Basic candlesticks for absolutely beginners.

Common mistakes made by novice and amateur traders in the stock markets.

How many commonly known trading mistakes have you committed in your trading.....

• Traded blindly without any homework or trading plans (poor discipline). 
• Traded impulsively or at a no-trade zone (poor or no trade plan). 
• Traded without Stop Loss or with too big Stop Loss (poor Risk Management). 
• Traded way too many trades in a day resulting net losses - over trading. (poor Risk and Money Management).  
• Traded against the trend and then booked losses (poor Plan and Risk Management). 
• Traded with the trend but booked small profit and too early. 
• Traded with good plan (mm, rm, plan, discipline) but with no confidence in the plan resulting less profit to cover other big losses. 
• Traded booking small profits and big losses. 
• Traded at Market Price in less volume scrips resulting big losses. 
• Traded on speculations, rumour or news and getting trapped in market makers game resulting in big losses. 
• Traded with fear/greed and without knowing risk/reward ratio. 
• Traded on others tips resulting huge losses. 
• Traded after reacting to watching CNBC or US/Europe NEWS and resulted in losses. 
• Trading not knowing and realising which time frame suits your personality. 
• Averaging and overleveraging losing position and selling in panic.  
• Converted intraday or swing trades into short term and long term without reasons.  
• Revenge trading. Unable to bear losses and then traded more and more to recover the loss.......nearly wiping out your account.
  
• Holding on to a losing position and trying to justify the trade which has gone against you.Using mental stop 
• Trying to exit a trade on a larger timeframe than the one entered in to. 
• Hoping and praying that a losing trade will turn a winner – praying to god! Reluctance to accept reality and changing your opinion of the market. 
• Not analysing loosing trades and not trying to LEARN lessons from it..... repeating same mistakes over and over.

-CP
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Learn,earn and have fun!

P.S. Do jot down any questions or comments below and share as needed.

Dow Theory - hybrid, market participants and why markets move?

Fundamental Analysis v/s Technical analysis.

People often ask me how they can become a better investor/trader or even a professional one.

Most people think you can make money ONLY when the market is going up.

 However, most don't know how to make money when the market goes down.That art/science is called as short selling(Pl see the video to understand the concept better).

They also ask me the difference between Fundamental and Technical analysis.

The answer also lies in understanding the difference between fundamental and technical investing.


Fundamental Analysis.

A fundamental investor seeks value and growth by looking at the financials of the company.For the fundamental stock investor, the most important consideration for selecting a good stock for investment is the future earnings potential of a company.

A fundamental investor carefully reviews the financial statements of any company before investing in it. He or she also takes into consideration the outlook for the economy as a whole, as well as the specific industry in which the company is involved, and the direction of interest rates.

Technical Analysis.

A technical analyst invests looking at the emotions of the market.The most important consideration for selecting a good stock is based on the supply and demand for the company’s stock.For that, they study the price of the company.

The technical analyst studies the patterns of the price of the company’s stock.Patterns of the price denotes the emotions in the market.Will the supply of the shares be more than Demand or Vice versa?

Large institutions buy/sell stock depending on careful and detailed fundamental analysis of the stock.When  they buy/sell, a demand and supply is created for that stock.Technical analysis detects that demand /supply and helps in decision making.

So,Simply put,

Fundamental analysis will tell you the 'business' of the company and how well that 'business' is conducted.For that you need to read and understand balance sheet/annual report.

Technical analysis will tell you if people in the markets are buying / selling and the emotions of the market.Your decisions then will be based on what others are doing in the market at that point.

Both styles need formal education and learning.

Do mention your comments or questions below and share as needed.Thanks.

- Chetan Potdar
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The Elliot Wave Principle

Traders, Investors and Gamblers.....

................difference between Trader, Investor and a Gambler.


Different people - different opinions. If I ask you wether you are a “trader” or an “investor”- you may say, I am “long term” investor without even understanding what it means.

Here’s my take on this subject.

An investor is usually a “buy and hold” types. He lives on hope. He buys a security and hopes that the price will go up. He does his “fundamental analysis” (whatever little that he does)and falls in love with his/her investment.

 Even when the price of security is going down, he doesn’t believe in selling it because he is convinced about his analysis. He doesn’t believe in timing the market but a strong believer in “valuation” and “growth” of companies whose securities he owns.

 If his analysis turns out to be true, he makes money in the “long term”. Otherwise, he ends up losing badly.


