Technical Terms-2

Chartist

Another term for technical analyst, because charts, whether handmade or computer generated, are the primary working tool used for analysis.

Common Gap

A gap that usually occurs in very thinly traded markets or in the middle of horizontal trading ranges. It is more a symptom of a lack of interest than anything else.

Closing the Gap

It refers to pulling the prices back to the levels at which the gap was formed. For example let us take a stock, which in the way of its upward movement closed a week at Rs54 and in the week following it opened at Rs55.5 and moved further to Rs68 without coming even at Rs56. Here a gap of Rs1.5 is created. The gap will be considered as closed when the price of stock comes down to the rate at which the gap was created (Rs54). Normally when stocks begin their journey from consolidation phase, they move with a gap, which is not easy to be filled.

Congestion Area

A period of horizontal or sideways price movements on the chart within a well defined top and bottom. The main purpose of congestion area analysis is to help the analyst determine in advance the direction of the ultimate breakout.

Continuation Pattern

Any pattern that typically signals the continuation of the trend in progress. Markets after taking a breadth start their journey again.

Call Option

A call option gives the owner the right to buy a future at a specific price which is called the Exercise Price or Strike Price. A trader who sells the option has an unlimited risk as the buyer of the option has an option to exercise it. The owner of the option can exercise his right on or before a predetermined date which is known as Expiry Date, after this date the option lapses.In-the-moneyIn case of call option, the option is treated as in-the-money if market price is higher than strike price.At-the-moneyThe option is treated as at-the-money if market price is equal to exercise price.Out of-the-moneyThe option is treated as out-of-money if market price is less than the strike price.Example:- Suppose if Niftys spot price is Rs. 2000 then call 1950 will be in-the-money, call 2000 will be at-the-money and call 2050 would be called out of-the-money.

Circuit Filter

Circuit filter is applied to all the shares to safeguard the interests of general investors from the extreme volatilities in markets by preventing any unexpected fall or rise in a single day beyond a limit. If the limit is crossed by any of the shares in a single trading day it is frozen for trade for some time (cooling period).

Crossover

It is a point on a stock chart where security price and an indicator intersect each other. Crossovers are used in aiding the forecast of future movements in the price of a security. A crossover is a signal to either buy or sell. Some of the indicators that may be used for crossovers are "moving average" and "Bollinger bands".

Covered Call

In a covered call, one should have delivery of the stock for which one can write an option to earn the premium against its delivery.

Technical Terms-1

Bar Chart

On a bar chart the x-axis records the time whereas the y-axis price.

Blow Offs

When the markets are near at the top, the prices of stocks begin to rally sharply accompanied with heavy volumes. It is also seen that the open interest is reduced at blow offs.

Bottom Reversal day

When the stock market is near the end of the downtrend, near the last after the new low is made and next day the market closes higher.

Breakaway gap

The breakaway gap gives the first hint of the change of the trend of the stock market/ gold and silver market. Once the market tired everyone and the market has stayed there for a long time, which can be seen by a major saucer formation-taking place or an inverted head and shoulder formation-taking place. Suddenly the stock or the index breaks a major trend line or the neckline of the inverted head and shoulder and moves up on heavy volumes. It is seen that breakaway gaps are not currently filled easily. Though at times the stock takes a rest before moving up again. When markets are at the top, the breakaway gaps are the first signs of the starting of the fall. On the top formation, a falling saucer formation or a head and shoulder can be seen.

Bull Trap

It is a term referring to wherein the stocks suddenly move up and starts falling with the result that the investing public is trapped. Technical formation generally speak of bull and bears trying to trap each other.

Bear market

A bear market is where the prices are falling, sellers outnumber the buyers, market sentiment is down and presence of any other negative sentiments in the market. Patterns of market charts forms lower bottoms and lower tops. The bear market is characterized by three phases namely:1st Distribution Period: this phase starts in the later part of a bull phase (market). In this phase the intelligent investors sense that the current Bull Run has overrun and is due for a correction (valuations are high), so they unload their holdings at higher valuations. 2nd Panic Phase: in this phase the number of sellers exceeds number of buyers hence indicating a start of downtrend. Prices begin to fall at a fast pace, as most investors want to quit their positions in a falling stock. Then starts secondary recovery of the prices in the form of sideways movement of share, this recovery may last for a long period of time.3rd Phase: in this phase those investors who did not sell their holding throughout the above two stages or those who had purchased the shares during the panic phase finding the prices cheaper from their top levels, start selling their stakes. The bear phase ends when every bad news, the worst to be expected, etc. has been discounted in the price of scrip.

Bear Spread

This strategy is adopted by an investor who visualizes the market going down and he buys a put option with a higher strike price and sells a lower strike price put option. Both options have the same expiry date. Example :- if an investor foresees the Index going down and assuming that Nifty Index is at 2000, then he buys a put 2000 and sell a put 1950 with a result that his investment is also less as well as he gets a profit if the market goes down. In Bear Spread one can also sell a call of lower strike price and buy a call of higher strike price. Example:- here you buy a call 2000 and sell a call 1950.

Bull Spread

It can be created by buying a call of lower strike price and selling a call of higher Strike Price. Both calls should have the same expiry date. Example:- If Nifty Index is at 2000 then one can buy a call strike 2000 and sell call 2050. So if the market goes up you have a profit. Similarly, one can short a higher strike price put and buy a lower strike price put.

Beta

It measures the correlation of an individual stock against the movement of the index.

Bid Price

This is the best market price a buyer is ready to buy at.

