Tag Archives: short term Trend

How to Trade with No Confusion?

In the previous article I have discussed how to choose a stock to make long term investment. But these stocks can also be used for short and medium term investment.

For a beginners it would be wise to invest in long term rather than short term. Learning is the key that will determine weather one will make profit in share market or not. Learn technical analysis and all the terminology related to a company’s growth before making any decision to buy or sell. Following the news and knowing the company’s net profit, assets and liabilities is not enough to know the future direction of price movement. One should also have a sound knowledge of technical analysis to make profit in the volatile share market.

Use 2 or at the most 3 indicators at a time.

First of all one has to understand that more the number of indicators employed in the analysis of share price, more you will be confused. You can’t reach to a right decision by using too many indicators and criteria to buy or sell a share. There are thousands of indicators and oscillators in the vast ocean of technical analysis topic. It is purely a research work that will include or exclude the indicators for reaching a correct decision. Also, according to Pareto principle, 2 indicators out of 10 will give right signal. So it is better to exclude those eight indicators that has high degree of power to create a confusion in your mind.

My extensive research has included only two indicators to determine the future direction of price movement of a stock. These indicators are

1. Trendline

2. 14 Period Stochastic oscillator

Drawing a trendline requires  experience but  it is not so difficult to learn and it gives right signal with 95% accuracy. My analysis of 14 period stochastics oscillator is somewhat different from the inventor of this oscillator that again makes this indicator to give 95% correct indication.

In this article, I am going to use some of the terminology that are unfamiliar for those who rarely read articles of technical analysis of stock market. But I will try to keep it as simple as possible. Before going to the actual analysis, I will like to share about the basic knowledge of trend, especially with beginners.

What is a trend?

The ultimate direction of price movement of a share in a specified time period is called a Trend.

Classification of trend

Classification on the basis of direction of price movement

Share prices move in 3 directions, so it can be classified according to the direction of trend.

1. Up Trend

Whatever may be the fluctuations in the share price, ultimately the price of share rises.

Monthly chart of nifty 50 showing up Trend
Monthly chart of Nifty 50 index, source Economic Times of India

2. Down Trend

Whatever may be the fluctuations in the share price, ultimately the price of share falls.

Weekly chart of Coal India Limited showing down Trend
Weekly chart of Coal India Limited, source Economic Times of India

3. Sideways Trend

Whatever may be the fluctuation in the share price, ultimately the price remains in a horizontal narrow region.

Daily chart of Steel Authority of India Limited, showing sideways trends
Daily chart of Steel Authority of India Limited, source Economic Times of India

Classification on the basis of time

Another type of classification of a trend is on the basis of time.

1.Long Term Trend

When a trend lasts for a very long period of time.

2. Medium Term Trend

When a trend lasts for medium period of time.

3. Short Term Trend

When a trend last for a short period of time.

4. Very Short Term Trend

When a trend last for a Very short period of time.

Strength of a trend

Long term trend is more powerful than medium term trend and medium term trend it is more powerful than short term trend.

If long term trend is showing an upward movement but medium term and short term Trend is showing downward movement, then the medium and short term Trend is ultimately going to reverse from downward movement to upward movement. This is because long term trend is more powerful than medium and short term trend.

Classification of Charts

Classification of charts with respect to time

Now, Charts can be classified in the following groups

1.Long term chart (say, monthly chart)

2. Medium term chart (say, weekly chart)

3. Short term chart (say, daily chart)

4. Very short term charts (say, hourly, half hourly, 15 minute, 5 minute, 2 minute, 1 minute charts)

These very short term charts are generally used by intraday traders.

How to know the direction a trend

There are many methods to know the direction of the current trend. But here I will suggest an easy method to know the direction of the trend.

1. Determining the direction of long term Trend

To know the direction of long term trend display monthly chart over your screen. Just below the monthly chart plot 14 period monthly stochastics. Also plot a horizontal line over stochastics chart at the level of 50.

Analysis

1. If the fast stochastics line is above 50, then the long term trend is upward.

2. If the fast stochastics line is below 50, then the long term trend is downward.

2. Determining the direction of medium term Trend

To know the direction of medium term trend plot weekly chart over your screen. Just below the weekly chart plot 14 period weekly stochastics. Also plot a horizontal line over stochastics chart at the level of 50.

Analysis

1. If the fast stochastics line is above 50, then the medium term trend is upward.

2. If the fast stochastics line is below 50, then the medium term trend is downward.

3. Determining the direction of short term Trend

To know the direction of short term trend plot daily chart over your screen. Just below the daily chart plot 14 period daily stochastics. Also plot a horizontal line over stochastics chart at the level of 50.

