Everything you need to know to make money in stock markets

MunafaSutra Stock Market Training Material

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Everything you need to know to make money in stock markets

When you hear the words stock markets, you automatically think about buying and selling. It seems so
simple. Buy something at low prices and sell it when the price goes up! Every expert in the markets tell
you to do exactly that, and it actually is that simple, but there's a catch.

You don't know what is the low price to buy and what is the high price to sell.

And to make things even worse, the psychology of a stock market trader is different from any other
businessman. It's actually the complete opposite.

A stock market trader tends to buy a stock when the prices are moving down in an expectation that the
prices will rise soon. Simillarly, they sell a stock when the prices start rising up in a fear that the prices
will fall down any time now.

A real businessman does exactly the opposite of this. They buy when they see a demand rising, meaning
people are willing to pay more for something. They sell when they see a lack of demand, meaning when
they see that people don't even want to pay the current price and may buy when its cheaper.

If only a stock market trader can behave in the same way as a real businessman behaves. They will start
making profits!

Remember, its about buying cheap, not falling. There's a difference, and I'll explain that in a minute.

But before we get deeper into the subject, here's a short story for you.

This is a real story. See if you can identify the person mentioned in this story.

I was fascinated by stock markets, specially since I heard that stock markets has made millionaires, and
even billionaires!
So one day, I went to a brokerage firm and opened an account. I only transfered a small amount of my
savings in my new trading account. I had a tip from a friend that XYZ stock is moving fast. I took a trade
and bought a small quantity.

I kept checking the prices regularly, and was very happy to see that my stock is still moving up. 10% up in
one day, 20% up another day! After a couple of days, my friend called me on phone and asked me to sell
the stock. I did,

This trade of mine has made me a profit of over 45% in just a few days!

I can't sleep that night. I had dreams in my wide open eyes. Dreams of becoming the next stock market
millionaire!

I had it all calculated. 45% profit in one stock, and even if I made 20% profit in worst case scenario, with
all my savings invested, I'd be a millionaire before the end of the next year!

I went to my brokerage firm the next morning and transfered a huge portion of my savings into my
trading account.

Then I called my friend to get the top stock on his radar. He was happy to share the name with me, and I
took a trade. I was still a little scared, so I took a small trade. It went up, but not as much as the previous
one...

I only made a small profit of 5% in this one. I needed more stocks to trade in now... Where can I get a
large list of stocks that can make me profits, I thought? TV, of course. Business channels on the TV!
where else?

I started watching the most popular channels everyday. I'd sit before the TV and note down every stock
that was suggested by the most "knowledgeable" analyst. They would say something like:

This stock has performed very good in the past, and is showing some correction now. This is the time to
"accumulate it on dips".

The stock is falling from a level of 45, but 35 is its nearest support. Until it breaks that level, it looks good
to me. Our strategy is to “buy it on falls.”
Although the stock has shown some correction in the last 4-5 sessions, still we are bullish on it, and its a
good time to "accumulate it."

And I accumulated.

And I saw my savings drain away slowly...

One after the other, trade after trade, my savings were draining away...

Of course, I made some profits every now and then, but the end result was that I lost my savings at a
geometric rate.

Can't you identify the guy in that story?

Has that not happened to you?

Do you know what went wrong in all those trades?

The mistake was not that you listened to someone on TV. The mistake was that you did not listen to
what the markets were telling you.

How do you listen to what the markets are telling you? That is exactly what this book is going to tell you.

You might think that you can be an investor, and not a trader. Investors make money! Really?

I'm sure you've heard success stories of stock market. How Warren Buffett, Rakesh Jhunjhunwala
became billionaires, but there are two sides of every coin. Today I'll show you the truth of stock
markets.

At this point you might be thinking that you can just put some money in each of the 51 companies listed
in NIFTY and as NIFTY keeps growing, your net money will grow.

Well, the index has grown significantly in the last 10 years...

Has it really?
The NIFTY you see today is not the same NIFTY it was just 10 years back. Thats right. Companies got
dropped, and companies got added. These companies are mainly based on market capitalization. When
a company loses its market cap too much, it gets dropped out of NIFTY.

Here are some of the companies that got dropped out of NIFTY. Please don't imagine what would have
happened to your investment if you had these companies. If you do, then please keep a heart doctor
nearby...

Suzlon Energy:

Added in NIFTY in 2006, and made a lifetime high of 412 rupees. Today trading at 5 rupees...

By the way, it made a new 52 week high today of 20 rupees...

A TV anchor would report: The stock has touched a new 52 week high, and has gained 400% in the last 3
years!

WOW! (eyes wide open)

Unitech:

Another stock which was in NIFTY in 2008, and made a lifetime high of 546 rupees

Please hold your breath for this one.

Its trading at 1.25 rupees today, as on 20 May , 2019...

That's less than 1% of its lifetime value. Can an investor ever imagine to regain what they lost here???

Even if the stock blasts, and rises 10 times, it would still be at just 10 rupees...

And now the ultimate winner of all! Reliance communication:

Just 11 years back, in 2008, the stock traded at a lifetime high of 844 rupees. Its currently at 2 rupees.

The company is filing for bankrupcy, meaning its assets will be sold piece by piece and money collected
will get distributed amongst its investors, mostly banks which lended the money.
There are hundreds of such stocks like DLF, Bartronics, Himachal Futuristics, Jaiprakash Associates,
Kingfisher Airlines. These stocks have lost anything from 80% to 99% of their value.

So if you had invested 100,000 rupees in one such stock, you'd be left with say 1000 rupees approx...

Sure there are stories like WIPRO, INFY, Eicher Motors etc, but then there are also RCOM, UNITECH,
SUZLON.

What should you do to protect yourself?

1. Never fall in love with a stock

Sell it at the right time and get out of it. Before it becomes a bottomless pit for your wealth.

2. Always remember that stock market investments are risky

Sure, the markets are going up, but if your investment is not, then its time to rethink your portfolio.

3. Have a system.

Develop a system of tracking, identifying support & resistance, and indicators like SMA, EMA will show
you when to get out of a stock...

This is exactly what this book is going to teach you. When to get in, and also when to get out of stocks.

You are not wrong when you thought that you are buying something at a cheaper price, and that you
can sell it at a higher price.

But is it cheap "enough"? Or, is it going to get cheaper?

Are the prices low enough, or are they going to get lower?
How will a stock market trader know that the prices are low enough?

If you have been trading in stock markets for any amount of time, I'm sure you have come across the
following situation:

You saw a stock moving up, its at about 100 points now. You thought everyone says to wait and watch,
so you watched. It went to 125 points.

Something in your brain tells you that this will go to 150 or more, so you got in, and got in with all you
had.

To your surprise, it started falling. Its at 120 points now. You thought, its just 5 points down, no
problem, no problem, it will move up.

It kept falling, and falling. Its close to 75 points now.

Suddenly, something in your brain tells you that it will keep falling and will go to 50 probably.

So you sold.

Sold all of it.

Oh My GOD, it started moving up the very next day. Its at 85, and then at 100, and then at 120, and then
at 150!

Oh My GOD, who's this guy watching me sell the stock?

This happens to you a couple of times, and you start believing that there is a Stock Market Voodoo
working against you...
Let me tell you, there's no one there watching you get in and out. There is no Voodoo... Then what went
wrong?

You thought you did the right thing by waiting and watching the stock for a few days. Everyone tells you
to wait and watch before buying. You did, but that backfired, didn't it?

What is this "wait and watch" game?

What are you supposed to watch? Is it the prices or something else?

What went wrong in the trade above?

These are the questions this book will answer for you. And once you understand this phenomena, you
will never make a loss in the stock markets! At least not a big one.

You will find out:

How to select a stock to trade in

When to buy a stock and avoid losses

When to sell a stock for maximum profits

How to read line and candle stick charts successfully

How to predict future movement of a stock using candle sticks

How to use technical indicators like Stochastics, RSI, MRSI, PVM, MACD, Moving averages, Cross overs
and the like

Before we jump in and start explaining the phenomena, let me first tell you how stock markets work,
and also about the three forces that are driving the stock markets. Every trade in the stock markets are
being governed by these. You identify these forces behind a trade, you will automatically know if the
stock is worth trading or is it just a wave that will soon pass by.
What is Share Market & how it works?

Share Market as the name suggests, means sharing, sharing of profits.

When you buy shares of a company, you are entitled to recieve a "share" from the profits earned by the
company.

Lets see this with an example.

A group of people are running a business.

They decide that they wish to expand their business, and so they reach to a bank and take a loan.

They handed over a couple of their company's shares to the bank.

As a result of this, this business will now share its profit with the bank.

This type of "fund raising" is called debt.

A few years later, they again decided to raise some more money.

But this time, instead of going to a bank, they went to "Stock Markets".

"Share" market, and "stock" market are same terms.

Here in stock markets, they submitted their documents, and a price band was set for the prices of this
business's shares.

A total number of "maximum" shares to be sold are also decided.

Price band is the basic amount between which people can offer to buy shares of this company.

For example, the lower band, or lower range was set at 300 rupees per share.

Likewise, upper band, also called upper range was set at 350 rupees per share.

For our example, lets say that the company is selling a total of 100 shares.
In practical terms, companies sell lakhs and crores of shares, but to keep our example simple and easy to
understand, we are using 100 shares as the total figure.

For the next few days, interested people, people like you and me, other investment companies etc, can
place their offers to buy shares of this company.

This is called Initial Public Offer, IPO of the company.

If the business is very good, and many people are interested in buying the shares, then people might
place their offers at the upper band of 350 rupees per share.

Not only this, but number of shares "demanded" might also cross the total available shares of 100. May
be 500 shares are being demanded now.

In this case, all the people will not get the shares. Some might not even get a single share.

If its just an average business, then offers might be close to the lower band of 300 rupees only. Total
demanded shares are also less than 100.

When the IPO gets closed, meaning new offers are not entertained anymore, and after distributing the
shares to the people who got it, then the company gets listed in stock markets.

Company got the investment it asked for, and people like you and me got the shares of the company.

We are now entitled to get a share from the profits of the company.

Company has sold its "Equity" to raise the funds it needed. We are holding equity shares of the company
now.

On the day when the company got listed, people who did not got the shares, they will try to buy the
shares from the "Share market" now.

Suppose you got the shares during the IPO at 350 rupees per share, and I did not, and I want to own
some of the shares.

So my only option is to buy some shares from you. The company is not selling its shares anymore. They
already sold what they wanted to sell.
So now, I will try to buy shares from you. How can I do this?

By giving you more price per share, isn't it?

I place a "bid" of rupees 360 per share.

Suppose you agreed, and sold me some shares at this price of 360, then the "new" price of the share in
the market is rupees 360.

Suppose you did not agreed, and did not sold the shares, then I can further increase the "bid", but price
of the share remains unchanged until a trade happens.

The "Last Traded Price", also called LTP, is the price which you see in share markets.

This is how price increases in stock markets.

Suppose, you got the share in IPO, and you want to sell it now.

You placed a "offer", also known as "ask price", in the market at rupees 360 per share.

Nobody came to buy. So you reduced your "ask price", and now you are asking 340 rupees.

Someone bought a few shares, and now price of 340 is the LTP, which becomes the current price of the
share in the market.

This is how prices fall.

Stock Exchanges have fixed a minimum and a maximum limit for every stock listed in stock markets.

These are called Lower and upper limits.

Neither "bids", nor "ask prices" are accepted beyond this range, for that day.

If a falling stock reaches its lower limit, then its said that it has hit a lower circuit. Sellers cannot ask
lower "ask prices" for this stock now, but only for that day.

Next day when the stock market opens, then again lower prices can be asked.
Similarly, when a rising stock reaches its upper limit, then buyers cannot "bid" higher for that stock now,
again, only for that day.

