7 investment lessons from Rakesh Jhunjhunwala

Follow these principles if you want to become a billionaire like him.

Rakesh Jhunjhunwala is a qualified CA and has chosen trading in stocks as his profession. Many consider him as the Indian version of Warren Buffet.

He is also sometimes referred to as 'The Golden Hand' of Indian stock market. People believe that everything he touches (invests) turns to gold.

Such is his popularity that there are people who track his portfolio and invest in the same companies that he invests.

So, what's his secret of success? What are his investment strategies which have made him a billionaire? Let's see what we can learn from him.

Buy for long term

Though he is investing in the stock market, he is not a short term trader. He invests in stocks for the long term. And this strategy has paid off for him. Some of the stocks he owns have multiplied his wealth over the years.

Had he sold them the moment they appreciated by 10-20 per cent, we wouldn't have been talking about him now.

Belief in India's growth story

He is one of those guys who believes strongly in India's growth story. He says again and again that Indian economy will keep growing. So, be a part of it.

The only way you can be a part of a growing India is to invest in its stock market. If you are investing in debt instruments like fixed deposits or bonds, you will not be able to reap multifold returns by any means. 

Search for value

Rakesh Jhunjhunwala believes in value oriented companies. He has his team who helps him in finding companies which offer value in the long term.

If the stock prices of these companies are higher now, he tends to wait a bit, but finally gets his hands on them.

Before buying a stock, he closely studies its management style, growth potential, competitive nature and many more factors.

One cannot create wealth through free advice

In an interview given to Mumbai Mirror, he has said that one cannot make wealth through borrowed advice.

You need to do your own research before making any investment. Free advice can actually cost you later.

If you blindly follow someone's free advice, you might not be paying them anything now but you will realise later when those investment turn out to be duds. That loss can be a lot more than the fees that you pay for an expert's advise.

Invest only in what you know

He invests only in companies whose business he can understand.

He does not opt for complex businesses.

'Keep it simple' is his strategy when it comes to investing.

Consistency

If it's done once, it could be a lottery. But if it's done again and again, we call it consistency. This is what Rakesh Jhunjhunwala is known for.

He consistently invests in the stock market irrespective of the conditions. The quantum or strategy of investing can differ based on those conditions but he has never left his belief that stock market will always deliver for you if you do everything right.

Success comes from failure

It's not that he has not tasted failure. Some of his investments have also been duds.

He believes that success springs out of failures. If you fail, instead of crying over it you should know why you have failed. Did you not read the business well? Were the markets hit by some bad news?

These are some questions whose answers he wants you to search.

Article Courtesy: 
http://www.rediff.com/getahead/slide-show/slide-show-1-money-7-investment-lessons-from-rakesh-jhunjhunwala/20140402.htm

10 Golden Rules for Successful Trading!

 

The following are 10 most successful rules which are important to turn you a consistent Winner if applied properly with discipline

1. Divide your Risk Capital in 10 Equal Parts.

As part of the Successful money management, it is always advised to divide your Risk Capital (which you can afford to lose) into 10 equal Parts and at any given time none of your Single Trade should have more than 3 parts of your capital in it even if you are in a winning position. At the same time always keep some spare money for any Buying Opportunity, which may come any time.

2. Trade ONLY in active & high Volume Stocks/ Futures.

Many Traders get stuck with stocks for want of liquidity. Always rely upon Stocks which have reasonably high volume over a period of time. High Volume are always advised for easy Entry, Exit and Stop Loss. In low volume stocks the spread is too high and chance of Stop Loss limit getting failed is too high as there would be no Buyer or seller at your Stop Loss Level.

3. Come Prepared with a Trading Plan

Successful traders always keep their Trading Plans ready before entering into any transactions. One must prepare a Watch List or Probable candidates for Day's trading and remain focused on the movement of those stocks only. For example a Stock 'X' is on verge of a Bullish Breakout from any pattern or stock 'Y' has declined substantially after an initial sharp upmove or stock 'Z' is close to an important support level. Successful trader would concentrate on the movement of those stocks only and enter the trade as soon as stock 'X' gives the anticipated breakout or stock 'Y' starts an upmove or stock 'Z' breaks the support level to initiate a trade for quick gains.

