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Indicators

The categorisation of Indicators:

• By what they tell.
• By the data they use.
• By lagging vs leading types.
• Oscillators and Non-Oscillators.

Indicators By what they tell:

• Trend Indicators
• Momentum Indicators
• Volatility Indicators
• Volume (Market Strength) Indicators
• Support & Resistance Indicators
• Cycle Indicators
• Trend: persistence with which prices move in any direction. (sustainability)
• These indicators show how strong a trend is, whether it is weakening on strengthening.
• Examples:
• Trendlines, MAs, MACD.
• Aroon, Directional Movement.
• Envelopes & Channels.

Momentum Indicators

• High Momentum
• Slow Momentum
• Momentum: the speed at which prices move over a given time.
• Changes in momentum often lead to changes in price.
• Examples:
• Momentum (ROC), Stochastic, RSI.
• MACD
• Ultimate Oscillator. (Popular oves)
• Much slow momentum & Strong Trend.

Volatility Indicators

• Volatility: the magnitude of “day-to-day” fluctuations in prices.
• Volatility is independent of direction.
• Changes in volatility tend to lead changes in prices.
• Examples:
• VIX may help as it uses option data. A rather other Indicator in this group uses mostly prices.
• Bollinger Bands, Ketner Bands
• Standard Deviation, Standard Error.

Volume (Market Strength) Indicators

• Volume strength or lack of it for a price can often indicate future price moves.
• Examples:
• Accumulation / Distribution.
• On Balance Volume (OBV), Positive (Negative) Volume Index, Price Volume Trend (PVT).
• MA (Volume Adjusted).
• Indicator trends give an Idea of what happened at a certain time.

Support & Resistance Indicators

• Prices tend to rise/fall to certain levels and reverse: this is Support & Resistance.
• Examples:
• Andrews Pitchfork, Envelopes
• Fibonacci, Trione, Gann.

Cyclical most useful in commodities.

• Agri (Definitely)
• Base metals

Cycle Indicators

• Securities often show cyclical behaviour.
• Useful in predicting price changes.
• Examples:
• Fourier Transform,
• Detrended Price Oscillator (DPO),
• Fibonacci Time Zones.
• Pro
• Used to find out when & where it might turn in another direction.
• Corn
• To use it in a short period, e.g., Intraday – pro highly impossible.
• Indicators give warning something is going to happen.

Divergence

What is a Divergence?

Interpretation in different market phases common mistakes

Divergences

• When prices and indicators move in the same direction, then are “in line”
  • The price trend is likely to continue
  • There is NO divergence
• When the indicator moves in a different direction to price then BEWARE – the indicator and price trend and Diverging
  • The divergence indicates that the velocity of the advance or decline is decelerating.
  • The prevailing trend MAY be about to reverse.
  • Can the trend velocity increase again?

Negative / Bearish Divergence

• Price – return line
• Momentum – Indicator Trend

• In an Uptrend:
  • The Up Trend Line connects the Bottoms of Price Action, BUT when checking for Divergences, you should connect the TOPS of an Up Trend.
• In a Downtrend:
  • The Down Trend Line connects the Tops of Price Action, BUT when checking for Divergences, you should connect the BOTTOMS of an Down Trend.

Positive / Bullish Divergence

• Price
• Momentum

In Divergence

Observing the momentum so that something going to happen in the price.

Divergence Strength: Points to note…

• Point A – point of maximum velocity of the price.
• Points B & C – price continues to rise (or fall) but at a slower pace.
• Divergence – the conflict between price and momentum (i.e. velocity of price)
  • Rising or Falling prices are supported by weaker momentum
  • Deterioration in Momentum is an early warning of weakness in the price trend itself!

Divergence Strength:

• Greater the Negative Divergence:

Greatermeans – the longer durations of the trend (How many Tops & Bottoms.)

• Fewer informed investors are buying while more of the uninformed buyers move in – Distribution? – when the weak buyers also start to sell then sharper the fall.

• Greater the Positive Divergence:
  • More and more informed investors are buying – Accumulation? – when the uninformed move in the price rise is mostly to be faster.
• Most mkt bottoms have at least one Positive Divergence
  • If the market is reaching a bottom and one does not see a positive Divergence then may be the market is NOT bottoming!
  • The above does not necessarily apply for tops.

Divergence Strength: Number of Divergences

• Greater numbers are indicative of longer & more significant weakening of the underlying trend (esp at mkt tops)
• When the confirmation (something happened in the ‘Price’) occurs, the reversal is likely to be sharper and faster.