Analysis

1. If the fast stochastics line is above 50, then the short term trend is upward.

2. If the fast stochastics line is below 50, then the short term trend is downward.

A daily chart showing the behaviour of stochastic oscillator
Stochastic below 50/ above 50

Determining the direction of very short term trend (used by intraday traders)

To know the direction of very short term trend plot hourly chart over your screen. Just below the hourly chart plot 14 period hourly stochastics. Also plot a horizontal line over stochastics chart at the level of 50.

Analysis

1. If the fast stochastics line is above 50, then the very short term trend is upward.

2. If the fast stochastics line is below 50, then the very short term trend is downward.

When to buy ?

When the below mentioned conditions are fulfilled by a stock, one can execute order to buy

1. Long-term trend should be up – In monthly chart, 14 period stochastics should be above 50

2. Medium term trend should be up – In weekly chart, 14 periods stochastics should be above 50

3. Short term trend should be up – In daily chart, 14 periods stochastics should be above 50

4. 1 hour chart is one of the strongest chart for intraday trading. Next we will watch movement of stochastics in one hour chart.

Buy signal

When 14 period stochastics of hourly chart moves from below 50 to just above 50, execute trade order to buy.

Sell signal and / or Stop loss signal

When 14 period stochastics of hourly chart moves from above 50 to just below 50, execute trade order to square up your trade.

A word of caution

Don’t worry or make drastic change in decisions, if stochastics oscillator moves above 80 (ie overbought territory) or fall below 20 (ie oversold territory). If you watch closely maximum price movement occurs in overbought or oversold territory. Also neglect the crossover of fast and slow stochastics (ie K% and smooth D% crossovers) as it shows numerous false signals. You have to follow the average line of stochastic oscillator

Basic disciplines to be maintained for option trading

1. Strike price selection : The strike price should be close to the actual share price and it should have high open interest with high number of contracts traded. In technical terms, select at the money contracts with high open interest.

2. No trading should be done in the last week of expiry date of that option.

3. No reversing of trade immediately after suffering a small loss.

4. Before ordering a new trade, plan where to make a stop loss. Always remain strict with yourself to order stop loss according to your plan. Best way is to give stop loss order along with the trade order

4. Never trade against the direction of long-term or medium term trend as prices will ultimately and suddenly start following medium and long term trend.

Advertisement

Latest Investment Strategy of 2021

How to take calculated risk in share market?

Investing in stock market is a dangerous thing but more you take risk more you will gain… this is true if you take a calculated risk. If you  recklessly take decisions you are bound to be a loser. In this post I will show you how to take calculated risk with very little chance of of losing.


Volatile market

Share market is so volatile that you can’t take any short term decisions. Any change in political and economical situation of our country will adversely affect the share price. You won’t be knowing when a negative news would suddenly destroy your investment plans. This is the reason why 99% of general public who are investing are losers. But institutional investors and big brokers are generally making a good profit. What is their strategy?

Inefficiency of technical analysis in short term

Technical analysis predicts future price movement based on past price movements. It is based on probability of occurrence of events. It is not a sure shot thing. It only shows the current trend is up or down. All the indicators in technical analysis of share market can’t predict the exact point of future trend reversal. It will confuse you, and you won’t be able to have faith on it if your investment is based on technical analysis.

Short term and long term Trend

You have selected a good company and investing your money by analysing long term and short term Trend. But there is no guarantee that long term Trend will not reverse suddenly. If long term trend reverses against you, then you are going to be a big loser. If you want to make money in short term trend analysis then you  are a common people who always make mistakes to become rich overnight.

The only one way to invest in share market

The only one way to invest in share market is by selecting 10 best stocks of the market and make long term investment. But what are the best stocks of the market? If you ask experienced brokers about the best stocks of the market then different brokers will guide you differently and selection of stocks will vary from person to person. The experienced brokers too will misguide you as they themselves don’t know when the trend will reverse.

How to select stocks to invest in long run

Analysing Nifty 50’s long term Trend

Let’s analyse Nifty 50 for 18 years as shown below
The value of nifty on 2003 was 934 and current price of nifty is over 13000. Now look at the graph, it shows basic trend of Nifty is always up and it has maintained its upward Trend for last 18 years. But unfortunately Nifty is not a stock, but it is an index of a group of stocks.

