STOCK MARKET

INTRODUCTION

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Dipak Sharma
 STOCK MARKET
INTRODUCTION

WHAT IS STOCK
Stocks consist of all the shares by which ownership of a corporation or
company is divided. A single share of the stock means fractional
ownership of the corporation in proportion to the total number of
shares.

WHAT IS STOCK
MARKET
The stock market refers to public markets that exists for issuing,
buying, and selling stocks that trade on a stock exchange or over the
counter. Stocks, also known as equities, represent fractional ownership
in a company, and a stock market is a place where investors can buy
and sell ownership of such investable assets.

What is the purpose of the Stock Market?

The first is to provide capital to companies that are listed in the stock
market so that they can use it to fund and expand their businesses.
Like- If a company issues one million shares of stock that initially sell
for Rs.10 a share, then that provides the company with Rs.10 million of
capital that it can use to grow its business.

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The two primary stock

markets in India
National Stock Exchange
The National Stock Exchange of India (NSE) is
one of the leading stock exchanges in India. It
was established in 1992 and is located in
Mumbai.

Bombay Stock Exchange

The Bombay Stock Exchange (BSE) is the oldest
stock exchange in Asia and one of the premier
stock exchanges in India. Established in 1875, it
is located in Mumbai.

The two depositories in India

National Securities Depositories Ltd (NSDL)

SEBI
(Securities and Exchange Board of India)

The role of SEBI in India is to regulate and promote the following

entities: Issuers of securities- These are the companies and
corporations that list their stocks on the stock market for open trade
and raising capital for expansion. SEBI ensures that the process of IPO
initial public offering is smooth.

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Who is a broker ?
Brokers—also known as trading members—perform a vital function in
the stock market. They execute transactions such as the buying and
selling of stocks on behalf of their clients. In return for this, they
charge a brokerage commission.

What is Demat account ?

A demat account is an Indian term for a dematerialized account that
holds financial securities digitally and to trade shares in the share
market. In India, demat accounts are maintained by two depository
organizations: the National Securities Depository Limited and the
Central Depository Services Limited.

What is Trading account ?

A trading account is a digital account that is used to do buying and
selling in the online market. You can also say a trading account
provides a link between your trading account and your demat
account. The funds you add are also transferred through your trading
account.

What is Saving account ?

A savings account is a bank account at a retail bank. Common
features include a limited number of withdrawals, a lack of cheque
and linked debit card facilities, limited transfer options and the inability
to be overdrawn.

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09:15 am to 03:30 pm
Monday to Friday

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Options to make money in

stock market
INVESTING
Investing in stocks means buying shares of ownership in a public
company. Those shares are called stock. If a stock you own becomes
more valuable, you could earn a profit if you decide to sell it to
another investor

INTRADAY
Buying and selling shares on the stock exchange on the same day are
known as Intraday trading. As buying and selling happen on the same
day, it is also known as day trading. The prices of shares keep moving
up and down during the day, the trader makes a profit from the
movement of the share price.

FUTURES
Futures are derivative financial contracts obligating the buyer to
purchase an asset or the seller to sell an asset at a predetermined
future date and set price. A futures contract allows an investor to
speculate on the price of a financial instrument or commodity.

OPTIONS
Options trading is a form of investment that involves the buying and
selling of financial contracts called options. Options give the holder the
right, but not the obligation, to buy or sell an underlying asset at a
predetermined price within a specific timeframe.

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 STOCK MARKET
TERMS

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Stock market important terms

Portfolio
A collection of investments owned by the investor is called portfolio. An
investor may have just one stock or multiple securities in a portfolio. It
contains a diverse range of financial instruments
like shares, bonds, futures, options, etc.

Derivative
A derivative is a financial instrument that derives its value from the
underlying asset or group of assets. Futures and options are examples
of derivatives. Usually, underlying assets are market indexes,
shares, commodities, currencies..

Nifty or Nifty 50
Nifty 50 is a basket or collection of the 50 largest most active stocks
listed on NSE. It helps investors gauge the overall market sentiments.
The term Nifty 50 is a combination of National Stock Exchange and
Fifty (50).

Sensex or Sensex 30
Sensex is BSE’s flagship index. It is a basket of 30 biggest, most actively
traded stocks listed on the BSE. The term Sensex is a combination of
sensitivity index.

