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Introduction About Technical Analysis –

Technical analysis is a method used by traders to forecast future price movements

of stocks by analysing past trading activity. Chart patterns and statistical numbers are used
extensively by technical analysts.

On the other hand, technical analysts believe that the fundamental elements of a stock’s
value are already represented in the stock price. In addition, they believe that stock prices
move in identifiable trends over a period of time
As an investor, it is very important to use discretion when applying the principles of
technical analysis for investment decisions. This is especially relevant for beginners in the
stock market.

Study the different technical analysis tools carefully so that you can determine which ones
fit best with your trading strategy

The price movement of a stock (or even the market) can seem quite random. But over a
period of time, trends and price patterns might emerge.
Technical analysts try to exploit these patterns in order to make huge gains in the stock
market. This method is mainly used for short term trading or long-term position buying by
investors

Basics Of Technical Analysis –

Technical analysis is becoming an increasingly popular approach to trading, thanks in part to

the advancement in charting packages and trading platforms. However, for a novice trader,
understanding technical analysis – and how it can help predict trends in the market - can be
daunting and challenging.

Technical analysis is the study of price movements in a market, whereby traders make use of
historic chart patterns and indicators to predict future trends in the market. It is a visual
representation of the past and present performance of a market and allows the trader to use
this information in the form of price action, indicators and patterns to guide and inform
future trends before entering a trade.

This technical analysis beginners guide will introduce you to the basics of this trading
approach, and how it can be used to trade the financial markets

Many traders have found technical analysis to be a useful tool for risk-management, which
can be a key stumbling block. Once a trader understands the concepts and principles of
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technical analysis, it can be applied to any market, making it a flexible analytical tool. Where
fundamental analysis looks to identify intrinsic value in a market, technical analysis looks to
identify trends, which conveniently can be caused by the underlying fundamentals.

Benefits of using technical analysis include the following:

 Can be applied to any market using any timeframe

 Technical analysis can be used as a standalone method
 Allows traders to identify trends in the

Types Of Charts –

The main chart types used by most traders are the Line Chart, Candlestick Chart, Renko
Chart, and Point and Figure charts. These charts are plotted either on arithmetic or
logarithmic scale and the analyst then chooses either depending on the information required

Technical charts help traders take an informed decision while making a financial commitment
in the markets. They are a graphical representation of historical price, volume, and time
intervals.

Over the years, several researches have co-related chart with technical tools like moving
average, trendlines, and technical indicators. Types of charts The main chart types used by
most traders are the Line Chart, Candlestick Chart, Renko Chart, and Point and Figure charts.
These charts are plotted either on arithmetic or logarithmic scale

We are doing analysis based on two types of charts

- Line Chart

- Candlestick Chart

What Is Line Chart –

A line chart is a graphical representation of an asset's historical price action that connects a
series of data points with a continuous line. This is the most basic type of chart used in
finance, and it typically only depicts a security's closing prices over time. Line charts can be
used for any timeframe, but they most often make use of day-to-day price changes

KEY TAKEAWAYS
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 A line chart is a type of chart that displays information as a series of data points
connected by straight line segments.
 A line chart is a way of visually representing an asset's price history using a single,
continuous line.
 A line chart is easy to understand and simple in form, typically only depicting only
changes in an asset's closing price over time.
 Because line charts usually only show closing prices, they reduce noise from less
critical times in the trading day, such as the open, high, and low prices.