Closing price chart of Nifty with 50  month moving average
Nifty 50 monthly closing price chart, reference Economic Times of India

The above graph is showing Nifty index’s monthly closing price in y axis and month & years in x axis. The red line is showing 50 month exponential monthly moving average.

If you observe the chart closely you will find the following observations:

1. Lowest closing price on 2003 – Rs 934

2. Closing price on 19 Dec 2020 – Rs 13320

3. Return in 18 years (13320/934)*100 =1426%= your money is multiplied 14 times

4. Long term Trend of Nifty is always up for last 18 years.

A Proof of Failure of Technical analysis

Technical analysis states when price falls below long term moving average, it becomes a strong indication to sell (ie strong bearish market) but if you look at the chat, as soon as the the price falls below 50 month moving average ( the red line) , it indicates upward movement of nifty 50 is going to start soon. This means Bearish market is in its last phase and bulls are ready to start their new journey. So, technical analysis will confuse you in multiple phases.

About Nifty 50 stocks

This part of the article is constructed with the reference of an article of Economic Times of India

How is a stock excluded/ included in the Nifty Index?

1. What is the criteria for inclusion in the benchmark Nifty index?

The stock should have traded for 90 percent of the observations at an average impact expense of 0.5 percent or less over the last six months and should also have at least twice the float-adjusted market capitalization of the current smallest index constituent. The business must be domiciled and traded on the stock exchange in India. To be eligible for inclusion, the stock must be available for trading in the futures and options section on the NSE. Other factors that are considered to include a stock in an index are market capitalisation, liquidity and trading frequency.

2. What gives rise to index exclusion?

In order to check the current index constituents twice a year, a list of new qualifying stocks is drawn up and if any adjustments are to be made, the smallest con stituents are withdrawn and new stocks are substituted. In the case of a spin-off, merger or takeover, exclusion can also happen.

3. When will the modifications take place?

On a semi-annual basis, the index is re-balanced and the ex adjustment gives four weeks before any adjustments to the index are made.

4. Who’s determining which stock is going to be part of Nifty?

As a group company of the National Stock Exchange of India, India Index Services and Products owns and operates 67 indices under the Nifty name, including the Nifty index. The Index Management Subcommittee has been created by IISL, which makes all decisions on index inclusions and exclusions.

5. After the changes are made, does the index level change?

No. If a stock is replaced by another stock in the index, the index divider is changed so that the adjustment in the market value of the index resulting from inclusion and exclusion does not change the amount of the index.

6. Will Nifty become part of Differential Voting Rights?

IISL revised its stock selection requirements in February 2016 to include Differential Voting Rights (DVRs) of shares in the index. The first DVR to be included in the Nifty was Tata Motors DVR, as a result of which it has 51 shares, but the number of companies remains at 50.

The Secret of 18 years of long term bullish run of Nifty 50

The persons controlling Nifty 50 are big investors and great influential persons. They have good relations with many institutional investors. They will never allow the High weightage stocks of Nifty 50 to fall permanently. After all share price is based on demand and supply. So they will manage more buyers to buy those High weightage stocks resulting in sharp increase in share price. So I can guarantee that Nifty will touch 1 Lakh in next 10 years.

# Which shares constitute Nifty 50

Below is the list of Nifty 50 Stocks. Weightage of 2020 that are included in Nifty 50 Index along with weightage sorted on the basis of percentages updated on December 1, 2020 for November closing.

