirmed Minimum Profit Technique (DCMP., Technique) works like a MIRACLE. You will not believe your eyes to see profit opportunity after profit opportunity if you test this technique before practically starting day trading using this Technique.

Actual LOW is lower than S1.......... 43 % times.
Actual HIGH is higher than R1......... 43 % times.
Actual LOW is lower than S2......... 17 % times.
Actual HIGH is higher than R2......... 17 % times.
Actual LOW is lower than S3......... 3 % times.
Actual HIGH is higher than R3........ 3 % times.

Now just apply your mind to interpret the findings of above study to help you decide ENTRY & EXIT points for your BUY or SELL positions.
This forms the basis of your understanding the market and interpretting it better & also grasping my different strategies.
Power Of 3 :-
As a trader always remember 3 is a very important number.
3 sec., 3 min., 3 hrs, 3 days, 3 months , 30 % etc. and so on.
Intraday as the term itself is self explanatory is the position you take and clear on the same trading day.As a general understanding of trading people feel that they have to first buy something to sell it later at profit.
But in intraday trading you can SELL a share even if you don’t have it with you. This is termed as SHORT SELL. i.e.: You sell suppose 100 XYZ share and Rs. 250 , here if the price comes down to say 220 and you buy back the 100 XYZ shares. Your transaction is complete. 250-220=30. And 30*100=3000 Rs is your profit.
i.e.: Short sell is exactly opposite of the buy first and sell later transaction.
SHORT SELL transaction has to be compulsorily completed by buying back the equivalent number of shares on the same trading day.

Remember Intraday Trading Is A Mindgame. There are many strategies one can apply to make profits daily in intraday trading as per my experience, observations & understanding. These strategies have been categorized or you can say designed on the basis of different Trade Times, Situations, Markets, & Shares. As discussed Mostly traders worldwide use above formula of Support & Resistance both for intraday trading as well as Delivery based trading short term & long term. So my advice would be to refer the support & resistance levels along with the various recommended strategies by me.

II - FIBONACCI DAY TRADING TECHNIQUE: Day trading techniques based on Fibonacci series is most popular method out of various stock selection methods followed by Day traders and stock market experts around the world. A large number of Stock market technical experts around the world strongly believe that Fibonacci analysis gives highly successful results in Day trading.

III - PROFIT TARGETS TECHNIQUE: Profit Targets technique is a simple and highly successful day trading technique. This technique is based on yesterday's intra day high price and today's opening price. By using one simple arithmetic formula you should make a calculation taking into account previous day's intra day high price and today's opening price of your recommended stocks at the time of opening bell. If the result is positive you should buy that stock immediately at opening bell. If the result is negative simply you should ignore that stock. If you buy that stock on positive result, you can earn 2 % to 4 % as profit on one single trade.

 Even if the result is negative, you can consider buying your recommended stocks for profit target trades in the early part of the day on certain assumptions and exemptions which we will teach you in our course books. In case if you catch up the lower limit of the day's trading range from opening price within first hour of trading then also you can consider buying the stocks according to this technique.

Every day you can use this technique in respect of at least 1 to 2 stocks in your list of recommended stocks to earn very big profits in 1 or 2 trades. You can use this technique in a very relaxed manner since there is no need to continuously monitor the price of stocks to use this technique. Within seconds at the time of opening bell itself, you can decide whether to buy stocks or not according to this technique.

IV - PROFIT SIGNAL TECHNIQUE: The stock prices moves up and down for every few moments continuously in small amounts. Some times it moves up and some times it comes down and suddenly again it moves up. In Profit signal technique, we will teach you how you can clearly and accurately identify a guarantee upward movement in price of more than 1 % to 4 % by observing the real time price action (price movement) of your list of stocks. If you identify profit signal in the price of your list of stocks, you should buy that stock and hold that stock till it achieves target to earn profit on that trade.

V - WARNING SIGNAL TECHNIQUE: The stock prices moves up and down for every few moments continuously in small amounts. Some times it moves up and some times it comes down and suddenly again it moves up. In warning signal technique, we will teach you how you can clearly and accurately identify a guarantee down ward movement in price of more than 1 % to 4 % by observing the real time price action (price movement) of your list of stocks.

If you identify a warning signal in the price of your list of stocks, you should not take any long positions in that stock and you should only enter into short trades in that stock by selling that stock first and later buy that stock at lower levels to earn profit on that trade.