Understanding Line Charts

A line chart gives traders a clear visualization of where the price of a security has traveled
over a given time period. Because line charts usually only show closing prices, they reduce
noise from less critical times in the trading day, such as the open, high, and low prices. Line
charts are popular with investors and traders because closing prices are a very commonly
viewed piece of data related to a security

What is Candlestick Chart: -

A candlestick is a type of price chart used in technical analysis that displays the high, low,
open, and closing prices of a security for a specific period. It originated from Japanese rice
merchants and traders to track market prices and daily momentum hundreds of years before
becoming popularized in the United States. The wide part of the candlestick is called the "real
body" and tells investors whether the closing price was higher or lower than the opening price
(black/red if the stock closed lower, white/green if the stock closed higher)

KEY TAKEAWAYS
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 Candlestick charts are used by traders to determine possible price movement based on
past patterns.
 Candlesticks are useful when trading as they show four price points (open, close,
high, and low) throughout the period of time the trader specifies.
 Many algorithms are based on the same price information shown in candlestick
charts.
 Trading is often dictated by emotion, which can be read in candlestick charts
Example Of Candlestick Chart

Candlestick Analysis: -

In candlestick analysis we are majorly focus on candlestick patterns,

Let’s understand how candle is form

It’s very important to understand the parts of candle

Open, High, Low, Close, Candle Body.

For
Example
–
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When Close Price is higher than opening price in that case Green/Bullish Candle will form.

When close price is lower than opening price in that case Red/Bearish will Candle

Candlestick Patterns

1 Bullish Engulfing: -

What is Bullish Engulfing Pattern?

Bullish Engulfing Candlestick Pattern generally forms at the bottom of a downtrend , during
a decline or near a potential support. Basically, it is made up of two candlestick or can say it
takes 2 days for the pattern to formed.

1. Day 1 (Smaller Bearish Candlestick): On Day 1, a bearish candlestick (Open price is

higher than the close price) is formed shown as red candlestick in the Figure.
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2. Day 2 (Larger Bullish Candlestick): On Day 2, a bullish candlestick (open price lower than
the close price) is formed which completely covers or engulfs the body of bearish candlestick
formed on Day 1, shown as green candlestick in the below Figure.

2 Bearish Engulfing:

As we seen in Bullish engulfing that second bullish candle completely engulfs previous
candle

In bearish engulfing second bearish candle completely engulf first candle

Below image indicates bearish engulfing pattern,

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Note: - While doing trading in engulfing candlestick pattern try to find such formation at
bottom and top for better results, because it indicates trend reversal.

For Example

3 Bullish Harami :

This is two candlestick patterns in which second candle forms inside of previous candle,

Generally, such type of formations helpful for picking oversold stocks

Next image indicates bullish-harami pattern:

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4 Bearish Harami: In Bearish Harami pattern second first candle forms inside of previous
candle then bearish harami pattern forms.

For example

Bearish harami indicates downtrend, this is also one of the trend reversal patterns.

That’s why try to do such type trade at top for better results.

5 Hammer:
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In above image clearly hammer is explained, color doesn’t matter in hammer, when open and
high is same of any candle in that case red color hammer forms.

If close and high is same in that case green color hammer form.

One thing is common in both type of image is long bottom shadow which indicates buying
pressure at bottom levels

Types Of Chart Patterns:-

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Head & Shoulder Pattern Example –

Inverse Head & Shoulder Pattern –

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Exactly reverse of head & shoulder Pattern which is used to identify uptrend

Double Bottom- used for identify Uptrend

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CPR Time cycle

15 mins time – For Day Trading

1 hour time - For one week

1 day time – For 1 Month

1 week time – For 1 Year

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Pivot Points

There are two types of pivot points we are using while trading & investing.

Standard Pivot points

Fibonacci Pivot points (90% of the time using)

For example
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How To Trade with Those Pivot Points.

For Example

Use exactly reverse strategy while short selling.

Oscillators:
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• Relative Strength Index (RSI): The RSI is part of a class of indicators

called momentum oscillators.
• What is momentum?
Momentum is simply the rate of change – the speed or slope at which a stock or
commodity ascends or declines.
• For example,
(Assume that you were riding in a friends’ car, not looking at what was
happening ahead but instead just at the speedometer. You can see when the car
starts to slow down and if it continues to do so you can reasonably assume it’s
going to stop very shortly. You may not know the reason for it coming to a
stop…it could be the end of the journey, approaching and intersection or
because the road is a little rougher ahead. In this manner watching the speed
provides a guide for what may happen in the future.)

