1 INTRODUCTION TO FINANCIAL MARKETS

2 INTRODUCTION TO ANALYSIS
C
3 FUNDAMENTAL ANALYSIS O
4 READING JAPANESE CANDLE STICKS
MECHANICS 5 CHART PATTERNS N
OF INDIAN STOCK 6 (SUPPORT AND RESISTANCE)
DEMAND AND SUPPLY
T
MARKET 7 GAPS
E
8 INDICATORS

9 MOVING AVERAGES N
10
T
OPTIONS

11 RISK MANAGEMENT & PSYCHOLOGY

S
WHAT ARE FINANCIAL MARKETS?

A marketplace where trading of securities occurs.

Includes the stock market , bond market

forex market &
derivatives market, among others.

Vital to the smooth operation of capitalist economies.

INVESTING V/S TRADING
INVESTING
Investors seek larger returns over an
extended period through buying and
holding securities.
Involves intense fundamental
research about a
company’s financial health.
Investing requires ridding out the
downtrends of the market &
not to sell unless required.
TRADING
Traders take advantage of both rising and
falling markets to enter & exit positions over
a shorter time frame, taking smaller more
frequent profits.
Make use of trading systems or chart-based
techniques to detect short-term patterns in price.
This is called technical analysis.
Trading requires selling off the stock/financial
instrument as soon as it Hits the target price
or crosses the loss threshold
(also called the stop loss price.)
 WHY INVEST?
INVESTMENT @12% P.a

To fight inflation.

Projected inflation rate in India stands at 5.7% during

2021-22 Average FD interest rate is 5.3%.

To create wealth small amounts regularly saved &

Invested compounded
Over time eventually add up to
substantial wealth.
The great Albert Einstein once said,
“Compound interest is the eighth wonder of the world,
He who understands it , earns it…he who doesn’t, pays it”. SAVINGS
 WHY TRADE? INSTRUMENTS TO TRADE

Equity : Physical stocks of publicly listed companies

Financial freedom Currencies : Foreign exchange
Commodities : Energy products
Location agnostics (oil, natural gas, gasoline)
Metals
(silver, gold , platinum )
Can reap the best returns amongst all Agricultural products
assest classes (wheat, corn , soybean )
if done using proper study and
Deravatives : A contract that derives its value from
the performance of an underlying entry ,
Can be a primary or secondary which can be an assert , index or interest rate.
source of income. Two kinds- Futures & Options.
 TYPES OF ANALYSIS

Fundamental analysis Technical analysis

is a means of examining and predicting price
Fundamental analysts study anything that can movements in the financial markets,
affect the security's value, from by using historical price charts and market statistics.
macroeconomic factors
such as the state of the economy It is based on the idea that if a trader
and industry conditions can identify previous market patterns, they can form a
to microeconomic factors like the effectiveness of the fairly accurate prediction of future price trajectories
company's management. and depict the right entry and exit levels.
FA is a method of measuring a security's intrinsic
value by examining related economic and financial factors.

Fundamental analysis being very important;

but it still does not guide us on our timings of entry and exit.
 STEP INTO THE WORLD OF
TECHNICALS

HIGH HIGH
TYPES OF CHARTS
OPEN CLOSE

BAR CHART BEARISH BULLISH

It is the most common type of price plotting method.

Each bar is represented by a vertical line that ranges

CLOSE OPEN
from the low to the high of the particular time
frame of the chart.
The opening is represented by a horizontal
protrusion to the left and closing is represented
by a protrusion to the right.
 TYPES OF CHARTS CANDLESTICK
CHARTS
Line charts are based on closing values and ignore open,
high and low prices information While the extensions beyond this range depict the highs
and lows as lines; called Shadows.

consists of two parts,

one is the two dimensional body which depicts the range
between the opening and closing prices.

HIGH HIGH

UPPER
SHADOW

CLOSE OPEN

REAL
BODY

OPEN CLOSE

LOWER
 TRENDS
The basic goal of technical analysis is to define and identify price trends.
The trends that we see are :

Uptrend
Is an overall move higher in price, created by higher highs and higher lows.
Each relative high is higher than the previous high and each relative low is lower
than the previous low

Downtrend
Is an overall move lower in prices, created by lower lows and lower highs.
Each relative low is lower than the previous low and
each relative high is lower than the previous high

Consolidation
Describe the movement of a stock's price within
a well-defined pattern of trading levels.