Divergence Strength:

Most Recent Divergence around Equilibrium…

• Closer the last point of the Indicator is to be Zero level the more significant the Divergence.
• Mid point cent----
  • Negative Divergence: point C is at / below the midpoint of the indicator.
  • Positive Divergence: point C is at / above the midpoint of the indicator.
• Refer to the charts on Pos & Neg Divergence,

Divergence Strength:

Time between divergence

• Greater the time gap between the price and momentum (indicator) greater the significance.
• Keep in mind the time frame one is looking at: short – Intermediate – long term?
  • Short time frame settings have importance for the subsequent intermediate trend.
  • Intermediate time frame settings are important for the next primary.
  • When comparing peaks and bottoms of an indicator then compare like time frames. (Comparing the peak / bottom of a short time frame with an intermediate time frame indicator is wrong!)

Confirmed Divergence

• Divergences on their own do NOT signal a price trend reversal
• When Price Reversal signal is formed then any pre-existing divergence is said to be Confirmed.
  • Egs of price reversal: Trendline break, MA Crossover, Price pattern completion, etc.
  • Until the price reversal happened then it is a “Tentative Divergence”.

Divergence Trap

• A Point where price reversal is expected
• Price eventually breaks down and initial divergence is confirmed
• Indicator moves to a level higher than the previous one or more tops.

Divergence Trap

• A trader who is not aware of Divergence Trap will give up on his bearish view at Point A – where a fresh rally starts (and is also likely to be confused about divergences!)
• Eventually the confirmation happens and the price reverses.
• Exercise: Draw the Bullish Divergence Trap.

To check the strength of the Divergence check with the shorter, medium, longer and in all the three then it is more evidence.

Complex Divergences

• Price trends are determined by Interaction of many different time frames.
• Indicators look at only one time frame.
• Good practice to have 2 (or more) different indicators with different time settings.
• Various scenarios can occur with such a study.

Complex Divergences

• Price and indicators more in same direction – a very healthy trend.
• Shorter time cycle indicator peaks and falls while the longer time cycle one continues to rise – cycles are out of important sync – beware!
• Both indicators show divergences – body of evidence of a price reversal is stronger.
• Always wait for confirmation with price trend reversal.

All reversal does not / need not to come with the Divergence

Complex Divergences

• Ensure that the different time cycles are separated properly. Eg 10d vs 20d is fine but 10 vs 12 is not.
• Longer term indicator should be peaking when shorter term indicator is close to equilibrium point –
• Exercise: Illustrate Complex Divergence at tops and bottoms.

Strong Momentum BUT Weak Price

• Price
• Strong momentum BUT respectively weak price move
• Momentum
• Sign of a mature trend – May not he a aggressive reversals.

Divergences.

Common Errors…

• Divergences can be misleading in a strong trend.
  • Many (mild) bearish divergences before a price top materializes in a strong uptrend.
  • Many (mild) bullish divergences before a price bottom forms in a strong downtrend.
  • Alternative Interpretation of this…
• Getting too excited about divergences.
• Always confirm with a Price Reversal!

Price Patterns

The Indicator chart itself can provide clues to future price moves.

When studies together with the price chart, one can get better insights into market movements.

TA Principles on Indicators

• The concepts of trend, patterns, MAs etc can be applied to Indicator charts
• Such a study can offer advance notice of impending price trend changes.
  • And of the Indicator itself.
• Price confirmation is always required!

Trendlines

• One of the most reliable indicators of trend of momentum
• Importance based on
  • Number of points on the TL
  • Duration of the TL
  • Angle of the TL
• Once a TL is broken, extend it for it may become a future Sup / Res of the Indicator.

Tops & Bottoms

• Uptrends with HTs & HBs and Downtrends with LTs & LBs occur in Indicators also.
• The principles of the tops & bottoms NOT holding indicating deterioration of the trend apply to indicators also.

Advance BOs and BDs

• Price – Subsequent high is often the high of the market
• Higher High Advance BO
• Lower Low – Advance BD
• Momentum
• Subsequent low is often the low of the market.

Price Patterns

• Indicators may sometimes show patterns (H&S, Triangles, Rectangles, Double, Triple Tops & Bottoms)
• CAUTION – a reversal in Momentum does NOT necessarily mean that there IS price reversal also.
• However, when reversal is confirmed by a price break, it almost always has important consequences.
• Trends in momentum are generally less sustainable than trends in price.

Price Patterns

• Usually there is a time lag between completion of a pattern in the indicator and the similar pattern completing in the price – with the indicator usually giving an advance warning.
• A reversal pattern forming at the extremes: OB and OS levels is more important than one at equilibrium point.
• On the other hand it is much better to ignore UP side breakouts at OB and DOWN side breakdown at OS levels.

