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.

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Introduction To Options

Options are a high-risk investment, but they are also highly profitable. Traders enter the option market for many reasons. One reason is because the amount of capital required to enter the market is lower than regular stock. The fact that most options move faster (volume) and produce higher returns is another reason traders dabble in the option market.

Many brokerage houses limit the amount of cash (margin) new traders can use to invest because of the market's high potential for loss. As option traders become experts, these limitations go away, and the trader is free to invest as much as their account allows. Once a new trader gets familiar with how the option market works, they can become an expert in no time at all.

Stock vs. Option

Regular or preferred stock is an asset. In other words, stock is equity, and it gives the holder ownership in the company where it's drawn from. It trades easy in the exchange because, like money, investors consider it a liquid asset.

An option is a derivative of stock. This means that its value completely depends on the value of the equity associated with it.

Option Buyers: Option buyers own a contract that says they have the right to buy or sell an asset by a certain date (expiration date). Option buyers are not obligated to buy or sell the asset, and if they choose not to, they let their option expire as it becomes worthless.

Option Sellers: Option sellers own a contract that obligates them to buy or sell an asset by a certain date (expiration date), if the buyer exercises the option. Most option sellers hope the buyer's contract expires, so they can collect premiums.

Online Brokers

Most investors trade options using an online broker system that connects directly to the brokerage house holding trader's investment account. Traders send orders through their broker, which go directly to an exchange. Their brokerage house, which has a seat on the exchange floor, receives the investor's order and sends the trader's request to auction after deducting or adding funds to their investment account. All this takes place in real-time, which occurs in a matter of seconds.

Expiration

Every option expires. Traders call an option's expiration date, the strike date, because it stands as a marker where all options must be either be bought or sold. On or before the strike date, the trader can either choose to exercise the option and buy the underlying asset, or they can let the option expire, where its value then becomes worthless.

Strike Price, Exercise & Assignment

An option's strike price is the value an investor will pay to exercise their right to buy or sell the option. If a buyer chooses to exercise the option, the brokerage house assigns the seller's assets to the buyer's account.

Margin Requirements

Margin is the total amount in which an investor can use to make a trade. Most traders make a deposit at a brokerage house, which serves as collateral for buying and selling options. Normally, the trader can only buy or sell options up to the balance available in their account (margin). Sometimes, brokerage firms extend credit to the trader, which adds on to their margin's limit. However, if at any time a trader buys an option on credit (borrowed margin), makes a bad choice, and their option starts to lose value, the brokerage house has the right to immediately sell the option to cover the margin (margin call).

Order Entry

Home broker systems basically have two types of transactions, buy and sell. Investors can fine-tune their orders by adding details to the order, including limit, stop or market, which directs their broker on how to specifically auction it.

Types of orders

In each of the two types of order entries, there are two types of orders that a trader can place.

Call Orders

Buying a call option - Trader buys a call option thinking its price will go up (long-buying). Buying the underlying asset is not an obligation.

Selling a call option - Trader sells (writes) a call option thinking its price will go down (short-selling). Trader must sell the underlying asset, if a buyer exercises the option.

Put Orders

Buying a put option - Trader buys a call option thinking its price will go down. Selling the underlying asset is not an obligation.

Selling a put option - Trader buys a call option thinking its price will go up. Trader must buy the underlying asset, if a buyer exercises the option.

Moneyness

Moneyness is the real value of an option. An option starts to lose value the minute it enters the market. The closer it gets to its expiration date, the less it's worth. Investors call this occurrence time decay. Intrinsic value is simply the difference between an option's strike price and the underlying asset's market price. Option traders calculate moneyness by adding an option's intrinsic value to its time decay value.

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Ethical Investing Tutorial

 

By Amy Fontinelle

Introduction

What is ethical investing? The definition depends on your personal beliefs. Ethical investing is highly subjective because each individual investor has different ideas about what constitutes ethical behavior by a company, and different priorities that they want to support with their investment dollars.

Broadly speaking, however, ethical investing is a way of earning returns in the financial markets by supporting companies that are creating positive change in the world, or, in some cases, that aren't creating positive change; but aren't making the world worse, either. Ethical investors want to reach their financial goals in ways that coincide with their values. Their investing decisions are usually part of an overall strategy for ethical living that includes making values-based decisions about work, housing, transportation and shopping, among other concerns.

A Niche Style Gains Popularity

Ethical investing is still a niche investment style, but it has gained popularity.

According to the Forum for Sustainable and Responsible Investment (US SIF), "From 2007 to 2010, social investing enjoyed a growth rate of more than 13%, increasing from $2.71 trillion in 2007. Nearly one out of every eight dollars under professional management in the United States today, 12.2% of the $25.2 trillion in total assets under management tracked by Thomson Reuters Nelson, is involved in socially responsible investing." Furthermore, socially responsible investing "encompasses an estimated $3.07 trillion out of $25.2 trillion in the U.S. investment marketplace today." These figures were as of 2011.

