HOW TO DO A STOCK ANALYSIS (COVERING FEW MODES AS PER INDIAN STOCK MARKET)

How To Do A Stock Analysis

Technical analysis is the method of predicting the stock price based on different factors. Stock analysts take note of the past market, price of the stock and volume of the traded stocks to do the stock analysis and thereby forecast the price of the stock. In practicetechnical analysis is done on the basis of the different models and trading patterns.

Analysts take note of various indicators such as relative strength index, regressions, moving averages, cycles regressions, inter-market and intra-market price correlations to prepare charts that actually show the pattern of the price movement for a particular stock. On the basis of the chart and indentifying the price pattern stock analysts predict the future movement of the stock. These financial indicators are actually mathematical transformation of the stock price and trading volume. Apart from these indicators some analysts also consider the market psyche while predicting the stock prices.

There are different models and theories in practice for stock analysis.

Candle Stick Charting - The method of candlestick charts was first developed byHomma Munehisa in the 18th century. The candlestick chart is basically a bar style chart that can be used to project and predict the price movement of the stock. The candlestick chart is basically the combination of the line chart and the bar chart and gives an overview of the opening price, closing price, high and low price in a day for over a period of time. This method of charting and technical analysis is very popular among the investors and analysts because of the easy readability of the chart.

Dow Theory - Dow Theory was first developed by Charles H. Dow, who was the first editor of the Wall Street Journal and co-founder of Dow Jones and Company. The theory is based on six basic tenets.

• There are three types of movements in the market.
• Market trends typically have three phases.
• Stock market discounts all news
• The market average must always confirm each other
• Market trends needs to be confirmed by the volume of trading
• Trends can only be said to be ended only when definitive signals prove that.

Elliott wave principle - This theory was developed by Ralph Nelson Elliott in his book The Wave Principle (1938). According to this theory the psychology of the investors generally moves from optimism to pessimism and this swing creates the price pattern that is projected by the three-wave structures of increasing degree or size.

Apart from above technical methods there are lot many methods available to do stock analysis of Indian stock market and movement of stocks listed in NSE and BSE can be estimated based on those indicators.

WHY TECHNICAL ANALYSIS?

Technical analysis is a commonly used term in the stock market and investors and experts are spending sleepless nights over it. Technical analysis of the stock is a method of predicting the stock price. There are different models or methods of doing the technical analysis like the Candle Stick Charting, Dow Theory, Elliott wave principle and so on. Thetechnical analysis is done on the basis of some data that are related to that particular stock. While doing the technical analysis, experts consider the past market, market trends, price of the stock and trading volume. Based on these data analysts perform the stock analysis to predict the price of that particular stock.

Through the stock analysis experts actually try to figure out the movement of a particular stock at the stock market. This is done by preparing charts on the basis of different indicators such as relative strength index, regressions, moving averages, cycles regressions, inter-market and intra-market price correlations. Once the chart or the pattern is formed according to the formula of the technical analysis experts figure out the similarity of the pattern with previous stock movements. When the pattern matches with a previous case, it is predicted that the stock will follow that pattern.

Technical analysis of the stock has given a mathematical and scientific explanation of the stock movements. This is a partially logical way of predicting the price of the stock and hence technical analysis is seriously considered by the experts and the investors in general. But in reality technical analysis is not the absolutely surefire way of predicting the price movement of the stock. Simply because there are so many other factors that influence the price of the stock other than those taken into consideration while doing the technical analysis. For example no technical analysis theory considers the psyche of the investors and panic in the market that hugely influences the stock prices.These factors are only considered by professionals in the market who understand market and are well versed with technical analysis too.

DOW THEORY

INTRODUCTION

The Dow Theory is developed by Charles Dow (1851-1902) who was journalist, founder and editor of WALL STREET JOURNAL this theory is refined by William Hamilton (1902-1929) after Dow’s death. The term Dow Theory was not used by Dow himself. Dow Theory provides basis for Stock price movements as well as Technical analysis. Dow Theory indicates that stock market behaves same today as it did 100 years ago.

Robert Rhea further refined the Dow’s theory in1932. Rhea studied the Dow’s and William concept and conveyed their thoughts on the market.

Dow Theory consist 6 basics concept for stock market movements as follows

Basically market has three types of trends upward, downward and volatile.

Dow said when prices are higher levels than those which was achieved in previous levels and prices are low than previous levels lows it means market is upward.(higher lows higher highs).

When there are lower lows and lower highs than it means market is downward. Market was volatile when there are both upwards and downwards.

Trends have three phases Accumulation phase, Public participation phase and Distribution phase.

In Accumulation phase stock prices does not change much more because in this phase investor is actively buying & selling securities against the general opinion of the market.

In public participation phase prices are rapidly changes because of participation by Technical investors.

In Distribution phase investors begin to distribute their holdings to the market.

Market hypothesis are efficient.

Stock prices are changes quickly (minute by minute). Once news about prices released prices will change to reflect this new information. At this point Dow Theory provides basis for efficient market hypothesis.

Trends are confirmed by volume.

Dow believed that trends are confirmed by volume. Low volume shows trend of aggressive seller. Dow believed that if many participants are active in particular security and prices moves significantly in one direction it is a signal of developing trend.

Stock market averages must confirm each other.

Dow first stock averages were an index of manufacturing and rail co.’s. Because goods were ship from manufacturing companies into the market by rail. According to this logic when profits of manufacturers become high than it means they will produce more goods. If they produce more then they have to ship more goods to consumers and therefore profits of railway also become high.  Soboth the averages should be moving in same direction.

