Candlestick patterns are critical for traders to decide the trading strategy. Still, before we go into candlestick patterns, we will go over the gist of what precisely a candlestick chart is. The Candlestick chart originated in 17th century Japan and is an essential charting tool to understand the price trends in the market quickly. Four different values in a candlestick chart form the candle and the wicks or shadows.
Open: The opening price of a stock at the start of the given time (forms the actual body of the candle)
High: The highest price of the stock in a given time (forms the upper wick)
Low: The lowest price of the stock in a given times period (forms the lower wick)
Close: The closing price of a stock at the end of the given time (forms the actual body of the candle)
They can be daily, weekly, monthly candle charts, or even charts for 1-minute, 5 minutes, 15 minutes time intervals on a given day.
The candlestick chart gives an excellent idea of the price fluctuation in a given period, much better than simply plotting the price at different times on the chart's x-axis.
Various candlestick patterns form interesting shapes that signal the beginning or end of the previous bearish or bullish trend. Depending on the pattern, market sentiments, and trend analysis, traders can decide on the price at which to buy or sell and when to make the trade.
Here are the top 5 candlestick patterns that traders must know:
Doji - The Doji pattern is formed when the Open Price and Close Prices are the same or almost the same, and there is Low and High Price, so the candle has nearly nobody with a lower and upper wick. After the start at the Open price, there is a price rise, but there is also a dip in the price within the same interval before settling down at around the opening price itself. (bulls and bears fighting but neither winning).
Hanging Man - The Hanging Man is also an important candlestick pattern that occurs only in an extended uptrend. It is called so because it resembles the line figure executed with legs swinging beneath. The pattern is formed with the open price either higher or lower than the close price, but it is very little or no price increase and the low price is much lower than the candle body, or the lower wick is at least twice the size of the body. Here, the traders sense a sell-off jump to get a bargain price; thus, the selling continues after this candlestick pattern.
Hammer - The Hammer pattern looks the same as the Hanging Man pattern as such, but it occurs after an extended downtrend, with the low price much lower than the open price and close price, but with the close price rallying higher, like the phrase "hammering out the bottom ." After this pattern, there is a significant uptrend and buying of the shares.
Bullish Engulfing Pattern - There is a definite downtrend in the Bullish candlestick pattern in the stock price in the Bullish candlestick pattern. Still, the next candlestick or the candle to the right shows a marked upward trend – a bullish trend, with the price opening lower than the close price of the previous candle. Still, the price rallies, and the closing price are higher than the previous candle's opening price.
Bearish Engulfing Pattern - In the bearish engulfing pattern, there is an uptrend, but immediately, there is a bearish rally, and a downtrend is shown in the next candle that engulfs the first candle. Here, the price is on the rise. Still, in the next trading time period, even though the opening price is higher than the close of the previous candle, bearish sentiments set in, and the closing price is much lower than the opening price of the previous candle. Although we cannot be sure which candlestick is most reliable, we can safely say that the Engulfing Pattern signals a switch in trend.
Morning Star and Evening Star - There are other candlestick patterns that we can see with three candles next to each other. In the morning star Pattern, there is a bearish candle (large dark candle) which shows a marked decrease in price; this is immediately followed by a star doji or a doji with a very small body, visible lower and upper shadows implying a slight change in trend towards a price increase. The third candle that completes the pattern shows a marked recovery and increase in price with a bullish candle that closes somewhere lower than the opening of the first candle. It shows rising prices like the rising Sun emerging out of the dark night, hence the Morning star.The Evening star is the opposite of the Morning star pattern, with a bullish candle, a star doji near the high of the first candle, and then a bearish candle that signals the end of the price rise and the start of a fall in price. The body of the bearish third candle is still within the first candle's body. But this marks the trend reversal, like the Sun setting into the dark night and the dark candle or downward price trend starting, hence the name Evening Star.
Conclusion
Traders use several candlestick patterns, but these five are the top patterns used. We can use these patterns to understand and predict how the market will swing next and invest our money intelligently.
The Relative Strength Index (RSI) is a well versed momentum based oscillator which is used to measure the speed (velocity) as well as the change (magnitude) of directional price movements. Essentially RSI, when graphed, provides a visual mean to monitor both the current, as well as historical, strength and weakness of a particular market. The strength or weakness is based on closing prices over the duration of a specified trading period creating a reliable metric of price and momentum changes. Given the popularity of cash settled instruments (stock indexes) and leveraged financial products (the entire field of derivatives); RSI has proven to be a viable indicator of price movements.