4. Never Over Trade

This is the most common mistake committed by Traders, particularly after a Streak of winning Trades. This mistake generally not only wipes off all the profits, but puts traders in heavy losses. In order to remain in market while making consistent Profits, under no circumstances, traders should go beyond their Risk Capital.

5. Trade in 2 to 4 Stocks at a time with strict Stop Loss.

In a Bull move, most of the stocks move up and similarly in any Bear Move, most of the stock moves southwards. As a Trader you know this fact but can you Buy 20 Stocks and try to make profit in all the 20 stocks just because all are moving up or vice versa in a Down trend? What will happen if market reverses without any indication on any bad news? Would you be able to monitor all your trades in such situation? Smart and Successful trader would trade in 2 to 4 stocks with strict Stop Loss and keep a strict vigil to avoid any misfortune in case of any eventuality.

6. Sell Short as often as you go Long.

More than 90% of common investors/ Traders are 'Bulls' by nature. Because they love to see prices going up only. Stocks are bought by anybody/ corporate/ financial institutions/ Mutual Funds to make profit on rise. They have large holdings and mentally they wish and pray for the market to rise only. But facts are different. History shows that Bull Phases have shorter duration that Bear phases. So every stock that moves up will retrace back to 38%-50%-66%. Since 90% investors are Bulls by heart they normally do not book profit at higher levels to re-enter later at lower levels instead they prefer to increase their portfolio at lower levels. Successful Traders know how to capitalize such correction. They are always prepared to go 'Short' as often as they trade

7. Don't Trade if you are not Clear.

Many Traders, because of their daily habits trade even when there are no signals to buy or short. Normally such situation arrives after a sharp rise or decline when stocks are adjusting their values. While some stocks attempt to move up, few may be taking breather before next move. Such situation are often confusing. There is no harm in taking rest for a day or two or short period if the trend is choppy, unclear or doubtful, instead of putting your money at higher risk.on 'Long' side.

8. Don't expect Profit on Every Trade.

If you consider you are a smart trader who can make profit on every trade, you are 100% wrong. Always be flexible and accept the fact as soon as you realize that you are on wrong side of the trade. Simply get out of the trade without changing your strategy during the market; it may cause you double losses.

9. Withdraw portion of your profits.

The business of Trading is excellent as long as you are making profits. Unlike other business your losses can be unlimited and rapid if market does not move as per your expectations. While in other businesses you may have other remedial measures available but in trading it is you only who has to control it. Traders have large egos particularly after series of successful trades and their tendency to enlarge commitments in overconfidence may cause major financial set back. There fore it is must that trader must take a portion of the profit and put it in separate account. This is absolutely must for long term stability in the market.

10. 'Tips'/'Rumors' can ruin you sooner or later- Don't follow them. 

Tips and Rumors are part of the game in Stock market. In most cases these are spread by vested interests through brokers, media, analysts, or other rumor mongers in the interest of any particular company well before their IPO's, or to reduce/enlarge holdings or whatever reason. But instead of relying on Charts which are the translated copy of Price Action of any scrip based on demand supply. While you may be lucky if you have had made profits on such 'Tips' but there are 100% chances that you are likely to be trapped in sooner or later if trading on 'Tips' or 'Rumors' is part of your strategy. Believe in Charts, act on Charts. There is no second best option.

Source : http://www.trade4profit.org

How to READ a MUTUAL FUND FACTSHEET

Most asset management companies usually publish monthly reports (also called fact sheets) that contain critical information related to the portfolios, at times a roundup on debt and equity markets from the fund manager and performance details of the schemes managed by the AMC.


