TECHNICAL ANALYSIS RATIONALE

Why would someone rely on just studying charts that plot past and current

price and volume information, as well as perhaps technical indicators or

formulas that use the same information?

The reasons are found in observations of the stock market, as first

noted by Charles Dow in this country and can be described in three ways.

1. Efficient Market. Over time, market prices reflect everything that

can be known about a stock and its future prospects. The market as

a mechanism is very efficient at discounting whatever can affect

prices. Even unforeseen events, such as new competition, legal or financial

problems, a company takeover, the death of a founder, and

so on are quickly priced into the stock. Even unknown (not yet

publicized) fundamental factors, such as a sharp earnings drop, are

seldom unknown or unanticipated by everyone; those who know

often act on the information, and selling volume starts to pick up

on rallies. Here I am not talking necessarily about facts known only

by company insiders. There are traders, investors, and analysts outside

a company or an industry who see changes coming, through astute

observation and sharp analysis.

2. Trends. The information about a company’s stock and its future

earnings prospects that are reflected in the stock price will also be

reflected in a price trend or tendency to go up or down. Trends are

not only up or down, but sideways as well or what is sometimes

called a trendless pattern—I consider a sideways movement to be

the third trend possibility, for example, a stock moves between 40

and 50 multiple times. A trend is the action of a body in motion

staying in motion until an equal countervailing force occurs.

3. Reoccurrence. Price trends occur and reoccur in patterns that are

largely predictable. The idea of trends reoccurring is that history repeats

itself. If there was abundant stock for sale (supply) previously

for sale at 50 and that selling caused a retreat in prices, it may well

be the case again when the stock approaches this level again. If it

doesn’t, that tells you something also, as demand was this time

strong enough to overcome selling.

The basic technical analysis rationale can be remembered by the ETR

acronym (as in Estimated Time of Arrival). Well, you can estimate arrivals

Source:-ESSENTIAL TECHNICAL ANALYSIS

by-LEIGH STEVENS

with technical analysis!

All About "SAR", Late Mr W.D. Gann's 'Stop And Reverse' Concept

Definition:

A stop and reverse (often known as SAR ) is a type of stop loss order that exits the current trade, and either simultaneously or immediately after wards, enters a new trade in the opposite direction. Stop and reverse orders combine elements of trade management and risk management, and are used in place of regular stop loss orders.

When Are Stop And Reverse Orders Used?

Stop and reverse orders are used when a trader wants to reverse their position (hence the name stop and reverse). For example, if a trader is in a long trade, and wants to exit the long trade and enter a short trade at the same price, they would use a stop and reverse order. The same task could be accomplished manually (i.e. placing an exit order, followed by an entry order), but stop and reverse orders are more efficient as they can combine the entry and exit into a single order.

How Do Stop And Reverse Orders Work?

Stop and reverse orders not a standard order type, and are not offered by many brokerages or any exchanges (that I am aware of). Therefore, stop and reverse orders are usually implemented by the trader's trading software (order entry software), and therefore their implementation can vary significantly, but with the same end result (a new trade in the opposite direction). If a trader's trading software does not offer stop and reverse orders (many do not), the trader can create a stop and reverse order by doubling the number of contracts (or shares, or lots, etc.) in their stop loss orders. For example, if a trader is in a long trade with one contract, a stop loss order that is placed for two contracts will function exactly like a stop and reverse order. Note that stop and reverse orders are not related to the Parabolic SAR indicator, however, a trader that is trading using the Parabolic SAR indicator may use stop and reverse orders in their trading.

Also Known As: SAR

(Courtesy: about.com) Mr Gann calculated SAR from the previous two trading days data. If Downtrend, he would use the Highest High of previous two trading days as SAR, if Uptrend he would use previous two trading days' Lowest Low as SAR.

Technical analysis says that when ever a stock price rises, it will continue to rise till there is break. This continuous rise in the price of the stock is known as 1.Uptrend. On the other hand when ever the price of the stock falls, it will continue to fall until the situation changes. This is known as 2.Downtrend. A chart is a combination of up trends and down trends.

As a investor or analyst we need to figure out the starting point of the uptrend to take a position and ending point of the uptrend so that we can make maximum profit. Similarly a buying decision in down trend can be taken at the end point of the down trend. Hence we use various methods in technical analysis to identify these trends.

In the chart shown above the price starts falling and the trend become DOWN, and the price again move up and the trend Become UPTREND.You can view/identify both these trends a line drawn in the chart.

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There is another trend is called 3.SIDE WAYS.

In side ways trend the price will held in a narrow cage and move side ways.When this happen we will not have buy and sell chances.Where us in up trend one can buy at low and sell at high.In Down trend one can sell at high and buy at low.The price differences between buy and sell is your profit.

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How to identify when to buy/sell !!!

We need to understand various technical parameters/analysis.There are so many indicators and chart patterns through which we can identify/will know when to buy and when to sell.It is a big study.We will discuss one after another ...

Technical Analysis’ Based on three assumptions-

1.The Market Discounts Everything.

2.Price Moves In Trends.

3.History Tends To Repeat Itself.

Mission of Technical Analysis:-

• Foresee the trend in advance and beat the crowd.
• The Overall markets are 80% Psychological and 20% Logical.
• Thousand and thousands of people make their first trade everyday.
• Technical Analysts employs tricks to take advantages of ‘Dump Money’
• The photo shown here is Larry Williams>- Larry Williams one of the pioneer in TA,Entered in trading competition and returned over 20,000% in a year

Larry Williams is one of my roll models in field of 'Technical Anlysis'.He is the one who found the 'Williom R%' indicators.He has devised many such indicators and still not reavealed it to the public and use all his tactics for his own trades and almost win in all his attempts and made massive wealth.

The Role Of Fundamental Analyst and Technical Analyst

Both Fundamental & Technical Analysts are the best for day trading and long term investment.

Let me give you the recent example:

After the LIC Housing Loan scam hit in news, the market fell down sharply and mainly the realty stocks touched new year bottoms. We gave a sell call based on news In 'CORE PROJET' near 240 and it fell down to 150 level .We covered short and also double bought based on fundamentals. it is worth to buy&hold for Rs.150..Same day it gone to Rs.250 and we sold it fully.

Many of our clients sold 100 qty- at Rs.243 and bought at Rs.155 and freshly bought at Rs.147 and sold in Rs.235 level.We made a gain of 88+88=176 points in intraday itself.The net profit in Intraday was 100X176=Rs.17600/-

We sold it, based on technicals and bought it based on the fundamentals of this stock.Thats what we used to insist buy value based stock at right time.We had an opportunity to buy at low &sell at high in core project..This may happen once in a blue moon,the investors need to wait like a 'Crane' which used to wait on the running water standing in one leg to catch the 'fish'. Even now the Current market price is around Rs.310.So what i say here is,both are good at its own way. it is upto the analyst who apply it in day trading.