The stock is said to have hit its upper limit now.

Next day when stock markets open, then buyers can bid higher and buy the stock.

Lets see an example.

In our example above, you got the share at 350 rupees.

Then you sold some of it at 360 rupees.

I still want more shares, so I placed another bid of 370. You sold some shares to me again.

Suppose the upper limit of the stock for that day is 400 rupees.

I placed a bid of 400, and you sold me some more shares, but I want more shares.

You are ready to sell me more shares at 410 rupees, but I cannot place a bid greater than 400, so no
trade is happening.

The stock has hit its upper limit now.

Only way any trade can happen now is if you agree to sell me some shares at 400, otherwise I will have
to wait till next day to buy more shares.

Generally upper and lower limits are set at 5%, and in some cases exchanges can increase these to 10%
to 20% on the same day.

Notice, at this point, the actual company whose shares you have bought in IPO, is not benefitting in any
way from this trading.

This trade is happening between you and me, not between me and the company.

The company got its investment money during the IPO, and now its just people like you and me who are
buying and selling the shares.

At the end of 3 months, if the company made any profits, they might announce a "dividend". Dividend is
the actual "share from profits" which share holders get.
Suppose the company announced a rupee 3 dividend per share, and you have 100 shares of the
company, then you get 300 rupees as your "share from the profit".

To be entitled to earn this dividend, you need not hold the share for all 3 months. You can simply have
the share in your account on the "dividend effective date", which is also announced by the company,
and earn the dividend.

Because of this reason, you will see prices of a share rising near the "effective date", specially if the
dividend announced is high.

The percentage of dividend announced, also called dividend yield, is calculated by dividing dividend per
share by current price and then multiplying by 100.

For example, price of share is 300 rupees.

Dividend announced is 3 rupees,

So dividend yield is 1% = ( 3/300 ) * 100

The higher the dividend yield, the better.

You can find a list of upcoming dividends here:

https://MunafaSutra.com/nse/dividends

3 forces that drive stock markets are:

1. Fundamentals: Every expert in the market tells you to buy stock with strong fundamentals. But what
are these fundamentals?

Fundamentals comprise of various factors like business model, available cash to a company, profit and
loss statements, liabilities, management etc.

Most of these factors are reflected in balance sheets. You can download these balance sheets from
various websites like stock exchange websites, or company websites.
A company with a strong business model is bound to survive longer than the one with a shitty business
model. Let me give you an example.

Company "ABC" is an online company selling furniture.

Company "XYZ" is another online company selling virtual e-cards.

Which of these is a company with a stronger business model? Forget the model, which of these
businesses do "you" understand clearly? Selling furniture, or selling a virtual e-card which doesn't exist
anywhere?

Simillarly, you need to know how much cash is available to a company, or at least how much they need
to payback to their lenders.

A classic example of this is an Indian company "KingFisher Airlines".

The company had to pay about a billion dollars to it's lenders. Everything was going smoothly in the
company. The stock was trading near 70 points, when suddenly, one of the lenders took legal action
against the company. They wanted their money back.

Soon after, other lenders followed. The company didn't have that much cash. They could not have paid
back the amount. The stock started falling at a geometric rate. The last price I saw for this stock was 1.30
points, which was when trading was stopped in this stock.

A stock of 70 points went down to 1.30 points...

This brings me to the second factor that drives stock markets.

Basics of fundamental analysis are explained further later in this material. You'll also learn how to read
financial documents, what to look for, how to calculate basic ratios to determine financial health of a
company, and also how to calculate approx Intrinsic value of a company based on fundamentals.

2. Liquidity: The second factor that drives prices up or down, even markets, is liquidity.

The amount of money available in the hands of the investors or traders.

Whenever there's excess liquidity in the markets, the prices will move up.

Liquidity can come from various sources like Foreign investors (FII), Domestic Investors (DII), or any
other sources. Whenever there is large liquidity in the system, it won't let stock markets fall too much.
3. Sentiments: Nothing might have changed in the company. They still have the same management,
same amount of liabilities that they have had for years, same business model, but suddenly the investor
sentiment changed and the stock started moving up or down.

Generally, a sentiment change is seen when a small factor changes about a company or an entire
industry.

The government might have announced something, the chairman of the company might have changed,
or something similar.

The changes will not affect the functioning of the company immediately, but are "expected" to change
something in the near or far future. Even the change is only "expected" and not "guaranteed".

When something like this drives the prices up or down, then it's safe to conclude that the prices are
moving because of a sentiment change. A sentimental price change generally returns back to it's original
position over the time. These changes might stay up or down for a short amount of time, but it's been
seen that they revert back to their original prices or close.

A classic example of this behaviour is another Indian company "Satyam computers".

The stock was trading near 90 points, when one day a NEWS came out that the chairman of the
company is involved in a shady deal of land. It was "expected" that the money used to purchase the land
for another company came from Satyam computers. The available cash in Satyam computers balance
sheets was found to be a lie, and this became the reason for the stock to fall down.

The lowest price I saw for this stock was near 6 points over a couple of months.

But because this was a sentimaental downward movement, the prices went back to 100 points in only a
couple of months.

Two sentiments, namely, Greed and Fear rule the markets.

If you wish to make any money in the markets, you must learn how to overcome these sentiments. The
fear will make you sell, and greed will make you buy. These both will however, make you lose your
money.
In our example above, what would you have done if you were invested in SATYAM computers? You are
constantly seeing the stock fall down, from 90 points to 6 points. won't you get scared of losing your
money and sell the stock somewhere near 70 points?

Consider the loss you made.

Should you not sell? You should, but not at 70 points. Then when?

The simple answer to this question is as soon as the stock broke it's first support levels. Here's a short
story for you.

I got two frogs, and two pots filled with water. The water in one of the pots is boiling hot, and the other
one is at normal room temperature.

I dropped one of the frogs in the boiling water and the other one in the normal water.

The one in the boiling water jumped out immediately because it felt the heat.

The other one started swimming in the pot. There was no heat in this pot.

Then I went ahead and lit a small fire under this normal water pot.

The water started boiling gradually, very gradually. 1 point at a time.

The frog did not feel the heat because the temperature was rising too slowly.

After a certain amount of time, the water was boiling hot and in the water was a super slow cooked
dead frog.

This is what happens to you in the market. You see a stock falling down slowly, 1-2 points. You think it's
probably just a small correction. I'll see the price tomorrow. The next day the stock fell down again, 1-2
points. You think never mind, it's just 1-2 points.

The third day the stock jumps up, 1-2 points. You feel happy. The correction is over and now the stock
will rise up. But the next day it falls down again. You think, it's okay, it'll rise up again tomorrow.

The fall continues, slowly and slowly. Now you are making a loss of 20 points on the stock. You cannot
get out of the slow boiling pot.
You are now a dead frog, cooked slowly.

This is the reason why you must always mark a level after which you "will" and "will" sell. This is called a
STOPLOSS point.

I personally use a point 1-2% below the current purchase price.

So if I purchased a stock at 100 points, then I will set my stoploss point at 99 or 98 points.

If the stock breaks these levels, I will not think twice, and sell the stock. This brings me to my next point.

Protect Your Money

What is the first thing you need to make money in stock markets?

MONEY, isn’t it? That is your raw material in this business.

You need money to buy stocks. If you don't have money, you cannot buy stocks. If you lose your money
today, you will not be able to buy stocks in the future. So at all cost, protect your money. Even if you
have to make a small loss, still protect your money.

Think about it like this. You started a business. You brought in a certain amount of money to start the
business. This is your capital.

You used your capital to purchase some raw material.

For some reason, at that time there were no buyers in the market, and your raw material started getting
bad. Your raw material is rotting and smelling.

What will you do? Will you store this bad raw material or will you try to sell the material at a lower cost?
If you sell at a lower cost, you will make a loss, but at least you will not lose your entire capital money.

Then why do you behave differently with stocks? When you see a stock falling down, going bad, rotting,
you don't sell it. Instead you store it and let it go bad, really bad.
The reason is that you don't see the stock going bad. It's a piece of paper in your hands. It's a number on
your computer screen. You don't feel the bad smell. You don't see the color changing.

This is why you should set a stoploss point. This point will tell you that your stock has started rotting and
that you should sell it before it goes really bad and the bacteria eats up your capital.

I told you that I use a point 1-2% below the point I purchased as my stoploss point. Why do I use this? I'll
tell you about this in the later sections of this book. In the section where I'll tell you where and at what
levels I buy a stock.

Before that I have a question for you.

How many friends do you have?

Considering you are on facebook, say 200?

How many of these are your real friends?

People you really know good enough?

Say 20?

How many of these are your best friends?

People who you can depend on in a time of need?

My guess is 1-2?

When you have just 1-2 best friends, who you can depend upon, then why do you select stocks to buy
from a list of 3000 stocks?

Your money depends on these stocks. Do you trust these 3000 stocks?
It's like you came across a difficulty in your life and you asked your 200 facebook friends to help you and
lend you money.

Your 20 close friends "might lend", but your 1-2 best friends "will definitely lend".

Stocks are similar. You are asking 3000 stocks to make you money. Will they?

Those 20 stocks you really track "might make money", but those 1-2 stocks that you are very well aware
of, "will definitely make money".

You should never jump on recommendations and tips you hear on TV channels. Even those anchors who
are recommending these stocks don't know much about these stocks they are telling you to buy.

All they are doing is using their "half" knowledge to pick a stock based on a certain chart pattern and
telling you to buy to boost their TV channel TRPs.

They know that you want to make easy money. They know you don't want to track stocks. They made a
show where they give you "tips" and you fell for it.

To make things even worse, there's a scam going on in the background. Here's what is really happening.

Who are the technical analyst who you see on TV channels?

They are MDs and CEOs of broker firms. These are large brokerage firms with large amounts of cash
available.

So here's what they do.

During the last hour of any trading day, they buy a stock at very high prices. Sometimes even 10% up.

The next day they appear on TV and give you a recommendation in the same stock. Because millions of
people are following these channels, and are buying on these tips, the stock opens 2-3-5% gap up. All
these people are buying the stock, including you.

You place an order with your brokerage firm, and most of the times, its the same brokerage firm that
recommended the stock on the TV.

The brokerage firm sells the stock to you.

There are no more buyers now, and the stock starts falling.
You keep seeing the prices fall, but you are stuck now.

Imagine, if I can make 2-3% gains everyday on just 2 stocks, I double my money in a month.

3% multiplied by 2 stocks, multiplied by 20 trading sessions in a month = 120% gains

Why are you falling for these tips? And who is giving you these tips?

Never trade in a stock that you know nothing about.

You should at least have some knowledge about the company you are putting your money in.

It should be one of the 20 friends. Not one of the 200 facebook friends.

Think about it like this. Suppose your son comes to you today and ask you to lend him money to start a
new business.

What will be your first question?

What business do you want to start?

Will that be your first question or not?

What if he keeps quite? What if he says , I don't know?

Will you still lend him money?

That was your own son. Your own flesh and blood you just refused.

Then why do you give your money to a stranger company in the stock market without asking them
about their business? Just because a TV channel guy told you to do so?
Before you read this book any further, I want you to select 10 or 20 stocks from the stock market you
trade in. These stocks should be the ones you know something about.

If not much, you should at least know what the business is about. What these companies make. What
these companies sell.

The more you know, the better.

Don't worry. This is just a basic rough list.

We are going to make a strong list in just a few minutes from now...

Look in your kitchen, look in your medicine cabinet, look at the boards on the road, look at the
advertisements on TV. Note down the name of these companies.

You will have a list of some very "familiar" companies who are constantly advertising to increase their
sales, aren't they?

They may not have surplus cash, but they are not short of money. They have enough to advertise, and
increase their sales.