Futures
Futures are financial contracts to buy or sell an asset at an agreed-
upon future date at a predetermined price. They are often used to
protect against price fluctuation of the underlying asset or help prevent
or minimise losses from unfavourable price movements. It can also be
used as a leveraged to speculate on the price movement of the
underlying asset and profiteer from it. Futures contract are traded in lot
sizes having different expiry dates and set prices that are known to the
investor at the time of the contract itself. There are many types of
futures contracts, such as commodity futures, stock futures, currency
futures, etc.

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Options
Options are financial contracts that provide the buyer the right but not
the obligation to buy or sell the underlying asset at a predetermined
price on or before the maturity date. Options are traded in lots. The
specified price is known as the strike price. The amount paid in
exchange for acquiring the right to buy or sell the underlying asset is
known as option premium. In case the buyer does not exercise this
right, his loss is limited to the option premium, he has paid. In case of
the seller, the potential losses that can be incurred by him are limitless;
however, the profit is limited to the option premium paid by the buyer
in case the buyer refuses to exercise his right. There are two types of
options: Call options and Put options.

Call Option
A call option gives the buyer the right but not the obligation to buy an
underlying asset at the strike price on or before the expiry date. The
buyer of a call option speculates that the market is bullish, and the
prices of the underlying asset will increase. If at the expiry date, the
price of the underlying asset is below the strike price, the buyer refuses
to exercise his right. His loss is limited to the premium paid. If the price
of the underlying asset is above the strike price, the profit is the current
stock price minus the strike price, multiplied by the lot size, with the
premium deducted as a cost of the call option.

Put Option
A put option gives the buyer the right but not the obligation to sell an
underlying asset at the strike price on or before the maturity date. The
buyer of the put option expects the price of the underlying asset to go
down. If the price of the underlying asset is below the strike price, the
gain is the difference between the strike price and current price of the
stock, multiplied by the lot size. In case the strike price is above the
stock price, the buyer loses the premium paid.

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Open Interest
Open interest refers to the total number of outstanding derivative
contracts that are yet to be settled. From the time the buyer and seller
initiate the contract until the counter-party closes it, the contract is
termed to be open. Open-interest provides an accurate picture of the
derivatives trading activity and whether the money rolling in the
derivative market is rising or declining.

Annual Report
Annual Report is the financial assessment of the company. It provides a
sneak peek at the financial condition and operations of the company.
Annual report is intended to provide shareholders with in-depth
knowledge of various parameters that constitute the performance of
the company in a specified financial year. It is an overview of the
company’s operations and its intended or unintended results in the
past or previous financial year. The annual report is scrutinised by
investors to determine the future potential of the company based on
past performance. Annual reports contain a basic description of the
industries the company is part of, audited statements of income,
financial situation, cash flow, and may even include management’s
discussion and analysis, the market price of the stock and dividends
paid. It can be described as the resume of the company with reference
to the previous financial year.

Arbitrage
Arbitrage is the simultaneous purchase and sale of the same securities
in different markets to benefit from the momentary price variations
prevailing in different markets. Arbitrage ensures that the minor price
differences in the same securities in different markets are eliminated,
leading to uniformed prices across market exchanges.

Moving Average
Moving Average is the average price per share for a specific period of
time. Some standard time frames are 200 days, 100 days and 50 days
moving averages.

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Averaging down
Averaging down is carried out when the investor acquires more stock
as the price of the stock steadily declines after the initial purchase,
resulting in lower average cost per share. It is undertaken by an
investor when he feels that the share is trading lower than the
perceived value, and the general consensus of the market is wrong.

Bear Market
Bear Market is the industry-specific jargon which indicates a downward
trend in the overall condition of the market. It means that the
cumulative market prices of the stocks listed on the stock market are
declining. If the stock price of a particular stock is plunging, it’s
considered to be bearish. Bear Market is typically caused by investors’
pessimism, fear and negative sentiments about the market or the
economy.

Bull Market
Bull Market is the exact opposite of Bear Market. It means that the
market is on an upward spiral. It is a result of investors’ palpable
excitement and optimism about the market or the economy. It means
that the aggregate market prices of the stocks are rising.