Calculation
RSI = 100 – 100/ (1 + RS)
RS = Average Gain of n days UP / Average Loss of n days DOWN
For a practical example, the built-in Pine Script function rsi(), could be replicated in long form as follows.
change = change(close)
gain = change >= 0 ? change : 0.0
loss = change < 0 ? (-1) * change : 0.0
avgGain = rma(gain, 14)
avgLoss = rma(loss, 14)
rs = avgGain / avgLoss
rsi = 100 - (100 / (1 + rs))
"rsi", above, is exactly equal to rsi(close, 14).
The basics
As previously mentioned, RSI is a momentum based oscillator. What this means is that as an oscillator, this indicator operates within a band or a set range of numbers or parameters. Specifically, RSI operates between a scale of 0 and 100. The closer RSI is to 0, the weaker the momentum is for price movements. The opposite is also true. An RSI closer to 100 indicates a period of stronger momentum.
- 14 days is likely the most popular period, however traders have been known to use a wide variety of numbers of days.
What to look for
Overbought/Oversold
Wilder believed that when prices rose very rapidly and therefore momentum was high enough, that the underlying financial instrument/commodity would have to eventually be considered overbought and a selling opportunity was possibly at hand. Likewise, when prices dropped rapidly and therefore momentum was low enough, the financial instrument would at some point be considered oversold presenting a possible buying opportunity.
There are set number ranges within RSI that Wilder consider useful and noteworthy in this regard. According to Wilder, any number above 70 should be considered overbought and any number below 30 should be considered oversold.
An RSI between 30 and 70 was to be considered neutral and an RSI around 50 signified “no trend”.
Some traders believe that Wilder’s overbought/oversold ranges are too wide and choose to alter those ranges. For example, someone might consider any number above 80 as overbought and anything below 20 as oversold. This is entirely at the trader’s discretion.
Divergence
RSI Divergence occurs when there is a difference between what the price action is indicating and what RSI is indicating. These differences can be interpreted as an impending reversal. Specifically there are two types of divergences, bearish and bullish.
Bullish RSI Divergence – When price makes a new low but RSI makes a higher low.
Bearish RSI Divergence – When price makes a new high but RSI makes a lower high.
Bearish Divergence creates a selling opportunity while Bullish Divergence creates a buying opportunity.
What is the head and shoulders pattern?
The head and shoulders pattern consists of three peaks: the left shoulder, the head, and the right shoulder. The left shoulder forms after a significant uptrend, followed by a price decline. The head is created when the price rises again to a higher peak, and then drops once more. Finally, the right shoulder forms when the price rises but fails to reach the height of the head, then declines again.
This pattern indicates a potential reversal in the current trend. In a standard head and shoulders pattern, it signals a transition from an uptrend to a downtrend.
Key to trading this pattern is the neckline, which connects the low points of the left shoulder, head, and right shoulder. The neckline's slope can be either upward, downward, or horizontal. Traders look for the price to break below the neckline which then signals the start of a new downtrend.
The Psychology Behind the Pattern
The head and shoulders pattern is more than just a visual chart formation; it reflects underlying market psychology and investor behavior.
The formation of the left shoulder occurs when a strong uptrend shows signs of weakening. Whereas the trend still looks healthy from the left shoulder to the head, the trend-continuation from the left shoulder to the head is often weaker and the price doesn't advance as much as it did in the early trend.
However, the first true signs of trend weakening occur when the right shoulder forms below the head. The lower high is an important warning sign to all bullish market participants.
Furthermore, the drop from the head to the neckline also requires careful analysis. The drop from the head to the neckline is often a strong bearish price reaction, typically much stronger than past bearish correction moves during the uptrend. In the example below, the strong bearish market phase after the head is highlighted in the black box.
The neckline represents a psychological support level. When the price breaks below this line, it confirms the shift in market sentiment. Traders interpret this break as a signal that the prevailing trend has reversed, prompting them to adjust their positions accordingly.
Most head and shoulders-based trading strategies suggest looking for trading opportunities around the neckline. We will explore some variations shortly.
Support and resistance levels are important points in time where the forces of supply and demand meet. These support and resistance levels are seen by technical analysts as crucial when determining market psychology and supply and demand. When these support or resistance levels are broken, the supply and demand forces that created these levels are assumed to have moved, in which case new levels of support and resistance will likely be established.
Support is the level at which demand is strong enough to stop the stock from falling any further. In the image above you can see that each time the price reaches the support level, it has difficulty penetrating that level. The rationale is that as the price drops and approaches support, buyers (demand) become more inclined to buy and sellers (supply) become less willing to sell.
Resistance is the level at which supply is strong enough to stop the stock from moving higher. In the image above you can see that each time the price reaches the resistance level, it has a hard time moving higher. The rationale is that as the price rises and approaches resistance, sellers (supply) become more inclined to sell and buyers (demand) become less willing to buy.
Let’s use a few examples of market participants to explain the psychology behind support and resistance.