At least they are not some shady companies hiding in the dark. They are well known companies, and
hundreds of thousands of people are using their products. You are using their products. You trust them.

Make a list of these companies.

Your list will have banks, FMCG companies, auto companies, consumer goods companies (Air
conditioning, heating units, etc), pharma companies and the like.

When you have read the EPS and PE section in this book, then visit www.munafasutra.com and click the
"EPS & PE comparison" link in the left menu.

Here you'll see "earnings" that these companies have posted. They are calculated as EPS. The higher, the
better.

Read the EPS & PE section below for details about this.
Remove the companies that have posted low EPS numbers from your list. Also remove the companies
that have a high "PE" ratio than other companies in the "same" sector. Very high PE means that the
company is overvalued. This will be more clear in the EPS & PE section below.

Now you have a list of fundamentally good, well known companies. Companies you can trust.

Now swear to GOD that you will never trade outside these stocks.

As you keep watching TV channels, reading business papers, you will find out more about some new
stocks. You can later add those stocks to your list. But for now, these are your close friends.

If you think that this method won't work, then let me burst that bubble for you.

The lord of stock markets, Warren Buffett did the same. He saw Coke, Gilette and other similar
companies spending a lot in advertising. Building a relationship with their customers. He evaluated the
companies, and found that their stock is trading at very cheap prices. He invested.

These stocks made him the richest man in this world, literally!

For many many years, he was the richest man on earth!!!

But its not like he did not make mistakes. He never invested in Microsoft. Why?

One simple reason. He said, "I don't understand what Microsoft does..."

Why are you throwing your money at companies you know nothing about?

Your first rule of markets is that you will never trade outside your list.

Now your second rule.

Select 1-3 stocks from your list which you know most about.

These should be stocks where you have previously pulled a trade, or companies you know most about.

You should know about the business of these companies.

You should know what these companies make or sell.

You should know about the markets of these companies.

Who are the target customers of these companies.

Who uses the products produced by these companies.

The more you know, the better.

These are your top 3 stocks.

Now swear to GOD that after reading this book, you will only trade in these 3 stocks for a while.

You will not look outside these stocks for a while. Let's say for the next 3 months.

After these 3 months have passed by, you can return back to your top 20 list.

But until then, just these 3 stocks.

That's your second rule of trading in stock markets.

Third rule: Track these stocks.

In the beginning of this book I asked you a question "What are you supposed to track?"

Now let's answer that question.

You keep hearing from different stock brokers on TV that you should track a stock before buying it for a
few days. You did in our example above, but you still made a loss. Why?

That is because you did not track what you were supposed to track. You just looked at the changing
price, and you let your psychology play a game with you.
Then what is that you should have tracked? That's the real question, and the answer is in the next line. I
want you to read this next line carefully, and read it a 100 times.

Track the movement of the stock. Track the points where the stock takes
a U-turn. A U-turn.

Read it again, 100 times.

Track where a stock is taking a U-Turn

In our example above, we saw that the stock took it's first U-turn at 125 points. It started falling there.

Then it took another U-turn at 75 points. It started moving upwards from there.

Now what was the mistake you did?

You sold the stoc near 75 points, and you bought the stock near 125 points. You were destined to make
a loss.

If you would have really "tracked" the stock you would have known that the stock will start moving up
near 70 points, and you would not have sold it.

Likewise, you would have never bought the stock near 100 points because you know that it will start
falling near that level.

But you did the complete opposite of that, didn't you?

So next time when you track a stock, track it's levels where it takes a U-turn, not just the price.

You'd ask, how do I track daily turn around points if I want to take a day trade? The stock will not stay
within a fixed range of 70-100 everyday. You are right.
The stock can easily make a daily range of say for example, 70-75 the first day, 78-85 the next day, 83-76
the third day and so on. It's impossible to determine a turn around point in this case. But wait, there's a
solution, and almost every trader in the market is using the exact same system. Well, all the professional
ones are. I don't know about the novice who jump in or out at any level...

Years ago, when there were no charts, no computers, people still traded in stock markets. They used a
very simple calculation to find out these turn around points, support and resistance points. The system
still exists, and is still the most preferred method to calculate daily support and daily resistance points.

The system is called Pivot point calculations, and is really simple to calculate. A 10 year old can do these
calculations.

Here's what it does:

You take the High, Low, and Closing prices of previous day.

Add them up, and then divide by 3. You got an average point now. This is Pivot point.

Now using this pivot point, you can easily calculate support and resistance (turn around points) for
today.

Here's how:

Support 1 (S1) = (Pivot x 2) - High

Support 2 (S2) = Pivot - (High - Low)

Resistance 1 (R1) = (Pivot x 2) - Low

Resistance 2 (R2) = Pivot + (High - Low)

You need not calculate these manually. You can view these daily support and resistance points

on www.MunafaSutra.com

You have 4 points now. All valid for today's session. Why does this system work?
Every professional trader, large or small is using this method to calculate these support and resistance
points.

They are carefully watching a stock's movement within the range of these points. They are waiting to
take action as soon as a stock moves beyond these points.

Let's say 100,000 traders are waiting for a stock to move beyond R1. All these 100,000 traders started
buying the stock as soon as the stock crossed this point. What will happen to the prices? They are
moving up!

What happened when it touched R2? All these traders know that this is a difficult level to cross, and as a
result they start booking their profits. Stock started coming down.

Suppose you had this stock and you did not sell the stock when it started moving down. You got greedy.
You waited, hoping it will move back up. Now you tell me, will it move back up?

Where are the buyers who will move the price up? They are selling.

When will it move back up? I hope you know this by now. Think about it for a second.

Yip, at S1 (support one), or at S2 (support 2). These same traders will now start buying this stock.

This is just one out of many methods you can use to take trades in intraday, also called Day Trading.

Other methods are discussed at the bottom of this book. I won't discuss them right now here because
most of the methods need you to have good knowledge about stock markets. Read this book, gain that
knowledge, and then move on to intra day if you have to.

But remember, intra day is the most risky thing in stock markets. This is where maximum money is lost.

So here are 4 thumb rules for you:

By heart these rules. Read them 1000 times if you have to.
 4 Golden rules of trading:

1. Buy a stock when it moves above a support point

2. Sell a stock when it goes below support points

3. Sell a stock when it starts falling from a resistance point

4. Buy a stock if it crosses resistance points

In the beginning of this book I told you that normally I use 1%-2% levels lower than my buy price as my
stoploss points. Why is that?

I hope you solved this mystery by now, but if you didn't, then here it is for you.

I buy the stock near it's support levels. A point which is 1%-2%-5% lower than this point is actually below
support levels. If a stock reaches these points, then it is bound to fall down even further. Then what's
the point of holding the stock when I know that it's going to fall down further?

Support levels can be determined using any of the following ways:

1. An important moving average point. For best results use a popular moving average like 20 day, 50
day, or even a 200 day moving average.

2. A prior reversal point. This is a point where a past fall stopped and stock started moving up again.

3. Bottoms marked by chart patterns. Later in this book you'll learn about various chart patterns. The
end result of each of these patterns is that they are marking a support point.

4. Using candle sticks. Just like line chart patterns, candle stick patterns also mark a support point. You'll
learn about those in the candle stick section.
Buying is not the only problem in the stock markets. It is actually just the first one.

The second problem is where to sell a stock for maximum profits? You'd say that sell the stock near
resistance levels. You are only partially right.

What if a stock goes near it's resistance levels and you sell it. But to your surprise you see that the stock
broke it's resistance levels and is reaching new heights?

You just sold a multi bagger stock. A stock which might even double in a few more days.

How would you know that the stock will break it's resistance levels?

The answer is that you cannot. You cannot know that the stock will break it's resistance levels. But there
is another trick up your sleeves!

Don't sell the stock when it is going near it's resistance levels.

You'd say that this is a contradiction to the 4 rules. It's not.

Read the rule number 3 and 4 again.

Rule 3 says: "Sell a stock when it starts falling from a resistance point"

Note the word "falling". If a stock is not falling at a resistance level it means it might try to move ahead
and cross the resistance. The stock did not fell when it reached resistance. Then why sell it?

Now what is rule 4?

"Buy a stock if it crosses resistance points". You already have the stock, don't you?

You never sold it because it did not fell.

Let the stock go up as high as it can near it's next resistance levels. If it takes a U-turn, sell it.

If it does not, don't sell it, hold it.

If the stock breaks it's resistance levels, then it has entered new territory.

Keep moving up your stoploss and hold it. As soon as the stock hits your stoploss point (1-2-5% below
top price), then you can sell it.

Remember, track the levels on a candle stick chart, so you can understand the candle behaviour as well.

A trailing stoploss is different from other stoploss point I mentioned earlier.

Although you can use those same methods to determine a trailing stoploss point as well, but in that
case, you'd have suffered enough "profit draining" before the stock hits the stoploss point.

For clarity, lets not call it a trailing stoploss point. Lets call it a "sell point" instead.

A "sell" point can be either 1-2-5% lower than current price, or previous day's closing, or previous week's
closing point. This depends on how long you want to wait, and what is your risk taking capacity.

Remember that these quick "sell points" are useful if you are a swing trader. You don't want to hold
something for long periods. You buy a stock for 10-15 days and sell it for a quick profit etc...

If you have a longer view, then its recommended that you use the previous method of determining
stoploss points.

Don't jump on a stock just because your mind tells you that it's cheap, or it will go up higher.

Jump when your "tracking" points are met.

Support is where the stock starts moving upwards, and resistance is where it generally falls back.

These are the points you need to find when you are tracking stocks.

Normally, you can see these levels easily on a simple "line" chart, but I always track these points on a
"candle stick" charts.
There are very few websites which will show you support and resistance levels on a candle stick chart,
but you can view these on www.MunafaSutra.com

Just click on the appropriate exchange i.e NSE, BSE, NASDAQ, ASX etc, and find the stock you want. Here
you can view:

1. Support and resistance levels for day trading

2. 5 day and 20 day simple moving averages

3. Different types of charts

4. Technical reports, updated daily

5. Tomorrow's predictions

6. Future Forecast, Experts View about the stock

7. Support levels, reversal points and lot more.

The reason you should use candle sticks is because sometimes, a stock might just appear as if it has
broken it's support levels and will fall down even further, but in reality it's preparing to move back up
again.

This behaviour can be seen on candle stick charts, and not on line charts.

This is generally called a candle reversal.

For example, the stock might have broken it's support levels today, but the candle formed is a
"hammer" or a "T-Doji", which clearly indicate that buyers are still bullish on this stock. And that the
stock showed a reversal from a long low point during the day.

You don't see daily highs and daily lows on closing point line charts. So during the session, if the stock
tried to break its resistance, but gave a closing below the resistance point, you'd think that its falling. But
in reality, its trying to break the resistance. And we all know what happens when a resistance is broken.

Likewise, it might appear as if a support level is broken on the downside, but in reality, the stock might
be trying to move above its support.
Such a stock might very well go up it's support levels, but if you were only tracking support levels on a
line chart, you'd have already sold the stock because you didn't see the reversal candle that was formed.

More about this in the candle stick charts section below.

If you have been watching TV, and listening to the talking heads on TV, then by now you already know
that you must buy when a stock is going down, and sell when it's moving up. That's the biggest lie
anyone can tell you.

Read this line, 100 times:

Never sell when a stock is moving up, and never buy when it's falling.

Read it again, 100 times. If thats not enough, read 1000 times.

You'd say that I suggested the same in this book. No. I said buy when a stock is cheap, not when it's
falling. There's a difference. Let me explain.

Suppose you want to buy a stock called XYZ. You see its currently trading at 100 points. 2 days later, the
prices came down to 90 points. Everyone on the TV is shouting "buy on dips".