Ethical investing isn't just for individual investors. Institutional investors also practice ethical investing. After all, many institutions, such as universities, are largely supported by individual donors, and the donors want their funds used in ways they approve of. Institutional investors are actually "the largest and fastest growing segment of the socially responsible investment (SRI) world," states US SIF. (To learn more, see our Introduction to Institutional Investing.)

Active Investing

Ethical investors are heavily involved in their investment decisions. They take their roles as part-owners of the companies they hold shares in seriously. They read annual reports and prospectuses, vote proxies and submit shareholder resolutions. They care who manages a company and who sits on its board. They are concerned about corporate transparency and accountability. They also want to know how companies are behaving with respect to the environment, social issues, human rights and workers' rights. Some ethical investors care about all of these issues; others choose to focus on just one or two. It's often difficult to find investments that meet 100% of an ethical investor's values and financial goals.

From a financial perspective, ethical investing has historically been considered a subpar investment style. However, it isn't true that socially responsible funds consistently underperform. Social investors don't have to sacrifice investment gains in the name of doing good. But, just like any type of investment, there are winners and losers in the ethical investing universe. It takes thorough research to find the investments that meet both ethics criteria and have the potential to meet desired performance goals.

Unethical Investors?

Of course, the idea that some investors are "ethical" doesn't mean that individuals and institutions that don't pursue ethical investing are unethical. Many people don't have the time, or the confidence, to make the active investment decisions required of ethical investors. Others simply don't like investing and want to put minimal effort into it. Chances are that these people are putting at least some of their money toward ethical causes whether they intend to or not. Investing for your family's future? That's ethical. And if you simply put your money in a Standard & Poor's 500 Index (S&P 500) fund, you can't help but have funds invested in a number of good companies.

What's more, people who consider themselves ethical investors often have to make compromises. A company that produces an ethical product might have some questionable business practices. A company that performs well on environmental issues might not perform well on social issues. A company that donates a percentage of its profits to the community might use sweatshop labor. Ethical investors are faced with the challenge of not only uncovering these complex issues, but deciding where to draw the line with their investments. Sometimes they will even invest in companies they are unhappy with and use shareholder activism to force the companies to change.

Even people who aren't particularly interested in the social, environmental, humanitarian or governance issues, that ethical investors support, can benefit from incorporating ethical investing principles into their investment strategies. Companies that treat people and the environment with respect are less likely to find themselves distracted by or burdened with lawsuits. Companies that have a positive image in the public eye are more likely to generate high sales levels. Ethical business practices can generate better profits and better returns for investors, especially in the long run. As Amy Domini, founder and CEO of ethical investment firm Domini Funds, puts it, "To pollute, to discriminate, to violate basic human rights, is just not good for business."

Ethical investing goes by a number of names, which will be used interchangeably throughout this tutorial. The most common is socially responsible investing; others include morally responsible investing, impact investing, mission investing, sustainable investing and triple bottom line investing (the triple bottom line being people, the planet and profits). (Learn more in Socially Responsible Stocks: Do Good Deeds Punish Profits?)

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Elliott Wave In The 21st Century

 

By Matt Blackman with Mike Green

There is a standard joke shared by technical analysts that if you were to put twelve Elliott Wave practitioners in a room, they would fail to reach an agreement on wave count and the direction in which a stock is headed. There is no doubt that the Elliott Wave theory has posed some interpretive challenges, but is such skepticism fair?

Robert Prechter, the undisputed leading expert of Elliott Wave, has made some excellent forecasts using the theory, particularly in the '70s and '80s - he forecasted the horrific crash of 1987. But Prechter's record at the end of the twentieth century has not been stellar. In fact, his book "At The Crest Of The Tidal Wave" (1995), which publicly called for the end of the great bull market in 1995, was nearly five years and many Dow points premature; he was advising clients to exit the market even though the ascent was nowhere near its end.

If even the leading Elliott Wave expert finds Elliott Wave theory and its application so challenging, what hope is there for the rest of us? The high degree of subjectivity involved in using the theory is one reason why it can be so problematic and why it is rare to find agreement among practitioners. This leads to uncertainty, which in trading or investing leads to inaction. This may explain why so many traders opt to trade without Elliott Wave or give up in frustration after using it for a while. But is such an attitude akin to throwing the baby out with the bath water?

In this feature, we hunt down and use Elliott Wave-based programs and products that greatly streamline the process of taking the theory and applying it to trade. Think of these as applications that help bring Elliott Wave into the twenty-first century.

Our goal is to familiarize readers with the new millennium version of Elliott Wave theory. For those who may have rejected the theory out of frustration, this tutorial will demonstrate how new developments in technology have transformed this application, which was developed more than sixty years ago.

First, let's take a look at the history of Prechter's application of Elliott Wave and how it demonstrates both the successes and challenges of the theory.

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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

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