Active Return
Active Return refers to the excess returns generated by the portfolio as
compared to the benchmark, index or market as a whole. Active
returns are the additional returns outside the purview of the portfolio
exposure to risks and returns to the investments benchmark, index or
market and is a consequence of the portfolio’s strength and the active
management decisions taken by the portfolio manager, i.e. the
deliberate decision to underweight or overweight the assets.

Volatility
Volatility refers to the degree or the extent in fluctuation in the prices of
the stock. Highly volatile stock witness abnormal highs and lows during
the trading session, while low volatile stocks experience ups and downs
to a lesser degree. Investing in highly volatile stocks can result in
enormous gains or tremendous losses.

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Beta
Beta measures the volatility in the prices of the stock as compared to
the overall movement of the market.. If the stock has a beta value of 2,
it means for every 1 point change in the entire market, the prices of the
stock change by 2 points. So if the stock market declines by 1 point, the
price of the stock will decrease by 2 points and vice-versa. The beta is
an important measurement to gauge the risk a stock is adding to a
portfolio. High beta stocks are risky as they are more volatile to the
swings of the market; however, there is a higher return potential.
Similarly, low beta stock presents a lower risk but correspondingly lower
returns as well.

Alpha
Alpha is the relative return on investment as compared to the overall
market, or the benchmark index. Alpha shows how well or poorly a
stock has performed in comparison to the overall market. Sometimes, a
stock may provide a nominal rate of return such as 5% but that 5%
would be the result of the general movement in the market and not an
actual barometer of the performance of an investment. Hence, Alpha is
a precise measurement of performance of a stock independent of the
market movements. Alpha tracks the historical active return of an
investment. Therefore an Alpha of 10% means that the investment
outperforms the overall market by 10%. Similarly, -10% means that
investment underperforms the overall market by 10%.

Blue Chip Stocks

Blue Chip stocks belong to the top 100 well-established companies
which have high market capitalisation with an array of high-quality,
widely accepted products and services. These companies often have a
history of providing hefty dividends to their shareholders and are
appreciated for their sound and effective management practices. They
often drive and lead the market in times of a booming economy and
optimistic investors’ sentiments. Blue chip stocks have an envious
record of stable and reliable growth in the times of adverse market
conditions and economic downturns. They represent a significant
chunk in the stock market, and the movement in the prices of these
stock can have outsized ramifications on the overall trend of the
market.
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Broker
The broker is an intermediary between the stock exchange and the
investors or traders who facilitate the transfer of funds and shares in
exchange for a commission. A broker is a middleman that facilitates the
trade between the buyers and sellers. A broker can also refer to a firm
when it acts as an agent of the investors and arranges transaction
between the buyers and sellers. The firm charges specific fees for these
services.

Bid
The bid is the maximum amount a buyer is willing to pay to acquire a
stock. A buyer may purchase stock only if the price does not exceed
the bid price he has placed.

Ask
Ask is the minimum amount a holder of a security is willing to sell for. A
seller will sell the security only if the bid price matches or exceeds the
ask price.

Close
The close refers to the time when all the trading and investing activities
ceases. The closing time of the stock markets in India is 3.30 pm. The
closing prices of the day are determined during this time which has a
significant bearing on the next day’s opening price.

Absolute Returns
Absolute Return is simply the rate of return on an investment attained
over a specific period. It basically measures the gain earned, and loss
suffered expressed as a percentage over the initial investment over a
particular period.

Internal Rate of Return

Internal Rate of Return is the rate at which the future cash flows are
discounted to arrive at the net present value of 0. The Internal rate of
returns assumes that the cash flows are periodic increments to an
investment. It is an important metric to estimate the profitability of
potential investments.

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Extended Internal Rate of Return (XIRR)

Extended Internal Rate is the internal rate of return on total investment
in case of inconsistent cash flows because of erratic increments and
redemptions occurring throughout the investment lifespan. XIRR is
applicable when there are cluttered and multiple transactions occurring
at various times spread over a period of time. Hence, External Internal
Rate of Returns reflects the real-life scenarios as compared to Internal
Rate of Return when it comes to mutual funds.