The idea is to help investors (both existing and potential) to track the performance of the mutual fund schemes so as to take an informed decision. To that end, factsheets serve as an investor's guide.


To be sure, factsheets were always meant to be the investor's guide. However, in many cases, they are not upto the mark leaving much scope for improvement and even standardization. We highlight the most critical reference points for the uninformed investor based on data that is more or less standardized across AMCs.


For ease of reference, we have divided the article in two parts, the first part discusses how to assess the equity fund factsheet and the second part discusses the debt fund factsheet.


A) Equity fund factsheets


Stock allocation


Thankfully, factsheets of most AMCs highlight the portfolio composition well enough, although there is scope for standardization. For an investor who wants to invest in equity funds, the factsheet can offer some critical insight into the fund management style/approach.


To begin with, consider the top 10 stocks in the portfolio to determine the level of diversification. In our view, a diversified equity fund should have no more than 40 per cent of net assets in the top 10 stocks. This should help the fund negotiate volatility more effectively than its concentrated peers. For instance, Sundaram BNP Paribas Growth Fund is a fund we like for its disciplined investment approach (no more than 5 per cent of assets in a single stock) that ensures that its top 10 stocks are well-diversified.


Sometimes, a fund could be well-diversified across the top 10 stocks, but investments in a single stock could be so high so as to offset an otherwise diversified portfolio. A case in point is HDFC Capital Builder (a well-managed value fund), which was done in during the market crash in May last year due to unduly high investments in a single stock (Hindustan Zinc).


Also look at the fund's portfolio over several months to get a sense of the consistency in the fund manager's stock picks. Too much churn in the stock picks (new names every other month) indicates that the fund manager could be punting rather than investing, thereby adding to the trading cost, which ultimately eats into the returns.


Sectoral allocation


Just as you evaluate the stock allocation, it is important to consider the sectoral allocation of the equity fund. Diversified equity funds should be well-diversified across stocks and sectors. A fund could be well-diversified across stocks, but may pay the price for not diversifying well enough across sectors.


For instance, Sundaram Growth Fund, a fund we admire for superior diversification across stocks, learn the hard way during the last market slide that diversification across stocks is as important as diversification across sectors. The fund had unduly high investments in infrastructure-related sectors.


The crash proved particularly harsh for the fund, as it had failed to diversify across other sectors. So like stocks, being diversified across sectors is just as important; unfortunately, it often takes a sharp dip in the stock markets to highlight the importance.


However, funds like HSBC Equity Fund, which pursue the top down investment approach, have concentrated sectoral allocations, which suit their investment style. These funds need to be evaluated differently from funds that pursue the bottom up investment style.


While calculating the sectoral allocation, the investor must combine like-natured sectors to understand the level of sectoral diversification. For instance, most equity funds list Auto and Ancillaries sectors distinctly; given the similar nature of these sectors, their allocation must be combined.


Another problem relates to the categorization of companies across sectors. Different equity funds categories the same company across different sectors. There is no standardization. While AMFI (Association of Mutual Funds of India) has introduced certain standardization processes in this regard, the same is not adhered to across the industry.


Asset allocation


Stocks and sectors apart, there is another detail that must catch your attention and that is the asset allocation. The asset allocation table tells you how the fund's net assets are diversified across stocks, current assets/cash. An equity fund's allocation to cash should be noted.


Among other reasons, this could be because the fund manager is not comfortable with market levels at that point in time. This fact can be established easily by browsing through the previous month's factsheets. If the fund manager has been in cash for some time, it means he does not find enough stock-picking opportunities at existing levels.


Being in cash could work in the fund manager's favor if the market crashes, like it did for Sundaram BNP Paribas Select Midcap May 2006. But a higher cash allocation works against the fund during a rising market, when being fully invested is what counts. Sundaram BNP Paribas Select Midcap has also witnessed this scenario, which explains its relative underperformance over the last few months.


Other data points


In addition to the points listed above, there are some data points that must be marked by the investor.