Gaps Understandings and how to use it for stock trading?

There are four types of gaps :

1.Common Gap
2.Breakaway Gap
3.Runaway
4.Exhaustion

Gaps are formed on daily bar charts where no trading has taken place. In an upside gap for example, a gap would be formed if the open is higher than the previous bars high (Murphy definition).

A downside gap would be formed if the open was lower than the previous bars low. These initial gapping moves form true gaps when at the end of that trading day the gap is left unfilled. So in an upside gap, todays low is higher than the previous bars high, in a downside gap todays high is lower than the previous bars low.

Common myth: All gaps must be filled. This a very tempting intra-day strategy but is strictly speaking, not true.

Common Gap
This type of gap generally occurs in the middle of trading ranges or in thinly traded markets. Chartists tend to ignore the common gap but futures traders are always keen to use the common gap with the following points in mind:
1.Every gap must be filled - which remember is not strictly speaking true
2.The gap high and low and even the close and open can be used as support and resistance levels.
3.Common gaps offer little to trend analysis or confirmation of a pattern breakout or reversal and are usually ignored by chartists.

Breakaway Gap
This type of gap can occur at the completion of a significant pattern. A breakaway gap gives a strong signal that the market has started a new trend or phase of a trend. This gap has more significance if it is left unfilled, and should remain unclosed to have validity. On an upside gap, the high of the previous bar (the gap low) is considered to be strong support. On a downside gap the low of the previous bar is considered to be strong resistance.

1.Breakaway gaps are seen as patterns are completed and stops are triggered, the market may be receiving a shock.
2.Breakaway gaps can be used as support or resistance as orders will be left at these levels to cut losses or initiate trades.
3.Once the breakaway gap is confirmed (the gap holds on a test) the trend move should be strong.

Runaway Gap
Once the trend is underway prices may leap forward to form a gap or even a series of gaps. This may have some strong volume associated with it. The runaway gap offers the same support and resistance studies that the breakaway gap does.
1.The runaway gap sometimes occurs in the middle of the trend move and can be a measuring gap.
2.The runaway gap occurs as the trend gathers more believers, new funds flow into the market to re-enforce the trend.
3.The runaway gap also occurs as stale longs or shorts cut their positions and take their losses. This can be on the back of news, shocks to supply/demand, or simply too much pain in existing positions.Exhaustion Gap

Exhaustion Gap
Once the trend is well established and most targets/objectives have been met, an exhaustion gap may be seen. This will appear like another runaway gap, but the price action will be critical. Basically, once the gap is seen, but is then filled and closed, the exhaustion gap could be in place.
1.Exhaustion gap is seen at the end of the trend move.
2.Exhaustion gap is confirmed as the gap is filled and closed.
3.Exhaustion gap signals a trend change


Island reversals
Island reversals occur when the market gaps higher with an upward exhaustion gap (or lower with a downwards exhaustion gap), trades in a narrow range for a few days and then gaps lower again. This leaves an “island” of prices, surrounded by unfilled space and usually signals a trend reversal.

Opening Gaps are worth watching out for in intraday trading, but dont get too obsessed with them!!

Attend our 2-days 'Technical Analysis Workshop'.

Where we will coach you how to analyse these gaps and gain out of it in the real market situation.

Average Directional Index -ADX

Introduction
J. Welles Wilder developed the Average Directional Index (ADX) to evaluate the strength of a current trend, be it up or down.

It's important to determine whether the market is trending or trading (moving sideways), because certain indicators give more useful results depending on the market doing one or the other.

The ADX is an oscillator that fluctuates between 0 and 100. Even though the scale is from 0 to 100, readings above 60 are relatively rare. Low readings, below 20, indicate a weak trend and high readings, above 40, indicate a strong trend.

The indicator does not grade the trend as bullish or bearish, but merely assesses the strength of the current trend. A reading above 40 can indicate a strong downtrend as well as a strong uptrend.

ADX can also be used to identify potential changes in a market from trending to non-trending. When ADX begins to strengthen from below 20 and moves above 20, it is a sign that the trading range is ending and a trend is developing.

When ADX begins to weaken from above 40 and moves below 40, it is a sign that the current trend is losing strength and a trading range could develop.

Positive/Negative Directional Indicators
The ADX is derived from two other indicators, also developed by Wilder, called the Positive Directional Indicator (sometimes written +DI) and the Negative Directional Indicator (-DI).

In its most basic form, buy and sell signals can be generated by +DI/-DI crosses.

A buy signal occurs when +DI moves above -DI and a sell signal when -DI moves above the +DI.

As with most technical indicators, +DI/-DI crosses should be used in conjunction with other aspects of technical analysis.

The ADX combines +DI with -DI, and then smooths the data with a moving average to provide a measurement of trend strength. Because it uses both +DI and -DI, ADX does not offer any indication of trend direction, just strength.

The Directional Movement Index, DMI, is an effective and frequently used trend indicator. This system was designed by Welles Wilder Jr. and is made up of three lines:
1. The +DI indicates the up average.
2. The -DI indicates the down average.
3. The ADX, average directional movement index, shows whether a trend is in effect by smoothing the difference between the +DI and -DI.

The time periods most commonly used in the complex formula are 10 or 14 days.

According to Wilder the DMI should be used with the ADX as a filter.
A rising ADX line means the market is trending and a better candidate for a trend-following system.

A falling ADX line indicates a non-trending market.

Some traders also look for an ADX greater than 20 or 25 to confirm that the market is trending. When the ADX line starts to drop from above the 40 level, that is an early sign that the trend is weakening. A rise back above 20 is often a sign of the start of a new trend.

Signals
Generally speaking, the two main buy and sell signals generated by DMI are as follows:
* A buy signal is given when +DI crosses above the -DI line.
* A sell signal is given when +DI crosses below the -DI line.

An ADX below 25 is a strong warning to avoid trading.

Pivot trading

Hi Dear Readers,

I happen to answers many query's about the 'Technical Analysis' . There are many new comers to our site who is also new to stock trading and keen in learning the basics..So i have posted here the most basics "Pivot Trading" and hope it may help the new comers to learn and initiate spark in further learning .

Pivot trading is very popular in floor trading; it gives us the fair value of financial instruments. Emotional trading will always move the price from its fair value but when traders realize the price is overbought or oversold, they will sell the overbought currency and buy oversold currency.

That’s why pivot point and the associated support and resistance levels often are turning points for the direction of price movement in a market. In an up-trending market, the pivot point and the resistance levels may represent a ceiling level (overbought) in price above which the uptrend is no longer sustainable and a reversal may occur. In a declining market, a pivot point and the support levels may represent a low price level of stability (oversold) or a resistance to further decline.