Popular methods of interpreting the market movement

 Given the Indian methods of data collection, one may also use the following techniques to understand future market movement:

• Price vs Volume change
• Advance-Decline Lines 
• New-High and New-Low indicator
• Use of derivatives data selectively

 Price vs Volume change for predicting market behaviour

 Technical analysts believe that price and volume are closely related. There are four rules for Price vs Volume change:

 a. A rising index with an increasing volume will indicate a bullish market and a "buy" signal as it reflects unsatisfied demand in the market.

 b. A falling index with decreasing volume shows a bullish signal.

 c. When volume tends to increase during index declines, it is a bearish signal.

 d. When volume tends to decrease as the index rises, it is a bearish signal.

 As the Exchanges provides daily volume data, by plotting volume as well as a market index, one can draw an inference about the market by looking at their direction of movement. Similarly, you can plot the volume data of individual securities along with their price movement chart to find a "buy" or "sell" signal.

 Advance-Decline line

 Every day several securities advance from its previous closing rate. Similarly, several of them fall off the last day's closing price. The cumulative net difference between the number of issues advanced and declined is used as an indication of the breadth of the market. When such data is plotted, it is called the advance-decline line. A hypothetical situation is given here to show how it is arrived at.

 Note that the sign change (plus or minus) has nothing to do with actual figures. It merely shows the direction. Analysts generally specify the initial cumulative rate, a considerable number, say 25000, to keep the collective difference positive. If you plot it daily, you will get the advance-decline line. For analysis, you have to view the advance-decline line against the plot of the Index.

 The rules are as follows:

 a. A rising Index with a falling advance-decline line indicates that despite a rise in about 30 blue chips in the Index, many small stocks are beginning to turn down. It is an indication of a weakening market and gives a bearish signal.

 b. A fall of Index with a rising advance-decline line gives a bullish signal.

 c. Technical analysts also believe that when the cumulative number of advances exceeds declines by 2000 over ten days; the market may be "overbought", meaning that it is susceptible to some reactions. Similarly, if the cumulative number of declines exceeds advances by 2000 over ten days; the market may soon have a rebound.

 If you are keen about plotting this chart, you can refer to the newspaper The Economic Times, which gives the daily share advance-decline data.

 What are the New-High and New-Low indicator?

 A rising market should normally view an expanding number of stocks hitting new high prices and decreasing new low prices. Conversely, a declining market is usually accompanied by an increasing number of new lows and a decreasing number of new highs. Many technical analysts believe that when the movement of New-High and New-Low data diverges from the movement of the market index, the movement of the former will usually provide a clue for the future price movement.

 How are the charts prepared?

 We generally use measures of momentum and overbought/oversold readings to aid in our interpretation of a stock. There are three different momenta for charting.

• Daily momentum for short term trading
• Weekly momentum for intermediate-term trading
• Monthly momentum for long term trading

 What is a ROC chart?

 A ROC chart or a Rate of Change chart intends to measure acceleration or deceleration in prices. It is conventional to plot this chart along with a price chart for interpretation. For instance, a 15-day Rate of Change (ROC) chart is obtained by taking the ratio of the current price to the price 15 days ago, which is converted to a percentage by multiplying with 100. If such 15 days ROC for each day is plotted, then you may get a 15 days ROC chart. A ROC chart will remain flat as long as the current price trend continues because the market returns will be constant. Any change in the price trend immediately shows up in the ROC chart, as the return will change. Thus basically, you can interpret whether the gross return from the market over constant intervals are undergoing any change, by glancing at the ROC chart.

 Can one perform technical analysis, with voluminous data on price and volume? 

 A simple charting for selected scrips as well as the moving average analysis can be easily done if you collect price data from newspapers over a while. As technical analysis is meant for short-term investment analysis, data gathering for more than 2-3 months is not necessary. You can plot the graph on paper. If you have access to a computer, and if you know MS - Excel, this further simplifies your job. You can even derive data on advance-decline, new-high new-low etc. from the daily The Economic Times and accordingly work out your analysis. The purpose of these exhaustive explanations on analysis is to provide an in-depth understanding of the subject. In future, if you read any analytical write-up in an investment journal or newspaper, you would easily comprehend it. Of course, if you have a computer and technical analysis software, you may utilise them for additional benefits. All the techniques mentioned here have been incorporated in the Indian softwares.

How to Predict Share Market

As traders, we must still place the corresponding orders to enter and exit positions at the right times and in the right directions in order to profit. Simply understanding the direction to trade in won't help you near as much as knowing when to get in and when to get out. It would be nice to have a crystal ball. But that's not what trading is all about. Timing is everything. Although we might accurately predict the next move of a stock or the market itself.