Portfolio Turnover Ratio


Put simply, this ratio tells the investor how much churn the portfolio has witnessed. This ratio is calculated based on the number of shares bought and sold by the equity fund over the review period. A high Turnover Ratio (vis-a-vis peers or other equity funds from the same fund house) indicates that the portfolio has seen above-average churn.


A high churn by itself does not necessarily imply that the fund is good or bad, however, it must be in line with the fund's investment philosophy. A growth fund can have a high turnover ratio (although that's not necessarily a good thing as it adds to the trading costs and therefore eats into your returns).


However, a value fund should typically have a lower churn as the fund manager would usually be investing in the stocks over the long term.


Important as it is, the Portfolio Turnover Ratio is yet to be given due importance by the fund houses (maybe they are afraid of 'exposing' their fund managers). How else, do you explain the fact that fund houses either don't reveal the Portfolio Turnover Ratios or when they do reveal them, it is not standardized thereby robbing investors of the opportunity to compare them across fund houses.


Expense Ratio


This ratio underscores how expensive your equity fund really is. A high Expense Ratio (regulations cap this at 2.50% for equity and debt funds) indicates that your mutual fund investment is expensive. As per regulations, fund management expenses, which form the largest chunk of the expense ratio, must decline with a rise in Net Assets. So larger equity have more scope to reduce their Expense Ratios.


Again, fund houses are not very enthusiastic about sharing this important detail with investors. However, they do declare this ratio every 6 months, which is only because regulations demand that they do so.


Fund manager information


It always helps to know who is managing your fund. Not that we have any particular fund manager in mind, rather we recommend that investors do not get infatuated by any fund manager in particular and look for investment teams instead. Over the long-term, it pays to have your money managed by a group of fund managers, rather than one star fund manager, who could quit the fund house any time and take the performance with him.


So keep an eye on the fund manager details, typically, there should not be many external changes in the fund management team. When the same names manage your money, over a period of time there is stability in the fund management process. Thankfully for investors, majority of the fund houses do provide the fund manager details.


B) Debt Fund Factsheets


Like their equity fund counterparts, debt fund factsheets offer enough insight to the debt fund investor. For this, investors have to keep an eye on at least three aspects:


Average Maturity


For debt fund investors, this is perhaps the most significant detail to look out for in a debt fund factsheet. Since the Average Maturity of a portfolio for a particular month in isolation does not tell the investor much, he must go back several months to see how the Average Maturity of the portfolio has moved in order to understand the fund manager's view on debt markets.


To give investors an idea - if the fund manager has been maintaining a higher Average Maturity for some time, it means that he expects interest rates to fall over time. On the other hand, if the Average Maturity of the portfolio is lower, it means that the fund manager is cautious about interest rates. Ideally, investors must read up on peer factsheets to understand the consensus on interest rates and if your fund manager has a differing view, you must try to understand why.


Credit Rating Profile


Debt funds invest in securities with varying credit ratings. In the Indian context, most debt funds do not take on undue credit risk - i.e. they invest primarily in securities that are highly rated. Investors should mark the credit rating profile of the debt fund. A large chunk in AAA/Sovereign paper (which is the highest rating) implies that the fund is taking lower credit risk. On the other hand, a higher allocation to AA+/AA paper underlines the fact that the fund manager is taking credit risk.


Asset Allocation
Like with equity funds, debt fund investors must consider the asset allocation of the fund under review. This should help him understand the investment approach of the fund manager and the risk he is taking. Debt funds invest mainly in corporate bonds and government securities, both of which carry varying risk. Investors must make a note of the assets invested across both these segments.


Then there are floating rate funds that invest predominantly in floating rate paper; in practice however, many are predominantly invested in cash/current assets for lack of adequate floating rate instruments.


Likewise, monthly income plans invest a portion of assets in equities (the maximum limit on which is predetermined), investors must check the equity allocation over the last several months to understand the kind of risk the fund manager is taking (on the equity side) and whether he is adhering to the ceiling on equity investments.