Calculation:

Several methods exist for calculating the pivot point (P) of a market. Most commonly, it is the arithmetic average of the high (H), low (L), and closing (C) prices of the market in the prior trading period:

P = (H + L + C) / 3.

Sometimes, the average also includes the previous periods or the current period's opening price (O):
P = (O + H + L + C) / 4.

In other cases, traders like to emphasize the closing price,
P = (H + L + C + C) / 4,

(Or) the current periods opening price,

P = (H + L + O + O) / 4.


Support and resistance levels

Price support and resistance levels are key trading tools in any market. Their roles may be interchangeable, depending on whether the price level is approached in an up-trending or a down-trending market. These price levels may be derived from many market assumptions and conventions. In pivot point analysis, several levels, usually three, are commonly recognized below and above the pivot point. These are calculated from the range of price movement in the previous trading period, added to the pivot point for resistances and subtracted from it forsupport levels.


The first and most significant level of support (S1) and resistance (R1) is obtained by recognition of the upper and the lower halves of the prior trading range, defined by the trading above the pivot point (H − P), and below it (P − L). The first resistance on the up-side of the market is given by the lower width of prior trading added to the pivot point price and the first support on the down-side is the width of the upper part of the prior trading range below the pivot point.


• R1 = P + (P − L) = 2×P − L
• S1 = P − (H − P) = 2×P − H

Thus, these level may simply be calculated by subtracting the previous low (L) and high (H) price, respectively, from twice the pivot point value:The second set of resistance (R2) and support (S2) levels are above and below, respectively, the first set. They are simply determined from the full width of the prior trading range (H −L), added to and subtracted from the pivot point, respectively:

• R2 = P + (H − L)
• S2 = P − (H − L)

Commonly a third set is also calculated; again representing another higher resistance level (R3) and a yet lower support level (S3). The method of the second set is continued by doubling the range added and subtracted from the pivot point:

• R3 = P + 2× (H − L)
• S3 = P − 2×(H − L)


This concept is sometimes, albeit rarely, extended to a fourth set in which the tripled value of the trading range is used in the calculation. Qualitatively, the second and higher support and resistance levels are always located symmetrically around the pivot point, whereas this is not the case for the first levels, unless the pivot point happens to divide the prior trading range exactly in half.

OPEN INTEREST AND ITS INTERPRETATION

A CONTRACT HAS BOTH A BUYER AND A SELLER, SO THE TWO MARKET PLAYERS COMBINE TO MAKE ONE CONTRACT. THE OPEN-INTEREST POSITION THAT IS REPORTED EACH DAY REPRESENTS THE INCREASE OR DECREASE IN THE NUMBER OF CONTRACTS FOR THAT DAY, AND IT IS SHOWN AS A POSITIVE OR NEGATIVE NUMBER. AN INCREASE IN OPEN INTEREST ALONG WITH AN INCREASE IN PRICE IS SAID TO CONFIRM AN UPWARD TREND. SIMILARLY, AN INCREASE IN OPEN INTEREST ALONG WITH A DECREASE IN PRICE CONFIRMS A DOWNWARD TREND. AN INCREASE OR DECREASE IN PRICES WHILE OPEN INTEREST REMAINS FLAT OR DECLINING MAY INDICATE A POSSIBLE TREND REVERSAL.

RULES OF OPEN INTEREST

1. IF PRICES ARE RISING AND OPEN INTEREST IS INCREASING AT A RATE FASTER THAN ITS FIVE-YEAR SEASONAL AVERAGE, THIS IS A BULLISH SIGN. MORE PARTICIPANTS ARE ENTERING THE MARKET, INVOLVING ADDITIONAL BUYING, AND ANY PURCHASES ARE GENERALLY AGGRESSIVE IN NATURE.
2. IF THE OPEN-INTEREST NUMBERS FLATTEN FOLLOWING A RISING TREND IN BOTH PRICE AND OPEN INTEREST, TAKE THIS AS A WARNING SIGN OF AN IMPENDING TOP.
3. HIGH OPEN INTEREST AT MARKET TOPS IS A BEARISH SIGNAL IF THE PRICE DROP IS SUDDEN, SINCE THIS WILL FORCE MANY 'WEAK' LONGS TO LIQUIDATE. OCCASIONALLY, SUCH CONDITIONS SET OFF A SELF-FEEDING, DOWNWARD SPIRAL.
4. AN UNUSUALLY HIGH OR RECORD OPEN INTEREST IN A BULL MARKET IS A DANGER SIGNAL. WHEN A RISING TREND OF OPEN INTEREST BEGINS TO REVERSE, EXPECT A BEAR TREND TO GET UNDERWAY.
5. A BREAKOUT FROM A TRADING RANGE WILL BE MUCH STRONGER IF OPEN INTEREST RISES DURING THE CONSOLIDATION. THIS IS BECAUSE MANY TRADERS WILL BE CAUGHT ON THE WRONG SIDE OF THE MARKET WHEN THE BREAKOUT FINALLY TAKES PLACE. WHEN THE PRICE MOVES OUT OF THE TRADING RANGE, THESE TRADERS ARE FORCED TO ABANDON THEIR POSITIONS. IT IS POSSIBLE TO TAKE THIS RULE ONE STEP FURTHER AND SAY THE GREATER THE RISE IN OPEN INTEREST DURING THE CONSOLIDATION, THE GREATER THE POTENTIAL FOR THE SUBSEQUENT MOVE.
6. RISING PRICES AND A DECLINE IN OPEN INTEREST AT A RATE GREATER THAN THE SEASONAL NORM IS BEARISH. THIS MARKET CONDITION DEVELOPS BECAUSE SHORT COVERING AND NOT FUNDAMENTAL DEMAND IS FUELING THE RISING PRICE TREND. IN THESE CIRCUMSTANCES MONEY IS FLOWING OUT OF THE MARKET. CONSEQUENTLY, WHEN THE SHORT COVERING HAS RUN ITS COURSE, PRICES WILL DECLINE.
7. IF PRICES ARE DECLINING AND THE OPEN INTEREST RISES MORE THAN THE SEASONAL AVERAGE, THIS INDICATES THAT NEW SHORT POSITIONS ARE BEING OPENED. AS LONG AS THIS PROCESS CONTINUES IT IS A BEARISH FACTOR, BUT ONCE THE SHORTS BEGIN TO COVER IT TURNS BULLISH.
8. A DECLINE IN BOTH PRICE AND OPEN INTEREST INDICATES LIQUIDATION BY DISCOURAGED TRADERS WITH LONG POSITIONS. AS LONG AS THIS TREND CONTINUES, IT IS A BEARISH SIGN. ONCE OPEN INTEREST STABILIZES AT A LOW LEVEL, THE LIQUIDATION IS OVER AND PRICES ARE THEN IN A POSITION TO RALLY AGAIN.