Book building

Book building is a process of deciding the issue price of an IPO. It is used at the time of offering the shares to public through an IPO. It is a process of pricing an IPO, in which a band of price is provided to the prospective bidders. Every investor is asked to state his bid price and the number of shares for which he is applying. After the closure of issue (date of receiving bids) the company with the help of its book runner (merchant banker) decides upon the price at which the shares will be issued to the public. These days most of issues to primary market are through book building process.

BSE Sensex

It is a group of top 30 stocks in BSE (Bombay Stock Exchange). The Index is computed on the basis of market capitalization weighted Index method. It is based on free float of equities in the market. Dow- Jones is also composed of 30 stocks.

Butterfly Spread

This is an option strategy in which neither the profit is much nor the risk is much. In this strategy, there will be three different strike prices. It can be created by buying two call options, one with low strike price and the other with comparatively high strike price, and selling two call options having the strike price which lies in the middle of above two strike prices. It should be near to the prevailing stock price. In this spread we can expect profit if stock price remains close to the strike price of options which we have sold.Example:- If Nifty Index is 2000 then you may buy a call 1950 and another call 2050 and sell two calls of 2000.

Technical terms in trading

Accelerating Trend

There is a very old saying that TREND IS YOUR FRIEND and it has been seen in the long run that if an investor does not go against the trend of the stock market, he does not loose. A trend can be an uptrend, downtrend or a sideways trend and once an investor is familiar with a main trend, he can make money. A sideways trend i.e., sideways market is the worst market for a trader.

Accumulation

When an investor or a group of investors starts accumulating a share resulting in the scarcity of the said share in market. The demand on the share exceeds its supply, which results in its price going upwards. Start of big rallies is always preceded by accumulation. This is the initial phase of an upward movement when shrewd and informed investors start accumulating the stock i.e., collect the stock when as per them the bad news has been discounted. (Here one can see the formation of a higher bottom higher top formation).

In the diagram A, the shrewd investor accumulate the stock and take it up. Diagram B is opposite of accumulation and is distribution where shrewd investor distribute and give

Apex

Normally when the stock price moves in a side ways zone and tries to converge in the form of a triangle, the converging lines where they meet is called an apex. If a stock has traveled till the apex, normally it signals a failure of that formation. Normally a stock comes out of formation at 66% of the formation.

Arithmetical Mean

Arithmetical mean is also known as simple moving average. It is calculated by summing all the quantities and then dividing the total by the number. Example an average age of 25 children in a class is adding 25 children age and dividing by 25.

Arithmetical Scale

It is a method of charting in which distances between two scales on a chart represents the same unit in rupees. For example a distance from 20 to 30 in an arithmetic scale represents a gap of Re 10 and a distance from 30 to 40 represents a gap of Re 10.

Ascending Trend

The price of the stock is going up and is making higher bottom higher top formation, general public is happy, the trend is rising. A good up trend generally is one in which the angle of slope up is 45% angle. Normally the rising trendline which is not much rising will trouble. If given a choice, one should be buying a stock which has more rising trendline than a flat trend line

Ascending Triangle

It is a typical pattern where the upper trendline is flat, while the lower trend line is rising, it is a signal that buyers are more aggressive than sellers and buyers are pushing the sellers back. It is treated as a bullish pattern and find if it breaks on the upside one should buy the stock. Normally from bottom formations in a bearish market, the first things one notices is ascending triangles

ADR American Depository Receipt

Foreign companies which want to get their stock listed on the US markets issue ADRs and this ADR represents a certain portion of the underlying stock. Example:- If one ADR represents two shares of the underline company being traded, then the price of ADR will be two times the market price of that stock which is being traded in that country. A lot of Indian companies have gone in for ADRs route.

Arbitrage

One can invest money in stocks in which the future is there. You buy the stock and sell the future and at the end of the settlement shift the future position to the next month with the result that you will keep earning the arbitrage interest on the stock. There are clever traders who go on squaring up and selling the future again and again to earn more arbitrage.

American Option

It is an option which can be exercised at any time from the date you purchased and till the date of its expiry. All Indian stocks options are American in nature and they can be exercised by the buyer anytime. Index options are not American in style.

ASK Price

This is the price at which the seller offers to sell his option or the stock or the future.

Assignment

If an option writer gets a notice from the option buyer to deliver the security or square up the trade at the closing price, then in the Indian context, it is now the right of the buyer of the option who can give the notice of assignment to the seller of the option.

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.Here for the reference of this side, we finds that people who come here have a more short term view of the market. They predict the short term movement of the market, technical analyst gives better results hence, we follow all the standard technical analysis tools.There are two advantages in the following technicals firstly, it tells us where the share/market is moving up or down. Secondly, technicals are not bothered about the fundamentals or the news ( it overrides them).In technicals we are only concerned with price charts and volumes. We believe that at any given point of time, a stock price reflects everything.

Assumptions

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.

Trading Rules

Trading Rules

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

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

Never do overtrading.

Never let a profit run into a loss.

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

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

Only trade active markets.

Distribute your risks equally among different markets.

Never limit your orders. Trade at the markets.

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

Never trade to scalp a profit.

Never average a loss.

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

Avoid taking small profits and large losses.

Never cancel a stop loss after you have placed it.

Avoid getting in and out of the market too soon.

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

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

Never hedge a losing position.

Never change your position without a good reason.

Avoid trading after long periods of success or failure.

Don't try to guess tops or bottoms.

Don't follow a blind man's advice.

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

When you lose don't blame it on luck.

Do's and Don'ts of Intraday

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.

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.

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

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

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.

Being a contrarians is very important while trading intraday.

Stop loss is a must while trading intraday.

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

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

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.

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.