Dividend
A dividend is an amount distributed to the shareholders of the
company, in proportion to the shares held by them. A dividend is the
reward to the shareholders for placing trust in the management and
believing in the potential of the company through the invested amount,
and it often originates from a company’s net profits. However, the
distribution of dividends is not guaranteed; a company can keep the
entire profit to itself as retained earnings. The investor may choose to
reinvest the dividends and increase his shareholdings in the company
or may choose to receive it in cash. Also, a company may still distribute
dividends even if it has not made any profits just to maintain the
established and steady record of making periodic dividend payments.

Index
Stock Market Index typically tracks the aggregated movement in the
prices of all the shares listed in the stock market as compared to the
previous day prices to determine the market performance. It may also
track the cumulative movement in the prices compared to the past
prices of a hypothetical portfolio of a basket of securities belonging to
a particular industry or collated and grouped based on market
capitalisation. It serves as an indicator of changes in the stock market.
The index serves as a benchmark for evaluating the active returns of a
portfolio. It serves as a reference against which to assess the
performance of a portfolio.

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Initial Public Offering

Initial Public offering is the initial offering or sale of securities to the
public. Here the owners or private investors sell their ownership in the
company and offer it for sale to the public. IPO is the route for the
companies to raise capital for future growth and development. Initial
Public Offering is one of the main reasons for the existence of the stock
market.

Leverage
Leverage in the stock market means borrowing capital to invest in
more shares than one is financially capable of buying with the singular
motive to boost profits. Leverage means amplification of comparatively
smaller investment force into a correspondingly greater profit. Leverage
can result in exponential gains; however, it can also result in massive
losses.

Margin
A margin account allows the investor to borrow money from the broker
to buy additional securities. The difference between the total value of
securities in the investor’s Demat account and loan taken from the
broker is called margin. Trading on margin is leveraging funds to its
utmost use by purchasing additional securities than one can afford.
Hence for a relatively smaller amount, you can buy a correspondingly
greater amount of securities. However, like any leverage, it can result in
massive profits but also can result in significant losses.

Initial Margin
Initial Margin is the amount that the buyer must transfer before he can
borrow money from the broker or before the broker can lend him the
money to buy additional securities. This is the mandatory amount that
the buyer is obliged to transfer before he can buy more securities on
margin. Initial Margin is calculated as a percentage of the total value of
shares in the investor’s Demat account. E.g., if the buyer wants to invest
in 100 shares worth Rs 20, but he cannot afford Rs 2,000, and he has a
margin account with the broker where the initial margin requirement is
50%; he is required to pay Rs 1,000 upfront to the broker before the
broker lends him the balance amount, i.e. Rs 1,000.
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Maintenance Margin
Maintenance Margin is the minimum amount the buyer must maintain
in order to keep the position open. The maintenance margin is
calculated as a percentage of the total investment at the time of
purchase, and the investor must ensure that the market value of the
assets doesn’t fall below the maintenance margin after deducting the
margin requirement. Continuing with the previous example, let’s say the
maintenance margin for Rs 2,000 investment is 40% of the total value,
i.e. Rs 800. Now if the price of the stock drops to Rs 15, then after
accommodating the investor’s 50% margin requirement, i.e. Rs 750, the
balance left is Rs 750. Hence there is a deficit of Rs 50, for the required
maintenance margin. In such a case, the buyer must deposit additional
funds to restore the account to the maintenance margin or liquidate
certain positions in order to meet the maintenance margin
requirements.

Margin Call
Margin Call is the intimation provided by the broker to the seller that
the value of the borrowed funds has fallen below the maintenance
margin and the buyer must either add more funds to the account or
sell off some assets to provide for the difference between the equity
share’s current price and the maintenance margin. If you do not meet
the margin call, then the broker will sell off some open positions to
bring the account to maintenance margin requirement.

Short Selling
Short-selling means selling equity shares that the investors don’t own
and are not present in their Demat account. But the investor must
cover his position before the close of the day. So if the price of the
stock that the investor has shorted falls, the investor can buy the shares
at a lower price than the price he had sold them and make a profit.
However, if the price of the stock that the investor has shorted rises, the
trader must honour the obligation of buying back the shares before the
clearing period irrespective of a higher price point and suffer a loss.
Short-selling is based on the speculation that the market is bearish, and
the prices of the shares will fall. The investor profits from declining
prices of stock.
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One-sided market
It refers to rare occurrences wherein a market contains only potential
buyers and potential sellers without both being present simultaneously.
It is a situation where the market is heading in only one direction. In
such a case, the market makers quote only the bid price or only the ask
price.