THE ABOVE SHOWN PICTURES IS SIMPLE AND EASY TO UNDERSTAND
SO, PRICE ACTION INCREASING IN AN UPTREND AND OPEN INTEREST ON THE RISE ARE INTERPRETED AS NEW MONEY COMING INTO THE MARKET (REFLECTING NEW BUYERS) AND IS CONSIDERED BULLISH. NOW, IF THE PRICE ACTION IS RISING AND THE OPEN INTEREST IS ON THE DECLINE, SHORT SELLERS COVERING THEIR POSITIONS ARE

Technical Analysis for Long Term Investors

An investor can benefit from the use of technical analysis for her investment decisions.

Long term charts can identify many patterns.
(a) Stocks in parabolic rallies. You should wait for corrections before entering.

(b) Stocks in trading range. These are stocks you may wish to track on lower time frame charts for breakouts.

(c) Stocks in deep downtrends. These stocks should be avoided till they begin to form bases, or succeed in tests of support.

(d) Stocks in visibly defined uptrend. Such stocks have a pattern of higher highs, higher lows. These are the stocks that you will be investing in.

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If , the index or the particular Script - one may wish to choose to buy for investment,it is important to see the pattern of 'consolidation' (for a longer time) it will bounce up anytime and one need to buy the same when just before it rise up.The Flag&pole also in great help to identify this.

TECHNICAL ANALYSIS WORKSHOP

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In This Two Days 'Workshop' we will make the individual to become independent to analysis the Stock Market and there by gain a great profits on daily & monthly basis.


For your participation or Conducting class in your place mail us @ > atmoaiswar@yahoo.in

Phi and the Fibonacci Series

Phi and the Fibonacci Series

Leonardo Fibonacci discovered the series which converges on phi

In the 12th century, Leonardo Fibonacci discovered a simple numerical series that is the foundation for an incredible mathematical relationship behind phi.
Starting with 0 and 1, each new number in the series is simply the sum of the two before it.
0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377 . . .

The ratio of each successive pair of numbers in the series approximates phi (1.618. . .) , as 5 divided by 3 is 1.666..., and 8 divided by 5 is 1.60.

The table below shows how the ratios of the successive numbers in the Fibonacci series quickly converge on Phi. After the 40th number in the series, the ratio is accurate to 15 decimal places.
1.618033988749895 . . .

Compute any number in the Fibonacci Series easily!

Here are two ways you can use phi to compute the nth number in the Fibonacci series (fn).
If you consider 0 in the Fibonacci series to correspond to n = 0, use this formula:
fn = Phi n / 5½
Perhaps a better way is to consider 0 in the Fibonacci series to correspond to the 1st Fibonacci number where n = 1 for 0. Then you can use this formula, discovered and contributed by Jordan Malachi Dant in April 2005:
fn = Phi n / (Phi + 2)
Both approaches represent limits which always round to the correct Fibonacci number and approach the actual Fibonacci number as n increases.

Cup with handle formation

i have found in the intraday banknifty future chart the 'Cup with handle formation' it is similar in appearance to Rounded Bottoms. Like rounded bottoms, the pattern includes an elongated U-shape.The pattern is similar in appearance to a coffee cup with a right-side handle, and indicates the potential for an uptrend.
....

Usually this cup formation tend to happens in 1-2weeks time and it is a kind of cosolidation for the uptrend since the extended right side handle . But today i am surprised to see the same in intraday chart and the technicals worked as well in intraday too.
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Bollinger Bands

Bollinger Bands Introduction:
Bollinger Bands are a technical trading tool created by John Bollinger in the early 1980s. They arose from the need for adaptive trading bands and the observation that volatility was dynamic, not static as was widely believed at the time.

The purpose of Bollinger Bands is to provide a relative definition of high and low. By definition prices are high at the upper band and low at the lower band. This definition can aid in rigorous pattern recognition and is useful in comparing price action to the action of indicators to arrive at systematic trading decisions.

Bollinger Bands consist of a set of three curves drawn in relation to securities prices. The middle band is a measure of the intermediate-term trend, usually a simple moving average, that serves as the base for the upper band and lower band. The interval between the upper and lower bands and the middle band is determined by volatility, typically the standard deviation of the same data that were used for the average. The default parameters, 20 periods and two standard deviations, may be adjusted to suit your purposes.

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The 15 basic Bollinger Band rules

The 15 basic rules for using Bollinger Bands.One of the great joys of having invented an analytical technique such as BollingerBands is seeing what other people do with it. While there are many ways to use Bollinger Bands, following are a few rules that serve as a good beginning point.

1. Bollinger Bands provide a relative definition of high and low.
2. That relative definition can be used to compare price action and indicatorto arrive at rigorous buy and sell decisions.
3. Appropriate indicators can be derived from momentum, volume, sentiment, openinterest, inter-market data, etc.
4. Volatility and trend have already been deployed in the construction of BollingerBands, so their use for confirmation of price action is not recommended.
5. The indicators used for confirmation should not be directly related to one another.Two indicators from the same category do not increase confirmation. Avoid colinearity.
6. Bollinger Bands can also be used to clarify pure price patterns such as M-type;tops and W-type bottoms, momentum shifts, etc.
7. Price can, and does, walk up the upper Bollinger Band and down the lower BollingerBand.
8. Closes outside the Bollinger Bands can be continuation signals, not reversalsignals--as is demonstrated by the use of Bollinger Bands in some very successfulvolatility-breakout systems.
9. The default parameters of 20 periods for the moving average and standarddeviation calculations, and two standard deviations for the bandwidth are justthat, defaults. The actual parameters needed for any given market/task may bedifferent.
10. The average deployed should not be the best one for crossovers. Rather, itshould be descriptive of the intermediate-term trend.
11. If the average is lengthened the number of standard deviations needs to beincreased simultaneously; from 2 at 20 periods, to 2.1 at 50 periods. Likewise,if the average is shortened the number of standard deviations should be reduced;from 2 at 20 periods, to 1.9 at 10 periods.
12. Bollinger Bands are based upon a simple moving average. This is because asimple moving average is used in the standard deviation calculation and we wishto be logically consistent.
13. Be careful about making statistical assumptions based on the use of the standarddeviation calculation in the construction of the bands. The sample size in mostdeployments of Bollinger Bands is too small for statistical significance and thedistributions involved are rarely normal.
14. Indicators can be normalized with %b, eliminating fixed thresholds in the process.
15. Finally, tags of the bands are just that, tags not signals. A tag of the upperBollinger Band is NOT in-and-of-itself a sell signal. A tag of the lower BollingerBand is NOT in-and-of-itself a buy signal.