Note – There are two types of methods one can use while using RSI,

- Commonly 20-30 is considered as oversold zone, where pullback is

expected, (kindly check any formation in such types of zones) and 75-80 is
overbought zone, where can book longs or make new short where some
profit booking expected (SL is Must)
- In second Method you can buy when RSI starts moving above 60, And book
profit when RSI at 75-80, If RSI starts moving below 40 then take short
position and exit when RSI at 25-30.
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• Moving Average Convergence/Divergence (MACD)

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MACD stands for Moving Average Convergence / Divergence. It is a

technical analysis indicator created by Gerald Appel in the late 1970s. The
MACD indicator is basically a refinement of the two moving averages
system and measures the distance between the two moving average lines.
• The MACD indicator is basically a refinement of the two moving
averages system and measures the distance between the two-moving
average. The standard setting for MACD is the difference between the 12
and 26-period EMA.
• Use of MACD lines
MACD generates signals from three main sources:
• Moving average crossover
• Centerline crossover
• Divergence

Crossover of fast and slow lines:

• Go long when the fast line crosses above the slow line.
• Go short when the fast line crosses below the slow line.

• Center line crossover:

• A bullish centerline crossover occurs when MACD moves above the zero
line and into positive territory.
• A bearish centerline crossover occurs when MACD moves below zero
and into negative territory.
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• Divergence: An indication that an end to the current trend may be near

occurs when the MACD diverges from the security. A positive
divergence occurs when MACD begins to advance and the security is still
in a downtrend and makes a lower reaction low.
• A negative divergence forms when the security advances or moves
sideways and MACD declines.
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• Moving averages

One of the most common and familiar trend-following indicators is the moving
averages. They smooth a data series and make it easier to spot trends, something
that is especially helpful in volatile markets.

2 Types of Moving Averages:

SMA (Simple Moving Average)

EMA (Exponential Moving Average

• Uses of moving averages
There are many uses for moving averages, but three basic uses stand out:

• Trend identification/confirmation
• Support and resistance level identification/confirmation
• Trading systems

200 DMA – mostly used by investor to identify right investment

opportunity
For Example
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Along With It – 50DMA, 150DMA also used to identify the entry and
exit points

For short term

5 DMA
9 DMA
20 DMA
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Option Basics: -

Derivative is a contract that derives its value from the value of an

underlying.
Options are contracts where only one party (writer/seller) is committed.
The other party (buyer) has the option to exercise the contract at an agreed
price (Strike price), depending on how the price of the underlying moves.
The option buyer pays the option writer a premium for entering into the
contract.
Option contracts to buy an underlying are called “call” options; “put”
options are contracts to sell an underlying.

Two types of Options: - 1-Call (CE), 2- Put (PE)

- Call (CE): -

If Market is bullish then call premium will increase and put premium will
decrease

In that case two methods can be useful

1- Buying a Call
2- Selling PUT

- PUT (PE): -

If market is bearish then PUT premium will increase and call premium

Will decrease

that case two methods can be useful

1 – Buying a PUT

2- Selling CALL

Here are a few jargons that we will look into

 Strike Price
 Underlying Price
 Exercising of an option contract
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 Option Expiry
 Option Premium
 Option Settlement
 Option Valuation
Options can be said to have two values

Intrinsic value

How to calculate intrinsic value

Price of underlying asset – Strike price = IV

Time value.

How to calculate time value

Time Value = Option premium-intrinsic value

The strike price is the price at which a buyer of a call option can buy the
security while for put options it is the price at which the security can be sold.
The strike price is fixed in the contract and does not fluctuate with any change
in the underlying script.

The strike prices are decided by the exchange based on the volatility in the
underlying script which previously was decided based on the denomination of
the script.

The difference between underlying securities current spot price and strike price
represents the profit /loss that the trader makes upon sale or exercise of the
option.

