BSE-NSE Ticker

Friday, June 28, 2013

Market Technicals

What is Nifty and how trading is done?

  1. Nifty (S&P CNX Nifty) is the Index of Indian share market on NSE (National Stock exchange) like Sensex on BSE (Bombay Stock Exchange)
  2. Trading is done on Nifty contract which is also called as Nifty future derivative.Nifty derivative movement is based on Nifty index.In stock market language it is called as “underlying of Nifty future contract is S&P CNX NIFTY Index.”
  3. Nifty Lot Size - Nifty derivative consist of a lot of 50 quantities of Nifty. So if you want to buy Nifty contract then you have to buy at least one lot.The trading in Nifty contract is done in lots.
  4. Nifty Expiry - The Nifty derivative expires every last Thursday of the month. In India we have three month future derivatives for trading.For example - In the month of October, we have October, November and December month Nifty derivative for trading. Current month derivative will have more liquidity (more volumes) as compared to other two months derivatives. A new contract is introduced on the trading day following the expiry of the current month contract. If the last Thursday is a holiday then contracts expire on the previous trading day.

Advantages of trading in Nifty

  1. Trader get margin to trade on Nifty. For example - Nifty derivative consist of 50 quantity of Nifty index so the cost of one lot will become Rs 2,63,000 [50 qty of Nifty multiple by the closing price of Nifty index, which is 5260 current closing (15 Jan 2010)]. Please note - You need to have 15% amount of the entire cost to trade in Nifty future contract. Approximately it comes to Rs 35,000. b) Small traders can even buy Mini lot of Nifty contract which consist of 20 quantities of Nifty. To buy one lot of Nifty mini lot, you need approximately Rs 11,000.
  2. You can do day trading (Intraday trading) as well as carry forward (hold your nifty positions) till the expiry period of your contract (minimum one month expiry and maximum three month expiry)
  3. You can trade both sides of the Nifty means if you feel market is going up then you can buy Nifty contract and if you feel market is going to fall then you can short sell Nifty and later buy it to cover up your positions.
  4. Very Low brokerage rates. Low brokerage rates increases your profit percentage. We are offering 0.01% for buying and 0.01% for selling. If you are interested to open the Demat account with us then please Contact us.
  5. High liquidity - Very high volumes are traded in Nifty future contract which will make the trader to square off at any time and at any price. ie.Based on your trading position your account will get adjusted on daily basis as per the closing price of Nifty derivative contract.
    For Example - If you buy one lot of Nifty at 5200 and Nifty closes at 5250 then Rs 50 as profit (total profit will become 50 qty x Rs 50 = Rs 2500) will get credited in your account. On the other hand if Nifty went down Rs 50 then Rs 2500 will be debited from your account.
    If you do not have balance in your trading account then very next day your position will be squared off by your broker. Some brokers provides some extra days to transfer money in your trading account.
  6. If you buy and sell on a same day then the profit and loss will be adjusted in your trading account accordingly.
  7. Trader has to square off the positions before or on expiry. If you does not square off then the contract expires on the expiry date and the money gets adjusted in your account.
  8. You can buy and sell Nifty derivative contract in your trading account/terminal. Separate account is not required.

Risk Involved in Nifty trading

Trading in Nifty future is a risky, heavy loss can occur. Basically trading involves big risk either you trade in Nifty future or in any other future contract or in stocks. Trading requires lot of experience and market knowledge. Investing and trading are two different factors in share market. Investing is not as risky as trading.

Technical Analysis

Technical Analysis is the study of prices and volume, for forecasting of future stock price or financial price movements. Technical analysis can help investors anticipate what is "likely" to happen to prices over time.
Technical analysis is not an exact science. It's an art and takes considerable experience. But don't worry everyone with each knowledge can learn it.
Technical Analysis is based on these three basic principles:
1 - Price Discounts Everything
Technical analysts believe that the current price fully reflects all information. Because all information is already reflected in the price, it represents the fair value, and should form the basis for analysis. After all, the market price reflects the sum knowledge of all participants, including traders, and …
Stock Market Technical analysis utilizes the information captured by the price to interpret what the market is saying with the purpose of forming a view on the future.
2 - Prices Move in Trends
Technical analysts or chartists believe that profits can be made by following the trends. In other words if the price has risen, they expect it to continue rising; if the price has fallen, they expect it to continue falling. However, most technicians also acknowledge that there are periods when prices do not trend.
3- History Repeats Itself
Technical analysts believe that investors en masse repeat their behavior and they assume that there is useful information hidden within price histories; that it is a way of analyzing the past actions of people in a particular market as reflected by their actual transactions.
Technical Analysis Tools
Every technical analyst needs charts and indicators to study market. Three common types of charts are used by investors: Line Chart, Bar Chart and Candlestick Chart.
Line Chart is formed by plotting one price point, usually the close, of a security over a period of time. Connecting the dots, or price points, over a period of time, creates the line.
Bar Chart is drawn by high, low and closing price. Sometimes, bar charts are drawn by opening price. In this case, bearish bars are drawn with another color.
Candlestick Chart A form of Japanese charting that has become popular in the West. A narrow line (shadow) shows the day's price range. A wider body marks the area between the open and the close.