Consolidation
Torrent pharma
 Dow Theory Discover the world of Support and Resistance

Support and Resistance

The present day
Technical Analysis is based on the theory
by Charles Dow.
Price discounts everything
The market comprises of three trends
Primary, Secondary and Minor Trends
Support is a point of concentration of demand while resistance is a point of concentration of supply.
The various ways by which we arrive at support and resistance levels are:
•Previous highs and lows
•Gaps, doji, Bollinger bands, etc
•Trendlines and moving averages
The more number of times a price halts or bounces from a particular level,
the more significance of that support and resistance level.

A trend remains intact until it

gives a definite reversal signal

The volume confirms the Trend

 GAPS

The Spice of Traders

Gaps are areas on the price chart in
which no trades were taken.
Many factors such as the results of a company,
political news, economic policy,
unforeseen calamity,
etc can result into creating gaps.

Mr.
Pre
m cha
Sto nd
ck Roy
Exc cha
han nd
ge ( fou
and BSE nded
BSE ), in the
is th Dal Bom
BSE e ol al S bay
has des tree
t ex t in
ove cha 185
r5 000 nge 4,
the in A
big com sia.
ges pan
t sto ies,
of t ck e and
he t xch hen
ota a nge ce i
l nu in t t is
mb h ew
er o
f lis orld
ted in t
com erm
pan s
ies.

Types of Gaps
Common Gaps
A common gap is a price gap found on a price chart for an asset.
These occasional gaps are brought about by normal market forces and,
Gapping Trading Strategies
as the name implies, are very common.
In general, there is no major event that precedes this type of gap.

Breakaway Gaps
A breakaway gap occurs when the price gaps above a
support or resistance area,
like those established during a trading range.
When the price breaks out of a well-established trading range via a gap,
that is a breakaway gap.
Breakaway gaps are also typically associated with confirming a new trend.
Runaway Gaps
A runaway gap is when the price opens significantly
higher than the prior close in an established uptrend.
During a downtrend, runaway gap is when the price opens
significantly lower than the prior close.
Typically the price continues moving in the runaway
gap direction within a few weeks,
and sometimes within days or even the next day.
runaway gap doesn't need to breach a major support or resistance level
(like a breakaway gap) but it must occur in the current trend direction.
Exhaustion Gaps
An exhaustion gap occurs near the end of a trend and
is caused by a final group of buyers,
who regret not having bought prior, surging in. In a downtrend,
an exhaustion gap is a gap caused by sellers.
An exhaustion gap is similar to a runaway gap,
except that an exhaustion gap is usually associated
with very high volume.
Buying the Gap (Up): Day traders often refer to this
strategy as the "gap and go." A position could be
taken on the day the stock gaps with a stop-loss order
usually placed beneath the low of the gap bar. The gap
should occur above a significant resistance level and
trade on heavy volume to increase the chances of a
profitable trade. Selling the gap (down) is a similar
strategy, except in this case the trader enters a short
position following a gap down.
Fading the Gap: Contrarians may use a fading strategy
to exploit gapping. Traders could take a trade in the
opposite direction of the gap under the premise that
most gaps tend to be filled over time. A stop-loss
order is placed above the gap bar's high, following a
gap up, with a profit target set near the previous day's
close. For a gap down, the trader buys, places a stop
loss below the gap bar's low, and sets a profit target
near the previous day's close.
 THE POWER OF TRENDLINES

Trendlines represent an area of strong

support and resistance.

They can be made by joining two highs or two lows.