They will even use technical statements like: The stock has a support at 85 and until and unless the stock
breaks 85, the strategy is to buy on dips.

Alright! Now my question to these people is "what is your strategy if the stock breaks 85?"

Their answer: It has broken an important support level of 85, and might fall even further. So book your
loss and sell it.

Who made a loss here? You? Me? or the Analyst on TV?

They kept telling you to accumalate the stock at 95 levels, and these same people are now telling you to
sell the stock below 85. How much loss did you make?

Did you understand what was wrong with that strategy? They were asking you to buy a falling stock. Not
cheap, but falling.

No one in the world knows how much a stock can fall. No one. It can go to zero from 100. You don't
know.

Then why are you buying something that is so uncertain?

Here's the answer: Its your greed that is making you buy. Remember the "sentiments" we talked about?

Fear will make you sell, and greed will make you buy.

You thought that the stock is at 90 and can go back upto 100, but answer this question:

Is it moving towards 100, or is it moving towards 85?

Its moving towards 85. Then why did you buy it? Let it start moving towards 100 first. Wait for it to stop
falling. Wait for a reversal.

Buying a falling stock is like trying to catch a falling knife. You can seriously hurt yourself. In this case,
your pockets.

Likewise, selling a rising stock is like leaving the room when someone is trying to stuff money in your
pockets.

A falling stock is one which is moving down, and you don't know how low it can get.

A cheap stock is a good stock which has already fallen, and is now preparing to move up or is already
moving up.

Do you see the difference now?

If a stock is taking a U-turn and is moving up, it means it has found a support and is reversing now. This
is also rule number 1, isn't it? Buy a stock when it has moved above a support point.

Take the example of Satyam computers again. The stock was near 90, and started falling down. Say it's
near 75 and listening to a TV anchor, you decide to buy it. You did. But the stock went down to 6 points
in the next 2-3 months. Imagine the loss you made.

However, if you'd let it fall, and then when it reverses and starts moving back up, you can buy. Say you
bought it at 10-15 points. It actually went back up to 100 points! Imagine the profits!

Recession of 2009 gave many such opportunities. Companies with strong fundamentals were available
at 1/4th their price. Even lower. And when they started moving back up, they crossed their previous
highs. Profits!

So the rule is, always buy when a stock is moving up a support point, and make sure it's not near a
resistance level.

Read those 4 thumb rules again. If you can stick to those 4 points, you will never make a big loss, and
you will always make a big profit!

Cause at the end of the day, stock markets is just about when to buy a stock and when to sell it. That's
all there is.

Every other tool like candle sticks, moving averages, trend lines, etc are just tools to help you determine
these entry and exit points.

You can use 100 tools, but if you still don't know when to enter, and when to exit, you'll never make
money in stock markets.

Read that line again and again. This is your only goal in stock markets. Find out when to enter a stock
and when to exit.

The lords of stock markets, be it Warren Buffett, someone who became the richest man in this world by
investing money in markets, or anyone else, follow this rule.
 Know when to enter, and when to exit.

Enter when a stock is cheap, and exit when its too costly.

You'd ask. Okay, so I know which stocks to trade in. I got a list. But how do I know when to enter and
when to exit?

Million dollar question. Literally a million dollar question. Answer to this question can actually make you
a million dollars!

And the answer is by looking at charts!

There are various methods you can use to determine which stock to take a trade in and when. These
are:

1. Moving averages.

2. A particular type of candle formation.

3. A particular type of formation on a line chart.

4. Using indicators to decide entry and exit points.

5. Using trend to determine the direction of the trade.

However, just like you have 1-2 best friends, likewise you should stick to 1-2 tracking methods.

Methods you understand properly.

Let me tell you a short story I heard somewhere.

A small boy went to a karate class and his teacher taught him 2 type of kicks for a few days.
After only a few days, the boy's father got a job in a different city and he had to move with his dad to
this new place.

The boy kept practicing these 2 kicks. He did this for years.

Then when he grew up, he returned to his city and met his karate teacher.

The teacher was holding a tournament amongst his students. The boy took his teacher's permission and
participated in the tournament.

To everyone's surprise, the boy won the tournament.

The boy just used those 2 kicks and had become such an expert in those that whenever he used those 2
kicks, his opponents were not able to block them. They lost, and the boy won!

Your opponent need not fear those 1000 kicks that you practiced 1 time.

They need to fear the 1 kick that you practiced 1000 times.

Stock markets are similar. You need not learn 1000 ways to track a stock. You just need to learn 1-2
methods and practice it 1000 times.

Practice it so much that you become an expert in it. It becomes your second nature.

I am familiar with all these methods discussed in this book, but do I use them? No. I stick to my basic 1-
2-3 methods. These are:

1. Closing point charts for trend analysis

2. Candle stick analysis to determine entry and exit

3. Moving average, cross overs, & MACD, sometimes stochastics & MRSI.

4. EPS and PE for a fundamental analysis

And in any case, Price to Volume measurement.

First look into Fundamental Analysis method of EPS & PE

EPS stands for Earnings Per Share

PE stands for Price to Earnings ratio

Here's a question: If you want to invest in a business, what is the one thing you want?

Profit, isn't it? In other words, Earnings, isn't it?

If a business cannot return a profit on your investment, then what's the point of giving them your
money?

At the end of every quarter, every stock market listed company declares their quarterly results. They
also declare their "earnings" in these results.

Now lets say for example, there are two biscuit makers listed, and they both declared their earnings.

Company1 said, we earned 150 crores

Company2 said, we also earned 150 crores

Now how will you know which is a better company? This is where EPS comes along!

Both these companies have issued shares to their investors. These are called "tradable shares." These do
not include bonds, preferencial shares etc.

All you have to do is simply divide the total Earnings with the total numbers of Shares, and you get EPS.

Company1:
Earnings of 150 crores

Total Tradable Shares: 100 crores

EPS= 150/100 = 1.5

Company2:

Earnings of 150 crores

Total Tradable Shares: 75 crores

EPS= 150/75 = 2

Therefore, its clear that company2 is posting "more earnings per share" than company1.

You'd say that its a better company. They are making more money per share. If they had more shares,
they could have made more money.

What is a share? Its money you and other investors gave them, isn't it? They gave you shares in return.

So basically, the amount of shares they have is directly related to the total investment they had, isn't it?

And if they had more investment, they might have made more money (earnings), isn't it?

But wait

What if I tell you that price of shares of company2 are much higher than those of company1?

In other words, company2, with just 75 crore shares, raised more investment than company1 did with
their 100 crores.

Now you are confused again. Which one is a better investment

This is exactly where PE comes along.

You now have EPS figures for both the companies.

All you got to do now is divide the "Share price" by "EPS" and you get "PE".

Company1:

Earnings of 150 crores

Total Tradable Shares: 100 crores

EPS= 150/100 = 1.5

Price of share: 10 rupees

PE = 10/1.5 = 6.6

Company2:

Earnings of 150 crores

Total Tradable Shares: 75 crores

EPS= 150/75 = 2

Price of share: 12 rupees

PE = 12/2 = 6

Company1 looks better now, doesn't it? It has a higher Price to Earnings ratio than company2!

This is the whole idea behind EPS and PE calculations.

Find out the company that is giving you more earnings per share, price of share discounted.

Nothing more. Nothing less.

Its important to point out that companies with a very high PE are sometimes overvalued, and its best to
look for a cheaper option instead.

Think about it for a second.

A very high PE could only mean two things:

1. Price of share is very high

2. EPS is very low.

If EPS is along the same lines compared to other companies in the sector, then it means that the price
has gone up too much and there is a possibility of a crash.

Generally, a PE of 10-25-35 is considered as a good investment, depending on the sector.

Some sectors have very high valuations, and a PE of 35 might be something normal in these sectors.
While in other sectors, a PE of even 25 might look overvalued.

This is why when comparing PE ratios, always compare companies within the same sector. Don't go on
comparing Telecom companies to FMCG companies...

This is when we are comparing two companies within the same sector. Even within the same sector, you
should not compare two companies which are posting Earnings far away from each other.

Say for example, if company1 posted an earnings of 150 crores, and company2 posted an earnings of 10
crores, then these companies are no match for each other, and should not be compared using EPS and
PE. Its already clear which is a better company. Then why go through all this trouble?

A difference of 10%-20% is compareable..

EPS and PE are not only useful when comparing two different companies, but also to keep track of a
single company's performance on a quarter to quarter basis.

Quarter 1 Earnings: 150 crores. EPS = 1.5

Quarter 2 Earnings: 200 crores. EPS = 2

Quarter 3 Earnings: 100 crores. EPS = 1 only

Isn't it clear that the company lost a lot of its earnings in the third quarter? Should you not book profits
here?

Likewise, you can use EPS to evaluate other fundamental factors as well. Along with Earnings,
companies also give you "Future" earnings. This is an expectation of Earnings they will have in the next
quarter. Now think about it for a second.

If the company can achieve its future expectations, then their plan of action has worked perfectly, but if
they fail to achieve their future expectations, then it can mean two things.

1. Management over estimated their products, workforce, demand etc.

2. Plan of action, production etc lacked behind

If this happened in one quarter, and then things got back on track, then its okay. But if this is a repetitive
behaviour, then its obvious that something is not working in favour of the company. They could be
lacking behind in production, or they are constantly over estimating demand, product value or
something else. So its best to stay away from this company.

Visit www.MunafaSutra.com and click EPS & PE comparison. This is a sectorwise list of companies sorted
based on their PE and EPS figures. You already know that a high EPS is good because its actually just
Earnings converted into per Share basis. You also know that high PE means that either the price is too
high, or earnings are less.

But what if Earnings are good, and still PE is less? Doesn't this mean that the price is very less compared
to another company in the same sector? Doesn't this mean that prices can move up dramatically in this
company?

Its only a matter of time before a big investor realises the potential and starts putting the bulk of his
money in the share, thus driving prices higher!
 Returning back to Technical Analysis:
The entire basis of technical analysis is relationship between price and volume.

Without enough volumes, the price movement will not continue further.

Doesn't matter what other indicators, or candles, or even charts are telling you. If there is no volume,
the move will not continue for long.

Sometimes just a couple of aggressive buyers or sellers can shoot up the prices, or bring them down. But
very soon prices will return back to where they were before the move.

Think of volume as "pressure" when shooting a rocket up in the air. If the pressure is too low, the rocket
will come down back in no time.

Exactly same happens to price as well. If volume is missing, then even if the prices went up, they won't
hold those levels.

I use the "MunafaSutra PVM" (TM) charts on www.MunafaSutra.com to check price and volume
measurements. There are two types of charts on that page.

The top one is a "measure" of how much the stock went up or down compared to previous closing, and
how much was the increase in the volume compared to average volume. This tells us for how long the
move will survive.

The power of this chart is really visible when you smoothen the line with a 3-5 day EMA. EMA is
discussed below.

You don't have to calculate all these manually. The website, or the software you are using will do all
these calculations for you and even plot the chart. After all, its not 1950s where everything was done
manually without computers...

Look at the charts below.

Gray bars are volume bars.

Green and red bars are how much price went up or down compared to previous prices.

Gray line is volume line chart

Red line is current prices chart

Notice how after smoothing, the PVM chart looks like an "arrow"

Suddenly, the volume bar gets longer, meaning lots of buying or selling. And the corresponding
green/red bar tells us if it was buying or selling.

Notice how the stock moves in almost the same direction for the next few days, but with falling
volumes?
Compare the bars with the lines below. Lines are not smooth. Bars are smoothened using a "3day
setting." Look at another charts. "MunafaSutra PVM" (TM) charts.
Notice how in the first chart we got an upmove with large volume bars, and it continued for days?