First let’s assume there are buyers who’ve been buying a stock close to a support area. Let’s say that support level is Rs 100. They buy some stock at Rs 100 and now it moves up and away from that level to Rs 110. The buyers are happy and want to buy more stock at Rs 100, but not Rs 110. They decide if the price moves back down to Rs 100, they will buy more. They’re creating demand at the Rs 100 level.
Let’s take another group of investors. These are the people that were uncommitted. They were thinking about buying the stock at Rs 100 but never “pulled the trigger.” Now the stock is at Rs 110 and they regret not buying it. They decide that if it gets to Rs 100 again, they will not make the same mistake and they will buy the stock this time. This creates potential demand.
The third group bought the stock below Rs 100; let’s say they bought it at Rs 90. When the stock got to Rs 100, they sold their stock, only to watch it go to Rs 110. Now they want to re-establish their long positions and want to buy it back at the same price they sold it, Rs 100. They’ve changed their sentiment from sellers to buyers. They regret selling it and want to right that wrong. This creates more demand.
Now let’s change things up to help understand resistance. Take all the above participants and say they all own the stock at Rs 100. Imagine yourself as one of the owners at Rs 100. The stock goes to Rs 110 and you don’t sell. Now the stock goes back to Rs 100, where you own it. What are you feeling? Regret for not selling it at Rs 110? Now it goes back to Rs 110 and you sell as much as you can this time. So do the other owners of the stock. The stock can’t get past Rs 110 and retreats. There are at least 3 groups of stock owners that are trying to sell their supply at Rs 110. This creates a resistance level at Rs 110.
These are just a few examples of many possible scenarios. If you’ve traded before, you’ve probably been through all of these scenarios and experienced the emotions and psychology behind them. You’re not alone. There are countless market participants going through the same emotions and thought processes as you, and this is what helps determine some of the market psychology behind support and resistance, and technical analysis in general.
In this article you will learn:
The mean price and moving averages
If you are new to trading and wondering how a moving average works, it is quite simple thanks to our guide to moving averages. As the name would suggest, moving averages (MA) provide traders with a visual representation of an average for the price of an instrument, such as a forex pair, over a certain period of time.
Moving averages smooth out price action to reveal patterns we might otherwise miss on a vanilla price chart. Moving averages can suggest when markets are overbought and oversold relative to the average price of the asset or instrument we are looking to trade. Typically oversold zones offer traders the opportunity to buy (at a discount). Overbought zones offer an opportunity to sell (at a premium). For instance, if we see that Nifty is trading below its 50-day moving average on the daily chart, we can assume that this pair, as it is now, is in a bearish phase. If trading above the 50-day moving average, we could say it is still bullish.
Markets have a tendency to revert to the mean, or average, price. When we add moving averages to a chart, we see prices continually reverting to the mean (mean reversion). This is the market's way of equalizing buying and selling action to find the true value for the asset being traded. Every time the price moves away from the moving average, you’ll notice it travels only so far before reverting back to the moving average.
Different types of moving averages explained
All moving averages are lagging indicators, which means they don’t predict new trends, rather, they confirm market trends once they have been formed. They do not predict future price movements.
What are the three most common types of moving averages?
There are three common types of moving averages:
Simple Moving Average (SMA):
The Simple Moving Average (SMA) is the most basic type of moving average and reacts to price movement a little bit slower than the EMA.
Exponential Moving Average (EMA):
For intraday trading, traders may prefer to use the Exponential Moving Average (EMA) as it lags less than the SMA and is more responsive to recent price action over shorter periods of time. It is also better suited to breakout trades.
Volume Weighted Moving Average (VWMA):
The Volume Weighted Moving Average (VWMA) combines a measurement of price movement as influenced by tick volume. This indicator places more importance on movements in price owing to spikes or steep drops in tick volume. In a volatile market the VWMA will be quicker to pick up changes in volume and move more closely to price than the SMA. What this means in practical terms is that the WWMA alerts a trader to a potential breakout sooner than the SMA.
By adding the SMA and VWMA on the same chart and comparing the two, you can get a more accurate picture of price action. For example, if the VWMA is trailing below the SMA in a downward trend, we can infer that there is significant volume pushing price lower. The opposite could be inferred in an upward trend with the VWMA floating above the SMA. The VWMA will also alert you to a potential reversal a little sooner than a SMA, as you can see in the chart below where the VWMA is represented by the red line.
The volume indicator is a vital tool investors and traders use to understand the liquidity and market activity in trading financial assets. It measures the number of shares or contracts traded during a specified period, providing insights into the buying and selling pressure in the market. The concept of the volume indicator dates back to the early 1900s and is credited to Richard Wyckoff, a pioneer in technical analysis.
The formula for calculating the volume indicator is straightforward:
Volume Indicator = Total number of shares or contracts traded during a specified period
This period could be a single or multiple trading sessions, depending on the timeframe being analyzed.