A trader is usually an “opportunistic ” person who believes in inefficient market theories. He believes that markets are driven by human emotions like greed/fear and due to demand / Supply.

No stock is fairly priced at any point of time. He tries to take advantage of these mispricing and profit's from the excessive “greed” and “fear”.


A trader always uses “probability”. He never uses words like “should” or “will”. He know's that no one can predict the markets and he never even tries. Like the markets “will” do this or the markets “should” do that. It is always, something “may” happen or “may not”. He is always optimistic that a trade might work out but turns into a “realist” when it doesn’t.

 He changes his opinion as many times as the market changes its direction. That’s how he always manages his risk and believes in cutting his losses. Traders take ‘directional” bets and also use some “leverage” to enhance their returns.

 Traders also use “market timing” techniques to get an edge in the market. A trader can choose to trade a “single market” or “multiple markets” like stocks, commodities, currencies, etc. Trading multiple markets helps him reduces his risk.


Usually when we hear the word “trader” we start thinking of “short term traders or intra day traders” who buy and sell 50 times in a day.

Contrary, Swing trading last for 5-7 days, Position trading last for a month and long term trading often last for 3- 12 months. So difference between a “trader’ and an “investor” is not the time frame but rather the difference in their thinking, approach and attitudes.

 Next are category of people who calls themselves “investors” or “traders” but are actually gamblers.

They say that they are in the markets to “make money” but actually are in the market “for excitement”. They treat markets like a “casino”. They DO NOT have any EDGE in the markets. They look for new ideas everyday, they buy and sell lots of securities everyday.


They DO NOT understand risk! They get on a “high” when they are winning and then they start to overtrade. This results in heavy losses and they get into “depression” when they lose money. In order to “recover” their money, they double their bets and lose even more! In the end, they lose their money and confidence.


So, simply put.....

If you are only interested in Buying / Selling and your profits - you are a Trader.

If you are interested in understanding the "Business" of the company AND invest in the business of the company by doing "Fundamental Analysis", you are a Investor.

However, if you are not interested in either and the hard work the above requires but simply wants to become rich very quickly - you are simply a Gambler.

- CP.
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Learn,earn and have fun!

P.S. Do jot down any questions or comments below and share as needed.

Learn Short Selling - Quick,easy explanation.

Learn Short Selling!

DON'T PREDICT THE MARKETS ,TRADE THEM!

Very often students ask me to predict the markets ( eg. what happens tomorrow with NIFTY?).

 No one can predict markets, No one!

Actually no one can predict anything in life.Except god men, astrologers, magicians and liars ( And I haven't seen many such rich people.)

Markets, however can be anticipated by using intelligence and most importantly can be traded to make money.

Trading is a process which gets over only when you successfully have the money out of the market and starts when you have the money in your account.Taking calculated decisions is what investing/trading is all about.


Similarly like, you can predict the bowler and the ball in cricket BUT you can 'PLAY' the ball.

Education and training helps the process.

Trading is very different from technical analysis (TA)- also called charting.It is a much higher concept of which technical analysis is a small part.

What, when, how much and what not to do after reading the charts is called trading.Adding, managing and removing money ( positions) from the market is called trading.

It is a dynamic process and changes with the market conditions.Its like playing chess with the markets and is amazingly stimulating on an intellectual level and greatly rewarding - financially and emotionally.

What differentiates charting and trading is the the emotional part. Physiology and cultivated emotional response mechanism is what either makes or looses money.

Trades/Investments have to be planned;TA is mere observation of the markets and to find out what is happening in the markets now ( as opposed to predicting the markets).

Once you know what is happening in the markets NOW with as much possible accuracy is that you can anticipate them.

Trading is the culmination of the following concepts.

 Hi risk reward ratio, demand supply, gamblers fallacy, Cognitive biasing, Inverse pyramiding, stop losses, Regression to mean, Martingale,.....

How many such do you know ......?

-CP.
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Learn, Earn , have Fun!

Books for trading / investing in the stock market.

.....So, knowing that Trading in the markets is not really gambling,.....here are few books which will help you learn the skill to Invest / trade.