HDFC Bank Ltd. – 11.21%
Reliance Industries Ltd. – 11.17%
Housing Development Finance Corporation Ltd. – 7.23%
Infosys Ltd. – 7.21%
ICICI Bank Ltd. – 5.84%
Tata Consultancy Services Ltd. – 5.04%
Kotak Mahindra Bank Ltd. – 5.00%
Hindustan Unilever Ltd. – 3.42%
ITC Ltd. – 3.03%
AXIS Bank Ltd. – 2.67%
Larsen & Toubro Ltd. – 2.45%
Bajaj Finance Ltd. – 2.33%
Bharti Airtel Ltd. – 1.99%
Asian Paints Ltd. – 1.79%
State Bank of India – 1.68%
Maruti Suzuki India Ltd. – 1.67%
HCL Technologies Ltd. – 1.60%
Mahindra & Mahindra Ltd. – 1.24%
Nestle India Ltd. – 1.14%
Dr. Reddy’s Laboratories Ltd. – 1.05%
Titan Company Ltd. – 1.02%
Sun Pharmaceutical Industries Ltd. – 0.99%
UltraTech Cement Ltd. – 0.99%
Tech Mahindra Ltd. – 0.97%
Bajaj Finserv Ltd. – 0.95%
Wipro Ltd. – 0.93%
HDFC Life Insurance Co. Ltd.- 0.91%
Power Grid Corporation of India Ltd. – 0.88%
IndusInd Bank Ltd. – 0.87%
Divi’s Laboratories Ltd. – 0.82%
NTPC Ltd. – 0.82%
Tata Steel Ltd. – 0.78%
Britannia Industries Ltd. – 0.77%
Bajaj Auto Ltd. – 0.74%
Hero MotoCorp Ltd. – 0.72%
Cipla Ltd. – 0.68%
Eicher Motors Ltd. – 0.63%
Grasim Industries Ltd. – 0.62%
JSW Steel Ltd. – 0.62%
Hindalco Industries Ltd. – 0.59%
SBI Life Insurance Co. – 0.59%
Shree Cement Ltd. – 0.58%
Tata Motors Ltd. – 0.58%
Adani Port and Special Economic Zone – 0.54%
Bharat Petroleum Corp. Ltd. – 0.54%
Oil & Natural Gas Corporation Ltd. – 0.51%
Coal India Ltd. – 0.47%
UPL Ltd. – 0.41%
Indian Oil Corporation Ltd. – 0.38%
GAIL (India) Ltd. – 0.34%

Select 10 stocks with highest weightage in nifty 50 index

These are the 10 stocks with highest weightage

HDFC Bank Ltd. – 11.21%
Reliance Industries Ltd. – 11.17%
Housing Development Finance Corporation Ltd. – 7.23%
Infosys Ltd. – 7.21%
ICICI Bank Ltd. – 5.84%
Tata Consultancy Services Ltd. – 5.04%
Kotak Mahindra Bank Ltd. – 5.00%
Hindustan Unilever Ltd. – 3.42%
ITC Ltd. – 3.03%
AXIS Bank Ltd. – 2.67%

Download free documents of nifty 50 – dated 27 November 2020

Watching the long term graph of each stock

All the below shown graphs are monthly closing price chart denoted by black zigzag line. The prices shown here are adjusted according to stock splits (declaration of bonus issues by the company). Red line in the graph shows 50 month exponential moving average. Monthly Closing price of 2003 and monthly closing price of November 2020 is denoted in red block letter.

HDFC Bank

monthly Closing price chart of HDFC Bank with 50 month moving average
Monthly closing price chart of HDFC Bank, source Economic Times of India

Reliance Industries

monthly Closing price chart of Reliance industries with 50 month moving average
Monthly closing price chart of Reliance industries, source Economic Times of India

Housing development financial corporation

Monthly closing price chart of HDFC with 50 month moving average
Monthly closing price chart of HDFC, source Economic Times of India

Infosys technology / Infy

Monthly closing price chart of Infy with 50 month moving average
Monthly closing price chart of Infy, source Economic Times of India

ICICI Bank

Monthly closing price chart of ICICI Bank with 50 month moving average
Monthly closing price chart of ICICI Bank, source Economic Times of India

Tata consultancy services

Monthly closing price chart of TCS with 50 month moving average
Monthly closing price chart of TCS, Source Economic Times of India

Kotak Bank

Monthly closing price chart of Kotak Bank with 50 month moving average
Monthly closing price chart of Kotak Bank, source Economic Times of India

Hind Unilever / Hindustan lever

Monthly closing price chart of Hind Unilever with 50 month moving average
Monthly closing price chart of Hind Unilever, source Economic Times of India

ITC limited

Monthly closing price chart of ITC limited with 50 month moving average
Monthly closing price chart of ITC limited, source Economic Times of India

Axis Bank

Monthly closing price chart of Axis Bank with 50 month moving average
Monthly closing price chart of Axis Bank, source Economic Times of India

Common analysis of the above charts

If you look at the above charts and compare it with Nifty index, it will look similar to Nifty index chart.

Rate of return

The rate of return of the investment is far more than Nifty index. It is more than 15 to 20 times of your investment done in 2003. Some of the shares has shown more than 50 times of your investment, specially private bank sector. IT sector(Infy and TCS) too has performed well. ITC and Unilever (FMCG sector) has given moderate gains.

Technical analysis

If you follow the rules of technical analysis, then you are bound to be a loser but if you look at the graph and 50 month moving average, you will realise best time to invest is “when price falls below 50 month exponential moving average – the red line”(just like Nifty index monthly chart)

How to make a safe investment?