Analyzing the volume indicator involves understanding the patterns created by the trading volume and their relationship with price action. High trading volumes often indicate increased market interest and liquidity, whereas low volumes suggest a lack of interest or limited market activity.
The volume indicator can be employed in various ways to enhance trading strategies:
The volume indicator offers several benefits to investors and traders:
Despite its advantages, the volume indicator has some limitations:
In conclusion, the volume indicator is valuable for understanding market activity and liquidity in trading financial assets. By analyzing the patterns created by trading volumes, investors and traders can gain insights into market sentiment, trend strength, and potential trend reversals. However, it is essential to recognize the limitations of the volume indicator and employ it in conjunction with other technical and fundamental analysis tools to improve the overall effectiveness of trading strategies. By doing so, investors and traders can make more informed decisions and enhance their chances of success in the financial markets.
The Super Trend indicator is a popular technical analysis tool used in the world of trading and investing. It's primarily employed to identify trends in the price movement of a financial asset.
Super trend indicator is like a colorful line drawn on the chart that shows the price of a stock or an index.It changes color, either to green or red, based on changes in the price of the underlying.When the line is green, it's like a green light, suggesting that the price is likely going up. When the line turns red, it's like a red light, indicating that the price is probably going down.
It's important to note that the Supertrend doesn't forecast the direction of the trend. Instead, once a trend direction is established, it functions as a guide by suggesting when to enter a position and advising that you maintain that position as long as the trend remains intact.
WHAT TO LOOK INSIDE SUPER TREND?
Supertrend relies on Average True Range (ATR) values for its calculations. Average True Range (ATR) is a technical indicator to measure market volatility. There is a formula for the calculation of ATR inorder to understand the working of the indicator. But it is not necessary for us to learn the complex formulas as the super trend indicator is readily available in stock chart itself. Only thing we need to do is to select the values for ‘Periods’ and ‘Multiplier’. Periods and Multiplier are two in-built parameters of Super trend indicator. Periods refers to the ATR number of days. There is usually a default value for this, but one can change the input as they deem suitable. And Multiplier refers to the number by which ATR will get multiplied
The Supertrend indicator is versatile, suitable for equities, futures, and forex trading across various timeframes like daily, weekly, and hourly charts. However, its effectiveness tends to decrease during sideways market conditions.
Like most indicators, Supertrend performs optimally when combined with other indicators like MACD, Parabolic SAR, or RSI.
Additionally, the 'Supertrend' serves as robust support or resistance levels while also offering a dynamic trailing stop-loss feature for ongoing trades.
Once a trader identifies a long position, it's advisable to maintain that position until the price closes below the green line. This green line essentially functions as a trailing stop loss for the long position.
A sell signal occurs when the stock or index price drops below the indicator value, causing the indicator to turn red. This moment is often marked by a crossover where the price falls below the indicator value.
This sell signal can be used to either initiate a new short position or exit an existing long one. However, relying solely on the sell signal to exit a long position can sometimes result in losses, so traders should exercise their judgment.
Once the short position is established, it's advisable to maintain it until the price closes below the green line. Essentially, the red line serves as a dynamic trailing stop-loss for the short position.
In practical terms, the Supertrend indicator proves more effective for intraday trading compared to a standard Moving Average system.
Options are tradable contracts that investors use to speculate about whether an asset’s price will be higher or lower at a certain date in the future, without any requirement to actually buy the asset in question.
Nifty 50 options, for example, allow traders to speculate as to the future direction of this benchmark stock index, which is commonly understood as a stand-in for the entire Indian stock market.
At first glance, options seem a little counterintuitive, but they’re not as complicated as they appear. To understand options, you just need to know a few key terms:
Let’s make sense of all of this terminology with an example. Consider a stock that’s currently trading for INR 100 a share. Here’s how the premiums—or the prices—function for different options based on the strike price.
| Call Option Premium | Strike Price | Put Option Premium |
|---|---|---|
| Highest | INR 90 | Lowest |
| INR 95 | ||
| ↕ | INR 100 —Current Price | ↕ |
| INR 105 | ||
| Lowest | INR 110 | Highest |
When trading options, you pay a premium up front, which then gives you the option to buy this hypothetical stock—call options—or sell the stock—put options—at the designated strike price by the expiration date.
A lower strike price has more intrinsic value for call options since the options contract lets you buy the stock at a lower price than what it’s trading for right now. If the stock’s price remains INR 100, your call options are in-the-money, and you can buy the stock at a discount.
Conversely, a higher strike price has more intrinsic value for put options because the contract allows you to sell the stock at a higher price than where it’s trading currently. Your options are in-the-money if the stock stays at INR 100, but you have the right to sell it at a higher strike price, say INR 110.