Pyramiding
Pyramiding is a method of leveraging the hiked up margin to increase
the position size with the appraisal in the margin obtained by utilising
the unrealised profits from the increment in the value of current
holdings of the same security. The investor who uses pyramiding uses
the increased unrealised value of the current holdings to buy more of
the same security. This is usually a slow method of increasing one’s
position size as opposed to purchasing securities on cash as the margin
increments allow for smaller purchases.

Growth Stocks
Growth stocks are considered to have the potential and the ability to
outperform the market in the future. Growth companies have
generated considerable, sustainable, and better-than-average returns
in the market and are expected to continue providing substantial
returns. In simple words, growth stocks are backed by healthy and
consistent earnings and robust performance in the past and are touted
to continue their growth pattern in the future as well.

Small-cap stocks
Most small-cap companies are early start-ups and entrepreneurial
ventures that present the opportunity to earn astronomical returns.
Understandably they are companies with inconsistent returns and low
revenues. Many of these companies can go bust. But at the same time,
many such companies are unicorns that are trading abysmally below
their intrinsic value. The information about these companies is not
readily available. Hence these small-cap stocks are a winner for
investors with a long investment horizon and an appetite for high risks.

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Value stocks
A value stock is a stock that the investor feels is trading at a market
price below their intrinsic value. Value stocks are considered
undervalued but are expected to reach its real inherent value. Value
investing means uncovering the actual intrinsic value of the stocks
through evaluation of financial statements, often ignored intangible
assets, of the concerned company then develop the patience to wait
for the prices to fall below their intrinsic value. Investors purchase value
stocks when they are trading below their intrinsic value and sell them
when the prices reach their true worth. Intrinsic value is the net present
value of all future cash flows expected to be generated through the
lifespan of the business. Warren Buffet, the legendary investor, is the
most successful practitioner of value investing.

Large-cap stock
Large-cap stocks are stocks of well-established companies with a
market capitalisation above Rs 20,000 crores. Large-cap stocks are
generally considered to be low-risk as they have a strong presence in
the market, and have a history of providing potent and stable returns.
Information about large companies is easily accessible. Most of the
companies disclose timely information about the operations, products,
expansion plans through media such as newspapers.

Mid-cap stocks
Mid-cap stocks are stocks of companies with a market capitalisation
between Rs 5,000 crores and 20,000 crores. Mid-cap stocks attract
investors as they provide the possibility of earning exponential returns
in the long-term. However, mid-cap companies are discrete about the
internal operations of the company and expansion plans, as they
endeavour to trump over the competition, and hence are furtive about
the information of the company. This makes it cumbersome for the
investors to judge the potential of the stocks. Therefore, conservative
investors stay away from such stocks.

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 STOCK MARKET
CANDLE STICKS

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What is a candlestick?
A candlestick is a way of displaying information about an asset’s price
movement. Candlestick charts are one of the most popular
components of technical analysis, enabling traders to interpret price
information quickly and from just a few price bars.
This article focuses on a daily chart, wherein each candlestick details a
single day’s trading. It has three basic features:

•The body, which represents the open-to-close range

•The wick, or shadow, that indicates the intra-day high and low
•The colour, which reveals the direction of market movement – a
green (or white) body indicates a price increase, while a red (or black)
body shows a price decrease

Over time, individual candlesticks form patterns that traders can use to
recognise major support and resistance levels. There are a great many
candlestick patterns that indicate an opportunity within a market –
some provide insight into the balance between buying and selling
pressures, while others identify continuation patterns or market
indecision.

BULLISH BEARISH

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Hammer
The hammer candlestick pattern is formed of a short body with a long
lower wick, and is found at the bottom of a downward trend.
A hammer shows that although there were selling pressures during the
day, ultimately a strong buying pressure drove the price back up. The
colour of the body can vary, but green hammers indicate a stronger
bull market than red hammers.

Inverse hammer
A similarly bullish pattern is the inverted hammer. The only difference
being that the upper wick is long, while the lower wick is short.
It indicates a buying pressure, followed by a selling pressure that was
not strong enough to drive the market price down. The inverse
hammer suggests that buyers will soon have control of the market.

