Module 2 part 2.pdf

Supports & Resistances Support Setup – 5 step process for Trading 1) Detection of a support forming alongside certain level 2) Confirmation of a support 3) Entry on confirmation 4) Stop loss setting (with a margin of safety) 5) Target setting as per conviction of view  What is a Support?...

Supports & Resistances Support Setup – 5 step process for Trading 1) Detection of a support forming alongside certain level 2) Confirmation of a support 3) Entry on confirmation 4) Stop loss setting (with a margin of safety) 5) Target setting as per conviction of view  What is a Support? The detection A support is a level at which demand to buy the stock overpowers the supply to sell the stock which in turn pushes the price up. The detection process involves spotting a level from which the price bounces upwards. Generally, the price bouncing twice from a certain level is enough to label that level as a demand zone (or as we are learning currently : it is called a support)  What is a Support? The confirmation Support confirmed (at point 3) The confirmation process involves observing the price retest the detected demand zone, maintain it and start moving upwards from that level. Understand that it acts like a floor preventing the price to fall below a certain level.  What is a Support? The entry Entry Support confirmed (at point 3) The entry is once the confirmation process is complete and you as a trader are confident of this level to maintain.  What is a Support? The stop loss setting Entry Stop loss Support confirmed (at point 3) The stop loss is below our support levels with a margin of safety Understand the psychology for this stop loss setting  What is a Support? The target setting Target Entry Stop loss Support confirmed (at point 3) Though very subjective and everyone can have their own respective targets as per their requirements, it is prudent to keep the previous high as a target Example of a Support Resistance Setup – 5 step process for Trading 1) Detection of a resistance forming alongside certain level 2) Confirmation of a resistance 3) Entry on confirmation 4) Stop loss setting (with a margin of safety) 5) Target setting as per conviction of view  What is a Resistance? The detection A resistance is a level at which Supply to sell the stock overpowers the demand to buy the stock which in turn pushes the price down. The detection process involves spotting a level from which the price turns downwards. Generally, the price turning down twice from a certain level is enough to label that level as a supply zone (or as we are learning currently : it is called a Resistance)  What is a Resistance? The confirmation Resistance confirmed (at point 3) The confirmation process involves observing the price retest the detected supply zone, maintain it and start moving downwards from that level. Understand that it acts like a ceiling preventing the price to rise above a certain level.  What is a Resistance? The entry Resistance confirmed (at point 3) Entry The entry is once the confirmation process is complete and you as a trader are confident of this level to maintain.  What is a Resistance? The stop loss setting (with a margin of safety) Resistance confirmed (at point 3) Stop loss Entry The stop loss is above our resistance levels with a margin of safety Understand the psychology for this stop loss setting  What is a Resistance? The target setting Resistance confirmed (at point 3) Stop loss Entry Target Though very subjective and everyone can have their own respective targets as per their requirements, it is prudent to keep the previous low as a target Example of a Resistance Do these levels hold for eternity? Resistance Breakout Breakout Resistance breached Resistance It occurs because of a shift in sentiment and opinion of the people. Bears give up, bulls take over. Trader’s Insight Resistance Breakout : Trade Setup Breakout Entry Resistance Stop loss It occurs because of a shift in sentiment and opinion of the people. Bears give up, bulls take over. Trader’s Insight Example of Resistance Breakout Mazdock (1 year – Daily) Support Breakdown Support Support breached Breakdown It occurs because of a shift in sentiment and opinion of the people. Bulls give up, bears take over. Trader’s Insight Support Breakdown : Trade Setup Stop loss Support Entry Breakdown It occurs because of a shift in sentiment and opinion of the people. Bulls give up, bears take over. Trader’s Insight Example of Support Breakdown Bandhan Bank (1 year – Daily) Support and Resistance : Order of play Under various circumstances, by the Buy alongside Short alongside forces of demand and supply, these support with stop resistance with support and resistance levels can loss below stop loss above breach and create massive stop loss support resistance triggers which in turn lead to exponential moves in the breached Support Resistance direction. Holds Holds Refer to the right side of the page to understand Order of Play for these important Support and Resistance Support Resistance levels. Breaches Breaches Short below Buy above Support breaches downwards and support with stop resistance with resistance breaches upwards. One can loss above support stop loss below play these as well to bag amazing resistance money making opportunities.  Resistance to Support - Change in Polarity Pullback Resistance Support taken breached Change in polarity Resistance Resistance regained Post breach of initial resistance and pullback - Scenario 1 : Resistance regained, i.e. bears regained control of the resistance levels temporarily lost to the bulls. -Scenario 2 : Support taken, i.e. bears could not regain control, in fact, the level which was holding as a resistance now in turn acts like a support. This marks a change in polarity. Prices have memories : Change in Polarity Example of CIP : Banknifty Change in polarity are ranges/zones/levels  Support to Resistance – Change in Polarity Support regained Support Support Resistance taken breached Change in polarity Pullback Post breach of initial support and pullback - Scenario 1 : Support regained, i.e. bulls regained control of the support levels temporarily lost to the bears. -Scenario 2 : Resistance taken, i.e. bulls could not regain control, in fact, the level which was holding as a support now in turn acts like a resistance. This marks a change in polarity. Example of CIP : Bandhan Bank (1 year – Daily) Example of CIP : Bajaj Finance  Support & Resistance Tracker The following are the requirements of the Trading System: Sector Scrip and Scrip Tikr CMP linked from Google Finance Support Level Support Within 2% Trigger (around 2% from our support levels) Points away from support Support Breached Trigger Resistance Level Resistance Within 2% Trigger (around 2% from our resistance levels) Resistance Breached Trigger Points away from resistance Trendlines Observe the diagram on left hand side, understand that how during an uptrend, we can plot a supporting trendline across the lows. Similarly, on the right hand side, during a downtrend, we can plot a resistance trendline across the highs. Arrows marked are points from where you can take trading positions. Remember we need 3 points for confirmations, so the first 2 points can be used for marking trendline and not making money off it. Supporting trendline giving us Resistance trendline giving us sell on buy on dip opportunities rise opportunities Example of Supporting trendline Example : Resistance trendline What is a channel? If the supporting trendline and resistance trendline are parallel to each other, it is called a channel. Incase it is sloping upwards, its called a rising channel/upward sloping channel. Incase it is sloping downwards, it is called a falling channel/downward sloping channel. It is mainly used by traders as it provides favorable entry and exits. Upward Sloping Channel Example Downward Sloping Channel Example What can happen if a supporting trendline breaches? What can happen if a channel breaches? Do Resistance Trendline and Supporting Trendline follow Change in Polarity? Support and Resistance : Order of play Under various circumstances, by the Buy alongside Short alongside forces of demand and supply, these support with stop resistance with support and resistance levels can loss below stop loss above breach and create massive stop loss support resistance triggers which in turn lead to exponential moves in the breached Support Resistance direction. Holds Holds Refer to the right side of the page to understand Order of Play for these important Support and Resistance Support Resistance levels. Breaches Breaches Short below Buy above Support breaches downwards and support with stop resistance with resistance breaches upwards. One can loss above support stop loss below play these as well to bag amazing resistance money making opportunities. Supporting Trendline & Resistance Trendline Tracker The following are the requirements of the Trading System: Sector Scrip and Scrip Tikr CMP linked from Google Finance Support Level Support Within 2% Trigger (around 2% from our support levels) Points away from support Support Breached Trigger Resistance Level Resistance Within 2% Trigger (around 2% from our resistance levels) Resistance Breached Trigger Points away from resistance  Basic Momentum Indicators and Oscillators & Order Placing Momentum Indicators What are the momentum indicators? What is leading indicator? What is lagging indicator? What do they signify? How to interpret ? How to make money off them? List Moving Averages Moving Average Convergence Divergence (MACD) Relative Strength Index (RSI) Moving Averages Trend-following or lagging indicator because it is based on past prices Smoothens out price action by filtering out the “noise” from random price fluctuations thus makes it easier to spot a trend 1) Identify the trend direction (upward, downward or sideways) 2) Determine support and resistance levels (daily/weekly/monthly charts) 3) Generate trading signals using pairs crossovers (ST and LT)  Moving Averages and Trading Setups Role 1: Helps to identify trend (Be it short term or long term)  Helps to identify trend : Observe the 30 MA Note : Apply 30 candles moving average on any timeframe chart and understand the underlying trajectory/trend  Helps to identify trend : Observe the 30 MA Note : Apply 30 candles moving average on any timeframe chart and understand the underlying trajectory/trend  Helps to identify trend : Observe the 30 MA Note : Apply 30 candles moving average on any timeframe chart and understand the underlying trajectory/trend  Helps to identify trend : Observe the 30 MA Note : Apply 30 candles moving average on any timeframe chart and understand the underlying trajectory/trend Helps to identify trend (no trend here):Observe the 30 MA Note : Apply 30 candles moving average on any timeframe chart and understand the underlying trajectory/trend  Moving Averages and Trading Setups Role 2: Identify support and resistance levels (Be it short term or long term) Identify support and resistance levels: Daily Chart (Short term) - Retrospective Identify support and resistance levels : Monthly chart (Long term) – Currently Active  Moving Averages and Trading Setups Role 3: Trade setups based on pairs crossovers Pairs crossovers Whenever a short term moving average intersects a long term moving average, it signals an upcoming price movement expectation. If short term moving average intersects long term moving average from below to above, we get a buy call.(See image on left) If short term moving average intersects long term moving average from above to below, we get a sell call.(See image on right) Ensure that the long term moving average is atleast twice than the short term moving average, otherwise the signals will come too quick and has a high fail percentage. Sell Long term moving average Long term moving average Short term Buy Short term moving average moving average Pairs crossovers Your stop loss will be on the candle prior to this crossover. So incase of a buy call, crossover – 1 candle low minus some points (0.50%) is the stop loss. Incase of a sell call, crossover – 1 candle high plus some points (0.50%) is the stop loss. A lot pairs are currently playable in the markets. A few of them are 5 & 20, 9 & 18, 13 & 36, 50 & 200. As moving averages are different for different timeframes, a 5 & 20 would work on XYZ stock for daily timeframe but not for its weekly or monthly timeframe. The entire effort of you as a researcher of moving average pairs crossover is to find appropriate pairs which make sense and help you time the market accurately. SL Sell Long term moving average Long term moving average Short term SL Buy Short term moving average moving average Example of pair crossovers (5&10) : Buy bias Example of pair crossovers (5&10) : Buy bias Example of pair crossovers (5&10) : Sell bias Example of pair crossovers (5&10) : Sell bias Moving Average Convergence Divergence (MACD) Trend-following momentum indicator that shows the relationship between two moving averages of prices MACD Line : Difference of 26 and 12 MA. 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 Divergence – The green bars in the indicator which measures the distance between the MACD line and Signal Line MACD Crossover Rules and Terminologies Crossover Crossover time above/below 0 scaling Terminology Blue intersects pink from below to above Below 0 Golden Cross Blue intersects pink from below to above Above 0 Normal buy call Blue intersects pink from above to below Above 0 Dead Cross Blue intersects pink from above to below Below 0 Normal sell call Sell if not sold Signal Line Signal Line MACD Line Buy if not MACD Line bought Example : Golden Crossover Example : Dead Cross MACD is late! Relative Strength Index (RSI) This data line oscillates between two extremes : 0 to 100 Values above 70 indicate that a security is becoming overbought or overvalued and may be primed for a trend reversal or corrective pullback in price(bears to kick in soon) Value at 30 or below indicates an oversold or undervalued condition indicating a trend reversal or a corrective pullback in price (bulls to kick in soon) For the Geeks (Assume 14 day default strength) Example – Oversold Zones Example – Overbought zones How do I make money of RSI in sideways markets (oversold + overbought)? How do I make money of RSI in sideways markets (oversold + overbought)?  RSI Divergence Price 70 30 RSI Bullish Bearish Divergence Divergence  RSI Divergence SL Price SL 70 30 RSI Bullish Bearish Divergence Divergence  Failure Swing RSI Divergence Price RSI stays below 70 RSI stays above 30 RSI Bullish Bearish Divergence Divergence  Failure Swing RSI Divergence SL Price SL 70 30 RSI Bullish Bearish Divergence Divergence Example of playing RSI