You can deploy a range of options trading strategies, from a straightforward approach to intricate, complicated trades. But broadly speaking, trading call options is how you wager on rising prices while trading put options is a way to bet on falling prices.
Options contracts give investors the right to buy or sell a minimum of 100 shares of stock or other assets. However, there’s no obligation to exercise options in the event a trade isn’t profitable. Deciding not to exercise options means the only money an investor stands to lose is the premium paid for the contracts. As a result, options trading can be a relatively low-cost way to speculate on a whole range of asset classes.
Option trading allows you to speculate on:
With call and put options, you need the underlying asset’s price to rise or fall to break even, which is a rupee amount equal to the premium paid plus the strike price. Here’s how you earn a profit:
If the asset’s price moves in the opposite direction than desired for either a call or put option, you simply let the contract expire—and your losses are equal to the amount you paid for the option (e.g., the premium plus associated trading fees).
Options trading strategies can become very complicated when advanced traders pair two or more calls or puts with different strike prices or expiration dates.
Options trading combines specificity with flexibility. Traders need to choose a specific strike price and expiration date, which locks in the price they believe an asset is headed toward over a certain timeframe. However, they also have the flexibility to see how things work out during that time—and if they’re wrong, they’re not obligated to actually execute a trade.
Because options contracts have an expiration date, which can range from a few days to several months, options trading strategies appeal to traders who want to limit their exposure to a given asset for a shorter period of time. Options traders need to actively monitor the price of the underlying asset to determine if they’re in-the-money or want to exercise the option.
Options trading is also attractive as a hedging tool. For example, if you own shares of a company, you could buy put options to mitigate potential losses in the event the stock’s price goes down. This is one reason that options for broad market benchmarks, like the Nifty 50, are commonly used as a hedge for potential declines in the market in the short term.
As a result, options trading can be a cost-efficient way to make a speculative bet with less risk while offering the potential for high returns and a more strategic approach to investing.
Options trading doesn’t make sense for everyone—especially people who prefer a hands-off investing approach. There are essentially three decisions you must make with options trading (direction, price and time), which adds more complexity to the investing process than some people prefer.
Unlike trading stocks, there’s also an additional hurdle for options trading: The Securities and Exchange Board of India (SEBI) requires that brokers approve customer accounts for options trading only after you fill out an options trading agreement. This is used to assess your understanding of options trading and its associated risks.
To make money from options trading, you’ll need to set price alerts and keep a close eye on the market to see when your trade becomes profitable. And you’ll need to be mindful of the risks and trading fees that can add up with various options strategies. While many brokers have eliminated fees for trading stocks or exchange-traded funds (ETFs), these still exist for options.
Commissions may range from a flat rate to a per-contract fee based on the amount you trade—both when you buy or sell options. As a result, options traders must take into account these fees when considering the profitability of an options strategy.
Finally, because options trades are inherently shorter term in nature, you’re likely to trigger short-term capital gains. Any investment that you’ve held for less than a year is taxed in India as ordinary income (up to 15%, depending on your RBI income tax bracket) versus a lower, long-term capital gains rate for investments you’ve owned for more than a year.
Option Greeks are financial measures of sensitivity of the option's price to its underlying asset. The Greeks are used in the analysis of options portfolios and sensitivity analysis of a portfolio of options. The measures are known to be essential to many investors for making informed decisions in options trading.
Options contracts are utilized for hedging a portfolio. The motive is to offset potential unfavourable moves in other investments. Options contracts are known to be used for speculating on whether the asset's price could rise or fall. A call option, in brief, gives the holder of the option the right to purchase the underlying asset, while the put option lets the holder sell the underlying asset.
Options could be practised and converted to shares of the underlying asset at a particular price called the strike price. Each option has an end date that is called an expiration date and a cost of value that is associated with it called the premium. The premium of an option is typically based on an option pricing model that leads to fluctuations in price. They are usually viewed in conjunction with an option price model to assist in understanding and gauging associated risks.
There are several key options for Greeks, and they are - Delta, Gamma, Vega, Theta, and Rho. There are still a lot of Greeks that could be derived.
Mentioned below are the different types of options for Greeks.
It's a measure of the sensitivity of an option's price changes that are relative to the changes in the underlying asset' prices. If the price of this underlying asset increases, the price of the option would change by an amount. Delta is found by ∂V/AS, where:
∂ = the first derivative
S = the underlying asset's price
V = the option's price
It is usually calculated as a decimal number from -1 to 1. Call options could have a delta from 0 to 1, and it puts a delta from -1 to 0. The closer the option to 1 t -1, the deeper the money option.
The Delta of the option's portfolio is the weighted average of the deltas of all options. It is known as a hedge ratio. If a trader knows the Delta of the option, he or she could hedge his or her position by buying or shorting the number of underlying assets that are multiplied by Delta.