ITM Options (In the money options)

a) A call option is said to be in ITM if the strike price is less than the current
spot price of the security.
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I.e., Spot- Strike > 0

b) A put option is said to be ITM if the strike price is more than the current spot
price of the security.

I.e., Spot- Strike < 0

ATM Options (At the money options)

a) A call option is said to be in ATM if the strike price is equal to the current
spot price of the security.

I.e., Spot- Strike = 0

b) A put option is said to be ATM if the strike price is equal to the current spot
price of the security.

I.e., Spot- Strike = 0

OTM options (Out of the money options)

a) A call option is said to be in OTM if the strike price is more than the current
spot price of the security.

I.e., Spot- Strike < 0

b) A put option is said to be OTM if the strike price is less to the current spot
price of the security.

I.e., Spot- Strike > 0

Let us consider an example to understand it better.

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Option Greeks: -

Greeks, which show the sensitivity of the value of an option to various

parameters.

 Delta – Measures the rate of change of options premium based on the

directional movement of the underlying
 Gamma – Rate of change of delta itself
 Vega – Rate of change of premium based on change in volatility
 Theta – Measures the impact on premium based on time left for expiry

Delta: -
 Delta is an Option Greek that captures the effect of the direction of the
market
 Call option delta varies between 0 and 1, some traders prefer to use 0 to
100.
 Put option delta varies between -1 and 0 (-100 to 0)
 The negative delta value for a Put Option indicates that the option
premium and underlying value moves in the opposite direction
 ATM options have a delta of 0.5
 ITM option have a delta of close to 1
 OTM options have a delta of close to 0.

Gamma: -
 Gamma captures the rate of change of delta, it helps us get an answer for
a question such as “What is the expected value of delta for a given change
in underlying”
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 Delta is the 1st order derivative of premium

 Gamma is the 2nd order derivative of premium
 Gamma is always a positive number for both Calls and Puts.
 Large Gamma can translate to large gamma risk (directional risk)
 When you buy options (Calls or Puts) you are long Gamma.
 When you short options (Calls or Puts) you are short Gamma
 Avoid shorting options which have a large gamma.
 Delta changes rapidly for ATM option.
 Delta changes slowly for OTM and ITM options.

Theta:- The Theta or time decay factor is the rate at which an option
loses value as time passes.
 Option sellers are always compensated for the time risk
 Premium = Intrinsic Value + Time Value
 All else equal, options lose money on a daily basis owing to Theta
 Time moves in a single direction hence Theta is a positive number
 Theta is a friendly Greek to option sellers
 When you short naked options at the start of the series you can pocket a
large time value but the fall in premium owing to time is low
 When you short option close to expiry the premium is low (thanks to time
value) but the fall in premium is rapid.

Vega: -

The Vega, as most of you might have guessed is the rate of change of option
premium concerning the change in volatility.

 Historical Volatility is measured by the closing prices of the stock/index

 Forecasted Volatility is forecasted by volatility forecasting models
 Implied Volatility represents the market participants expectation of
volatility
 India VIX represents the implied volatility over the next 30 days period
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Long Straddle: Long straddle is perhaps the simplest market neutral

strategy to implement.

Buy a Call option

Buy a Put option
Ensure –
 Both the options belong to the same underlying
 Both the options belong to the same expiry
 Belong to the same strike
For Example
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Short Straddle: Short straddle is opposite to the Long Straddle strategy.