It's important to be able to locate and use chart patterns and technical analysis for trading. I sure don't think a trader's ability to tell the future (or backtest the past) will make him a profitable trader. Chart pattern recognition is certainly helpful to traders.

Every trader is going to go through times of being right and being wrong. Successful trading is about damage control when you're wrong and pressing it when you're right. What's most important is staying in sync with the market and adjusting your trading size and frequency at the right times in order to maximise your profitability.

Let me clear two assumptions for you now
1. All indicators either follow the price or lead-based on momentum but are dependent on the underlying stock. A stock with a clear trend and behaviour will also have signs which will give clear direction.
2. Every symbol has an active working percentage which is not stagnant. Like RSI can provide you 70-80% accuracy on a trending market, but if the market is sideways it's skill might go below 40%

So after you've understood the above, it's pretty simple.
For your question a) it may be because the market dynamics have changed and hence the indicator is less useful for the current scenario.
b) the index will always be based on the underlying stock, so if the stock is manipulated or has unclear/choppy trend, the indicator will also give ambiguous results.

Anyone can esily earn money in stock market  by using some follwing statergy 

Only invest cash you won’t need for five years (MOST IMP)

1.  Avoid the herd mentality
2.  Take informed decision
3. Don't try to time the market
4. Follow a disciplined investment approach
5.  Do not let emotions cloud your judgement
6. Create a broad portfolio
7. Have realistic expectations
8.  Monitor rigorously

Do you know? Investment Vs Trading - Stock Market Advanced Technicals.

As per technical rules and trading ethics, Trading will highly risk basis earing. Sometime we will get profits, and Sometime we will get Loss. But Weekly 2 days or 3 days trading is the best opportunity, and they are professional traders.

For example, if you earned profits from Monday to Wednesday don't enter for next 2 days.

More profits will convert the mind to enter wrongly without technical knowledge. Some time will lock in news based markets.

If booked profits in Monday, Loss booked in Tuesday, so enter in Friday only for weekly closing markets.

Some rules will happen, some indicators and news will form the market in bull or bear mode.

If you want to earn some profits from markets, then enter for limited days only.

The investment will be a better option for earning purely from technical base calls.

it will be short-term, mid-term or long-term mode.

The answer from any other colleague trader for can I become a trader for life time? Answer is Yes. Is stock market for all? I can argue on this question for many days/months. Market Is For All. It is about be aware of what we do on the trading hours and our preparation for it.

So what personality traits are needed?

1) Learning: Be ready to learn the market. By saying learn. It is not just about how to buy and sell. It is about knowing what are all possible avenues in stock market to earn. It is important to learn especially after a trade is one. We should analyze where we went wrong and what we did right. To share my personal experience, it took me about 15 to 19 good months to know where was my mistake and what was my mistake while doing stock market trading and investment. 

2) Passion: We cannot login to trading account each day and keep watching for many years unless we have the passion. Take a tupical example of a IT person. He/She loses passion in their job after 5 to 6 years. Remember IT job gives lucarative and consitent money and enhancements to life style, status-quo and personality. It is the very same for professional traders. We need to have passion and have appetite to explore new things. 

3) Confidence: The moment we start trading in real life we should start with confident note. Example: You should know why do you enter the trade. There is no point in thinking after the fact.

4) Less Greedy And Less Fear: Once we learn and start following a strategdy in trading, we should not be over greedy to win it in one day. At the same time not to fear and doubt the strategies especially after you practised a lot. A gradual win over market will help you too.

What are professional traits needed to become a life time trader?

1) Hardwork: We need to be smart in knowing which stocks give us the right trade. Just like in any job hard work leads to smart work. Without having willingness to work hard we cannot become successful in market.

2) Self-Appraisal: We should appreciate and reward ourself to keep going forward! We should enjoy the success. It is important to take care of our own emotions too and not just trade numbers! Better way to do is document the emotions and mood we had during a trade on a weekly or monthly basis. Better to review the document every 6 months or Quarterly basis.

3) Understanding Co-Traders And Market: In a office job, we always talk and be knoweldege sharers with co-workers and our company. Similar to it, we need to respect the trading instruments market trends and remember market is all about fellow mates' psycology. It is imperative to understand what my fellow trader/investor thinking. 

4) Not bad to have a butterly in tummy: It is very much true that every person have their own stagger at beginning. I have listened to one of interviews of Dr. SPB (Singer and Legend) saying, he fears on every stage till the first item is sung by him till date. So when legends have their initial hiccup, why not normal person like us.