Technical Indicators

Technical indicators are the basis of technical analysis. There are dozens of technical indicators, how to choose good stock indicators? Technical indicators are used to know when to enter or exit a trade. If you know how to enter and exit a trade, you can easily make profits. That is why choosing good stock indicators are important.
Some of stock indicators are more common and useful than others. Also you need a few of them to know when to enter or exit a trade not all off them.
Technical indicators can be divided into four major categorizes:
1- Price Indicators: Oscillators, Bollinger Bands
2- Trends
3- Number Theories: Fibonacci numbers, Gann numbers
4- Waves: Elliott's wave theory
Price Indicators are computed by prices data. A subcategory of Price Indicators is oscillators. Oscillators are indicators that are usually computed from prices and tend to cycle or oscillate within a fixed or limited range.
Common oscillators are: Momentum and Rate of Change (ROC), Moving Average Convergence/Divergence (MACD), Relative Strength Index (RSI), and Stochastic Oscillator.

Momentum and Rate of Change (ROC)

Momentum is an oscillator designed to measure the rate of price change, not the actual price level. This oscillator consists of the net difference between the current closing price and the oldest closing price from predetermined period.
The formula is:
Momentum (M) = CCP OCP
Where: CCP is Current Closing Price and OCP is Old Closing Price
Momentum is simply the difference, and the ROC is a ratio expressed in percentage. Momentum and Rate of Change (ROC) are simple indicators showing the difference between today's price and the close N days ago. Momentum in general term means strongly movement of prices in a given direction.

Moving Average Convergence/Divergence (MACD)

MACD is computed by subtracting a longer moving average from a shorter moving average. MACD is used with a signal or trigger line, which is a moving average of MACD. If MACD and trigger line cross, then this indicate that a change in the trend is likely. MACD developed by Gerald Appel.
The MACD smoothes data, as does a moving average; but it also removes some of the trend, highlighting cycles and sometimes moving in coincidence with the market.

Relative Strength Index (RSI)

RSI measures the relative changes between up-moves or down-moves and scales its output to a fixed range, 0 to 100. RSI is an oscillator and Welles Wilder devised it.
The formula for calculating RSI is:
RSI = 100 [100/ (1+RS)]
Where: RS is average of N days up closes, divided by average of N days down closes and N is predetermined number of days that usually chosen 14.
RSI can use as an overbought/oversold indicator. A buy signal is when the RSI moves below a threshold, into oversold territory, and then crosses back above that threshold, usually 30 is taken for oversold threshold. A sell is signaled when the RSI moves above another threshold, into overbought territory, and then crosses below that threshold, usually 70 is taken for overbought threshold.

Technical Indicators - part 2

In this page you will be familiar with two indicators: an oscillator that is Stochastic Oscillator and Bollinger Bands indicator.
As I mentioned before, Oscillators are technical indicators that tend to cycle or oscillate within a fixed or limited range, and Momentum in general term means strongly movement of prices in a given direction.

Stochastic Oscillator

The Stochastic Oscillator is a momentum indicator, it indicates whether the market is moving to new highs or new lows or is just meandering in the middle. This indicator is based on George Lane’s observations.
The Stochastic Oscillator is plotted in two lines Fast %k and Fast %D.
The formula is:
Fast %k = 100 * [( C L (n) ) / ( H (n) L (n) )]
C is the most recent closing price.
L (n) is the low of n previous trading day (or bar).
H (n) is the high price of the same n previous day (or bar).

Usually n is chosen 14.

A 3-period (day or bar) moving average is taken from Fast %k and called Fast %D. Fast %D is used as a signal line in the same way that the moving average of the MACD is used as a signal line for the MACD.
Stochastic Oscillator is plotted in two lines but, usually these lines cross each other many times. Now to smooth the chart, a 3-period moving average is taken from Fast %D and called Slow %D (Also, Fast %D is called Slow %K), so the smoothed chart is plotted with Slow %K and Slow %D.

Using of Stochastic Oscillator

1- Oscillators are used as an overbought/oversold indicator. A buy is signaled when the oscillator moves below 20, and then crosses back above 20. A sell is signaled when the oscillator moves above 80, and then crosses below 80.
2- Also, when %K crosses above or below %D, Buy and sell signals can be given. But, may be crossover occurs frequently in short periods and causes bad results. This using isn't very common.

Bollinger Bands

John Bollinger created Bollinger Bands in the 1960s; Bollinger Bands are used to determine support and resistance levels. This indicator consists of three lines; the middle line is an exponential moving average of price data and the two outside bands are equal to the moving average plus or minus standard deviation.
Standard Deviation is a statistical measure that indicates volatility of price. The bands will expand when price becomes volatile and they will contract during less volatile periods.

Using of Bollinger Bands

1- Bollinger Bands are used to determine the boundaries of market movements. If a market moved to the upper band or lower band, then there was a good chance that the market would move back to its average. In the other words, when price closes to upper band, market is overbought and when price closes to lower band, market is oversold.
2- Another using of Bollinger bands is that to indicate up-trends and down-trends. If price deflects off the lower band and crosses above moving average then price fluctuate between upper band and moving average, it comes to indicate upper price target. It is visa versa to indicate lower price.

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