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

A comprehensive guide to using Bollinger Bands
from the man who created them!

Over the past two decades, thousands of veteran traders have come to view Bollinger Bands as the most representative-and reliable-tool for assessing expected price action. Now, in his long-anticipated first book Bollinger on Bollinger Bands, John Bollinger himself explains how to use this extraordinary technique to effectively compare price and indicator movements-for sound, sensible, and profitable trading decisions.


John Bollinger developed Bollinger Bands in the early '80s. Since their introduction, they have become one of the most widely used technical indicators by investors and technical analysts. Bollinger Bands are currently available on most of the stock market software and Internet charts in use and for good reason-they work! While many investors have heard of Bollinger Bands and use them, prior to this book there was no literature explaining how to use them properly.

This book is John Bollinger's answer to numerous requests for guidance.

How will Bollinger Bands help you make better investments?

They provide a relative definition of whether the current price is high or low. This book explains how that relative definition can be used to compare price action and indicator action to arrive at rigorous buy and sell decisions.

"Bollinger on Bollinger Bands" explains in simple language how to use Bollinger Bands and how to use a wide array of technical tools and indicators to make rational investing choices. Starting with the basics and building to the complex, the book teaches the technical analysis process. Learn which indicators to use and how to read charts. The book takes multiple investment styles and timeframes into consideration so there is valuable information for the day trader as well as long-term investor.

"Bollinger on Bollinger Bands" provides trading systems that you can employ and integrate into your investment style. It also comes with a reference guide for easy recognition of trading patterns. The layout and content of the book provide hands-on guidance on how to use Bollinger Bands effectively to improve investing results.

If you use Bollinger Bands already and or if you want to learn how, "Bollinger on Bollinger Bands" is a must read.

The basics through advanced topics
Three trading systems
How to set up optimal charts
Indicators to use for confirmation
Easy pattern recognition techniques
Normalization of indicators for easier interpretation
Multiple investment styles and timeframes
For day-traders and long-term investors
Free reference guide with trading patterns

Further Readings Visit The Source.
Source ~ See Bollinger Bands in action at > www.BollingerOnBollingerBands.com.

Dow Theory

Click on the picture to enlarge and see the details.

Trading with Dow Theory

There are many times in a bear market when people (especially the media) start getting excited. The market starts to rally, and before you know it we have truck loads of market experts calling a new bull market. But how do you look through all the news and noise and really tell if a new bull market has really started?

Here is one way that has been very successful in keeping out of bad trades and staying in good ones over the last 50 – 100 years. Originally coined from Charles Dow’s own writings (if his name sounds familiar, it’s because it is one half of the “Dow Jones Index”) Dow Theory, as it is now called, is simple and quick to use. But why would we use Dow Theory?

Here are the main benefits:
1: Dow Theory is an easy and measurable way to recognise when the market is heading up, and when the market is heading down (and likely to continue).

2: As Dow Theory is viewed on a weekly chart, you only need to scan the market once a week. This means you can work full time and still trade successfully.

3: Being a weekly strategy, you get to capture the longer weekly trends. These will usually range from 5% to 30%, but can stretch out to 50%, 100% or more.

4: Dow Theory is easy to recognise. You do not need to have any fancy indicators, volume, or astrological charts on your screen to recognise a Dow Theory signal.

Now, according to Dow Theory, to have a bear market we must see a peak in price, followed by a trough, then followed by a lower peak. Once price trades through or closes below the previous trough, this is our signal to sell.

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By the same token, to have a bull market we must see a trough, followed by a peak, then followed by a higher trough. Once price trades through or closes above the previous peak, this is our signal to buy. If this all seems confusing,

I found the above picture which says a thousand words
Graph Source > http://www.asxmarketwatch.com/wp-content/uploads/2009/06/dow-theory1.jpg

FUTURE and OPTIONS (F&O)

What are Futures?

Futures are a financial derivative known as a forward contract. A futures contract obligates the seller to provide a commodity or other asset to the buyer at an agreed-upon date. Futures are widely traded for commodities such as sugar, coffee, oil and wheat, as well as for financial instruments such as stock market indexes, government bonds and foreign currencies.

The earliest known futures contract is recorded by Aristotle in the story of Thales, an ancient Greek philosopher. Believing that the upcoming olive harvest would be especially bountiful, Thales entered into agreements with the owners of all the olive oil presses in the region. In exchange for a small deposit months ahead of the harvest, Thales obtained the right to lease the presses at market prices during the harvest. As it turned out, Thales was correct about the harvest, demand for oil presses boomed, and he made a great deal of money.

By the 12th century, futures contracts had become a staple of European trade fairs. At the time, traveling with large quantities of goods was time-consuming and dangerous. Fair vendors instead traveled with display samples and sold futures for larger quantities to be delivered at a later date. By the 17th century, futures contracts were common enough that widespread speculation in them drove the Dutch Tulip Mania, in which prices for tulip bulbs became exorbitant. Most money changing hands during the mania was, in fact, for futures on tulips, not for tulips themselves. In Japan, the first recorded rice futures date from 17th century Osaka. These futures offered the rice seller some protection from bad weather or acts of war. In the United States, the Chicago Board of Trade opened the first futures market in 1868, with contracts for wheat, pork bellies and copper.

By the early 1970s, trading in futures and other derivatives had exploded in volume. The pricing models developed by Fischer Black and Myron Scholes allowed investors and speculators to rapidly price futures and options on futures. To supply the demand for new types of futures, major exchanges expanded or opened across the globe, principally in Chicago, New York and London.

Exchanges play a vital role in futures trading. Each futures contract is characterized by a number of factors, including the nature of the underlying asset, when it must be delivered, the currency of the transaction, at what point the contract stops trading, and the tick size, or minimum legal change in price. By standardizing these factors across a wide range of futures contracts, the exchanges create a large, predictable marketplace.

Futures trading is not without significant risk. Because futures contracts generally entail high levels of leverage and they have been at the heart of many market blowups.

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Options - A beginner's guide

Introduction

A few weeks back, capital markets regulator, SEBI, decided to introduce options from July 2, 2001. While trading on index-based options has begun, that on scrip- based options would begin from July 2. The introduction of options came in the wake of a concomitant ban on the 135-year old carry forward system, popularly called badla. The introduction of options is yet another milestone in India's march toward globalisation and the adoption of international systems and best practices. Much like stocks, options can be used to take a position on the market in an effort to capitalize on an upward or downward market move. Unlike stocks, however, options can provide an investor the benefits of leverage over a position in an individual stock or basket of stocks reflecting the broad market.

