idiots guide to stocks

IDIOTS GUIDE TO STOCK TRADING

Who are you?

• Investor?

• Trader?

• Intraday Trader?

Investor

• Long term growth

• Fundamental Analysis

• Can live with short term uptrends and downtrends

Trader

• Short term view

• Technical Analysis

• Studies and Makes the most out of market trends

Intra Day Trader

• Short term view

• Technical Analysis

• Closes out all open positions overnight

• glamorized as an easy path to riches

• SEC warns “Day Traders suffer severe loss in the first months of trading”

Fundamental Analysis• Study economic value of the stock

• Factors used are Economic, financial and other qualitative and quantitative factors

• underpriced = buy, overpriced = sell or short

• Key areas considered are Revenue, Earnings, Future growth, ROI, Profit margins

• Depends mainly on financial statements of the company (Balance sheet, Cash flow statement, P&L statement)

Technical Analysis

• Doesn’t care for the value of the company

• Price movements and trends are fundamental to this analysis

• Study of Supply and Demand

• Analyzing the statistics generated by past prices and volume

Contd… (Technical Analysis)

• Rely on chart patterns

• Rely on Indicators and Oscillators

• Combination of patterns, indicators and oscillators.

• Three most important things– Market discounts everything– Price moves in trends– History tends to repeat

Trends… (Technical Analysis)

• Trends– Uptrends– Downtrends– Sideways/Horizontal trends

• Trend lengths– Short-term trend– Medium-term trend– Long-term trend

Contd… (Technical Analysis)

• Trendlines – represents the trend in the market or stock

• Support – Price level in which stock has difficulty in falling below.

• Resistance– Price level in which stock has difficulty to break through (up or down).

Volume… (Technical Analysis)• Volume – Number of shares that trade at a given period of

time (Typically a day)

• Confirms trends

• Confirms patters

• High volume and price movement is stronger

• If Relationship between volume and price starts to deteriorate it’s a sign of weakness in trend

Chart Types… (Technical Analysis)

• Chart Types– Line Chart– Bar Chart– Candlestick Chart– Point and Figure chart

Patterns… (Technical Analysis)

• Reversal – Head and Shoulders– Double Tops and Bottoms

• Continuation – Cup and Handle

Patterns… (Technical Analysis)

• Triangles– Symmetrical– Ascending– Descending

• Flag and Pennant

Patterns… (Technical Analysis)

• Wedge – Continuation or Reversal

• Gap – difference in price

• Triple tops and bottoms

Patterns… (Technical Analysis)

• Rounding Bottoms

Moving Averages… (Technical Analysis)• Simple Moving Average - Sum of all of the past closing prices over the time

period and divides the result by the number of prices used in the calculation

• Linear Weighted Average - sum of all the closing prices over a certain time period and multiplying them by the position of the data point and then dividing by the sum of the number of periods

• Exponential Moving Average - This moving average calculation uses a smoothing factor to place a higher weight on recent data points

• Trend Reversal– The first common signal is when the price moves through an important

moving average– when one moving average crosses through another.– A move through a major moving average is often used as a signal by

technical traders that the trend is reversing

Indicators… (Technical Analysis)• Crossover - Crossovers are the most popular and are reflected when either the

price moves through the moving average, or when two different moving averages cross over each other.

• Divergence - when the direction of the price trend and the direction of the indicator trend are moving in the opposite direction

• Moving Average Convergence Divergence (MACD)– When the MACD is positive, it signals that the shorter term moving average

is above the longer term moving average and suggests upward momentum. The opposite holds true when the MACD is negative

– When the MACD line crosses over the centerline, it signals a crossing in the moving averages

– most common buy signals is generated when the MACD crosses above the signal line (blue dotted line), while sell signals often occur when the MACD crosses below the signal.

Indicators… (Technical Analysis)• Relative Strength Indicator –

• RSI helps to signal overbought and oversold conditions• A reading above 70 is used to suggest that a security is overbought• A reading below 30 is used to suggest that it is oversold

• OversoldA situation where the price of an asset has fallen to such a degree - usually on high volume - that an oscillator has reached a lower bound. This is generally interpreted as a sign that the price of the asset is becoming undervalued and and may represent a buying opportunity

• OverboughtA situation in which the price of a security has risen to such a degree usually on high volume - that an oscillator has reached its upper bound. This is generally interpreted as a sign that the price of the asset is becoming overvalued and may experience a pullback

BSE or NSE?

• Where should I trade?– Where ever the stock is available

• Bombay Stock Exchange is the oldest stock exchange – 1979– SENSEX is an indicator of 30 major companies of the BSE

• National Stock Exchange was started in 1992• NIFTY is an indicator of 50 major companies of the NSE

Sample Chart of LUPIN stock

Resources

• http://www.investopedia.com• http://wikipedia.com• http://traderji.com• http://moneycontrol.com