Sector wise diversification

Top 10 high weightage shares of Nifty consists of three sectors

1.Bank and Finance sector

2. Tech Sector

3. FMCG sector

So invest one third of your capital in each sector. This will diversify your portfolio and keep your investment safe.

Modification of portfolio

Top 10 high weightage shares will change from time to time. But I would suggest you to modify your portfolio after 18 months. After 18 months include the top 10 highest weighted shares of Nifty index and exclude that are below top 10 ranking.

Invest and forget

Do not watch the share price everyday. This will create a panic inside you when share price starts to fall. It is better to invest and forget about the investment. Many news and rumours will arrive in front of you and it will force you to square up your trade.

Have faith

In the last 18 years these shares have performed miraculously. So 18 years long Trend will not be reversed so easily. News of many economic disbalance will arise in next 15 years. So don’t worry and have strong faith over your investment.

Conclusion

Share market is so volatile that anyone can be confused about the direction of trend. The direction of long term Trend is not so weak compared to short term Trend. So always make long term investment. Remember, no one can become a millionaire overnight. Please comment?

Source of all graphical pictures – Economic Times of India, technical analysis. Check this link to perform your own technical analysis on any stock of National stock exchange of India

How to Buy Stocks to be Successful in Life?

How do you trade without knowing how the market works? With this significant lesson, the beginning of your trade journey starts. You can make good decisions and subsequently benefit only when you study share market analysis or stock market analysis.

What’s the Trend?

The general direction in which the stock is changing is a pattern. The patterns shift upward or downward depending on whether the market is bullish or bearish. For a movement to be called a trend, there is a defined period, so the longer the trend moves (either upward or downward), the more notable the trend becomes.

What is the Study of Trends?

Share Market Analysis of trends in the stock market is the method of evaluating existing trends in order to forecast future trends. Using an overview of share market patterns, you can try to predict whether a specific market segment that is rising now will continue to grow in the future. Or in one specific field, a consumer trend will launch a trend in another. This method requires a lot of data in the study of share market movements, but nobody can reliably forecast trends with a 100 percent guarantee.

Analysis of the share market trend is an element of technical analysis that attempts to forecast a stock’s future movement based on past data. The idea that past movements are windows to future patterns is the foundation of a share market pattern. There are three major categories of developments in the share market: short, intermediate and long-term.

Share Pattern Analysis for the Sector

Share Industry Trend Forecasting seeks to forecast market dynamics. If the forecast trend is a bull market rally, before there is a trend reversal, you can ride it. As an investor, if you step with and not against the trends, you will make money.

Why is study of share market patterns important to you?

In the analysis of share market trends, there is a lot of data involved and we must first determine which sector we need to select in order to begin analysis. The emphasis may be on the type of business, such as the pharmaceutical industry, or on the type of investment, such as the bond market. You can only start analysing it when you pick your market. Both external and internal factors that influence it compose the stock market trend study. Changes in a comparable sector or the implementation of a new government regulation count as market-impacting powers. Analysts then take this knowledge and try to forecast, going forward the path the market will take.
You have to grasp, as an investor, the meaning behind the trend in stock market trading. Similarly, as you wouldn’t drive your car on the wrong side of a one-way lane, it’s advisable not to trade against market patterns.

How is it possible to understand  stock market trend ?

The sequence of price movements must be valid for it to be a meaningful trend and not just a phenomenon, because there is no time period for a movement to be considered a trend. And you should be willing, as an investor, to recognise it. So for the most reliable stock market trend study, here’s a list of 5 rules you can use.

Guiding Direction

In three directions, up down and sideways, patterns will pass. You’ll be able to see all three forms of patterns on the same map if you research prices over a long period of time.

Observe the slope, watch it closely

A trend’s slope shows how much the price can move every day. Steep lines show a certain pattern, going either upward or downward. If the line is too smooth, however, both the validity of the pattern and its predictive powers are called into question.

Timing the trend

The amount of time decides a trend’s validity. Monthly time series are usually of greater significance than weekly rates, which replace daily prices.

Long-term Trends

The longer a pattern stays in place, the bigger the weight it bears.

Best way to invest in stock market

When the long term trend is up( weekly chart) and short term trend is considerabley down(daily chart) , buy the stock maintaining a fixed 2% stop loss limit.

If you thoroughly learn about them and their applications, stock market analysis or equity is a powerful analytical tool that will support your analysis and give you positive results.