Enumerated below are some basics on options:-

What is Options?
A stock option is a contract which gives the buyer the right, but not the obligation, to buy or sell shares of the underlying security or index at a specific price for a specified time. Stock option contracts generally are for 100 shares of the underlying stock. There are two types of options, calls and puts.


What is a call option?
A call option gives the buyer the right, but not the obligation, to buy the underlying security at a specific price for a specified time. The seller of a call option has the obligation to sell the underlying security should the buyer exercise his option to buy.


What is a put option?
A put option gives the buyer the right, but not the obligation, to sell an underlying security at a specific price for a specified time. The seller of a put option has the obligation to buy the underlying security should the buyer choose to exercise his option to sell.


What is the option premium?
The premium is the price at which the contract trades. The premium is the price of the option and is paid by the buyer to the writer, or seller, of the option. In return, the writer of the call option is obligated to deliver the underlying security to an option buyer if the call is exercised or buy the underlying security if the put is exercised. The writer keeps the premium whether or not the option is exercised.

What is a strike price?
The strike, or exercise, price of an option is the specified share price at which the shares of stock can be bought or sold by the buyer if he exercises the right to buy (in the case of a call) or sell (in the case of a put).


What is an at-the-money option?

An in-the-money option?

An out-of- the money option?
When the price of the underlying security is equal to the strike price, an option is at-the-money. A call option is in-the-money if the strike price is less than the market price of the underlying security. A put option is in-the-money if the strike price is greater than the market price of the underlying security. A call option is out-of- the-money if the strike price is greater than the market price of the underlying security. A put option is out-of-the money if the strike price is less than the market price of the underlying security.

What is a contract size of an equity option?
The amount of the underlying asset covered by the options contract. This is 100 shares for one option unless adjusted for a special event, such as a stock split or a stock dividend.

What is open interest?
Open interest refers to the number of outstanding option contracts in the exchange market or in a particular class or series.

What does it mean to be exercised or assigned on an option transaction?
When you buy an option you have the right to either purchase or sell stock at a predetermined price. When and if you choose to purchase or sell stock at that predetermined price you are said to be " exercising your right".When you sell an option you now have the obligation to sell or purchase stock. You have or may not have to fulfill that obligation. You are considered to be "assigned" if you are being required to fulfill that obligation. Typically this occurs when the option is in-the-money.


What happens to my option if I do nothing?
If you bought a call or put you would lose the premium you paid for the option plus whatever commissions and fees incurred on that transaction. If you sold a call or a put and your option is in-the-money you will most likely be assigned and you will have to sell or buy stock.

What is a European-style and American-style option?
American-style is an option contract that can be exercised at any time between the date of purchase and the expiration date. Most exchange-traded options are American-style. All stock options are American-style. European-style is an option contract that can only be exercised on the expiration date.

What is the expiration date?
The last day (in the case of American-style) or the only day (in the case of European-style) on which an option may be exercised.

What is a strike price and how are they determined?
A strike price is the actual numeric value of the option. For example, a May option may have strike prices of 45, 50 and 55. Strike prices are determined when the underlying reaches a certain numeric value and trades consistently at or above that value. If, for example, XYZ stock was trading at 49, hit a price of 50 and traded consistently at this level, the next highest strike may be added.

How options work?
If you anticipate a certain directional movement in the price of a stock, the right to buy or sell that stock at a predetermined price, for a specific duration of time can offer an attractive investment opportunity. The decision as to what type of option to buy is dependent on whether your outlook for the respective security is positive (bullish) or negative (bearish). If your outlook is positive, buying a call option creates the opportunity to share in the upside potential of a stock without having to risk more than a fraction of its market value. Conversely, if you anticipate downward movement, buying a put option will enable you to protect against downside risk without limiting profit potential. Buying an XYZ July 50 call option gives you the right to purchase 100 shares of XYZ common stock at a cost of Rs50 per share at any time before the option expires in July. The right to buy stock at a fixed price becomes more valuable as the price of the underlying stock increases. Assume that the price of the underlying shares was Rs50 at the time you bought your option and the premium you paid was 3 1/2 (or Rs350). If the price of XYZ stock climbs to Rs55 before your option expires and the premium rises to 5 1/2, you have two choices in disposing of your in-the-money option:

You can exercise your option and buy the underlying XYZ stock for Rs50 a share for a total cost of Rs5,350 (including the Option premium) and simultaneously sell the shares on the stock market for Rs5,500 yielding a net profit of Rs150.

You can close out your position by selling the option contract for Rs550, collecting the difference between the premium received and paid, Rs200. In this case, you make a profit of 57% (200/350), whereas your profit on an outright stock purchase, given the same price movement, would be only 10% (55-50/50).

Bullish Outlook
The profitability of similar examples will depend on how the time remaining until expiration affects the premium. Remember, time value declines sharply as an option nears its expiration date. Also influencing your decision will be your desire to own the stock. If the price of XYZ instead fell to Rs45 and the option premium fell to 7/8, you could sell your option to partially offset the premium you paid. Otherwise, the option would expire worthless and your loss would be the total amount of the premium paid or Rs350. In most cases, the loss on the option would be less than what you would have lost had you bought the underlying shares outright, Rs262.50 versus Rs500 in this example. Put options may provide a more attractive method than shorting stock for profiting on stock price declines, in that, with purchased puts, you have a known and predetermined risk. The most you can lose is the cost of the option. If you short stock, the potential loss, in the event of a price upturn, is unlimited.

Bearish Outlook
Another advantage of buying puts results from your paying the full purchase price in cash at the time the put is bought. Shorting stock requires a margin account, and margin calls on a short sale might force you to cover your position prematurely, even though the position still may have profit potential. As a put buyer, you can hold your position through the option's expiration without incurring any additional risk. Buying an XYZ July 50 put gives you the right to sell 100 shares of XYZ stock at Rs50 per share at any time before the option expires in July. This right to sell stock at a fixed price becomes more valuable as the stock price declines. Assume that the price of the underlying shares was Rs50 at the time you bought your option and the premium you paid was 4 (or Rs400). If the price of XYZ falls to Rs45 before July and the premium rises to 6, you have two choices in disposing of your in-the-money put option:

You can buy 100 shares of XYZ stock at Rs45 per share and simultaneously exercise your put option to sell XYZ at Rs50 per share, netting a profit of Rs100 (Rs500 profit on the stock less the Rs400 Option premium).

You can sell your put option contract, collecting the difference between the premium paid and the premium received, Rs200 in this case.

If, however, the holder has chosen not to act, his maximum loss using this strategy would be the total cost of the put option or Rs400. The profitability of similar examples depends on how the time remaining until expiration affects the premium. Remember, time value declines sharply as an option nears its expiration date. If XYZ prices instead had climbed to Rs55 prior to expiration and the premium fell to 1 1/2 , your put option would be out-of-the-money . You could still sell your option for Rs150, partially offsetting its original price. In most cases, the cost of this strategy will be less than what you would have lost had you shorted XYZ stock instead of purchasing the put option, Rs250 versus Rs500 in this case. This strategy allows you to benefit from downward price movements while limiting losses to the premium paid if prices increase.