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Bullish engulfing
The bullish engulfing pattern is formed of two candlesticks. The first
candle is a short red body that is completely engulfed by a larger
green candle.
Though the second day opens lower than the first, the bullish market
pushes the price up, culminating in an obvious win for buyers.

Piercing line
The piercing line is also a two-stick pattern, made up of a long red
candle, followed by a long green candle.
There is usually a significant gap down between the first candlestick’s
closing price, and the green candlestick’s opening. It indicates a strong
buying pressure, as the price is pushed up to or above the mid-price
of the previous day.

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Morning star
The morning star candlestick pattern is considered a sign of hope in a
bleak market downtrend. It is a three-stick pattern: one short-bodied
candle between a long red and a long green. Traditionally, the ‘star’
will have no overlap with the longer bodies, as the market gaps both
on open and close.
It signals that the selling pressure of the first day is subsiding, and a
bull market is on the horizon.

Three white soldiers

The three white soldiers pattern occurs over three days. It consists of
consecutive long green (or white) candles with small wicks, which open
and close progressively higher than the previous day.
It is a very strong bullish signal that occurs after a downtrend, and
shows a steady advance of buying pressure.

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Hanging man
The hanging man is the bearish equivalent of a hammer; it has the
same shape but forms at the end of an uptrend.
It indicates that there was a significant sell-off during the day, but that
buyers were able to push the price up again. The large sell-off is often
seen as an indication that the bulls are losing control of the market.

Shooting star
The shooting star is the same shape as the inverted hammer, but is
formed in an uptrend: it has a small lower body, and a long upper
wick.
Usually, the market will gap slightly higher on opening and rally to an
intra-day high before closing at a price just above the open – like a
star falling to the ground.

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Bearish engulfing
A bearish engulfing pattern occurs at the end of an uptrend. The first
candle has a small green body that is engulfed by a subsequent long
red candle.
It signifies a peak or slowdown of price movement, and is a sign of an
impending market downturn. The lower the second candle goes, the
more significant the trend is likely to be.

Evening star
The evening star is a three-candlestick pattern that is the equivalent of
the bullish morning star. It is formed of a short candle sandwiched
between a long green candle and a large red candlestick.
It indicates the reversal of an uptrend, and is particularly strong when
the third candlestick erases the gains of the first candle.

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Three black crows

The three black crows candlestick pattern comprises of three
consecutive long red candles with short or non-existent wicks. Each
session opens at a similar price to the previous day, but selling
pressures push the price lower and lower with each close.
Traders interpret this pattern as the start of a bearish downtrend, as
the sellers have overtaken the buyers during three successive trading
days.

Dark cloud cover

The dark cloud cover candlestick pattern indicates a bearish reversal –
a black cloud over the previous day’s optimism. It comprises two
candlesticks: a red candlestick which opens above the previous green
body, and closes below its midpoint.
It signals that the bears have taken over the session, pushing the price
sharply lower. If the wicks of the candles are short it suggests that the
downtrend was extremely decisive.

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Doji
When a market’s open and close are almost at the same price point,
the candlestick resembles a cross or plus sign – traders should look
out for a short to non-existent body, with wicks of varying length.
This doji’s pattern conveys a struggle between buyers and sellers that
results in no net gain for either side. Alone a doji is neutral signal, but
it can be found in reversal patterns such as the bullish morning star
and bearish evening star.

Spinning top
The spinning top candlestick pattern has a short body centred
between wicks of equal length. The pattern indicates indecision in the
market, resulting in no meaningful change in price: the bulls sent the
price higher, while the bears pushed it low again. Spinning tops are
often interpreted as a period of consolidation, or rest, following a
significant uptrend or downtrend.
On its own the spinning top is a relatively benign signal, but they can
be interpreted as a sign of things to come as it signifies that the
current market pressure is losing control.

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Falling three methods

Three-method formation patterns are used to predict the continuation
of a current trend, be it bearish or bullish.
The bearish pattern is called the ‘falling three methods’. It is formed of
a long red body, followed by three small green bodies, and another
red body – the green candles are all contained within the range of the
bearish bodies. It shows traders that the bulls do not have enough
strength to reverse the trend.