 VOLUME NEVER LIES
Trend line breakouts on volume charts:
We can create trend lines on volume charts similarly
to how we do them on price charts. When the trend
line on the volume chart is breached,
we can see the price of the stock breaking
its support or resistance line.
VOLUME CHARACTERISTICS
Rounding formation on volume charts:
Rounding top or rounding bottom formations
are very commonly seen price pattern.
During these formations volume charts
also show rounding formation.
 VOLUME NEVER LIES
VOLUME CHARACTERISTICS
Volume expands in the direction of the trend and contracts
while price retraces:
Price, volume and trend usually go hand in hand.
During an uptrend we see the higher top and
higher bottom formation
along with rising levels of volume.
Whereas in a down trend we see this volume contracting.
VOLUME CHARACTERISTICS
Volume supports large movement in prices: In
reference to the cyclical behaviour of stock
market and the initial phase of the bull market.
After accumulation, price starts an upward
journey with expanding volumes. The increased
interest and the increased activity level becomes
clearly visible. Hence more and more people
jump into the trend.
Volume precedes price: We usually see large
volume in a stock when it may be at its bottom or
before the start of any upward movement as
institutions usually do their research earlier and
purchase large quantities of the share. Then
gradually we start seeing the prices rise.
 FEEL THE MAGIC OF ONE AND TWO BARS
VOLUME CHARACTERISTICS
ONE & TWO BAR PRICE PATTERNS
They generally suggest an exhaustion point.
Volume increases at turning points: We must Incase of an uptrend such formation;
keep this basic trading rule in mind that go short when buyers pushes prices too high &
if the low of the highest high is breached in an up need to rest or vice versa in a downtrend
when liquidation has been completed.
move or go long if the high of the lowest low is
breached in a down move. It is natural that a lot Inside bar:
This is the opposite of an outside bar in which
of traders will jump into such an opportunity and the trading range is completely formed inside the previous day.
a lot of activity will take place. It indicates the trend persisting prior to this has
ended for a short term and
the trend which may occur now will most likely
Parabolic sell off: In a rising market, initially price be sideways or may reverse.
& volume expand slowly. Gradually a stage comes
Outside bar: This is when the trading range
when price and volume expand exponentially.
totally encompasses the previous bar,
This becomes the final blow off of the trend. We it indicates a strong reversal in trend , the wider the outside bar,
then see drastic fall in volume and prices; this is a the more bars it encompasses, the greater the volume;
reversal pattern. the more impactful will be the outside bar.

Similarly, we see this in a selling climax where the Two bar reversal:
opposite happens in a down trend. The 2 Bar Reversal is made up of 2 candles or bars.
For a bearish 2 Bar reversal the first bar must go up
in In
fosys
?
and close near the sessions highs.
ney ts

The second bar must then open and snap back

e mo gges
rs m
ak ns su
to latio
inves calcu ught
Did lope or bo
the enve 0 ,000
1
ck of ted 93,
Ba inves in 19
that
if

near
o

ly
n

1
e had

00 sh
ares
of In

h ov
f

e
o

r
s

R
ys

s
back

2 cro
re as
on
lower showing rejection of those previous
wort
it w

June
o u ld be

12. highs and faking traders out.

Hammer Inside bar
It is a single candle, bullish, bottom reversal pattern. Inside bar is a candle stick pattern when price is
It is characterised by a small green or red body, trapped with in a single candle and consolidate
a long lower shadow with no or a very small upper shadow. within that range. In such pattern the move is
It is seen at the bottom of a down move.
expected either side.

HDFC LTD
 These patterns reflect changes in psychology that have a short term influence on price.

EVERY CANDLESTICK PATTERN HAS A STORY SINGLE CANDLE PATTERNS

Hanging man:
Doji It is a single candle, bearish, top reversal formation.
It is formed at the top of an up move,
characterised by a small red or green body.
This is formed when the open and close of a security are roughly equal. It has no upper shadow and a long lower shadow.
Doji conveys a sense of indecision between buyers and sellers.
Incase after the Doji,
the price moves in an upward direction;
people take a long position with the stop loss being the dojis low and
vice versa if it moves in a downward direction with the
stop loss being at the dojis high. Inverted Hammer:
Doji can take various shapes based on its shadows. It is a single candle, bullish, bottom reversal patterns.
Doji acts as a strong support or resistance. It is characterised with a long upper
body and no lower body.
It is seen at the bottom of a trend

Dr. reddy 20th july 2018

Shooting Star:
It is a single candle, bearish, trend reversal pattern.
It is characterised with a long upper body and no lower body.
It is seen near the top.