VI - PIVOT POINTS TECHNIQUE:

 you can take the assistance of this technique in Profit targets technique. With the help of Pivot points you can easily calculate the lower limit of day's trading range, in respect of your list of stocks. At least in one or two stocks if you can catch up lower limit of day's trading range, in the first hour of trading, you can enter into Profit Target trades to earn big profits in those one or two stocks.

Buy Order Window

Short Selling

A short sale is one in which borrowed securities are used for delivery to the buyer (in the transaction in which you sell short). The process is not complete until the seller discharges his obligation to the lender by delivering to him the securities to cover the short sale.

Many will not grasp how they can sell what they do not own. It is possible because of your broker’s facilities for borrowing stocks with which he is able to make delivery for you. When you sell short and your broker has borrowed a portion of stock and delivered it to the purchaser, the first part of the transaction is complete.

Covering the Short

As with all trades, there remains the second half, that of covering your short. That is, providing your broker with an equivalent amount of stock at a later date so he can return it to the person or broker from whom he borrowed it (which you do by telling him to ‘buy to cover’ the short).

But you can take your sweet time about this second half of the deal. Unlike if you buy a put option (which in simplified terms is a highly leveraged short sale), when you have a specific date by which you must exercise your option, you don’t have to cover your short sale in any specified time period. In theory, this can be many years. There is no time limit, provided your account is in good order.

When To Go Long Or When To Short On Intraday Basis

I Took Nifty as an examples showcast the Intraday view.Before going to our analysis section let us recap what has happened yesterdays market.

Nifty Data for 02,June 2008

Open : 4869

High  : 4909

Low  :  4713

Close : 4740

Also have a look at Nifty intraday chart as shown. In the Nifty Intraday CandleStick Chart you see you can notice

5 types of EMA (Exponential Moving Average)

3min – EMA  – Red Line (closely following candle Stick)

13min – EMA – Green Line

34min – EMA – Black Line

55-min EMA – Gold Line

200 min EMA – Yellow Line ( Wont visitble good in white background so i kept it orange )

Two Simple Rules to Follow

1) Go Long if 3 EMA is  above 13 EMA and 13 EMA is above 34min EMA with stop loss below 34 EMA

2) Go Short if 3 EMA is below 13 EMA and 13 EMA is below 34min EMA with Stop loss above 34 EMA

These Two rules wont follow in a range bound market and well behave in case of volatile market

If you witness from the stock that at 4870 it is clearly witness from the Intraday chart that 3 EMA is below 13 EMA and

13 EMA is below 34min EMA with Stop loss below 34 EMA. Cool We have founded  the selling point in Nifty.

So one can short the market at this level with minimum stop loss at 4890 above 34min EMA. If EMA pattern reverses then your stop loss may hit.

But if you notice the chart it is clearly evident that the pattern doesn’t changes until the end of the session so one can carry forward

to next day or else can book the profit.

For Real Time Intraday Charts visit our blog NSE Tracker ( Also found in our Important Link Section). Where you can find a nifty intraday chart with above mentioned EMA’s

Also you are requested not to take trade based on this two simple theory alone. As lots of patterns and signals are there andthis pattern is one among them.

           

                                              Chapter V I

 

                              Findings and conclusion

Findings:

1) For day trading or intraday trading you get margin on your capital amount.Suppose for    example, if you have Rs.10, 000 then you may get Rs.40, 000 extra amounts to do day trading. This is called Margin Trading. Margin amount depends on your brokerage firm.

2) Brokerage is less for intraday trading as compare to delivery trading

3) No risk of overnight holding.

4) Excellent returns in day trading if done properly and systematically.

5) As you have to pay the low brokerage so no need to wait to book huge profit. You can book very small profit and can do multiple trades in a day so that you can book good profit at the end of the day.

6) Its very risky - Only experienced traders can do intraday trading, if you are new to share market then you should avoid doing intraday or day trading.

7) Time limit in day trading - You have to square off your trade before market hours. Some brokers like ICICIdirect.com squares off your order automatically at 3.15 p.m.

8) Huge risk - If done without knowledge and experience then there are chances of huge loss.

9) Stop loss is a must while trading intraday.

10) Always trade in very liquid stocks i.e. which have very high volume because entry and exit can be very fast in such stocks.

Conclusion:

                         Its very risky - Only experienced traders can do intraday trading, if you are new to share market then you should avoid doing intraday or day trading. Being a trader requires you to endure huge daily stressors, not only on the perspective of possible money losses, but also because the job will require you to give all your focus on what's happening in the markets that could affect your trades. You will also have to constantly watch the fluctuations in the prices and the market plus the indicators that will help you decide where to put your next trade.so with the help of technical charts or with the knowledge of technicals we can act as a successful day trader.