Source - Rediff

How to Invest Without Fear

A safe investment sounds like a paradox, considering the jaw-dropping losses investors suffered during the global financial crisis. Be it stocks, bonds or real estate portfolios, the crisis swept across all asset classes, giving investors sleepless nights. Although experts are of the view that the worst is behind us and the scepticism seems to have waned, one still needs to be careful about where he invests. Dhirendra Kumar, CEO of Value Research, insists that there is no such thing as an 'invest and forget' approach.

Only bank deposits and small savings schemes could qualify for this tag. These are perhaps the least favoured currently owing to the reduced rate of interest on fixed deposits and the cap on investment in some small savings schemes. In fact, the rate of interest offered on deposits is unlikely to beat inflation in the future. For instance, if you fall in the 30 per cent tax bracket, an interest of 7 per cent per annum earned on a one-year deposit translates to a 4.9 per cent post-tax return, which is just under the inflation target of 5 per cent set for this year. The other disadvantage of banks is that only up to Rs 1 lakh of your deposit is insured by the government.

If you want to earn more, you could consider corporate fixed deposits, which, in the past two years, have offered better rates of interest. However, this comes with an additional risk. While small savings schemes carry the sovereign tag, you can invest only up to Rs 70,000 in the Public Provident Fund (PPF). Also, the interest earned on your investment in the National Savings Certificate (NSC) is not exempt from tax, which brings down your effective rate of return. The advantage of such investments is that they are the lowest on the risk spectrum. However, as most of us want some good returns as well, it may be prudent to opt for investment avenues that offer better riskadjusted returns and perform decently in a down market. Ultimately, it's this perfect combination that is going to allow you to get a good night's sleep.

So, is there any such investment? Kumar suggests that investors look at income funds from a longer term perspective for a fixed income portfolio. Most income funds have an exposure to AAA-rated bonds with no suspicious investment in their portfolio, he says. In the long run, these funds fetch better returns than other short-term funds. However, he adds, investors might be saddled with capital loss in case of a sharp rise in interest rates. Generally, these funds have managed interest rates with dynamism. The maturity of the underlying portfolio of income funds has ranged between one year and 15 years within the same fund, which clearly proves their claim.

One could also invest in arbitrage funds, which primarily generate income by capitalising on the mis-pricing between the cash market and derivatives market. Every purchase in the cash market is matched by a corresponding sale for the same quantity in the futures market. As arbitrage funds do not take any directional calls, these too are low on the risk spectrum and offer attractive tax-free returns of 6-7 per cent annually. The tax treatment for these funds is the same as for equity-oriented funds.

In the future, the biggest concern for investors will be to beat inflation. While investing in equities is considered riskier than in bonds, in reality, inflation could eat into the returns of a fixed income portfolio even as equities offer a hedge against inflation, says Parag Parikh, chairman, Parag Parikh Financial Advisory Services. This does not mean that you should blindly invest in stocks and equity funds at the cost of your risk tolerance. Buy stocks or funds that offer you returns commensurate with your risk appetite, but make sure there's some cushioning if the markets become negative.

Take dividend yield funds. These are known to be less volatile during a downturn because they invest in defensive sectors. They refrain from high-growth, high-PE and momentum stocks. Instead, they invest in high cash flowgenerating companies with low volatility in earnings. This offers them some cushioning when the stock markets plunge.

Source: Money Today.
Reproduced From Money Today. © 2010. LMIL. All rights reserved by them.

http://in.finance.yahoo.com/personal-finance/mutualfunds_basics/49/how-to-invest-without-fear

10 Deadly Trading Mistakes in Stock Market Trading

The following are 10 most common but deadly Trading Mistakes, which traders should avoid at all costs. Anyone of them can literally destroy one's financial dreams and goals!