Gamma is a measure of the Delta's change relative to the changes in the price of the underlying asset. If the price of the asset increases, the options delta would also change in the Gamma amount. The major application of Gamma is the assessment of the option's Delta. Long options have positive Gamma. An option has a maximum gamma when it is at the money. However, the Gamma decreases when an option is deep-in-the-money or out-the-money.
Vega is an option Greek that would measure the sensitivity of the option price that is relative to the volatility of the asset. If the volatility of the assets increases by a per cent, the option price will change by the Vega amount. Vega is expressed as money amount over the decimal number. An increase in vega generally corresponds to an increase in the option value.
Theta is the measure of the sensitivity of the option price relative to the option's time to maturity. If the option's time to maturity goes down in one day, the option's price will change by the theta amount. The theta option in Greek is also referred to as time decay. Mostly, theta is negative for options. It shows the most negative value when the option is at the money.
Rho measures the sensitivity of that option price relative to increased rates. If a benchmark interest rate increased by a per cent, the option price would change by the RHO amount. The RHO is known to be the least significant among other option Greeks because the option prices are generally less sensitive to interest rate changes than to changes in other parameters. As usual, call options have a positive RHO, while the RHO for the put option is negative.
Some of the minor greeks that have not been discussed are lambda, epsilon, vomma, vera, speed, zomma, color, and time.
Futures are financial contracts that obligate the buyer to purchase an underlying asset, such as a commodity, currency, or stock index, at a predetermined price and date in the future. They are used as a tool for hedging against price fluctuations, speculating on market movements, and managing risk. Futures contracts are standardised and traded on regulated exchanges – known as the futures market – allowing for easy transfer of obligations between parties.
Futures investments are like a high-speed race in which traders try to predict the future movements of a commodity, stock, or index and make a profit. It is like driving a car at a high velocity where you need to have quick reflexes and make split-second decisions based on the road ahead. Just like a race, futures trading is not for the faint-hearted; it involves high risks and requires expertise and knowledge.
To elaborate on ‘what is futures trading’, it is a game of probabilities where traders analyse market trends, study economic indicators, and use technical analysis to make informed decisions about buying and selling futures contracts.
The goal of futures investments is to generate a profit by buying low and selling high or selling high and buying low. But the markets are volatile and can change rapidly, so traders need to be prepared for the unexpected and be able to adjust their strategies accordingly.
Therefore, futures trading is a fast-paced game that requires traders to have nerves of steel
and the ability to make quick decisions based on analysis and expertise. It’s a world full of risks, rewards, and uncertainties. Thus, constant adaptation and evolution are vital for
success.
Futures work by allowing investors to lock in a price for an asset that they expect to buy or sell in the future. The buyer of a futures contract agrees to purchase the underlying asset at a predetermined price (the ‘strike price’) on a specified future date, while the seller of the contract agrees to deliver the asset at the strike price.
It is imperative to know the working of the futures market along with what is futures trading. The futures market works by allowing traders to buy and sell contracts for the purchase or sale of a particular commodity or financial instrument at a predetermined price and date in the future. These contracts are traded on organized exchanges, such as the Multi Commodity Exchange (MCX) and Intercontinental Exchange (ICE).
There are two types of futures traders – hedgers and speculators. Let’s take a look at each type:
Hedgers are usually wholesalers, retailers, manufacturers or companies that use futures contracts to secure themselves against future price volatility. Hedging is suitable for investors who want to physically own or require the commodity. Therefore, hedgers are risk averse in nature and aim for protection against price risk. In hedging, there is negligible profit potential. The only upside is that the hedgers might reduce the risk associated with price fluctuations.
A speculator is an experienced investors who does not actually seek to own the underlying asset. Rather, they enter the market seeking profits by offsetting rising and declining prices. This is achieved through buying and selling of contracts. Thus, speculators are risk-takers who want to maximise their profits by leveraging the volatility in prices. In addition, speculators are seasoned traders who are well versed with technical analysis and fundamental analysis. Speculation has immense profit potential but is also associated with an equally big potential losses.
Futures contracts is an agreement between two parties to buy or sell an asset at a predetermined price and date in the future.
In futures trading, buyers and sellers enter into a contract called a futures contract. The contract specifies the quantity, quality, and delivery date of the underlying asset. The parties agree on a price, and the trade is executed through a regulated exchange.
Futures trading carries risks such as market volatility, leverage magnifying losses, counterparty risk, and the potential for unexpected events affecting the market.
To start futures trading in India, you need to open a trading account with a registered broker. You should complete the necessary documentation, provide required identification, and fulfil the account funding requirements. Once your account is set up, you can place orders for futures contracts through the broker's trading platform.