Likewise, we got a downmove in the second chart with large volume bars, and that too continued for
many days.

These bars you see are not real volume, or price bars. They are a measure of increase in volume
compared to a base volume. This is the average volume that the stock normally has. So if our look back
period is 20 days, then add the volume of 20th, 19th, & 18th day. Divide by 3 to get average volume.
Now divide each volume from 20th day to current day by this base volume to get these volume bars.
Not difficult at all.

If the volume is less than average volume, you'll get volume bars of size 0.5, 0.9, less than 1.

If the volume is higher, the bars will be of length greater than 1.

Likewise, price bars are also not real prices. They are current price divided by previous period close.

The line chart at the bottom is real prices and real volumes.

Anyway, its not 1950s and computers can do all these calculations for you. I just wanted you to know
how "MunafaSutra PVM" (TM) is calculated.

See how "MunafaSutra PVM" (TM) forms an arrow like shape when it finds a large move? A large move
is when both price & volume bars are long. Notice how the next few price bars are moving in the same
direction as previous long price bar. And volume is decreasing at each bar. The overall structure looks
like an arrow moving forward. This triangular arrow represents a breakout and a consolidation. Move
that succeeds is another breakout, and another consolidation, generally in the same price direction.

The general rule of thumb is that if volume and price are both moving in the same direction, then the
move will continue. However, if price is going in the opposite direction of volume, it might be time for a
reversal.

1. Volume increasing, Price up. Price might go higher.

2. Volume decreasing, price up. Price might come down soon

3. Volume increasing, price down. Price might fall further.

4. Volume decreasing, price falling. Price might soon go upwards.

These are just basic assumptions. Confirmations will come from other indicators which we will look into
further down in this material. Methods like Moving averages, MACD, Cross overs, Stochastics, Trend etc.

Other methods of analysing volumes are below.

 On-Balance Volume Analysis

This is another method of volume analysis, and is very effective too!

Calculations for this volume indicator are extremely simple.

If price is up today, then today's volume gets added into previous day's volume.

Likewise, if price is down today, then today's volume is subtracted from previous day's volume.

Then a line is plotted using these points.

This is a purely price and volume indicator, nothing else is done. Eveen the price line is not smoothened,
which means that there is no drag in the indicator. Its real-time!

Many people trade using this indicator alone.

They simply buy when the OBV line starts moving up, and they sell when OBV line starts to come down.

The direction of the line is reflecting price movement, and the amount of increase in the line is
indicating volumes. Really simple, isn't it?

The second chart you see, just below the PVM charts (on MunafaSutra.com ), is the OBV chart. The gray
line is the OBV line, and red line is price, plotted just as a reference.

Remember, direction of the line is indicating the price direction, and amount of change is indicating
volumes. So when the line moves upwards in a sharp move, it means that price has gone up with high
volumes. Time for entry!
Now look into how prices move in stock markets.

Prices move in a Trend

Prices don't move in a straight line. They move in a trend.

In uptrend, they move up, then come down a little, then move back up again.

Likewise if trend is down, then they fall, then move up a little, and then fall more.

In case of uptrend, each time they move up, they will make a new high, and when they fall, they won't
fall as much as they fell previously.

In a downtrend, when they fall, they will fall lower than previous levels, and when they move up, they
won't reach the previous heights they touched earlier.

This is called moving in a trend. Its not necessary that a trend will exist in every stock. Some stocks move
sideways. They are not in a trend. In the later section we'll also see how to decide the trend of a stock by
"drawing trend lines"

You can see this trend in both the charts I showed you above.

In the first one, see how the stock gave a sudden upmove. Then it moved sideways for a little while.
Finally up again. This time higher. See the red price line at the bottom.

Likewise, in the second chart. See the red price line. See how prices fell, then stopped falling. Small
upmoves. Then fell again a lot.

This is a downtrending stock.

This trend is what forms the triangular arrow like structure. This is the benefit of smoothing. We don't
see the noise made in between. We just see the trend.
According to Dow theory, there are three trends in a stock. Primary, secondary, and short third one.

The primary one can last upto an year or two.

The secondary can last for 3 months.

And the third small one last less than a month. (less than 3 weeks)

If the primary trend is up, the other two can either be up, or they can be in a downtrend. This is what
causes the short falls in the stock.

If you trade in the direction of the primary trend, then you need not worry about these smaller ones.

However, people who do not understand this theory can only see prices falling, and rising. They get
scared when they see a fall, and greedy when they see a rise.

Ultimately the stock moves in the direction of the primary trend, and these people lose money.

They say: Market went up as soon as I sold. Market went down as soon as I bought.

Now do you know why this happens?

They are trading in the direction of the smallest trend, and that one does not give correct trading
signals.

How do you check trends of a stock?

Two ways of doing this:

1. Moving averages lines

2. Drawing a trend line.

First let's look into moving averages

 Moving Averages:
There are basically two types of moving averages.

1. Simple moving average, also called SMA

2. Exponential moving averages, also called EMA

An average, as the name suggests is a sum total of numbers, divided by the total quantity. So if I had 5
numbers, I add them up, and then divide by 5 (total quantity)

This is simple moving average.

Exponential average uses a slightly more complicated formula and gives more weightage to recent
prices.

How are these used in stock markets?

Just like we plot a chart of closing prices, likewise we plot a chart of moving averages

Here's an example.

Lets say I want to view the chart of 5 day simple moving averages for a stock, and I wish to view this for
the last 10 sessions.

So here's how I calculate these:

Starting from the oldest value, I add 5 closing prices, and divide by 5. I have point one now.

( CL10 + CL9 + CL8 + CL7 + CL6 )/5 = point1

Now I drop the oldest value and bring in a newer value.

( CL9 + CL8 + CL7 + CL6 + CL5 )/5 = point2

and I keep doing this

( CL8 + CL7 + CL6 + CL5 + CL4 )/5 = point3

( CL7 + CL6 + CL5 + CL4 + CL3 )/5 = point4

and so on till I reach the most recent (newest) value.

Finally, I have a few points which I plot on a chart, which of course, makes a line.

This line can now either move upwards, move downwards, or stay flat.

When its moving up, it's concluded that the stock is in a uptrend. Meaning that the new prices that are
coming in are higher than the older prices which got dropped.

Likewise, if the line is moving downwards, it means the stock is in a downtrend because the newer
numbers that are coming in are smaller than the older numbers which got dropped.

And if its flat, it means that stock is moving within a range. The newr numbers are pretty much the same
as the older numbers. Very small difference.

Here's an example. For ease of calculation, don't consider the number after the decimal point. I only
have it so I can show you the price of a "day".

100.7 is price on 7th day. 100 is price, and .7 is day.

100.6 is price on 6th day. 100 is price and .6 is day.

200.5 is price on 5th day. 200 is price and .5 is day. okay?

( 100.10 + 100.9 + 100.8 + 100.7 + 100.6 )/5 = 500/5 = 100

( 100.9 + 100.8 + 100.7 + 100.6 + 200.5 )/5 = 600/5 = 140

( 100.8 + 100.7 + 100.6 + 200.5 + 300.4 )/5 = 800/5 = 160

If you plot a line for just these 3 points, it'll be an upward moving line, and why? Because the most
recent value that came in, was larger than the oldest value dropped.

So final conclusion is that the stock has started to show higher closing prices, meaning moving upwards
in a constant motion.

But did you notice that even though the price was 300.4, still the line only moved 20 points up? This is
the drag factor in simple moving averages, and the solution to this was exponential moving averages.

Exponential moving averages:

These are a little different. They give more weight to more recent values and hence the line turns faster
on a chart as compared to a simple moving average line.

The way to do this is to have a constant multiplier and multiply each item in the series with this constant
number.

Before I give you a formula, let us understand the need and logic first.

As compared to SMA, an EMA is more difficult to calculate. Then why did people need this?

An EMA is more reactive to current prices, while SMA is not. This means that a EMA chart will move its
trend faster than a SMA chart.

Say for example, if your prices are like:

(2+3+4)

Now what will happen if you multiplied each item in that series with a constant number say 3 for
example?
The series becomes:

( 6 + 9 + 12 )

Notice the difference in the two series, and the difference between each number in the series.

In the first series, the difference of last 2 items (3 and 4), is 1, but in the second series the difference of (
9 and 12) is 3

Where is this additional difference of 2 points coming from? It's coming from the weight of the second
number, also the latest number.

This is the logic behind EMA, exponential moving averages

Giving more weight to current prices so the trend movements can be detected faster.

Now returning to actual calculations of EMA.

The constant number used to calculate EMA depends on the time frame. This means that the constant is
different for a 5 day EMA, and a 10 day EMA.

The constant is calculated as: 2/( (number of days)+1 )

So constant for 5 day EMA is: (2/6)

Constant for 10 day EMA is (2/11)

Constant for 20 day EMA is (2/21)

and so on

Notice how the constant will keep decreasing as the number of days will increase?
Finally, put this constant in this formula

( Current closing - Previous EMA ) * constant + Previous EMA

But there's something wrong about that formula. Can you tell?

How do you start the first calculation? You do not have a "previous EMA" yet...

The work around this is to use the SMA for the first calculation and then keep using the EMA you get for
the next calculations.

So in order to calculate Exponential Moving Averages, you need 2 formulae:

First EMA = ( Current closing - SMA ) * constant + SMA

Second EMA = ( Current closing - First EMA ) * constant + First EMA

Third EMA = ( Current closing - Second EMA ) * constant + Second EMA

and so on

When you have these EMA, simply plot these on a chart to draw a trend line, just like you did with
Simple moving averages (SMA).

You'll notice that lines of EMA will turn faster as soon as the price rises or falls. That was the whole point
of inventing EMA method.

To detect price movement faster.

To see this in action, go to www.MunafaSutra.com

and click MACD chart link under any stock symbol.

The lines you see on the top are EMA.

Now click the "moving averages" link for the same stock.

These are SMA. Make sure you are viewing 10Day SMA. Because EMA was also 10Day line Okay?

You'll notice how EMA is turning faster than SMA.

In the example we used a 10 day SMA. Likewise you can use a 20 day SMA, 60 day SMA, 100 day SMA,
even 200 day SMA. It's completely upto you. You can even make up your own. A 30 day SMA, a 45 day
SMA...

The most popular ones are 20, 50, 100, 200 day SMA.

The only difference is that in a 20 day SMA you are adding 20 points, and dividing by 20, while in a 200
day SMA you are adding 200 prices and dividing by 200

Rest is all same. Drop the oldest price, and bring in a newer price.

A week has 5 sessions, a month has 20, a quarter has 50-60, a year has about 200 sessions. That is the
logic behind those numbers.

Do you remember that there was a drag in SMA? How does it help us?

Take a minute here. Think about this concept for a while.

In our 5 day SMA, there was so much drag. Imagine the drag in a 200 day SMA. Its a very strong line,
and prices have to move up or down a lot before the line changes its direction. However, a small 20Day
SMA will change its course faster.

So if you had a 200 day SMA and a 20Day SMA plotted on the same chart, then at some point you will
see that the lines will cross each other.

What does this mean?

It means that in the short term the stock is changing its trend. The trend can be up or down. These are
called cross overs.

When a short SMA crosses a long SMA from below and starts moving up, then its called a Golden cross.

Likewise, when a short SMA crosses a long SMA from top and starts moving downwards, its called a
Dead cross.
In this chart below you see a 5 day SMA and a 50 day SMA. The green circles are marking a golden cross
over. Look how the movement of the stock changed as soon as a cross was made.

Did you notice how after crossing, the line of longer moving average also turned upwards after a short
while itself? The larger trend changed!

How can you use this? Do I have to tell this? Get in on the golden cross and get out of a dead cross.

Moving Averages not only serve as trend lines, but also serve as major support and resistance levels.