1. Trading for excitement & thrill Not for profits. Many traders consider stock market as casino and trade for thrill and fun only. As soon as one has a losing trade, he wants to quickly make back the lost money. He thinks about the other things he could have done with the money, regret taking the trade and want to recover as quickly as possible. This in turn leads to further mistakes. Be patient and wait for the next high probability opportunity. Don't rush back in.

2. Trading with a high ego. Many individuals who have remained highly successful in other business ventures have failed miserably in trading game. Because they have a fairly big ego and thought they couldn't fail. Their egos become their downfall because they can not except that they would be wrong and refuse to get out of bad trades. Once again, whoever or wherever has any one come from does not concern the markets. All the charm, powers of persuasion, number of degrees & diplomas of business management on the wall or business savvy will not budge the market when you are wrong.

3. Three 4-letter words that will kill you! HOPE--WISH--FEAR--PRAY If you ever find yourself doing one or more of the above while in a trade then you are in big trouble! Markets has own system of moving up & down. All the hoping, wishing and praying or being fearful in the world is not going to turn a losing trade into a winning one. When you are wrong just use a simple 4-letter word to correct the situation-GET OUT!

4. Trading with money you can't afford to lose. One of the greatest obstacles to successful trading is using money that you really can't afford to lose. Examples of this would be money that is supposed to be used in any other business, money to be paid for college/school fee, trading with borrowed money etc. Ultimately what happens is that when someone knows in the back of their mind that they are risking the money they can not afford to lose, they trade out of fear and emotion versus logic and no emotion. If you are in this situation It is highly recommend that you stop trading until you earn enough to put into an account that you truly can afford to lose without causing major financial setbacks.

5. No Trading Plan If you consider yourself a trader, ask yourself these questions: Do I have a set of rules that tell me what to buy, when to buy and how much to buy, not just for the next trade, but for the next 10 trades? Before I enter a trade, do I know when I will take profits? Do I know when I will get out if I am wrong? These questions form the first part of a trading strategy. There simply cannot be any expectation of success if we can't answer these questions clearly and concisely.

6. Spending profits before you make them. Nothing is more exciting then getting into a trade that blasts off and puts you into a highly profitable situation. This can cause major problems however, because this type of trade puts you in a highly euphoric state and leads to daydreaming about the huge profits still to come. The real problem occurs as you get caught up in the daydream and expectations. This causes you to not be prepared to get out as the market reverses and wipes off all your profits because you have convinced yourself of the eventual outcome and will deny the reality of the situation. The simple remedy for this is to know where and how you will take profits once you enter the trade.

7. Not Cutting Losses or letting Profits run One of the most common mistakes made by traders is that they let their losses grow too large. Nobody likes to take a loss, but failing to take a small loss early will often result in being forced to take a large loss later. A great trader is not someone who has never had a loss. Great traders have made many losses. But what makes them great is their ability to recover quickly from a string of losses. Every trader needs to develop a method for getting out of losing trades quickly. Research and learn to apply the best methods for placing protective stoploss orders. The only way to recover from many (small) losing trades is to make sure the winning trades are much larger. After a series of losing trades, it becomes difficult to hold a winning trade because we fear that it will also turn into a loss. Let your profitable trades run. Give them room to move and give them time to move.

8. Not Sticking to your plans & Changing strategies during market hours If you find yourself changing your strategy during the day while the markets are still open, be mindful of the fact that you are likely to be subject to emotional reactions of fear and greed. With rare exception, the most prudent thing to do is to plan your trading strategy before the market opens and then strictly stick to it during trading hours.

9. Not knowing how to get out of a losing trade. It's amazing that most of the traders don't have any clear escape plan for getting out of a bad trade. Once again they hope, pray wish and rationalize their position. It must be kept in mind that market does not care what you think. It does what it does and when you are wrong you are wrong! The easiest way to keep a bad trade from going really bad is to determine before you get in, where you will get out.

10. Falling in love with a stock (Just Flirt). Many traders get fascinated by just a stock or two and look for opportunities to trade in those stocks only ignoring the other profitable trading opportunities. It is because they have simply fallen in love with a stock to trade with. Such tendencies can be suicidal as for as trading is concerned. It may cost any one dearly.