Trends exist until definitive signals proved that they have ended.

Dow believed that market may be temporarily moved in opposite the trend but it will soon come on prior level. Trends become exist despite of market noise.

CANDLESTICK ANALYSIS: THE MOST POPULAR TRADING CHART

Candlestick analysis is one of the simplest and most effective methods of technical analysis for currency trading as well as stock trading. While there are other types of charts available including line and bar charts, the candle patterns are the most popular.

History Of Candlestick Charts

This type of price tracking chart was developed in Japan in the 18th century and that is why you will sometimes see them referred to as Japanese candlestick charts. It also explains why many of the common recognized patterns have Japanese names such as doji and marubozu.

The charts are believed to have been invented or at any rate used by the very successful Japanese commodity trader Mr. Homma who mainly profited from trading in the price of rice. Previously, simple line charts had been used to track commodity closing prices. Candlesticks gave traders a way of plotting more variables while staying within a two dimensional chart.

While bar charts can also plot the open, close, high and low, the advantage of candlesticks is their visual utility. Bullish and bearing periods are clearly visible at a glance.

Mr. Homma's phenomenal success as a trader led other Japanese commodity traders to adopt his analysis tool and in the early 20th century it was introduced to the American stock market by Charles Dow, the founder of the Wall Street Journal and co-founder of the Dow Jones company.

What Is A Candlestick

A typical candlestick has a block that is the body of the candle, plus vertical lines known as shadows or wicks which stick up and down from the body. The top of the upper shadow is the highest price reached during the trading period and the bottom of the lower shadow is the low.

The top and bottom of the candle block mark the opening and closing prices in either order. The candle was originally unshaded (white) for a rising market where the open was the bottom of the candle and the close was the top, or shaded (black or green) for a falling market where the open was the top of the block and the close the bottom. You may now see other colors used, e.g. green or blue for a rising market and red for a fall.

In a case where there is some coinciding of prices and the open, close, high and low are not all different, the candle may look slightly different. Here are some examples:

Doji - period with an equal opening and closing price, looks like a cross.

Marubozu - period when the opening price was the low and the closing price was the high (white marubozu) or vice versa (black marubozu). Has a candle body block only, with no shadow sticks top or bottom.

Candlestick Analysis In Real Time Trading

Candlesticks can record any measured time period. Typically traders will use 5 or 15 minute candles with the resulting chart showing several hours, but it is possible to set your chart for a longer term or shorter term view. Patterns can be identified that indicate emerging trends or possible forthcoming breakouts. You can then compare with indicators or other time periods to check the signals.

Trading decisions in the live market often need to be made very fast. The colored blocks of candlestick analysis help traders to see movements and reversals at a glance and avoid mistakes.

An interesting real documentary about trading

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Five Things You Absolutely Need To Know To Become A Successful Day Trader

Most people feel the lure of day trading: seeing the frenzy on the floor of the New York Stock Exchange, grabbing onto the tail of a skyrocketing stock, and earning your millions. They want to start day trading and find the answer to that famous quote from the movie Wall Street: “How many yachts can you water-ski behind?”
Unfortunately, the vast majority of these beginner traders want to see results faster than it takes to watch the movie. In fact, about 90% of beginner day traders are knocked out of the game within the first few months.
The good news is that this fact can easily be addressed. Just about all of those who crashed and burned did so because they didn’t have a plan. If you take the time to develop a plan and learn how to trade, you stand a much better chance of making that top 10% of day traders who go on to successful day trading careers.

Here are five things you need to know before you start day trading:
1. Is Day Trading Right For You? – This seems like a basic question, but you should seriously evaluate your trading personality. Will risking that much money make you nervous? Can you afford to lose money in the stock market? Are you financially – and emotionally – prepared to leave your job and co-workers behind you? These and other questions must be answered before you go any further in planning your day trading career.
2. How to Control Your Emotions – What most beginner day traders don’t realize is that trading psychology has a huge impact on your success – and the market likes to play with your mind! There are many different emotions that come into play, but it boils down to two main dangers: fear and greed. It is vitally important you learn how to control your emotions before you try to tackle the market.
3. How to Develop a Solid Trading Plan – If you fail to plan, you plan to fail. And yes, it really is that simple. A solid trading plan will include details like determining what type of trader you are, your trading strategies (see below), what products (stocks, e-minis, etc.) you will trade, what software you will use, even your entry points, exit points, and stop
loss points. The more detailed your plan, the more likely you are to have day trading success.
4. What Kind of Trading Strategies You Will Use – There are many trading strategies that will help you succeed at day trading. As a beginner trader you will probably be best served learning one or two to start with. For example, the Bull Trap is an easy type of momentum play for beginners to learn that allows you to predict a trend reversal, and cash in by following the momentum. But there are many different trading strategies; the key is finding the right set of strategies for you.
5. How to Develop a Business Plan – You should approach day trading as a business, not a hobby. Even if you plan to trade just part time, make sure you develop a full business plan that covers all the financial basics like how much trading capital you have, what your short-term and long-term financial goals are, developing cash flow statements, etc. You should also decide how you will work: where your office will be, what time you will be in your office in the morning, what daily preparation you will need, etc.
Learning these five things won’t guarantee that you will become a successful day trader. But if you start day trading before you find out these answers, you most certainly won’t get too far.

ARTICLE SUMMARY:
About 90% of beginner day traders are wiped out within a few months. The biggest reason is that most traders just jump into the market without any experience, knowledge, or planning. This article discusses five key things you need to know before you start risking real money in the market and helps increase your chances of day trading success