Futures contracts are available on various assets, including commodities (such as gold, crude oil, and agricultural products), equity indices (like Nifty 50), currencies, and interest rates. However, the availability of specific futures contracts may vary depending on the exchange and broker.
Futures trading is subject to income tax, where profits are treated as business income and taxed at the applicable income tax slab rates. Expenses can be deducted, and losses can be set off against speculative gains. Transaction taxes like STT and CTT may also apply.
Beginners stepping in options trading will see the options chain as a complex maze of data. Option chain is a chart that will give in-depth information related to all stock contracts available for Nifty stocks.
The best thing about the option chain is that it provides valuable information about the current security value and how it will affect it in the long term.
Understanding the option chain will help investors make correct choices within the market. This article will give you a clear understanding of the Options chain to make the right trading decision.
Options chain can be defined as the listing of all option contracts. It comes with two different sections: call and put.
A call option means a contract that gives you the right but does not give you the obligation to buy an underlying asset at a particular price and within the option’s expiration date.
On the other hand, a put option means a contract that gives you the right but does not give you the obligation to sell an underlying asset at a particular price and within the option’s expiration date.
An option strike means the stock price at which the investor is ready to buy the stock if the choice is exercised.
An option chain lists all option contracts, including put and call option for given security. However, several traders focus on net change,’ ‘bid,’ ‘last price,’ and ‘ask,’ columns to assess current market conditions.
Option chain is also called the option matrix. With the help of the option matrix, several skilled traders can easily see the direction of price movements.
Option Matrix also allows users to analyze and identify the points at which a low or high level of liquidity appears. Typically, it limits the traders to evaluate the depth and liquidity of specific strikes.
Here are components of the options chart that will help you to read the options chain chart easily. Let’s look at the given below:
Typically, options have two different types:
a. Call Option
Call option means a contract that extends the right to buy underlying at a specific price within a specified date
b. Put Option
Put option is also a contract that extends the right to sell underlying at a specific price within a specified date.
Strike price means a price at which both buyers and sellers of the Option agree to execute a contract. When the options price goes beyond the strike price, the options trade turns out to be profitable.
In-the-Money ATM is considered when the call option’s strike price is a smaller amount compared to the present market value.
Conversely, the put option is the In-The-Money ATM if the current market price is less than the stock price.
At-The-Money or ATM defines a situation wherein the strike price of a put or a call option is equivalent to the current market price of an underlying asset.
Over-The-Money is considered when the strike price is more than the current market price of an underlying asset.
Similarly, on the other hand, if the strike price is lower than the current market price of an underlying asset, then the put option is said to be at OTM.
Open Interest means the Interest of traders during a specific strike price. The higher the amount, the Interest will be more among the traders for the actual strike price of an option. Since there’s more Interest among traders, there will be high liquidity to trade your opinion.
It shows all the significant changes taken place in the Open Interest before the expiration date. The significant difference in OI signifies that either contracts are closed, exercised, or squared off.
The volume shows the trader's interest, and the total number of contracts of an option for a specific price traded within the market.
Volume is calculated daily and can even help understand the current Interest of several traders.
Implied Volatility showed the price swing. High Implied volatility means there will be a high swing in prices, and low implied Volatility means there will be few or low swings in prices.
LTP means the last traded price of an option.
Bid Price means the actual value quoted within the last buy order. A price above the Last Traded Price (LTP) may indicate rising demand for options.
Bid Quantity is the total number of buy orders booked for a particular strike price. However, it tells you about the current demand for the strike price of an option.
Ask Quantity is the total number of open sell orders for a particular strike price. It indicates the availability of the options.
Ask Price is the value quotes within the last sell order.
A double top pattern is formed after a market’s price reaches two highs consecutively with small declines in between. It forms an M-shape on a chart.
The double top is a bearish reversal pattern, so it’s thought that the asset’s price will fall below the support level that forms at the low point between the two highs. It’s crucial to confirm this support level, as basing your trade solely on the formation of the two peaks can cause a false reading.
In a double top, an upwardly trending market twice tries to hit new highs. But both times, it retraces as sellers drive the price back down – a sign that bullish momentum may be on the wane.
Often, the second top won’t be quite as high as the first, as it’s signaling the end of buying pressure.
A double bottom is, perhaps unsurprisingly, the opposite of a double top. It’s formed when a market’s price has made two attempts to break through a support level and failed. In between, there has been a temporary price rise to a level of resistance. It creates a W-shape.
The double bottom is a bullish reversal pattern because it typically signifies the end of selling pressure and a shift towards an uptrend. Therefore, if the market price breaks through the resistance level, it is likely to continue rising.
As with a double top, it is always worth confirming the resistance level before you open your position. Many traders do this by looking at past price action or using technical indicators.
The ascending triangle is a chart pattern that’s created when a horizontal set of highs is met by an ascending set of lows. The upper horizontal line is the resistance level, and the lower upward sloping line is support.