Whenever a major support or resistance is broken, prices immediately try to test it back again.

Say for example, a resistance is broken. Then don't be surprised if stock moves down a little bit and re-
tests the resistance line before shooting up.

Why is this happening? Think about it.

As you already know that people will sell at a resistance point. New shorts will be created at resistance
levels. All this will push the prices down a little bit. However, buyers who are now bullish on the stock
will keep buying the stock.

This little tug-of-war will continue for a while, until one side finally gives up.

If sellers give up, then buyers will push the prices up, and you'll see a breakout.

If buyers give up, sellers will short the stock even more, and push the prices down again, below the
resistance line that was broken earlier.

Exactly the same thing happens when support lines are broken.

We know that people buy at support levels. When prices break a support line, buying will come in the
stock.

Once again the tug-of-war will start here, and eventually one side will give up.

This is when prices will either move back up again, above the support line, or will fall dramatically to the
next support point.

This tug of war can continue for a long time, or a short time. The time will depend on the volume with
which the support or resistance line was broken.

The higher the volume, the stronger the move will be and more likely that the breakout will continue.

This behaviour is very clear in these charts below. These are charts of AUROPHARMA, company listed in
NSE India.

Top section is line charts, along with moving averages. Second section is candle stick charts, followed by
some popular indicators.

Notice the thickness of the candle stick when the breakout happened. A thick candle means high
volumes. These candle sticks will make more sense when you've read the candle stick patterns below.
For now, just remember this line. A thick candle stick is more important than a very thin one.
 Thick candle sticks represent high volumes

See how the stock brokeout, but then retested the levels again before giving another good session of
heavy buying?

You'll also notice a flag like structure in the line chart on the top. This chart pattern is also discussed in
the later sections of this book.

Also notice how moving averages lines are acting as support and resistance levels for the stock.

Needless to say they are also giving a clear picture of the trend of the stock.

Can you point out a golden cross made by two moving averages lines?

The third section in these charts are some popular indicators. These are also discussed below and how
you can use them in your trading.

If you are using www.MunafaSutra.com for your charts, then this is the chart you'll see by default for
any stock.

1. You'll see the line charts along with moving averages.

2. You'll also see candle stick charts with adjust width according to volume.

3. And you'll also see popular indicators.

If you are using a software, you'll probably have to add indicators on the chart. They won't be available
by default, depending on the software you are using.

Volume bars are also plotted separately. Candle sticks have similar width size. Some softwares don't
even plot volume bars when viewing candle stick charts. They just write a huge number as current
volume.I didn't like that setup, which is why I developed www.MunafaSutra.com for my trading needs.

What good is this line on the top right corner: "Volume 200,564" This is why I use
www.MunafaSutra.com Everything I need is right there
 Average Directional Index ADX

ADX is one the primary indicators used by traders worldwide.

In the same image above, notice this section:

These are two indicators.

One on top is ADX, and the one at the bottom is MACD.

Let's talk about ADX first.

ADX is an indicator that measures both trend and momentum of a stock

ADX also gives you information about which trend is picking up momentum. Positive or negative.
Uptrend, or downtrend.

Calculation of ADX is very complicated, and depends on 5 different sub calculations.

1. Calculate True Range first, TR

2. Calculate Average True Range using TR, ATR

3. Calculate positive DM (+DM), and negative DM (-DM)

4. Calculate positive DY (+DY) and negative DY (-DY)

5. Calculate ADX

Although I prefer to understand the calculations behind anything I use in stock markets, but I'm not
going to discuss the calculation of ADX here. It'll only confuse you. I know it confused me a lot. Took me
2 whole days to figure out what was going on...

Fortunately, the harder the calculation is, the easier it is to understand an ADX chart.

All you need to remember is:

1. If positive DY is greater than negative DY, then buying is dominating stock prices.

2. If negative DY is greater than positive DY then selling is dominating stock prices.

The green line you see on the chart is positive DY. (Thick green line)

Reddish line is negative DY (Thin reddish line)

Everytime green line is above red line, it means that buying is dominating stock prices. Likewise, if red
line is above the green line, it means that selling is dominating stock prices.

How strong buying or selling is what the ADX line black line() is telling us.
So if green line is above red line, and black line is moving up, it means buying is picking up momentum.

If green line is above red line, but black line is falling, it means that although stock is strong, but its losing
its momentum, its strength. There is a good chance that soon selling will start in the stock.

It can't be made simpler. All you have to do is check which line is above, and if black line is moving up or
down.

When can you buy or sell?

If you are using ADX indicator, then as soon as lines cross each other.

or as soon as momentum starts falling

Note that when momentum slows down, it doesn't mean that the trend has reversed. It simply means
that existing trend is slowing down, and the other trend is picking up momentum.

Trend reversal is only confirmed when lines cross each other.

Another indicator which is probably equally popular is MACD. Lets look into it now.

MACD: Moving Averages Convergence Divergence

So far you've already seen how by using just "simple moving averages" you can figure out the trend and
even identify entry and exit points in a stock. Now lets take things to higher level. Higher in terms of
both calculations and accuracy.

Some people call it MAC-D, while some others call it M.A.C.D (each alphabet)

To understand the strength of MACD, you need to understand how its calculated, and later how you can
draw conclusions about future price movements using it.
As the name suggests, we are looking for two things in a MACD. They are:

1. Convergence, two or more things "coming near" to each other

2. Divergence, two or more things "going away" from each other.

So what are these two things? Both of these are EMA lines, but slightly more complex.

You just read about EMA, exponential moving averages, and the entire calculations of MACD are based
on it.

You do not have to calculate EMA or MACD yourself, but its important you understand it.

The charting software you are using is probably already showing you both these charts of EMA and
MACD as well.

www.MunafaSutra.com has these charts too.

So if you are using just MunafaSutra.com for your charting needs, then you are fully covered! You don't
need to download or install a paid software...

Now getting back to the calculation.

The first line is called MACD line. This is also called "faster line"

The second line is the signal line, also called "slower line."

The signal line is just a simple EMA line of a certain duration, and is used as a base line.

The most popular setting for a signal line is a 9 day EMA. Why 9? That is one and a half week of trading.

Now remember, when the system of MACD was invninvented, commodity markets of USA had 6 trading
sessions per week. It was invented by Gerald Appel, an analyst and money manager in New York, in the
late 1970s.

Later when the indicator became popular, people started using it in stock markets too.

Some people use the same default setting, and some use a different setting. Like: 5, 35, 7

In a minute about these settings. For now, understand using 12, 26, 9
Faster line, the more important line, is the MACD line itself. This is how its calculated.

1. Calculate 12 day EMA, that is 2 weeks of trading

2. Calculate 26 day EMA, that is roughly a month of trading

Now subtract the longer day EMA from the shorter day EMA, that is 12EMA-26EMA

Now keep doing this till you have reached current day price.

At the end you have lots of points to plot on charts. But its not done yet.

To get MACD line, you need to calculate the EMA of all these points together. A 9Day EMA of these
points. At the end you plot a line on a chart using all this. So much calculation for just 2 lines, huh!

But wait, here's where things get interesting. Look at the charts of Infosys below.

These are 2 charts put together in one for easier comparison. See explanation below.
On the top are basic EMA lines. 10day and 100day EMA.

White one is 10day EMA, and black one is 100day EMA.

Notice how the white one first crossed the black one from below, thus making a golden cross?

Later the same white line crossed the black line from top and came down, thus making a dead cross?
As soon as the golden cross was formed, the stock kept rising and finally found a resistance at the
200day SMA. You can see the SMA chart of INFY just after these charts.

The SMA charts are also showing you golden and dead crosses.

Then why EMA? Because EMA showed you the cross a little sooner than SMA. Thats the only difference
in SMA and EMA. EMA is faster in reaction.
Notice how in SMA chart, the dead cross is still not formed. But notice how in EMA charts (first image,
top charts), a dead cross is already formed?

This is the primary reason why we use EMA instead of SMA. However, as I already told you, SMA lines
are much stronger trend defining lines than EMA. Its upto you which ones you want to use.

You saw the golden crosses on both SMA and EMA, and now lets return to our MACD lines.

In the first picture, look at the bottom part.

You'd see some green and red bars, and two lines that look like ECG lines of a heart patient...

This is the chart of MACD in its totality.

Repeating the chart below for quick and easy checks.

You'll notice 3 things in a MACD chart:

1. Bars. In the chart above, green and red.

2. Two ECG like lines

3. A horizontal, flat line. Bars are plotted on this line. Zero line, or the center line.
What are these green and red bars. Candles of some sort? No, not at all.

Remember I told you that to calculate MACD you subtract longer EMA from shorter EMA, meaning
12EMA-26EMA?

When you'll do this, you'd get points like these:

-3, -2, -2.5, -1, 0, 0.6, 1, 2, 3, 4 etc

Zero is the base point, and the MACD can only either be above it, or below it. Positive and negative
values.

Using these positive and negative values, we draw bars on the zero line. Zero line is also called center
line sometimes.

At www.MunafaSutra.com I used different colors, green for positive, and red for negative, but most
softwares use the same color for both the bars. The difference is that the bar is either above zero line, or
below zero line.

Green side is the positive zone, and red side is negative zone.

The black line, also called slower line, is the trend of the stock.

Notice the word "trend"

This is the first purpose of MACD. It tells you the trend of the stock.

You can actually use any of the two lines to get the trend, because both are basically same.

The slower line is just the EMA of the faster line itself.

This is why we are using slower line as the trend telling line. It takes more time to break a trend, doesn't
it? Slight price movement , up or down, doesn't break trends, does it?

An uptrend is when you "buy", and a downtrend is where you sell. Primary Buy and sell signals are
generated here.
Here's a list of all the signals generated by MACD charts:

But before that, I got one question for you.

You saw the formula to calculate MACD. You also saw a few sample values of MACD. The question is
what is making them positive, and what is making them negative?

Don't read below. Think about it for a minute, and then read below.

They are indicating a golden cross and a dead cross, isn't it?
Think about it mathematically.

If the numbers for 12Day EMA are smaller than 26Day EMA, then you get all negative numbers, isn't it?

12Day= 10, 20, 30, 40, 50

26Day= 20, 30, 40, 50, 60

Result= -10, -10, -10, -10, -10

If 12day EMA was a larger number, then all these numbers would be positive, isn't it?

So basically, 12 day moving average line is moving "above" the 26 day moving average line.

Thats a golden cross. Shorter moving average goes above longer moving average!

Likewise, if the numbers were negative, we know that 12 day line is moving below the longer EMA line,
meaning a dead cross has happened...

Do you see how the bars alone gave you a good buy and sell signal?

A golden cross is made, green bars, buy.

A dead cross is made, red bars, sell.

The length of the bar is also giving you an extremely good interpretation in itself. Can you tell what?

Lots of "long" green bars are telling ou that the stock is over-bought. Too much buying has happened in
the last couple of days. A correction, profit booking might be due.

See how green bars are getting longer and longer? And then selling started!

Likewise, the length of the red bar is telling you that the stock is in "over-sold" zone. A buying might
start anytime now.

Notice how the two MACD lines are going away from each other when the stock gets over-bought and
over-sold.

But these are just "alert" signals. When actual buying has started is determined by the "visible" cross
made by the two MACD lines themselves, the slow and the fast lines.

When the fast MACD line (white) crosses the slow MACD line (black) from bottom, rising above the slow
line, its a buy signal. Go long here. White line has gone above the black line!

Likewise, if the fast MACD line (white) goes below the slow MACD line (black), its a sell signal. Go short.
White line has gone below the black line!

In the charts above notice how the white line crossed the black line and went below it even when the
stock was in the positive zone. And since then, the stock kept moving down and finally went intothe red
zone.