STOCK PARAMETER

WHAT IS STOCK PARAMETER ?

WHY DO WE NEED THESE PARAMETER?

An investor need to know everthing about the company he/she is going to invest.while investing one need to be aware about the risk involved in investing a particular equity stock.Not only that the investors are very keen about the 'Return On Investment'. (ROI).

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The ROI is the main purpose of any investments. Each investor is really keen on their investment safety first, and make sure it is going to the right hand that tend to appreciate day by day,year after years. The money once invested in a particular stock, we may not have control over our money. Hence, the money is handled by other people through various means.So the investor need to throughly analyse before investing.

Health Check Up- Anlysing a stock like a Doctor who does a complete health check up of the patient like- Blood pressure,Sugar Level and Heart Beat/Pulse Etc.

Here the investors must check up/make sure the pulse of the company before investing,through the company past performance's and so on. This will safe guard the investments they are going to Make.

Here ' STOCK PARAMETER ' will serve this purpose very effectively.

Here the parameters that help the investors are...

Face Value (F.V.)

The nominal value of scrip stated by the issuer.
Like Re.1.00,Rs.2.00 and Rs.5.00 Etc.Look out stocks equity to gain more dividend and bonus shares.

Book Value (B.V.)

Book Value is the net worth (Equity Capital plus reserves and surplus) divided by the number of shares outstanding.

Market Price (M.P.)

The current market price of the security traded on NSE/BSE. The market price is often vary time to time according to the trend of the market.

The investor really need to wait for the right price/buy at low in the market as low as one can.This need some skills of market trend UP/DOWN.

Market Capitalization (M.Cap.)

It is defined as the value of corporation as determined by the market price of its issued and outstanding common stock. It is arrived by multiplying the closing prices of shares with fully diluted equity capital.

Volume

The average quantity of shares transacted over a period of 15-Days on BSE and NSE.The heavy volumes may indicates the demand.

52 weeks High/Lows

The 52 weeks High /Lows represents the highest and the lowest point attained by a share during the immediately preceding 52 weeks.

Price to 52 Week High/Lows

It has been arrived by dividing the current market price of the stock by 52 Week High/Low. It indicates how the stock has performed over the period of 52 Weeks. To interpretate P52WH, the lower the ratio, the more unattractive the stock. Similarly, the higher ratio for ratio for P52WL, the more attractive the stock.

Earning per share (EPS)

EPS is net profit calculated on a trailing 12 months basis (Aggregate net profit of four consecutive quarters ) divided by fully diluted equity capital

Price to Earning Ratio (P/E)

It has been arrived at by dividing the day's closing price of a script by its earning per share (ESP).when you see a high P/E Ratio share it is mant time give low return in the near future.

when a stock seems 'strong ' by using the other parameters One need to also look out the LOW P/E Ratio, so that the chances are there for the future P/E yield will be high.

Promoters Stake

It is the percentage share holding of promoters in the equity capital. It includes government's holding in case of public sector undertaking .

a. if, the Govt/Public Sector investment is strong,this indicates the company creditibility/strength.

b. if, the promoters holding is storng ,it is a good symptom for investors. for e.g.- DLF percentage of promoters holding is very strong.

Beta

Beta is the shares sensitivity to market movement. It indicates how much the scrip move for a unit change in the market scrip. Beta could be positive or negative.

A negative beta -indicates that the share moves in a direction opposite to the market. The beta of the index is 1. A higher beta indicates the stock's movements are sharper than that of the market index.

Stock return

Stock return tells about how much return a particular stock has given over the past 1-month,

3- months and 1-year.

Equity

It is defined as the latest subscribed equity capital.

Networth

Networth determines the value of the company. It is calculated as the difference between total asset and total liabilities. It is composed of primarily of all the money that has been invested since its inception, as well as the retained earning for the duration of its operation.

Book Closure

A company closes its register of member for updating the records to facilitate payment of dividends or issue of rights of bonus shares.

Book closure is the period during which this process is done and deliveries are not effected in the clearing house.

Dividend

Dividend is defined as the distribution of a portion of a company's earnings, decided by the board of directors, to its shareholders.

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Dividend is a boon for long term investors.In many countries the divident is 100% Tax free.So the investor can invest for a long term and enjoy the tax benefits and also enjoy 'ROI' on yearly basis apart from the regular ROI.

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Also see the post who will decide the dividend?..in this same blog.

Link>http://wealthtrainer.blogspot.com/2010/10/what-are-dividends-and-when-theyre.html

Dead Cat Bounce - video

Many Times During our trading hours, we used wait for the right moment to enter into the market simply by Buying some stocks / Derivative / Commodities... we simply wait,wait to gain a better price or expect a some more lower price , so that we can have some mileage and a kick back momentum to exit...In those times the market really test all our patiance.. it won't come down, instead it certainly jumps up within no time for no reasons...By the time now, All our patiance will be gone and we really don't know what to do at this point....??

We make a hurry burry decision to buy the script at the current level- high/Market price...just by Thinking/Assuming it will go further high's ,so that we can make some profit/ money out of it. The price at what level we bought may be the highest price of that day.in this kind of situation, 'what happens many times are , the market totally change it direction' ( U -TURN) from up to down (FALLING KNIFE) and even some time break the earlier low points... un to the lowest.

What is all this ?

This is what called the ' DEAD CAT BOUNCE '.
I Have found the above video in youtube that simply and very effectively elaborated all this fact in Neat format. A single picture is fair enough to tell thousand news/stories.. is proved once again.

Nifty -Open intrest

The open intrest for Dec'2009 Nifty Future is shown here in this above graph.

What it indicats really is the 5200 and 5300 Call option added more and showing greater strength than the Put Option. So the market tend to move to the upper side.The nifty having strength to go another 200 (+/- 50 points)points from the current level

What Open Interest Tells Us

A contract has both a buyer and a seller, so the two market players combine to make one contract. The open-interest position that is reported each day represents the increase or decrease in the number of contracts for that day, and it is shown as a positive or negative number. An increase in open interest along with an increase in price is said to confirm an upward trend. Similarly, an increase in open interest along with a decrease in price confirms a downward trend. An increase or decrease in prices while open interest remains flat or declining may indicate a possible trend reversal.