50 Golden Rules for Successful Trading

1. Divide your capital into 10 equal risk parts.

2. Never over trade.

3. Never place order for BUY/SELL without stop loss conditions.

4. Never let profit turn into loss.

5. Trade with the trend.

6. Never take lead you may loose heavily.

7. Never try to be over smart.

8. Don't trade if trend not clear

9. Don't follow tips only.

10. Use the right orders only.

11. Withdraw portion of profits.

12. Don't be whimsical about closing your trades.

13. Never buy a stock to get dividend.

14. Never average your losses.

15. Take big profits and small losses.

16. Sell short as often as you go long.

17. Never buy any stock just it is low priced.

18. Pyramid your trades correctly.

19. Decrease your trading after a series of successful trades.

20. Don't change your opinions during market hours.

21. Don't follow the crowd - they are usually wrong.

22. Buy on rumor and sell on news.

23. Take windfall gains when you get.

24. Keep your charts up to date.

25. Preserve your capital.

26. Nothing ever new occurs in market.

27. Markets are never wrong opinion may be.

28. Never permit speculative ventures to turn into investments.

29. Never try to predetermine your profits.

30. Never buy a stock just because it is low priced or don't sell just because it is high priced.

31. Look for reasonable profits.

32. Buy as soon as a stock makes new highs after a normal reaction.

33. Ban wishful thinking in the market.

34. Leaders of today may not be leaders of tomorrow.

35. Don't be too cautious about reasons behind the moves.

36. Trade only the active stocks.

37. Bear markets have no support and bull markets have no resistance.

38. The smarter you are the longer it takes.

39. It is very hard to get out of a trade than to get in.

40. Don't talk about what you are doing in the market.

41. When time is up, markets must reverse.

42. Control what you can; manage what you can not.

43. Big movements take time to develop.

44. A good trade is profitable right from the start.

45. If you can not make money trading the leading issues you can not make it trading the overall market.

46. Avoid partnership in trading accounts.

47. The human side of every person is the greatest enemy of successful trading.

48. Money can not be made every day in the market.

49. As long as market is acting right don't rush to take profits.

50. Never buy a stock just because it has fallen from a great high, nor sell a stock because it is high priced.

We request you to follow above rules strictly and religiously to maximize your profits in the stock market.
Source : http://www.ways2gain.com

The ABC of Technical Analysis

A Glossary Of Technical Analysis Terms And Its Meanings

Advance/decline line
Each day's declining issues are subtracted from that day's advancing issues. The difference is added to (subtracted from if negative) a running sum.

Failure of this line to confirm a new high is a sign of weakness. Failure of this line to confirm a new low is a sign of strength.

Area pattern

When a stock's or commodity's upward or downward trend has stalled, the sideways movement in price which follows forms a pattern. Some of these patterns may have predictive value.

Examples of these patterns are head and shoulders, triangles, pennants, flags, wedges and broadening formations.

Candlestick charts

A charting method originally developed in Japan. The high and low are described as shadows and plotted as a single line. The price range between the open and close is plotted as a rectangle on the single line.

If the close is above the open, the body of the rectangle is white. If the close of the day is below the open, the body of the rectangle is black.

Congestion area

At a minimum, a series of trading days when there is no or little progress in price.

Correction

A price reaction of generally 1/3 to 2/3 of the previous gain.

Cup and handle

A pattern on bar charts. The pattern can be as short as seven weeks and as long as 65 weeks. The cup is in the shape of a U. And the handle has a slight downward drift. The right hand side of the pattern has low trading volume.

Double bottom/double top

These are reversal patterns. It is a decline or advance twice to the same level (plus or minus 3 per cent). It indicates support or resistance at that level.