Did you see how many things this one chart alone told you?

Is there any other tool that gives you so much information in just one look?

Now lets see what are the signals MACD is giving us.
 Final results of MACD

Positive zone: Golden cross is made on EMA!

Negative zone: Dead cross is made on EMA!

Long bars: Over-bought, over-sold

Cross of MACD lines themselves: Final Buy and Sell signals!

There is one more thing that a MACD chart is telling you. Its called Positive or Negative Divergence. Also
known as Bullish, or Bearish Divergence. In a minute about that. I need to explain trend before I explain
that.

Drawing trend lines is a different system in itself. That is what we are going to discuss in the next section
below.

One final question before that. You know that cross made by MACD lines is giving you final buy and sell
signals. Can you tell what else its telling you? Specially if the cross happens soon after a long bar?

Isn't it marking a "support" or a "resistance" point as well?

An over-bought stock is falling now. Isn't this a resistance point?

Likewise, an over-sold stock is about to move up. Isn't this a support point?

This is the whole basis of charts. Finding support and resistance points, and trading according to the 4
rules given to you!

Before we go any further, there's one more indicator I'd like to discuss with you.

This is Bollinger Bands

 Bollinger Bands:

Unlike ADX and MACD, Bollinger bands don't show us momentum or trend. Instead they show us how
much prices are deviating away from a short term moving average.

Its calculation is also simple.

1. Calculate 20 day Simple Moving Average

2. Calculate the Mean of prices used to calculate the moving average

3. Multiply the mean by two

4. Upper band is made of Moving Average plus double of Mean

5. Lower band is made of Moving Average minus the double of Mean

Surprisingly, its rare to see prices move too far away from outside these bands!

Bollinger Bands were not developed to give us information about trend, momentum etc. Instead they
give us possible reversals

The basic idea behind Bollinger Bands is that Moving averages act like magnets for price. When prices
are too far away from a moving average, they will tend to revert back to the moving average.

So if prices are too far away and near the lower band, then there is high possibility that prices will move
back to the moving average soon.

Likewise, if prices are too far away and near the upper band, then too they will try to revert near the
moving average.
A possible sell signal can be generated when prices go below the moving average. And a possible buy
signal is generated when prices move above the moving average.

Remember we also learnt this in the moving averages section above?

That when a moving average is broken, it gets re-tested again and again before a confirmation of a
breakout?

Moving averages act as strong support and resistance points!

And they get re-tested often.

There are so many other indicators like RSI, Stochastics which are discussed below. But these are some
of the most popular and widely used indicators.

At www.MunafaSutra.com I've plotted a few indicators I use, or have used in the past.

You'll be able to view these all in the "All Indicators" section of the charts you are viewing.

Some indicators are already plotted on the default chart itself like Moving averages, ADX, MACD, and
MunafaSutraRSI (MRSI, discussed later below).

This is what the "All Indicators" section looks like:

1. Top right corner has Price with Volume bars and popular moving averages

2. Top left corner has Bollinger bands

3. Just below Bollinger bands is CCI, Commodity Channel Index.

4. Below CCI is Stochastics

5. Below stochastics is RSI

6. Just below moving averages on the right is ADX

7. Below ADX is MACD

Which one you use is upto you.

I personally prefer the ones on the right. These are:

1. Moving averages and volumes

2. ADX

3. MACD
 Trend Lines & how to use them to predict future movement

Trend lines is another way of determining price movement. I'm sure you've heard this before:

Trend is your friend!

But what does it mean, and how can you use trend?

There are two types of trends. They are UpTrend and DownTrend

Before I tell you how to draw trend lines, first look at this picture below.
In the image above, you can see two charts.

The one on the top is showing UpTrend, and the one at the bottom is showing a DownTrend.

First, look at the one at the top, UpTrend.

An uptrend line is drawn by connecting two or more "lows" made by simple closing price chart.

Notice in the first image how price dropped, but moved up again, giving us low point 1.

Then it fell again, and moved up, thus giving us low point 2.

Also notice how the second low point is slightly "higher" than the first low point.

So if the first low point was 100 points (share price), then second low (higher), could be around 110.

When we draw a straight line from point 1 to point 2, and keep extending it, we get a trend line. In this
case, an UpTrend line.

This straight line will act as a "support" and even if you see prices falling down, still you cannot confirm a
reversal until prices stay above the trend line.

Once the price falls below this trend, its time to exit the stock.

Look at the same chart again. Notice how there is a third low point towards the end?

The price started falling, but as soon as it came close to the trend line, it bounced back up again.
Additionally, the third low point further confirmed the strength of the trend itself.

Similarly, we can draw a DownTrend as well.

The only difference in a downtrend line is that its formed by connecting two "highs" made by a closing
price chart.

Remember the uptrend was made by connecting two "lows" made by price.

Look at the same image again, this time at the chart towards the bottom.
By connecting "high 1" and "high 2" we made a line and extended it. This line confirmed that stock is in a
downTrend and we can only confirm a reversal when prices start closing above this line.

Some important things about Trend lines.

1. Its not necessary that a trend will exist. Don't try to draw one forcefully

2. In case of Uptrend, the second low has to be "higher" than the first low point.

3. In case of DownTrend, the second high has to be "lower" than the first high.

4. If the line has a steep slope, then its a weak trend.

5. If the line is very close to "horizontal", then the trend is very strong.

In an uptrend, the stock makes higher LOWS, and also higher HIGHS. Meaning when it moves up, it
moves higher than it previously went, and when it falls, it doesn't fall as much as it previously fell.

In a downtrend, the stock makes lower LOWS, and lower HIGHS. Meaning that when it falls, it goes
below the low it made earlier, and when prices rise up, they do not go above the high peak they made
earlier.

These LOWS, and HIGHS are represented by "peaks" and "troughs" on the chart as you saw on the trend
lines chart.

You can draw Trend lines on daily, weekly, or monthly charts. Whichever you like. You can do it using
your stock charting software, or even on www.MunafaSutra.com

Just find the stock you want to draw trend lines for, and click the "Draw trendlines" option

Here you'll see the chart, and all you have to do is click your mouse at two low/high points to draw a line
joining the two points. The trend line will be drawn for you.

Remember when I told you about Bullish and Bearish Divergence in the MACD section? Now lets look
into it.
 Bullish, Bearish Divergence

A Bullish divergence happens in a downtrend. Meaning prices are about to move back up now. The
downtrend is ending.

A Bearish Divergence happens in an uptrend. Meaning the uptrend is about to end now, and prices will
start falling.

Divergences are seen on indicators. Indicators like MACD, or Stochastics.

We know that in an uptrend, prices are making a higher LOW. But if at the same time if the indicators
are making a lower LOW, then this is a divergence situation.

Prices might fall very soon.

Likewise, in a downtrend, prices are making a lower HIGH. But if at the same time if indicators are
making a higher HIGH, then its a divergence signal. Prices might start moving up again.

Divergences are best used when used along with strong support and resistance points.

Divergence is just an indication of something "might" happening. Whether it happens or not is a

different story. Support and Resistance give a strength to the indicator.

Think of it like this. You are driving, and car ahead is blinking its indicator for a right turn. But there is no
right turn road there. How will he turn without a road?

The road is the support, resistance point on the chart. Its a "turning" point, isn't it?

A signal near a support or a resistance point would mean a lot, won't it?
 Stochastics Indicator

You've already seen MACD indicator, and lets now look into stochastics indicators.

MACD is a more recent indicator. It was developed in late 1970s, while stochastics is an older indicator,
developed in 1950s. If something so old is still actively being used by professionals, then its worth
looking into, isn't it?

Remember there were no computers in those days. No excel, no programming languages. The
calculation of stochastics is fairly simple. Here's how it works:

Say for example if we are plotting stochastics for the last 5 days, then:

1. We find the highest HIGH made in the past 5 days

2. We find the lowest LOW made in the last 5 days

3. We use this formula:

K = ( Current closing - LOW ) / (HIGH - LOW) * 100

Then we repeat the same for all previous days, for as long far back we want the chart to go back in time.
We can plot chart for past 3 months, but the duration of HIGH and LOW points remains the same
throughout. In our case 5 days back for each closing point.

4. Then we draw a trend line using our K values.

D= 3 point simple moving average of K values

Stochastics charts are also available on www.MunafaSutra.com

The reason I'm telling you about the calculation is because you should know what the chart is doing.

In our case, its showing us the difference between CLOSE & LOW, or CLOSE & HIGH

In simple words, its telling us if the prices are near LOWS, or near HIGHS.

Once we have enough points, we plot the points on a chart, forming a line.

Stochastics values always move between 0 and 100, and 50 is the center line.

Like any other chart, stochastics chart also have two lines. A fast line, the K line, and a slower trend line,
the D line.

Original calculations for stochastics were done using a 14,3 setting. 14 day period, and a 3 day SMA line
as D line.

However, because of too much daily up and down in prices, the stochastics lines are too fast. This is why
a SLOW stochastics was developed later on. A simple 3 point of K line becomes the new K line, and again
a 3 point SMA of new K line becomes the D line.

Later on a need was felt to have customized settings for stochastics, which brought in a FULL stochastics
chart.

Settings for FULL stochastics charts are simply like this: 14, 3, 3

Which means: A 14 period look back to get a K line, K line smoothened by 3 point, and D line is 3 point
SMA of K line.

Exactly the same as we did in the slow chart, isn't it?

But in a FULL stochastics chart, you can change these settings with something like:

20, 5, 6 20 day HIGH & LOW used, K line smoothened by 5 points, and D line is 6 point SMA of K line

Or just about anything you want. 60, 2, 4 or 100,3,3 etc

Look at these charts below.

There are 3 charts in that one chart.

1. FAST stochastics on top

2. FULL stochastics just below that

3. Daily price line at the bottom.

Remember that in a 14,3,3 setting, the FULL chart is nothing but slow chart. Calculation is the same now
as that of a slow chart.

Do you see how the lines are smooth in the FULL/SLOW chart compared to the FAST chart?

In the chart above, white lines are the K lines. and black lines are the D lines

Signals generated by Stochastics:

The primary signal signal generated by stochastics is the direction of the stock. If the stock is at the
lower levels of stochastics then it means that the stock is falling.

Likewise if its at higher levels of stochastics then it says that the stock has been rising.

Second signal generated by stochastics is over-bought and over-sold.

If a stock stays in the lower areas of stochastics for a comparritively long time, then the stock is in the
over-sold zone, and buying might start soon.

Similarly, if it stays in the higher range for a long time, then it tells us that the stock is over-bought, and a
selling might come in soon enough.

Think about it for a minute. Which are the situations when a stock will stay in upper range for a long
time?

1. Either the stock has found a resistance and is not able to cross it. In this case it keeps testing the
resistance and stays up, near the resistance.

2. Its constantly making new highs and closing near those highs.

The formula of stochastics finds the highest level in the past and uses it in the calculation, isn't it? So the
new high made by the stock is higher than all the other highs, and the stock closed near that level. This
caused the stochastics line to stay up. Not difficult to understand.
This means that if a stock is constantly making new highs and closing near those, then stochastics K line
will be close to the top range.

In the charts above, notice how the K line stayed in the top range for a long time. These are charts of
NIFTY when it made new lifetime highs.

And these new lifetime highs were made when the stochastics line went straight from lower range into
the top range.

Once it made new highs, it stayed there for a while and then profit booking started coming in. This is
when the stochastics line also started coming down.

Third signal generated by stochastics is Bullish or Bearish Divergence. See the Divergence section above.

All the rules of Bullish or Bearish Divergence apply to stochastics as well.

Both Stochastics and MACD are indicators that can be used to determine over-bought, over-sold zones,
and also to check Divergences. Bullish, or Bearish.