Sell a Call option (ATM)
Sell a Put option (ATM)
Ensure –
 Both the options belong to the same underlying
 Both the options belong to the same expiry
 Belong to the same strike
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The Long & Short Strangle: The strangle is an improvisation over the
straddle. The improvisation mainly helps in terms of reduction of the strategy
cost, however as a tradeoff the points required to breakeven increases.
 Long Strangle Short Strangle
 Buy OTM Call Sell OTM Call
 Buy OTM Put Sell OTM Put

The Iron Condor: The iron condor is an improvisation over the short strangle
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Buy the far OTM call option

Sell the OTM Call option
Buy the far OTM PUT
Sell the OTM PUT option

In iron condor strategy we decide market range for the particular expiry

For example, if we are expecting market range for the august 2022 exp

In between 17000 to 18000, in that case following steps

In above image we will analyse the possibilities

If market close in the area within 17000 -18000 then

Our max profit will be selling premium = 100+100=200(received premium)

Paid premium minus (16800 and 18200) = 50+50 =100(paid premium)

Net profit = 100 points

Max loss if market goes out of our selected range i.e 17000& 18000 then
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i.e if market close at 18200 then 18000 CE will become = 200

and 18200 ce will be 0, here we lose 100 points in 18000 CE and 50 point in
18200 ce total loss will be 200(18000 ce) + 50 (18200 ce i.e. 0 on expiry)-
received premium 100 = 150

and in PE Side both 17000 and 17200 will be 0

where we will get 100 -50 =50 points profit

summery we gain 50 points in PE side and Lose 150 points in CE side

net loss is around = 150 -50 = 100

benefit of iron condor is probability of gaining trades is nearly 65-75%, also it

hedges your trade that reduces your risks in volatile markets as well
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What IS fundamental Analysis: -

Fundamental Analysis is used for identifying a stock/security actual value by studying related
economic and financial parameters,

Intrinsic/real value is the value of an investment bases on the issuing company’s financial
conditions,

Fundamental analyst study anything that can be affect stocks value,

Such as, company management,

By doing fundamental study we can understand whether the particular stock is undervalued
or overvalued.

Use of fundamental analysis: -

- To understand real or fair market value.

- to understand current market price is lower or higher that real

value,

- Financial Performance of particular company,

Few Fundamental Points to Consider while doing analysis

Company Business Model

What exactly does the company do?

In which business they are dealing with,

What is the current and future demand of that particular companies? Like there products and
services.

Also, can check the pear comparison of that industry.

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Management

Management is most important part for investing in a company,

It makes sense because if the best business model doomed if the companies’ leaders fail to
execute plan properly.one can look at the corporate websites and check the data of top board
members,

Corporate Governance

Corporate governance describes the policies in place within an organization denoting the
responsibilities and relations between management, directors, and stakeholders.

If you want do business with the company that is run ethically, fairly, transparently and
efficiently. That need good corporate governance.

Industry

Its also important to consider a company’s industry

Its customer base,

Market share from among firms,

Industry growth, competition, regulation and business cycles.

Company’s Balance Sheet

The balance represents a record of company’s asset liabilities, equity at a particular point in
time,

Asset = Liabilities + Shareholders Equity

The Income Statement

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Income statement measures company’s performance over the specific time frame, you could
have a balance sheet for month or even one day, but you will see public companies report
quarterly or annually.

Statements of Cash flows

The statement of cash flows represents a record of a business' cash inflows and outflows
over a period of time. Typically, a statement of cash flows focuses on the following cash-
related activities:

 Cash from investing (CFI): Cash used for investing in assets, as well as the
proceeds from the sale of other businesses, equipment, or long-term assets
 Cash from financing (CFF): Cash paid or received from the issuing and borrowing
of funds
 Operating Cash Flow (OCF): Cash generated from day-to-day business operations

The cash flow statement is important because it's challenging for a business to
manipulate its cash situation

Book Value

KEY TAKEAWAYS

 A company's book value is the amount of money shareholders would receive if assets
were liquidated and liabilities paid off.
 The market value is the value of a company according to the markets based on the
current stock price and the number of outstanding shares.
 When the market value is less than book value, the market doesn't believe the
company is worth the value on its books.
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 A higher market value than book value means the market is assigning a high value to
the company due to expected earnings increases.
 When using book value and market value to evaluate companies against each other,
it's important to compare companies within the same industry