5) Stand steady: Always have positive mind about a trade setup and believe it. When success comes to you never say I can never be beaten. You Need To Stand Humble after every win and never stumble even after a defeat.

What are Derivatives?

• A derivative is a financial instrument whose value is derived from the value of another asset, which is known as the  underlying.

• When the price of the underlying changes, the value of the derivative also changes.

• A Derivative is not a product. It is a contract that derives its value from changes in the price of the underlying.

Example:

• The value of a gold futures contract is derived from the value of the underlying asset i.e. Gold.

Underlying Assets:

• Crude Oil.

• Precious Metals.

• Interest Rates.

• Agricultural  Commodities.

• Bonds.

• Currency.

• T-Bill.

• Interest Rates.

Features of Derivatives:

• Traded on Exchange.

• All Transaction in derivatives take place in future  specific date.

• Hedging Device-Reduces Risk.

• Derivatives are often leveraged, such that a small  movement in the underlying value can cause a  Large difference in the value of the derivative.

Types of Derivatives Contract:

1. Forwards:

• A forward contract is a customized contract between  two entities, where settlement takes place as a specific  date in the future at Predetermined price

•  Forwards are also known as Private Contracts Normally traded outside exchange

Features of forward contracts:

• They are bilateral contracts and hence, exposed to counterparty risk.

• Each contract is customer designed, and hence is unique in terms of contract sixe, expiration date and the asset type and quality.

• Each contract is customer designed, and hence is unique in terms of contract sixe, expiration date and the asset type and quality.

• The contract price is generally not available in public domain.

• On the expiration date, the contract has to be settled by delivery of the asset and if party wishes to reverse the contract.

Limitations of Forward contract:

Forward markets are facing many problems. They are:

• Lack of centralization of trading,

• Liquidity and Counterparty risk.

• The basic problem in the first two is that they have too much flexibility and generality.

• Counterparty risk arises from the possibility of default by any one party to the transaction. When one of the two sides to the transaction declares bankruptcy, the other suffers

2. Futures:

• Future contract is an agreement between two parties to buy or sell an asset at a certain time in the future, at a certain price. But unlike forward contract, futures contract are standardized and stock ex-changed traded.

• A Financial contract obligating the buyer to purchase an  asset, (or the seller to sell an Asset), such as a physical  commodity or a financial instrument, at a predetermined  Future date and price.

• Some of the most popular assets on which futures  Contracts are available are equity stocks, indices,  Commodities and Currency.

For example:

• Sugar cane or wheat or cotton farmers may wish to have contracts to sell their harvest at a future date to eliminate the risk of change in price by that date.

• There are commodity futures and financial futures.

The standardized items in a futures contract are:

• Quantity of the underlying,

• Quality of the underlying,

• The date/month of delivery,

• The units of price quotation and minimum price change and,

• Location of settlement.

Important terms in future contract:

• Spot price: The price at which an instrument/asset trades in the spot market.

• Future Price: The price at which the futures Contract trade in the future market.

• Contract cycle: The period over which a contract trades. The index futures contract typically have one month, two months and three months expiry cycles that expire on the last Thursday of the month.

• Expiry Date: It is date specified in future Contract. This is the last day on which the contract will be traded, at the end of which it will cease to exist.

• Contract Size: The amount of the asset that has to be delivered under one contract.

• Basis: Basis is defined as the future price minus spot price. There will be difference basis for each delivery month for each contract. In the normal market, basis will be positive. This reflects that futures price normally exceeds spot price.

Distinction between Forward and Future Contract:

3. Options:

• American options can be exercised at any time up to the expiration date.

• European options can be exercised only on the expiration date itself.

Types of Options:

i. Call option gives the holder the right to buy the underlying asset by a certain date for a certain price but not the obligation to buy the underlying asset.

ii. Put option gives the holder the right to sell the underlying asset by a certain date for a certain price but not the obligation to sell the underlying asset.

• The price in the contract is known as the exercise price or strike price.

• The date in the contract is known as the expiration date or maturity.

Participants in options markets:

1. Buyers of calls option: Those who buy Call option 

2. Seller of calls option: Those who sell Call option

3. Buyer of puts option: Those who Buy Put Option

4. Seller of puts option: Those who sell Put Option

Market Players:

• Hedgers: Transfer of Risk component of their portfolio

• Speculators: Intentionally taking the risk from the  Hedgers in pursuit of profit

• Arbitrageurs: Operating in different markets  Simultaneously, in pursuit of profit and eliminate  mis-pricing

In India, three type of derivatives are available in exchanges: