•  Historically, individual stocks and equity markets, both domestic and global, have moved upwards (short-term movement aside). Thus, if we agree that the direction of markets is generally bound upwards, then holding on to a short position for a longer time is betting against the historical trend of a market is very risky. 
• A trader should always exit the market once the target is achieved or the stop loss is triggered. But as this discipline in market is against our natural instincts of fear and greed and lack of such discipline, makes the position riskier. 
• Theoretically, one stands to make only limited profit on a short sell with chances of unlimited loss. This is because, the stock price can rise to any level, whereas the gain is limited since the stock price cannot go below zero. 

• You may be very short-term oriented, wanting to capitalize on quick, five-to-ten-day moves to make many small profits over a long period of time.
• If you are less active or more sensitive to commission costs, you may want to trade every six weeks or so, and to set wide stops so that your trades have breathing room.
• You may want to focus on the general market trend, or may feel more confident trading short-term opportunities against the trend. 

NSE has introduced a fantastic technical analysis tool - NSE Tame Lite.
Some of the features include:
Charts: TAME-LITE provides OHLC, line and candlestick charts.
Intraday Charts: TAME-LITE provides historical as well as intraday data.
Intraday charts are available for 1 minute, 5 minutes, 15 minutes, 30 minutes and 1 hour summaries.
In Cash Market and Future segments, intraday charts are available for all the stocks listed and available for trading in these segments.

Index Charts:
Historical charts are available for S&P CNX NIFTY, CNX NIFTY JUNIOR, CNX IT, BANK NIFTY, CNX 100, S&P CNX DEFTY, S&P CNX 500, CNX MIDCAP and NIFTY MIDCAP 50.

Intraday charts are available for S&P CNX NIFTY, CNX NIFTY JUNIOR, CNX IT, BANK NIFTY, CNX 100 and NIFTY MIDCAP 50.

This is a fine tool but lacks indicators and other chart options available with the usual online trading software.

Just give it a try NSE Lite

Candlestick Reversal Patterns
Just as many traders look to bar charts for double tops and bottoms, head-and-shoulders, and technical indicators for reversal signals, so too can candlestick formations be looked upon for the same purpose. A reversal does not always mean that the current uptrend/downtrend will reverse direction, but merely that the current direction may end. The market may then decide to drift sideways. Candlestick reversal patterns must be viewed within the context of prior activity to be effective. In fact, identical candlesticks may have different meanings depending on where they occur within the context of prior trends and formations.

Hammer -- a candlestick with a long lower shadow and small real body. The shadow should be at least twice the length of the real body, and there should be no or very little upper shadow. The body may be either black or white, but the key is that this candlestick must occur within the context of a downtrend to be considered a hammer. The market may be "hammering" out a bottom.

* Hanging Man -- identical in appearance to the hammer, but appears within the context of an uptrend.

*Engulfing Patterns -- Bullish -- when a white, real body totally covers, "engulfs" the prior day's real body. The market should be in a definable trend, not chopping around sideways. The shadows of the prior candlestick do not need to be engulfed.

*Bearish -- when a black, real body totally covers, "engulfs" the prior day's real body. The market should be in a definable trend, not chopping around sideways. The shadows of the prior candlestick do not need to be engulfed.

* Dark-Cloud Cover(bearish) -- a top reversal formation where the first day of the pattern consists of a strong white, real body. The second day's price opens above the top of the upper shadow of the prior candlestick, but the close is at or near the low of the day, and well into the prior white, real body.

* Piercing Pattern (bullish) -- opposite of the dark-cloud cover. Occurs within a downtrend. The first candlestick having a black, real body, and the second has a long, white, real body. The white day opens sharply lower, under the low of the prior black day. Then, prices close above the 50% point of the prior day's black real body.


A large portion of the material is taken from an excellent book called Japanese Candlestick Charting Techniques.As traders, we need as many trading tools in our arsenal, and a basic knowledge of candlesticks provides a trader much needed ammunition. Also remember that no matter what the trading tool, no matter how advanced or ancient, it is only effective when put into practice properly.

This is the second part of the series Technical Analysis - Candlestick Charts.
Standard bar charts are commonly used to convey price activity into an easily readable chart. Usually four elements make up a bar chart, the Open, High, Low, and Close for the trading session/time period. A price bar can represent any time frame the user wishes, from 1 minute to 1 month. The total vertical length/height of the bar represents the entire trading range for the period. The top of the bar represents the highest price of the period, and the bottom of the bar represents the lowest price of the period. The Open is represented by a small dash to the left of the bar, and the Close for the session is a small dash to the right of the bar.

The long, dark, filled-in real bodies represent a weak (bearish) close , while a long open, light-colored real body represents a strong (bullish) close . It is important to note that Japanese candlestick analysts traditionally view the open and closing prices as the most critical of the day. At a glance, notice how much easier it is with candlesticks to determine if the closing price was higher or lower than the opening price.

Common Candlestick Terminology
The following is a list of some individual candlestick terms. It is important to realize that many formations occur within the context of prior candlesticks. What follows is merely a definition of terms, not formations.We have already discussed about black candle and white candle, just above.

Spinning Tops -- candlesticks with small real bodies, and when appearing within a sideways choppy market, they represent equilibrium between the bulls and the bears. They can be either white or black.

 

Doji Lines -- have no real body, but instead have a horizontal line. This represents when the Open and Close are the same or very close. The length of the shadow can vary. 

 

In the next part, candlestick reversal patterns will be discussed.

What is the History of Candlestick Charts?

Candlestick charts are on record as being the oldest type of charts used for price prediction. They date back to the 1700's, when they were used for predicting rice prices. In fact, during this era in Japan, Munehisa Homma become a legendary rice trader and gained a huge fortune using candlestick analysis. He is said to have executed over 100 consecutive winning trades!

The candlesticks themselves and the formations they shape were give colorful names by the Japanese traders. Due in part to the military environment of the Japanese feudal system during this era, candlestick formations developed names such as "counter attack lines" and the "advancing three soldiers". Just as skill, strategy, and psychology are important in battle, so too are they important elements when in the midst of trading battle.

What do Candlesticks Look Like?

Candlestick charts are much more visually appealing than a standard two-dimensional bar chart. As in a standard bar chart, there are four elements necessary to construct a candlestick chart, the OPEN, HIGH, LOW and CLOSING price for a given time period. Below are examples of candlesticks and a definition for each candlestick component:



* The body of the candlestick is called the real body, and represents the range between the open and closing prices.
* A black or filled-in body represents that the close during that time period was lower than the open, (normally considered bearish) and when the body is open or white, that means the close was higher than the open (normally bullish).
* The thin vertical line above and/or below the real body is called the upper/lower shadow, representing the high/low price extremes for the period.

It is important to realize that this introduction is just that, an introduction to candlestick analysis.The rest of the many patterns and variables that can go into candlestick analysis, will be discussed later.

Support & Resistance

Simple English words which most of us quite familiar with and indeed, would probably be using it quite often in our daily lives in the markets. But how many of us have really understood the concepts behind these two seemingly obvious words?

Let us try defining them. We know that the market is a force of supply and demand, which ultimately forms the prices. Therefore we can define Support as "that area below the market where demand will overwhelm the supply" whereas Resistance can be defined as "that area over the market where supply will overcome demand."

Since the play of supply and demand is a constant one - depending on the market cycle that is being described – the market or the stock would be constantly moving between areas of supply into areas of demand and vice versa. Hence one could probably state that the entire chart of a stock would be made up of a series of identifiable areas of support and resistance.

What makes for support and how does resistance form?

Imagine a stock, which is priced at 50 currently. Some fresh development occurs, which is however known only to a few people. These few people would therefore be the buyers in the stock and would begin absorbing the quantity at 50. They will do so to the extent of their capacity and if this were now larger than the supply available at the price of 50, the prices then would stop moving below 50, as the demand is constant. Or, in other words, 50 become the support. At around the same time, those who are not aware of the development would be selling the stock; some of them possibly short selling. There would also be set of people who are unable to decide whether they should take a stand or not – either on the long side or on the short side.

Let us now say that the buyers have absorbed all the stock that is available at the price of 50 but continue to remain hungry for more. This would then raise the prices, as the demand will drive up the prices. This way the price will move to, say 75. At this price, let’s say that the original buyers unloaded their stake while there were other willing sellers at 75. The double action of existing sellers now being strengthened by other sellers will lead to a situation where the supply suddenly increases. This will halt the advance of the stock. Hence 75 will act as a resistance.

This gives us a the classic rule of support and resistance :

Supports once penetrated will act as Resistance in the future when the same price level is approached again and vice versa. They have a role reversal characteristic.



By now it would therefore be clear as to what support and resistances are and how they function. To summarize:

Support lies beneath the market and shows demand.
Resistance lies above the market and shows supply
Prices move constantly from one area of support into an area of resistance.
Supports once broken will reverse to resistance and vice versa.

Does Technical Analysis have any chance of working at all or is it just like reading tea leaves?

Last year same time technical analysts were giving targets of 25000 and 30000. Even a few weeks before they had said 12500 was a strong support,but today the markets is at 8700. Does Technical Analysis really work?

Technical Analysis is the study of market action, principally through the use of charts. Market action is expressed through movement of prices and the volumes that accompany them. Prices and volumes are therefore the only two variables to be studied when using technical analysis. Technical analysis is the art of interpreting stock price movements. Since financial market analysis involves some degree of subjectivity, all of them are therefore an art and not a science (which involves exact rules being met under all circumstances).

Since technical analysis addresses the market, it is actually studying the effect of action by all kinds of players. We know it to be a simple stated fact that all effects are rooted in some cause. Technical analysis is based on the fact that the market, which is made of all participants, has more knowledge than individual players. It reflects every market player’s opinion on the market. Technical analysis believes that history and patterns repeat again and again A good understanding of these underlying dynamics of market behavior will ensure that it works all the time.

Still, why does technical analysis sound so esoteric?

This is because there has not been a structured way of imparting this knowledge to people. The methods originated in the West and it was not until recently that information about technical analysis was at all available in India.
Since it deals with an entirely new subject, it has a jargon of its own which is unlike what we encounter normally in the markets, and hence, it appears esoteric. Other reasons such as ignorance, unavailability of information, no formal learning structure and a general resistance of people to change are also why the subject has remained relatively unexplored.

If I follow fundamentals, Should I know anything about technical analysis at all?

Fundamental analysis addresses all variables outside the market whereas Technical analysis deals with variables within the market. The objective of both forms of analysis is the same - it is to find future direction of stock price movements. Only the means of achieving the same differs. One of the major advantages in learning technical analysis is that it enables one to deal with market risk - this is one important area that is completely ignored by fundamental analysis.
In a statistical study done by Purdue University in the United States, it was found that the major risk faced by investors were - in order of importance - market, sector and stock. It is only technical analysis, which can give one an insight into market risk. Hence a good knowledge of both technical and fundamentals would produce a more rounded, well-informed, investor.

Successful investors like Warren Buffet don't seem to rely on technical analysis. Why is that?

Every person in the market should choose his own style of investing. People like Buffet are players over the very long term. This may sound easy and acceptable but in practice, is a very difficult job to do. Not many of us have such commitments to the very long term. Indeed, instant gratification is almost the buzzword in the markets!
Warren Buffet notwithstanding, it can be very conclusively proved that a proactive, market timing based investment model will consistently outperform a mere buy and hold strategy most of the time. There are always exceptions to any rule. From millions and millions of investors the United States could still produce only one Warren Buffet or one Peter Lynch. They are the exceptions rather than the rule.

Does technical analysis work as well in Indian markets as it does abroad?

Since technical analysis deals with the market and not geographical areas, it will work in any free trading financial markets anywhere.

Aren't technical analysts like economists? None of them seem to ever agree on anything.


Well, they make the weatherman look good! Since analysis is an art rather than a science, every form of analysis, including technical and fundamental and economics (and maybe, even tea leaves!) would leave considerable room for individual interpretations. Non-agreement, therefore, is something quite common.

Do you know what they say about Economists?

If everybody relied on technical analysis, wouldn't their collective actions itself distort the market? The market is always residing in the future. Any form of analysis or method, which seeks to project future direction of stock prices, will develop a sense of self-fulfillment periodically, especially over the short term. However, this in itself will set up a corrective cycle, as human emotions of greed and fear will compensate for the seeming mass action. Hence such distortions remain only over the very short term.
There are so many theories in technical analysis. How do I know which one works the best?

The many theories in technical analysis are all the result of consistent and ongoing work in the subject. In essence, they are a series of different ways of looking at the same set of variables - price and volume. It is a bit like a jigsaw puzzle. Each different viewpoint is a piece which when finally put together produces a complete picture. There really isn't one method that would work all the time in all the market conditions. One has to pick and choose the method to suit the market, sector and stock.

Among all the stock trading tools for analysis,Fibonacci studies is an interesting one.This is such a large and complex study that it is tough to be an expert in this area and hence we shall only be discussing three primary Fibonacci ratios and not minor ratios, ovals, arcs, bands or the time axis.

Leonardo Fibonacci da Pisa was born around 1170 the son of a city official and merchant. He became a prominent mathematician and is credited with the discovery of what we now call the Fibonacci series.

After a trip to Egypt he published his now famous Liber Abacci (Book of Calculation) in which amongst other things he comes up with the sequence of numbers.
1,1,2,3,5,8,13,21,34,55,89>>On to infinity.

If you add one of the numbers in the sequence to the number before it you get the next number in the sequence e.g. 3+5=8 and so on.After the first few numbers in the sequence if you measure the ratio of any number to that of the next higher number you get .618 to 1 e.g. 34 divided by 55 equals 0.618. The further along the sequence you go the closer to phi you will get.

If you measure the ratio between alternative number you get .382 e.g. 34 divided by 89 = 0.382 and that's about as far into the explanation as I care to go. As a trader you don't need to know any of this. All you need to know is if your charting software has Fibonacci capabilities. If it does then that will work everything out for you.
The three Fibonacci ratios we shall use are .382, .500 and .618 and how we can use them in our trading.

In an uptrend measure the distance between point A and point B and in a downtrend measure the distance between point A and point B where point A will always be the lowest recent point in an uptrend and the highest recent point in a downtrend.


In the example below you can see a chart where Point A is 119.09 and Point B is 123.16. If you calculate the 38.2% retracement you get 121.61, the 50% retracement is 121.13 and the 61.8% retracement is 120.64. For example. The difference between 119.06 and 123.16 is 4.07. If you calculate 38.2% of 4.07 you get 1.55. If you then take 1.55 from 123.16 (Point B) you get the 38.2% retracement of 121.61. You can use the same principal for the other retracement levels.


In our next stock chart example Point A is 7.916.08 and point B is 7.877.70.If you calculate the 38.2% retracement you get 7892.36, the 50% retracement is 7896.89 and the 61.8% retracement is 7901.42.

For example. The difference between 7.916.08 and 7877.70 is 38.38, if you calculate 61.8% of that you get 23.72. If you then take 23.72 and add it to Point B of 7.877.70 you get 7901.42 the 61.8% retracement.


The only difference between the downtrend and the uptrend is that you add your calculations to Point B and in the uptrend you subtract from Point B.

So how can we use all this information? Well, you would be amazed just how many times a security will find support or resistance at Fibonacci levels. These levels can be used buy at support levels and sell at resistance levels with proper stop loss techniques.

Trading Stocks using Trendlines

In Technical analysis identifying the trend is an important factor.The trend can be up, down or sideways. Trend Lines are an important tool in technical analysis for both trend identification and confirmation. A trend line is a straight line that connects two or more price points and then extends into the future to act as a line of support or resistance.

Using trend lines as a tool to technically analyze the markets has been around for a long time and was originally also used by floor traders. A long line of past price ranges together gives you a pattern.There will be plenty of ups and downs along the line but you should still be able to discern a general direction up, down, or sideways.

How to draw a trend line.

The first consideration when looking at any market is the direction of the long term trend.Trendlines illustrate the direction of the market movement and provide a primary consideration in any analysis.
Uptrends consist of a series of successively higher highs and lows.
Drawing trendlines during an up trending market: The trendlines above have been drawn by connecting as many successive lows as possible (along the bottom of the price range). An up trending trendline represents major support for prices as long as it is not violated.


Downtrends consist of a series of successively lower highs and lows.
Drawing trendlines in a down trending market: Down trending trendlines are drawn by connecting as many successive highs as possible as shown above (along the top of the price range). A down trending trendline represents major resistance for prices as long as it is not violated.



Support and Resistance

An important concept in the use of trendlines as mentioned above is that of support and resistance.
A continued trend is based on underlying support for prices in the market, for whatever reason.

Similarly, there is resistance to higher prices built into the market.The trendline is one way to capture and illustrate these zones of support and resistance.

As long as the market stays within these zones of support and resistance, as shown by a trendline, the trend is sustained. Any penetration through a trendline warns of a possible change in trend. We may not know the reason behind such a change, but we do know that for some reason the support or resistance for a market is changing.

The general idea behind trading trendlines is to look for a break of the trend in the opposite direction

Conclusion

Trend lines can offer great insight, but if used improperly, they can also produce false signals. Other items - such as horizontal support and resistance levels or peak-and-trough analysis - should be employed to validate trend line breaks. While trend lines have become a very popular aspect of technical analysis, they are merely one tool for establishing, analyzing, and confirming a trend.

Trend lines should not be the final arbiter, but should serve merely as a warning that a change in trend may be imminent. By using trend line breaks for warnings, investors and traders can pay closer attention to other confirming signals for a potential change in trend.

Relative Strength Index was developed by J.Welles Wilder Jr. and first introduced in his book 'New Concepts In Technical Trading Systems'.It is one of the most popular technical tools around and is plotted on a vertical scale of 0 to 100.The 70% and 30% levels are used as warning signals. A relative strength index above 70% is considered overbought and below 30% is considered oversold.

When trading the stock markets "buy" signals on the RSI are considered to be readings of 30 or less (the security is considered oversold) and "sell" signals are considered to be RSI values of 70 or greater (the security is considered overbought). Depending on the technician and price volatility, there are various other qualifiers and nuances that can be incorporated into a signal.


An RSI above 70% is considered overbought and below 30% is considered oversold.
An overbought or oversold condition merely indicates that there is a high probability of a counter reaction. It is an indication that there may be an opportunity to buy or sell, but does not provide the final signal. RSI signals should always be used in conjunction with trend-reversal signals offered by the price itself.

Calculation
Relative Strength Index (RSI) measures the strength of all upward movement against the strength of all downward movement in a specified time frame.

The mathematical formula for RSI is shown below:
RSI = 100 - [100/(1+RS)]
RS = average of n day's up closes / average of n day's down closes

The most common parameter for RSI is period 14, although users can pick their favorite period of time if they wish. It is one of the most popular oscillators that works well in range-bound market.

Signals
Tops and Bottoms
These are indicated when the readings go above 70 (top) and below 30 (bottom). RSI can form formations similar to Chart Formations. The RSI may form chart formations that may or may not appear on the actual bar chart e.g. you might see a head and shoulders formation on the RSI but not on the bar chart.

Failure Swings
When the RSI goes above 70 or below 30 this is a strong indication that the market is ready for a reversal.

Support and Resistance
It is sometimes more apparent that support or resistance is forming in the RSI than can be seen on the bar chart.

Use Of RSI

Use of RSI is that of divergence as suggested by Wilder himself.. When the security you are trading makes a new high and the RSI turns down that is bearish divergence.

The same is true of bullish divergence. When price makes a new low (red line) and the RSI turns up (blue line) that is bullish divergence as in the 30 min chart of the BSE Sensex shown below:



We also prefer to see divergence at major tops and bottoms. That is to say, if we have been in a down trend for some time as shown in the chart above and price has gone past a reading of 20 on the RSI AND we see divergence then we are a lot more confident that price has in fact bottomed.

We don't like to use RSI as a sole trigger for a new position but rather like to use it in combination with other indicators to help build a picture.


You will notice that in most cases of divergence the security makes a low as does the RSI, then the RSI begins to turn up but the security continues down.

We wait for the security to make a new low and the RSI to come down but not as low as the previous low and that is the point where action can be taken. The fact that the RSI has not dropped lower than its previous low and the price has, is the point of recognition.

Conclusion

* The RSI is a momentum indicator, or oscillator, that measures the relative internal strength of a market (not against another market or index).
* As with all oscillators, RSI can provide early warning signals but should be used in conjunction with other indicators.
* Divergences are the most important signal provided by RSI.

The MACD is a trend-following momentum indicator that shows the relationship between two moving averages of price. The MACD is calculated by subtracting the 26-day exponential moving average (EMA) from the 12-day EMA. A nine-day EMA of the MACD, called the "signal line", is then plotted on top of the MACD, functioning as a trigger for buy and sell signals.

First Some History
Developed by Gerald Appel, Moving Average Convergence/Divergence (MACD) is one of the simplest and most reliable indicators available. MACD uses moving averages, which are lagging indicators, to include some trend-following characteristics. These lagging indicators are turned into a momentum oscillator by subtracting the longer moving average from the shorter moving average. The resulting plot forms a line that oscillates above and below zero, without any upper or lower limits.


Benefits of the MACD

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, as opposed to simple moving averages, some of the lag has been taken out.

MACD Setup

The default settings for the MACD which we will use are:

Slow moving average - 26 days
Fast moving average - 12 days
Signal line - 9 day moving average of the difference between fast and slow.
All moving averages are exponential.

Although there are three moving averages mentioned you will only see two lines. The simplest method of use is when the two lines cross. If the faster signal line crosses above the MACD line (The MACD line is calculated by the difference between the 26-day exponential moving average and the 12-day exponential moving average) then a buy signal is generated and vice versa.

It is also used as an overbought and oversold indicator. The higher above the zero both lines are the more overbought it becomes and the lower below the zero line both lines are the more oversold it becomes.

It may also lead to a stronger signal if the signal line crosses down when it is overbought and crosses up when it is oversold. The last common use of MACD is that of divergence.

If the MACD is making new lows and the price of the security is not making new lows that is one form of divergence (bullish divergence). Also, if the MACD has made a high and starts to head down but price continues up that is another type of divergence (bearish divergence) and may lead to an indication of a change in direction.
There are many ways to trade the MACD but one of our favourites are too use two different time frames. All you do is establish a trend in a higher time period than the one you intend to trade. For our higher time frame we like to use the 30 min chart and then drop down to the 5 min chart when conditions have been met on the 30 min chart..
As you can see from the 30 min chart example of the BSE Sensex below there was a buy signal on 12th December 06. The chart below (red arrow) shows the fast 9-day signal EMA (thin red line) crossing over the MACD line EMA (thin blue line).

The histogram represents the difference between MACD and its 9-day EMA. The histogram is positive when MACD is above its 9-day EMA and negative when MACD is below its 9-day EMA.