ICICI PRULI
 TWO CANDLESTICK PATTERN
Harami
It is a two day pattern which consists a small body on
the second day completely contained within the last body created on the first day.
The word Harami means Pregnant in Japanese and this is
how the second candlestick is nestled inside the first.
You have a Bullish Harami and Bearish Harami Pattern.
Bullish Engulfing Pattern
It is a two candle, bullish, strong reversal pattern.
It is created where a small body on day one is
completely engulfed by a large body on day two.
The stock should be in downtrend and last candle should be
a red candle which is engulfed by a green candle.

Bearish Engulfing Pattern

It is a two candle, bearish, strong reversal pattern.
It is characterised by an up move in which the last candle is a
small green candle, which is engulfed the next day by
a large red candle.
 Dark cloud cover
It is a bearish top reversal pattern.
It is characterised by an up move which creates a
large green candle.
(Bajaj auto 1st feb 2018) The subsequent day the market opens gap up
and then retraces back
by more than 50% of the previous green candle.

Piercing line
It is a strong bullish reversal pattern seen at the bottom of a down move.
It is characterised by a stock which is in a downtrend
and creates a large red candle.
The subsequent day the price opens lower than the
previous the day lows and climbs up to more
than 50% of the previous days price.

(TCS 21st june 2019)

(Titan 10th October 2018)

 THREE CANDLE PATTERNS
MORNING STAR
It is a three candle, bullish, reversal
pattern seen at the bottom.
It is characterised by a big red candle on day one.
Day two will be a small real body (either green or red)
which gaps lower than day one.
Day three is the day where bulls
take over forming a green candle
within the trading range of day one.
EVENING STAR
It is a three candle, bearish pattern seen at the
top of an up move.
We can see that on day one the bulls have a win with a
large green candle.
Day two is a small candle which is formed gap up.
Day three is dominated by the bears forming a red candle
within trading range of day one.
Maruti 18th April 2019
PANDORA’S BOX OF PRICE PATTERNS

Flag Pattern
• The Flag pattern is an important trend continuation pattern.
It is created in an instance when a share is in
an uptrend for weeks and stop to take a breather
and starts to trade a small narrow range for less
than 4 weeks.

Then we can see the Flag formation is created.

The target for the Flag formation can be
calculated by adding the height
of the pole to the breakout level.
 Triangle Pattern
Triangle pattern can be Either Ascending, Descending or Symmetrical.

In the case of an ascending triangle formation,

the top is a horizontal line which acts as a
resistance and an upward slope
is created to form a right angle triangle.
The resistance is tested a few times before a breakout
and vice versa for descending triangle formation.
Cup and handle formation
This is a Bullish reversal pattern. It is formed during a downtrend
where share prices have fallen
much below their valuation. At this point buyers start
accumulating over a long period forming a base.
Eventually this raises the prices completing the cup.

Then comes the formation of the handle on the right lip of the cup.

The target for this pattern can be taken out by

subtracting the lowest point of the base from
he highest point on the right lip and adding that
difference to the high on the right lip
Double Top Formation
The
'bu
ll' a
the nd
ma 'be
rke ar'
ani t co wo
ma me rd s th
ls a fro at a
thr tta mt re u

WIPRO
ust ck he sed
s it the wa
sh ir o y th in
wh orn pp ese
ile su on
ab p in ent
ear to s. A
sw t he bu
ipe air ll
s it up
sp wa
aw rds
sd ,
ow
nw
ard

You can find the target by subtracting the

difference between the top and bottom
point from the breakdown point.
 Double Bottom Formation

It is a Bullish reversal pattern which is seen at the bottom of a downtrend. COAL INDIA
 Head and Shoulder
Top and Bottom Formation
The H &S Top is a Bearish Trend reversal pattern which is usually seen at the end of a bull run.
It is a three peak formation where the centre peak it taller than the other two peaks creating
the head and the other two are the shoulders. The lows of the shoulders create a neckline. LICHSGFIN
A target can be taken out by finding out the difference between the
highest point of the head and the lowest
point on the neckline and subtracting the difference from the breakout point.

The H & S Bottom is a Bullish Trend reversal pattern.