MOVING AVERAGE CONVERGENCE AND DIVERGENCE

Technical Analysis with Macd
Moving Average Convergence and Divergence (MACD)

Introduction

Macd is one of the simplest and most reliable indicators available. Macd uses moving averages, which are lagging indicators but turn them into a momentum oscillator by subtracting the longer moving average from the shorter moving average. The subtracted value when plotted forms a line that oscillates above and below zero, without any upper or lower limits. Using shorter moving averages(5 & 10) will produce a quicker, more responsive indicator(fast macd), while using longer moving averages(12 & 26) will produce a slower indicator(Slow macd), less prone to whipsaws.

Macd measures the difference between two Exponential Moving Averages (EMAs).

A positive Macd indicates that the 5 or 12-day EMA is trading above the 10 or 26-day EMA.

A negative Macd indicates that the 5 or 12-day EMA is trading below the 10 or 26-day EMA. If Macd is negative and declining further, then the negative gap between the faster moving average (blue) and the slower moving average (pink) is expanding. Downward momentum is accelerating, indicating a bearish period of trading. Macd centerline crossovers occur when the faster moving average crosses the slower moving average.

In Jan.2008, Macd turned down ahead of both moving averages, and formed a negative divergence ahead of the price peak(6274).

In Oct.2008, Macd began to strengthen and make higher Lows while both moving averages continued to make lower Lows(2259).

Finally, Macd formed a positive divergence in Mar.2009 while both moving averages recorded new Lows.

MACD Bullish Signals

• 1.Positive Divergence
• 2.Bullish Moving Average Crossover
• 3.Bullish Centerline Crossover

Positive Divergence

A Positive Divergence occurs when Macd begins to advance and the security is still in a downtrend and makes a lower reaction low. Macd can either form as a series of higher Lows or a second Low that is higher than the previous Low. Positive Divergences are probably the least common of the three signals, but are usually the most reliable, and lead to the biggest moves.

Bullish Moving Average Crossover

A Bullish Moving Average Crossover occurs when Macd moves above its 9-day EMA, or trigger line(red). Bullish Moving Average Crossovers are probably the most common signals. If not used in conjunction with other technical analysis tools, these crossovers can lead to some false signals.

Bullish Centerline Crossover

A Bullish Centerline Crossover occurs when MACD moves above the zero line and into positive territory. This is a clear indication that momentum has changed from negative to positive, or from bearish to bullish. After a Positive Divergence and Bullish moving average Crossover, the Bullish Centerline Crossover can act as a confirmation signal.

MACD Bearish Signals

MACD generates bearish signals from three main sources. These signals are mirror reflections of the bullish signals:

1.Negative Divergence

2.Bearish Moving Average Crossover

3.Bearish Centerline Crossover

Negative Divergence

A Negative Divergence forms when the security advances or moves sideways, and the Macd declines. The Negative Divergence in Macd can take the form of either a lower High or a straight decline. Negative Divergences are probably the least common of the three signals, but are usually the most reliable, and can warn of an impending peak.

Nifty showed a Negative Divergence when Macd formed a lower High in Jan.2008(& in Oct.09), and it formed a higher High at the same time. This was a rather blatant Negative Divergence, and signaled that momentum was slowing and Nifty fell strongly.

Bearish Moving Average Crossover

The most common signal, a Bearish Moving Average Crossover occurs when Macd declines below its 9-day EMA. As such, moving average crossovers should be confirmed with other signals to avoid some false readings.

Bearish Centerline Crossover

A Bearish Centerline Crossover occurs when Macd moves below zero and into negative territory. This is a clear indication that momentum has changed from positive to negative, or from bullish to bearish. The centerline crossover can act as an independent signal, or confirm a prior signal such as a moving average crossover or negative divergence. Once Macd crosses into negative territory, momentum, at least for the short term, has turned bearish.

The significance of the centerline crossover will depend on the previous movements of Macd as well. If Macd is positive for many weeks, begins to trend down, and then crosses into negative territory, it would be bearish. However, if Macd has been negative for a few months, breaks above zero, and then back below, it might be a correction. In order to judge the significance of a centerline crossover, traditional technical analysis can be applied to see if there has been a change in trend, higher High or lower Low.

MACD Benefits

One of the primary benefits of Macd is that it incorporates aspects of both momentum and trend in one indicator. As a trend-following indicator, it will not be wrong for very long. The use of moving averages ensures that the indicator will eventually follow the movements of the underlying security. By using Exponential Moving Averages (EMAs), as opposed to Simple Moving Averages (SMAs), some of the lag has been taken out.

As a momentum indicator, Macd has the ability to foreshadow moves in the underlying security. Macd divergences can be key factors in predicting a trend change. A Negative Divergence signals that bullish momentum is waning, and there could be a potential change in trend from bullish to bearish. This can serve as an alert for traders to take some profits in long positions, or for aggressive traders to consider initiating a short position.

Since Macd's introduction, there have been hundreds of new indicators introduced to technical analysis. While many indicators have come and gone, the Macd has stood the test of time. The concept behind its use is straightforward, and its construction is simple, yet it remains one of the most reliable indicators around. The effectiveness of the Macd will vary for different securities and markets. The lengths of the moving averages can be adapted for a better fit to a particular security or market. As with all indicators , Macd is not infallible and should be used in conjunction with other technical analysis tools.

MACD Drawbacks

One of the beneficial aspects of the Macd is also one of its drawbacks. Moving averages, be they simple, exponential or weighted, are lagging indicators. Even though Macd represents the difference between two moving averages, there can still be some lag in the indicator itself. This is more likely to be the case with weekly charts than daily charts. One solution to this problem is the use of the Macd-Histogram.

READ more on Macd @ Stockcharts.comCombining EW with Macd:(Read the related post)Since the last post on Oct.09, you can see the price declining sharply after a "5 wave structure" and a negative divergence in Macd.

For Investors:

Investors who have a huge portfolio can use the weekly macd chart to spot the Negative divergences to "Part Book" once and during the Bearish Cross over a second "Part booking" and a last one at Bearish centreline crossover. Similarly Start buying in parts when Positive divergences start to develop and add more to it with Bullish cross over & Bullish centreline crossover.

For Traders:

Use it in combination with other Technical tools such as Stochastics and with a basic EW knowledge to make entry & exits. When you combine your studies of various time frames such as Week, Day & Hour, you have potentially a system which will follow the prices to a good accuracy.

Needless to emphasise here, there are no foolproof systems in stock markets but only more efficient ones in relative term.

Your experience, your discriminating ability to stay off the market when the picture is muddy & unclear with choppy moves, your patience to wait for good set ups/ opportunities, your intuitive risk taking ability when the euphoria & Fear are at their peaks will set you on a path to riches.Get rich slowly.

Article Source:-JUST NIFTY

(Link-http://tradeinniftyonly.blogspot.com/2009/12/technical-analysis-with-macd_05.html#comments )

Thanks to my friend Mr.Illango