1.Technical Analysis of Stock Trends, 10th Edition  
Robert D. Edwards,  John Magee and W.H.C. Bassetti

2.Technical Analysis The Complete Resource for Financial Market Technicians, 2nd Edition  
Charles D. Kirkpatrick  and Julie R. Dahlquist

3.Technical Analysis Explained, 5th Edition  
Martin J. Pring

4.The Definitive Guide to Point and Figure, 2nd Edition
 Jeremy du Plessis

5.Investment Psychology Explained  
Martin J. Pring

6.Technically Speaking
Chris  Wilkinson

7.Evidence-Based Technical Analysis  
David R. Aronson


8.Technical Analysis for the Trading Professional, 2nd Edition  
Constance M. Brown

9.Japanese Candlestick Charting Techniques, 2nd Edition  
Steve Nison

10.The Evolution of Technical Analysis  
Andrew W. Lo


11. Behavioural Technical Analysis: An introduction to behavioural finance and its role in technical analysis.  
Paul V. Azzopard

12.Trading in the Zone  
Mark Douglas

13.Disciplined Trader  
Mark Douglas


14.The Trading Book: A Complete Solution to Mastering Technical Systems and Trading Psychology   
Baiynd, Anne-Marie


15.How to trade in stocks?  
Jessie Livemore


16.Encyclopedia of Chart Patterns
Thomas N. Bulkowsk


17.Trading Classic Chart Patterns  
Thomas N. Bulkowsk


18.Technical Analysis of Financial Markets  
John J. Murphy

Do post your questions / comments....... share liberally.

- CP
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Learn, Earn, have Fun!

Revitalize your killer instinct and be that bear!

Here is what one is most likely to find in a bear trader's manual on how to profit from short selling.

• Go after companies with weak or worsening fundamentals.

• Look for problems in the balance sheet (too much debt, for one).

• Target promoters who are over-leveraged (having pledged a big chunk of their shares).

• More specifically, aim for promoters who love punting in their own stock.

• Stocks with a combination of weak fundamentals, eligible for futures & options trading, and a market-cap crazy promoter, are ripe for short selling.

• If possible, find out from the market or from a source at the financier (where the promoter has pledged shares) the trigger point for margin calls.

• If the stakes are high, it even pays to have a mole in the target company who can pass on vital information about the promoter’s counterattack plan.

• Check the general sentiment in the market. Short sales have the maximum impact when the overall outlook (both on the economy and the market) is bearish.

• If all these conditions are satisfied, just go ahead and start hammering the futures indiscriminately.

And that is exactly what bear traders seem to be doing at the moment.

Companies where stock prices have plunged dramatically (prompting howls of protest from the promoters) satisfy many or even all of the above mentioned conditions.

And whatever the promoters’ claims, bears cannot hope to profit unless the company’s fundamentals are weak the overall market trend, bearish.

Here is how massive short selling of futures triggers a slide in the stock price. Stock futures always trade at a slight premium to spot price, and this gap is usually constant, except in very volatile market conditions.

Many traders make a small but low risk profit by short selling stock futures and simultaneously buying an equivalent quantity of shares, in what is known as cash-futures arbitrage.

Assume the stock future is quoting at Rs 101 and the stock at Rs 100. The trader will sell the future, buy the share, and lock the one-rupee profit. On expiry day of the contract, the trader will reverse the transaction i.e, he will buy the future and sell the share. As long as the gap between the futures and the spot price is same (irrespective of the prices at the time of expiry), the trader is ensured of his profit of one rupee. That is because any profit/loss on one leg of the trade will be offset by the loss/profit on the other leg.

What bear traders try and do is to short sell the futures so much that the futures start quoting at a discount to spot price, instead of the other way round. This then triggers a reverse arbitrage trade, as players try to cash in on this differential. Assume now the stock is available for Rs 100, and the stock future for Rs 99.

Those owning the shares will sell them, and buy an equivalent quantity of futures, thus locking in the profit. As the supply of shares in the market increases, the stock price starts to slip. And as the gap between futures and spot is usually constant, the futures price will also start to slip, benefitting traders who have short sold the futures.

If the promoter has pledged a sizable chunk of his shares, the weakness in stock price will trigger margin calls, wherein he has to either deposit more shares as collateral or return a part of the money he has borrowed. If the promoter is unable to meet the margin call, the lender will dump his shares, causing the stock price to crash.

There have been a few instances when bear cartels have actually have maximized their profits by timing their sell trades to perfection. In 2009, bears increased their short positions in the stock of a non-conventional energy major after getting to learn that the promoter had stepped on to a flight to Europe to mobilize funds.