Broadening Formation
Broadening formations occur when a market is experiencing heightened
disagreement among investors over the appropriate price of a security over a
short period of time.
Buyers become increasingly willing to buy at higher prices,
while sellers find ever more motivation to take profits.
This creates a series of higher interim peaks in price and lower interim lows.
When connecting these highs and lows, the trend lines form a widening pattern
that looks like a megaphone
The price may reflect the random disagreement between investors,
or it may reflect a more fundamental factor.
For example, many countries experience broadening formations due to heightened
political risk ahead of an upcoming election.
Different polling results or candidate policies may cause a market
to become very bullish at some points
and very bearish at other points.
Broadening formations may also occur
during earnings season when companies may report differing
quarterly financial results that can cause
bouts of optimism or pessimism.
MATHEMATICAL TOOLS-
ONCE YOU HAVE IT, YOU’LL LOVE IT
 MOVING AVERAGES MOVING AVERAGES
Moving averages
A moving average (MA) is a widely used indicator
in technical analysis that helps smooth
out price action by filtering out the “noise” The golden cross over up is a bullish breakout pattern formed from
a crossover involving a security's short-term moving average
from random short-term price fluctuations. (such as the 15-day moving average),
intermediate term moving average (such as 50 day moving average) and
It is a trend-following, or lagging, indicator its long-term moving average (such as the 200-day moving average).
because it is based on past prices. As long-term indicators carry more weight,
the golden cross indicates a bull market on the horizon
and is reinforced by
Common moving average lengths are 10, 20, 50, 100 and 200. high trading volumes.
These lengths can be applied to any chart time frame Conversely, a similar downside moving average
(one minute, daily, weekly, etc.) crossover constitutes the death cross and is understood to signal a decisive
depending on the trader's time horizon. downturn in a market.
The time frame or length you choose for a moving average,
also called the "look back period, If the shorter moving average is above the longer moving average,
" can play a big role in how effective it is. trend is up.
If the shorter moving average is below the longer the moving average,
the trend is down.
Types of Moving averages
The simplest form of a moving average,
appropriately known as a simple moving average (SMA),
is calculated by taking the arithmetic mean of a given set of values.
In other words, a set of numbers, or prices
in the case of financial instruments,
are added together and then divided by
the number of prices in the set.
The exponential moving average is a type of
moving average that gives more
weight to recent prices in an attempt to
make it more responsive to new information.
 The median price is a simple
indicator of the midpoint price
The median price is calculated = (High + Low) 2.
as :
=

MEDIAN PRICE
The main Idea about median
price is that go long if the price
Median price can be calculated is trading above the median
on a daily, weekly or yearly price. The moment the price
basis. drops below the median price
The short your position.

PIVOT POINTS
Based on the time frame for calculating
the Pivot points, varies their
significance. Eg: a Yearly pivot point
calculation is more influential than a
daily.
Pivot Points is a technical indicator used to
help calculate our support and resistance
levels.
The 5 point Pivot calculation formula is
Pivot point (PP) = (High + Low + Close) / 3
First resistance (R1) = (2 x PP) - Low
First support (S1) = (2 x PP) - High
Second resistance (R2) = PP + (R1- S1)
Second support (S2) = PP - (R1 - S1)
 MATHEMATICAL MAGIC WITH FIBONACCI AND GOLDEN RATIO

FIBONACCI NUMBERS FIBONACCI NUMBERS

There is a special ratio that can be used to describe the proportions of everything Each number in the sequence is approx 1.618 times the previous number.
from natures smallest
building blocks such as atoms to the most Each number is 0.618 times its next number.
advanced patterns in the universe.
Financial markets also conform to this Golden Ratio.
Every alternate Fibonacci number is 2.618 times the other.
A Fibonacci sequence is derived by simply adding two preceding terms. Looking at the inverse of alternate number,
(1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144…..)
The important point in this is that the ratio of one to the next is each number is 0.382 times the next.
roughly 1.618 and the inverse is 0.618.
The other important ratios are 0.786% and 0.236%

Everything in nature adheres to this ratio,

including dividing our height from our head to our toes by the distance
from our belly button to our toes we get 1.618. FIBONACCI RETRACEMENTS

TCS
alon
tota e is
l m- bigg
cap er th
all li of an t
sted he
(As stoc
of A ks in
pril 2 Pak
3,20 istan
18) .
 BONDING WITH BANDS
BOLLINGER BANDS

Bollinger Bands are a technical analysis tool developed by John Bollinger.