It is a continuation pattern, usually appearing after an uptrend. Over the course of the pattern, the market consolidates (which means the trend stalls), but if it breaks out above the resistance line, then a new uptrend should form.
As we’ll cover below, traders usually look to confirm a pattern before they start trading. One way to confirm an ascending triangle is to look at volume indicators – activity should decline within the pattern, but then quickly pick up as the breakout takes hold. If this arises, then the price is more likely to continue upwards.
Although the price does typically break out in the same direction as the prevailing trend, it doesn’t always happen. Ascending triangles can also indicate the start of a downtrend if price breaks lower or volume declines.
The descending triangle is the opposite of an ascending one. It usually occurs after a downtrend, and is formed when a horizontal set of lows (the support level) is met by a descending set of highs (resistance).
It’s also considered a continuation pattern, telling us that the market is likely to break out lower through the support level, making it a bearish signal. However, if the market breaks out through resistance instead, it may mean the beginning of a new uptrend.
As with its ascending counterpart, falling volume within the pattern followed by a spike as the market breaks out can make for a stronger signal.
Symmetrical triangle patterns occur when two trend lines approach one another. Essentially, it’s like if you overlaid an ascending triangle onto a descending one – and got rid of both of the horizontal lines.
The symmetrical triangle can signal a few different things, depending on market conditions.
It’s often considered a continuation pattern because the market usually continues with the prevailing trend. However, if there is no clear trend before the pattern forms, it’s a bilateral pattern and the price could go in either direction. Once a breakout in either direction is confirmed, it suggests that the trend is likely to continue in that direction.
To trade a symmetrical triangle, be ready for the market to break out in either direction. Then watch to see whether that turns into a new trend, and buy or sell accordingly.
Fundamental analysis is a method used to evaluate the intrinsic value of a stock by examining various financial and economic factors. Here are the key components:
Financial Statements: Analysts review a company’s income statement, balance sheet, and cash flow statement to assess its financial health. Key metrics include:
Economic Indicators: Broader economic factors such as GDP growth, inflation, and unemployment rates are considered to understand the market environment.
Industry Conditions: The company’s position within its industry, including competitive advantages and market share, is evaluated.
Management Effectiveness: The quality and experience of the company’s leadership team can significantly impact its performance.
Valuation Ratios: Ratios like price-to-earnings (P/E), earnings per share (EPS), and return on equity (ROE) help determine if a stock is overvalued or undervalued1.
Fundamental analysis aims to identify stocks that are trading for less than their intrinsic value, making them potential investment opportunities. Conversely, it can also signal when a stock is overvalued and might be a good candidate for selling.
Market View
Range Bound, Not moving
The Trade
Sell a Put and Call at the same strike near the stock price. Your view is that the stock will not go up or down
Premium
Receive
Margin
Required
When To Do
Pros
Cons
Time and Volatility
Market View
Range-bound, Not moving
The Trade
Sell a Put below stock price and sell a Call above the stock price. Your view is that the stock will not cross the call or put strikes.
Premium
Receive
Margin
Required
When To Do
Pros
Cons
Time and Volatility
Market View
Range-bound, not moving
The Trade
Sell a put and call at the same strike near the stock price. Your view is that the stock wont go down or up. Buy a lower Put and a higher call for protection on both sides just in case you're wrong.
Premium
Receive
Margin
Required
When To Do
Pros
Cons
Time and Volatility
Market View
Range-bound, not moving
The Trade
Sell a Put below stock price and sell a Call above the stock price. Your view is that the stock won’t cross these strikes. Buy a lower Put and a higher Call for protection on both sides just in case you're wrong.
Premium
Receive
Margin
Required
When To Do
Pros
Cons
Time and Volatility
Market View
A big move up or down
The Trade
Buy a put and call at the same strike near the stock price. Your view is that the stock will either go down or up in a big way.
Premium
Pay
Margin
Required
When To Do
Pros
Cons
Time and Volatility
Market View
A big move up or down
The Trade
Buy a Put below stock price and buy a Call above the strike price. Your view is that if there is a breakout, the stock will cross either of these strikes by a margin
Premium
Pay
Margin
No
When To Do
Pros
Cons
Time and Volatility
Market View
A significant move up or down
The Trade
Buy a put and call at the same strike near the stock price. Your view is that the stock will go down or up. Sell a lower put and a higher call on both sides for reducing premium
Premium
Pay
Margin
Required
When To Do
Pros
Cons
Time and Volatility
Market View
A significant move up or down
The Trade
Buy a Put below stock price; Buy a Call above the stock price. Your view is that the stock will cross these strikes. Sell a lower put and a higher call for reducing premium
Premium
Pay
Margin
Required
When To Do
Pros
Cons
Time and Volatility