The stock fell below a trigger price, prompting many lenders to dump it and caused a complete rout. The bears would not have been so aggressive if the promoter was around, because they knew he could somehow support the stock price temporarily. But his travel plan was leaked to the bears, who then made a nice meal of the stock.

-CP/ Invest-mints

Learn, Earn, have Fun!

How do the stock markets REALLY work.....Market cycles.

In financial markets, the “majority is always wrong.”

When the investing majority or the crowd is overly bearish, this is the best time to be buying stocks. When the crowd is overly exuberant, this is the time to be selling stocks.

The financial markets always work in this ironic way.


The Start of a Bull Market 

The bottom of the market starts at a time when the stock market is weak and the general population is pessimistic.

At this point most investors sell after having endured a long and torturous bear market. This extreme pessimism found at a bottom is always irrational and undeserved. Now the market is undervalued and is a bargain. Savvy investors, the “smart money”, buy bargain stocks knowing that they will be able to sell them higher in the near future.

Smart money buying, called accumulation, causes stocks to rise.

The smart money often consists of operators, and corporate insiders (promoters of companies). These traders have access to information that the general public does not.

Rising stocks is eventually noticed by institutional investors, as billions are introduced into the market place. Mutual fund investment causes the stock market to advance in a powerful manner. Much of the steady large trends are powered by institutional investors. After the stock market has gained, stocks are now fairly valued and are no longer considered bargains. The smart money is now sitting on a large profit, as well. The average investor is still skeptical, however.

As bull market events unfold, retail investors begin to take interest in stocks.

Retail investors, or the unsophisticated little guy, make up the vast majority of investors. This group does not invest for a living. Retail investors often make investment decisions based on what they read in financial magazines, from their brokers and from tips from friends. As the flood of retail capital is invested, the market soars, causing great euphoria. At this point in the cycle, many companies become public, or launch an IPO. Companies go public when investor sentiment is most optimistic so as to gain the highest possible stock price.

IPO’s generate even more optimism as unsophisticated investors buy into the fallacious thoughts of instant riches. Now is the time when many small investors become wealthy. In this phase, stocks are doubling and tripling as the media cheers on the advancing bull market.

At this point, the smart money sells, or distributes, the now overvalued stocks to overconfident retail investors.

The smart money knows that overvalued stocks are no longer worthy investments, and will soon drop in value. Widespread greed always occurs, in some form, at stock market tops. Sometimes this greed takes form as stock market scams and fraud. These immoral activities can take place because irrational retail investors will buy a stock simply because it is glamorous.

To compound the problems, investors will now start to use margin, or leverage, to further accelerate gains. All caution is thrown to the wind as "investors" think “the old rules don’t apply”.

The Start of a Bear Market

After mutual funds and retail investors are fully invested, the market is overbought.

This means that there is no more cash to fuel the rally. The market can only go in one direction: down. All it takes is just a hint of negative news and the market collapses under its own weight. Up trends are fueled by greed , but down trend is only fueled by fear.Investors quickly realize the market is made of smoke and mirrors, as frauds or other scams come to light.

When panic selling starts, a market will always fall quicker than it had risen.

Oftentimes, as everyone heads for the exit at the same time, there isn’t anyone willing to buy the stock. This can be especially disastrous for margin users as they grow deeply indebted to their brokers. Bankruptcy is the usual result for these foolish gamblers. The majority of retail investors don’t sell even as the market is plummeting. This crowd keeps holding on to stocks in hopes that the market will recover.

As the market plummets 25%, then 50% the average retail investor foolishly holds on, in complete denial that the bull market is over. Finally retail investors sell every stock they own plummeting the market even further. Markets are never risky.Its your attitude, beliefs,thought and behavior in the markets that are risky.The only way to correct these points are by continuous education.


The Cycle Starts Again


It is at this point that stocks are undervalued once again.

The smart money is accumulating and stocks rise.

The majority of retail investors bought at the top and sold at the very bottom. This is the very essence of the “dumb money”. They are perpetually late into the game. This cycle continues over and over. Only the smart money actually “buys low and sells high”.

After trading in this manner, the dumb money will adhere to adages such as, “the stock market is risky”, the downward trending stock is "Fundamentally good" stock.

In reality, however, the stock market is only risky if you trade like the mindless majority!

Do share this note as you need with your family and friends.


- CP / Invest-mints
Learn, Earn and have fun.

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