There are three lines that compose Bollinger Bands: A simple moving average
(middle band) and an upper and lower band.
The upper and lower bands are typically 2 standard deviations
+/- from a 20-day simple moving average
Bollinger Bands are a highly popular technique.
Many traders believe the closer the prices move to the upper band,
the more overbought the market, and the
closer the prices move to the lower band, the more oversold the market.
 THINK DIFFERENT, THINK MOMENTUM
OSCILLATOR
An oscillator is a technical analysis tool.
An technical analyst bands an oscillator
between two extreme values
and then builds a trend indicator with the results.
The analysts then use the trend indicator to discover short-term
overbought or oversold conditions.
DIVERGENCE
Divergence is when the price of an asset
is moving in the opposite direction of a
technical indicator, such as an oscillator.
Positive divergence signals price could
start moving higher soon. It occurs
when the price is moving lower but a
technical indicator is moving higher or
showing bullish signals.
Negative divergence points to lower
prices in the future. It occurs when the
price is moving higher but a technical
indicator is moving lower or showing
bearish signals
 POSITIVE DIVERGENCE

DIVERGENCE Price is still making new lows while the

indicator is not making new lows.

If the stock is making new highs, but the RSI starts

making lower highs,
NEGATIVE DIVERGENCE
this warns the price uptrend may be weakening.
This is negative divergence. The trader can then determine Price is still making new highs while the
if they want to exit the position or set a stop loss in indicator is not making new highs.
case the price starts to decline.
Positive divergence is the opposite situation.
Imagine the price of a stock is making new lows while the
RSI makes higher lows with each swing in the stock price.
Investors may conclude that the lower lows in the stock
price are losing their
downward momentum and a trend reversal may soon follow.
 SWINGING WITH OSCILLATORS
Moving Average Convergence Divergence(MACD)
Developed
Developed by by Gerald
Gerald Appel,Appel,
MACD
MACD is is
oneone of the
of the simplest
simplest andreliable
and most mostindicators
reliable available.
indicators available.
MACD MACD
uses moving uses moving averages.
averages.

The momentum
The momentum oscillator
oscillator is determined
is determined by subtracting
by subtracting
the Longer
the Longer term
term moving
moving average
average from thefrom theterm
shorter shorter term
moving moving average.
average.

If positive,this
If it positive, this indicates
indicates a bullish
a bullish trend. trend.

If it’s
If it’s negative
negative , this indicates
, this a negative
indicates trend trend
a negative

The standard
The standard formula
formula for for
MACD
MACD is is calculated
calculated using using
the 26 the
and 26
12 and 12 day
day moving moving averages.
averages.

Millions of
people sear
ch 'SGX Nift
on y Live'

Google ev
ery weekd
ay betwee
n 8.30 AM
AM IST. to 9.15

It indicates
SGX Nifty
plays a vita
l role in th
Indian stoc e
k market an
d many trad
SGX Nifty ers look at
Futures to
gauge the
open levels
Nifty (NSE in
) and to m
anage thei
r open acti
trades. on
Relative Strength Index
The RSI is a popular momentum oscillator developed
in 1978.

The RSI shows bullish and bearish price momentum,

and it is often plotted beneath the graph of an asset's
price.

An asset is usually considered overbought when the

RSI is above 70% and oversold when it is below 30%.

The average gain or loss used in the calculation is the

average percentage gain or loss during a look-back
period. The formula uses a positive value for the
average loss.

The standard is to use 14 periods to calculate the

initial RSI value.
 The market like all facets of life move in a cycle of
bulls and bears. Some commonly seen cycles are:

January Effect: Historic data suggests markets

have a tendency to give a higher closing in
December and market tops the rally from

CYCLES IN A MARKET January to May.

Rollover Effect: Last Thursday of the month

being the expiry of derivatives contracts, it
follows a pattern where markets start to
move up from there.

Eight Year Cycle: This cycle shows that every

8 years markets show a major event, be it
top or bottom.