Elliott Wave Theory

Originally published by Ralph Nelson Elliott in 1939, it is a pattern recognition theory. It holds that the stock markets follow a pattern of five waves up and three waves down to form a complete cycle.

Many technicians believe that this pattern can hold true for as short a time period as one day. However, it is generally used to measure long periods of time in the markets.

Fibonacci ratio

It's the relationship between two numbers in the fibonacci sequence. In general terms the fibonacci series is 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89 - where the previous two numbers are added to derive the next number. 0+1 is 1, so the first number is 1. 1+1 is 2, so the next number is 2, and so on. The sequence for the first three numbers is 0.618, 1.0, and 1.618.

Fibonacci Ratios and Retracements can be applied both to price and time, although it is more common to use them on prices. The most common levels used in retracement analysis are 61.8 per cent, 38 per cent and 50 per cent.

When a move starts to reverse the three price levels are calculated (and drawn using horizontal lines) using movements from low to high. These retracement levels are then interpreted as likely levels where counter moves will stop.

Head and shoulders pattern

This can also be inverted. It is a reversal pattern and is one of the more common and reliable patterns. It is comprised of a rally which ends a fairly extensive advance. It is followed by a reaction on less volume.

This is the left shoulder. The head is comprised of a rally up on high volume exceeding the price of the previous rally. And the head is completed by a reaction down to the previous bottom on light volume.

The right shoulder is comprised of a rally up which fails to exceed the height of the head. It is then followed by a reaction down. The last reaction down should break a horizontal line drawn along the bottoms of the previous lows from the left shoulder and head. This is the point in which the major decline begins.

The major difference between a head and shoulder top and bottom is that the bottom should have a large burst of activity on the breakout.

KST

Short for know sure thing, the KST indicator was developed by Martin Pring. A weighted summed rate of change oscillator. Four different rates of change are calculated, smoothed, multiplied by weights and then summed to form one indicator.

Moving averages convergence/divergence (MACD)

The crossing of two exponentially smoothed moving averages. They oscillate above and below an equilibrium line.

Negative divergence

When two or more indicators, indices or averages fail to show confirming trends.

Relative strength index (RSI)

RSI is an oscillator first introduced in 1978 by Welles Wilder in Commodities (now Futures) Magazine.

The RSI compares the magnitude of a stock's recent gains to the magnitude of its recent losses on a scale from 0 to 100. When using RSI as an overbought/oversold indicator, Wilder recommended using levels of 70 or more as overbought and 30 and below as oversold. Generally, if the RSI rises above 70 it is considered bullish for the underlying stock. Conversely, if the RSI falls below 30, it is a bearish signal.

Relative strength

A comparison of an individual stock's performance to that of a market index. Most times the S&P 500 or the Dow Jones Industrial Index are used for comparison purposes. It is calculated by dividing the stock price by the index price.

A rising line indicates that the stock is doing better than the markets. A declining line indicates that the stock is not doing as well as the markets.

Resistance

A price level where a security's price stops rising and moves sideways or downward. It indicates an abundance of supply. Because of this, the stock may have difficulty rising above this level. There are short-term and longer-term resistance levels.

Support

A price level at which declining prices stop falling and move sideways or upward. It is a price level where there is sufficient demand to stop the price from falling.

Trendline

Constructed by connecting a series of descending peaks or ascending troughs. The more times a trendline has been touched increase the significance of a break in the trendline. It can act as either support or resistance.

Books recommended by experts

Market Wizards	by	Jack D Schwager
Stock Market Logic	by	Norman G Fosback
How To Make Money In Stocks	by	William J O'Neil
Street Smarts	by	Laurence A Connors and Linda Bradford Raschke
Smarter Trading	by	Perry J Kaufman
Winning On Wall Street	by	Martin Zweig
Technical Analysis Explained	by	Martin Pring
Beyond Candlesticks	by	Steve Nison
Elliott Wave Theory	by	Weiss Research, Frost and Pretcher
Dow Theory and Basics	by	Martin Pring, John Magee and John Murphy