Rising three methods

The opposite is true for the bullish pattern, called the ‘rising three
methods’ candlestick pattern. It comprises of three short reds
sandwiched within the range of two long greens. The pattern shows
traders that, despite some selling pressure, buyers are retaining control
of the market.

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CHART PATTERN

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INTRODUCTION

What are Chart Patterns?

Chart patterns put all buying and selling that’s happening in the stock
market into a concise picture. It provides a complete pictorial record of
all trading and a framework for analysing the battle between bulls and
bears.
Chart patterns can help us in determining who is winning the battle,
and also allow traders to position themselves accordingly. Chart
pattern analysis can be used to make short-term as well as long-term
forecasts.
The data used by the chart patterns can be intraday, daily, weekly,
monthly or yearly. Gaps and reversals may form in one trading session,
while broadening tops and dormant bottoms may require many
months to form.

Why is it Important to analyse the Chart Patterns?

Chart patterns are a great way of viewing price actions which occur
during the stock trading period.
Chart patterns tend to repeat themselves over and over again which
helps to appeal to human psychology and trader psychology in
particular.
If you are able to learn to recognize these patterns early they will help
you to gain a real competitive advantage in the markets.

Types of Chart Patterns:

Chart patterns can be basically classified into:

Continuation patterns: These kinds of chart patterns give continuation

signals of the ongoing trend

Reversal Patterns: These kinds of chart patterns give reversal signals

Bilateral Patterns: These kinds of chart patterns shows uncertainty and

high volatility in the market.

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Head and shoulders

Head and shoulders is a chart pattern in which a large peak has a
slightly smaller peak on either side of it. Traders look at head and
shoulders patterns to predict a bullish-to-bearish reversal.
Typically, the first and third peak will be smaller than the second, but
they will all fall back to the same level of support, otherwise known as
the ‘neckline’. Once the third peak has fallen back to the level of
support, it is likely that it will breakout into a bearish downtrend.

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Double top
A double top is another pattern that traders use to highlight trend
reversals. Typically, an asset’s price will experience a peak, before
retracing back to a level of support. It will then climb up once more
before reversing back more permanently against the prevailing trend.

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Double bottom
A double bottom chart pattern indicates a period of selling, causing
an asset’s price to drop below a level of support. It will then rise to a
level of resistance, before dropping again. Finally, the trend will
reverse and begin an upward motion as the market becomes more
bullish.
A double bottom is a bullish reversal pattern, because it signifies the
end of a downtrend and a shift towards an uptrend.

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Rounding bottom
A rounding bottom chart pattern can signify a continuation or a
reversal. For instance, during an uptrend an asset’s price may fall back
slightly before rising once more. This would be a bullish continuation.
An example of a bullish reversal rounding bottom – shown below –
would be if an asset’s price was in a downward trend and a rounding
bottom formed before the trend reversed and entered a bullish
uptrend.

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Cup and handle

The cup and handle pattern is a bullish continuation pattern that is
used to show a period of bearish market sentiment before the overall
trend finally continues in a bullish motion. The cup appears similar to
a rounding bottom chart pattern, and the handle is similar to a wedge
pattern – which is explained in the next section.
Following the rounding bottom, the price of an asset will likely enter a
temporary retracement, which is known as the handle because this
retracement is confined to two parallel lines on the price graph. The
asset will eventually reverse out of the handle and continue with the
overall bullish trend.

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Rising Wedges
Wedges form as an asset’s price movements tighten between two
sloping trend lines. There are two types of wedge: rising and falling.
A rising wedge is represented by a trend line caught between two
upwardly slanted lines of support and resistance. In this case the line of
support is steeper than the resistance line. This pattern generally
signals that an asset’s price will eventually decline more permanently –
which is demonstrated when it breaks through the support level.

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Falling Wedges
A falling wedge occurs between two downwardly sloping levels. In this
case the line of resistance is steeper than the support. A falling wedge
is usually indicative that an asset’s price will rise and break through the
level of resistance, as shown in the example below.
Both rising and falling wedges are reversal patterns, with rising wedges
representing a bearish market and falling wedges being more typical
of a bullish market.

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Pennant or flags
Pennant patterns, or flags, are created after an asset experiences a
period of upward movement, followed by a consolidation. Generally,
there will be a significant increase during the early stages of the trend,
before it enters into a series of smaller upward and downward
movements.
Pennants can be either bullish or bearish, and they can represent a
continuation or a reversal. The above chart is an example of a bullish
continuation. In this respect, pennants can be a form of bilateral
pattern because they show either continuations or reversals.
While a pennant may seem similar to a wedge pattern or a triangle
pattern – explained in the next sections – it is important to note that
wedges are narrower than pennants or triangles. Also, wedges differ
from pennants because a wedge is always ascending or descending,
while a pennant is always horizontal.

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Ascending triangle
The ascending triangle is a bullish continuation pattern which signifies
the continuation of an uptrend. Ascending triangles can be drawn
onto charts by placing a horizontal line along the swing highs – the
resistance – and then drawing an ascending trend line along the swing
lows – the support.
Ascending triangles often have two or more identical peak highs which
allow for the horizontal line to be drawn. The trend line signifies the
overall uptrend of the pattern, while the horizontal line indicates the
historic level of resistance for that particular asset.

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Descending triangle
In contrast, a descending triangle signifies a bearish continuation of a
downtrend. Typically, a trader will enter a short position during a
descending triangle – possibly with CFDs – in an attempt to profit from
a falling market.
Descending triangles generally shift lower and break through the
support because they are indicative of a market dominated by sellers,
meaning that successively lower peaks are likely to be prevalent and
unlikely to reverse.
Descending triangles can be identified from a horizontal line of
support and a downward-sloping line of resistance. Eventually, the
trend will break through the support and the downtrend will continue.

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Symmetrical triangle
The symmetrical triangle pattern can be either bullish or bearish,
depending on the market. In either case, it is normally a continuation
pattern, which means the market will usually continue in the same
direction as the overall trend once the pattern has formed.
Symmetrical triangles form when the price converges with a series of
lower peaks and higher troughs. In the example below, the overall
trend is bearish, but the symmetrical triangle shows us that there has
been a brief period of upward reversals.
However, if there is no clear trend before the triangle pattern forms,
the market could break out in either direction. This makes symmetrical
triangles a bilateral pattern – meaning they are best used in volatile
markets where there is no clear indication of which way an asset’s price
might move. An example of a bilateral symmetrical triangle can be
seen below.

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SUPPORT AND RESISTANCE

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The Resistance
Resistance is the price level at which selling is thought to be strong
enough to prevent the price from rising further. Logic dictates that, as
the price advances towards resistance, sellers become more inclined to
sell and buyers become less inclined to buy. By the time the price
reaches the resistance level, it is believed that supply will overcome
demand and prevent the price from rising above resistance.
Resistance does not always hold; a break above resistance signals that
the bulls have won out over the bears. A break above resistance shows
a new willingness to buy and/or a lack of incentive to sell. Resistance
breaks and new highs indicate buyers have increased their
expectations and are willing to buy at even higher prices. In addition,
sellers could not be coerced into selling until prices rose above
resistance or above the previous high. Once resistance is broken,
another resistance level will have to be established at a higher level.

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The Support
Support is the price level at which demand is thought to be strong
enough to prevent the price from declining further. The logic dictates
that as the price declines towards support and gets cheaper, buyers
become more inclined to buy and sellers become less inclined to sell.
By the time the price reaches the support level, it is believed that
demand will overcome supply and prevent the price from falling below
support.
Support does not always hold, however, and a break below support
signals that the bears have won out over the bulls. A decline below
support indicates a new willingness to sell and/or a lack of incentive to
buy. Support breaks and new lows signal that sellers have reduced
their expectations and are willing sell at even lower prices. In addition,
buyers could not be coerced into buying until prices declined below
support or below the previous low. Once support is broken, another
support level will have to be established at a lower level.

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Trend Lines
Trend lines are straight lines that connect two or more price points on
a chart to identify and confirm trends.
In technical analysis, trend lines are a fundamental tool that traders
and analysts use to identify and anticipate the general pattern of price
movement in a market. Essentially, they represent a visual depiction of
support and resistance levels in any time frame.
The importance of trend lines in technical analysis lies in their ability to
provide a clear visual representation of market trends and potential
reversal points, which can help traders make informed trading
decisions. They provide a simple yet effective means to identify and
anticipate market behaviour.

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THANK YOU !!!

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