Additionally, both tell us whether a stock is reaching a support or a resistance level.

However, MACD is much more powerful. It also tells us about golden and dead crosses, and also
generates buy and sell signals.

Whichever you use, or even if you use both, remember one thing. These are both just indicators. These
are to be used along with real support and resistance levels on the charts. Remember how we talked
about roads and turns? If there is no road, you cannot turn.

These turning roads are our support and resistance levels.

These levels could be where a stock takes a u-turn, a point where stock stays for a long time, a point
marked by moving averages lines. Doesn't matter which method you use, they are all doing the same
thing. Marking a point where prices, and even trend changes.

When you check "Expert View" section on www.MunafaSutra.com you can see all support & resistance
levels for that stock. Note these down!
 RSI & MRSI MunafaSutraRSI:
RSI stands for Relative Strength Index. Lets look into this first.

Like MACD, RSI was also developed in late 1970s, again a time with no computers. As the name suggests
its a measure of strength in relation to something else.

The basic idea behind RSI is to find how many times did a stock move up, or moved down during a
certain given period. For example, if I tell you that a stock has been constantly moving up for the last 5
days, then what will be your reaction?

Likewise, what if I tell you that a stock has been falling for the last 4 days, then what will be your
reaction?

RSI is a formula that puts both the concepts together and gives you understandable points to plot charts
using those.

Here's the formul:

RSI = 100 - [100 / (1 + RS)]

RS = Average Gain / Average Loss

Average gain is total of how much the stock went up during a certain given time period. And becauses its
an average, the total is divided by the time period used. Just like simple moving averages.

Average loss is the total of how much the stock went down during the same time period, divided by the
time period.

You'd say its complicated. Its not. You'd ask why I need to know this when I can just see a computer
made chart of RSI? How do you draw conclusions without understanding what the line is doing? Why
the line went up, or went down? And its not difficult either. Look at the small example below.
Say for example, stock ABC is moving up for the last 5 days. Went from 100 to 120 in 5 days. But as we
know, stock prices don't move up constantly. It must have fallen down as well.

So during the rise, first day it moved up 10 points. Second day also it moved up but only 5 points. Third
day it fell 2 points. Fourth day also it fell another 3 points, and finally, fifth day it went up 10 points
again.

So to calculate RS, we just add up all the up numbers. 10 + 5 + 10 and divide with 5, which is our look
back period.

We do the same with loss i.e 2 + 3, and divide by 5.

So the RS we get is 5/1 = 5

We then put this in the RSI formula

RSI = 100 - [100 / (1 + RS)]

RSI = 100 - ( 100 / 6 ) = 100 - 16.66 = 83.44

Now suppose if the situation was different. Instead of 5 being average gain,it was average loss. And
instead of 1 being average loss, it was average gain. Meaning the stock fell more. How will these new
numbers affect RSI? Lets see

RS= gain/loss = 1/5 = 0.2

RSI = 100 - ( 100/1.2 = 100 - 83.33 = 16.77

So we can conclude that when a stock is falling it has less RSI, and if it has been rising it has a bigger RSI
value.

Using the same formula, and first average gain and loss, we keep calculating and plotting the next
points. Only the method of calculating next gain or loss changes.

Average Gain = [(previous Average Gain) x (time-1) + current Gain] / time

Average Loss = [(previous Average Loss) x x (time-1) + current Loss] / time

The chart of RSI might look something like this:

Notice the line in the top section. That is RSI line. The one which is moving inside the zero and 100
range.

What are these bars you'd ask? That is MunafaSutraRSI. In a minute about that.
The formula of RSI makes sure that RSI can never be less than zero, and it can never be more than 100.

In the chart above, I used a "5" day look back period. You can use anything you want. Default is 14 day.
But remember, the longer your time period will be, the flatter & stronger the RSI line will get. Its the
same concept of simple moving average.

When we used a 5 day period in SMA calculation, the line was very volatile. But when we used a 100 day
SMA, we got a strong, relatively flat line.

Returning back to the above chart.

Notice how the line went into the 70 range and started to fall? Also notice how it went in the 30 range
and started moving up?

Based on our understanding of the RSI calculation, we know that the line will fall when a stock is falling
more than its gaining, don't we? So even if the prices of the stock are moving up, we know that the
average is falling. And eventually, the prices of stock might start falling too.

The fall started happening in the 70 range. Coincidence? Certainly not. 70 range is considered as "over-
bought" zone in RSI.

This doesn't mean that the stock will start falling as soon as it gets in the over-bought zone. It can even
enter 90 zone!

So how do we know that its time to exit the stock? Two ways of doing this:

1. Look for a Divergence as we discussed in the bullish and bearish divergence.

2. Look for when the stock breaks the zone line.

In our chart above, when the stock broke the 70 range and came below it, it kept falling, and went
straight into the 30 range before it started moving up again.Coincidence? Again, not at all. 30 is
considered as the "over-sold" zone in RSI!
We already learnt that an over-bought stock means that prices might fall from here. Likewise we also
know that an over-sold stock might start showing buying interest very soon.

However, this is no way a guarantee of a reversal. RSI is also just an indicator.

RSI being an indicator can only give you an "indication" that something is about to happen. Whether
that will happen or not depends on charts, support and resistance levels.

Remember one more thing about RSI. RSI was developed for commodity trading, and not for equity
trading. This doesn't mean that it doesn't work for equity trading, but the default settings of look back
period differ. The 14 day period was suitable for commodities, and is still today, but I find a "5" day
setting as much more meaningful when applying RSI to stock prices.

5 day is not small. Its an entire week of trading prices packed into one point.

To conclude RSI, it gives you 2 types of signals.

1. Over-bought and over-sold zones

2. Bullish and Bearish Divergences

3. A stock can stay in the over-bought or over-sold zones for a long time.

Like in the chart above, notice how long the stock stayed in the over-bought zone? All this time, the
prices kept moving up. Gradually, but still increasing. A sell off signal was finally given when the 70 line
was broken and stock started falling from there.

It tried to take support at the 50 line, which also acts as support or resistance. But as soon as this line
was broken too, the next stop was at 30 line. Did not stop before that.

Use www.MunafaSutra.com to check RSI charts in different settings and see which one works best

Here's the same RSI chart with a 14 day default setting.

Notice how the line is now much more flat compared to the 5 day setting? It barely touches the 70
range and reverses way before that.Likewise, it never reached the 30 zone either and is trying to reverse
from the 50 zone itself.

Pretty much moving around between 40 and 60 range only...

Lets now look at the second part of this same chart. The MunafaSutraRSI (tm) charts

MunafaSutraRSI (TM) Chart:

MunafaSutraRSI is a formula developed by MunafaSutra, and you might not find these charts elsewhere.

Like the name suggests, its also a Relative Strength Index, but calculated differently.

Before I dive into showing you the calculation, first understand the need and power of MunafaSutraRSI.

Until now, you have learnt about different type of indicators like Moving averages, MACD, Stochastics,
and also RSI. Can you point out one problem that exists in each of these indicators? Yes, there is one.

They are all based on previous day averages.

Why is this a problem, you'd ask? It simply means that the longer duration you'll use, the slower your
indicator will become. Signals will get delayed more and more...

MunafaSutraRSI on the other hand, is based primarily on "current" day prices. And secondary on a fast
moving short EMA.

A combination of the two generates the signal on the same day, when the move actually happened.

This makes you one of the first ones to catch the move and take a trade accordingly.

Currently, as of writing this, I don't know any other indicator that is as fast as MunafaSutraRSI. May be
something in the future... (29 May, 2017)

The indicator was developed to get relative strength of a stock's trend, and later a buy or sell signal
generator was added to the indicator for a better clear picture.

Here's all the information that this single indicator can give you.
 Information visible on MunafaSutraRSI chart

1. A reversal has happened in the stock. Get in or get out of the stock

2. A clear trend, if there exists one.

3. Momentum of the trend. Is it slowing or continuing.

4. How long can the existing trend continue.

5. A clear buy or sell signal, which is just to support the reversal indicated earlier.

6. A possible support or resistance for future.

7. Over-bought, over-sold status

Let me first explain the basic concept and the calculation involved, and then I'll cover each of these
points individually.

From the RSI section above, you understood that RSI measures the relative strength compared to
previous period closing prices. However, because of using previous period's closing prices, and further
using a simple moving average method in the calculation to calculate RS, the line gets slowed down. And
the longer period you use, the slower the line will get.

In MunafaSutraRSI, we don't compare the momentum with previous closings, instead we compare
today's current prices. Furthermore, the formula of MunafaSutraRSI does not uses SMA averaging
methods. It uses a very short EMA to smoothen the calculation. The final points are plotted as histogram
bars, and a regular EMA is plotted on top of it for comparison and confirmations.

The benefit of using today's current prices are:

1. Current day Momentum doesn't depend on yesterday's closing, so the trend is not slowed down.

2. The series is smoothened by EMA formula. You already know that EMA is a fast moving average,
giving more weight to current, latest addition in the series.

The best setting I've found is something between 3-5 day smoothening.
Below are charts of AUROPHARMA with a 5 day RSI, and a 5 point smoothening of MRSI.

Notice how the RSI line is pretty much straight, with very little movement.

Look at MRSI instead.

The last few bars have completely changed from red to green. Why is this? Because MRSI took into
account the large 13% gain the stock prices had in a single day

MRSI generated an immediate turn around signal and allowed you to enter the stock. Look at the gains
that followed. The EMA turned two days later in an upward direction.
If you have trouble understanding the bars, look in the black box in the center, at the bottom. That is the
MRSI bar, plotted as a line.

The center line is the zero line, much like MACD.

Here's another chart. This is for INFY

MunafaSutraRSI MRSI moves between -100 and 100 (negative 100 to positive 100). It rarely reaches its
top ranges. What we are looking for are sudden changes in the MRSI line or histogram. A sudden move
upward suggests that a bullish sentiment has dominated the stock or vice versa.
 Signals generated:

1. It tells you who is dominating the stock. Buyers, or sellers.

Whenever the bars are green, or MRSI line is above the zero line, it means that stock is gaining more
than its losing in the nearby sessions.

2. Everytime the line starts coming down towards zero line, it means that gradually the stock is losing its
momentum, and sellers might soon dominate the prices.

3. The reverse of both the above is also true. If MRSI line is below zero line, or bars are red, it means
that sellers are dominating in the stock.

4. If the red bars are getting shorter, or MRSI line starts moving upwards towards the zero line, it means
sellers are losing control, and buying has started.

5. Long red bars represent an over-sold zone. Likewise, long green bars represent an over-bought zone.

However, remember that a stock can stay in its over-sold, or over-bought zones for sometime.
Depending on the settings you use, this could be 1-2-3 session, or 5-6-7 sessions. Remember that in
stochastics, a stock can stay in its over-sold or over-bought zones for a long time and can keep giving
you false over-bought/sold signals. This is not the case with MRSI because MRSI depends on difference
between closing and opening, and not on the distance between a "range" of highs and lows over a long
period.

6. Divergences: MRSI also follows all the rules of divergences. For example, it might form higher LOWS
soon before a trend reversal. Why? Its not difficult to understand this. Its falling, but its not able to go as
low as it went earlier. Meaning buyers are jumping on the stock as soon as the prices are showing some
correction.

Likewise, a lower HIGH might mark the beginning of a downtrend.

The moving averages lines plotted on top of bars provide a secondary signal about a trend reversal. They
are just supporting lines for MRSI, and calculation of MRSI does not depend on those at all.

MunafaSutraRSI is also a good indicator to use in intraday where price movement is fast, and immediate
action is required in order to make profits.

Think about it. Do you need an indicator that gave you a buy or sell signal half an hour after the price
action started changing? Or do you need an indicator that reacts to immediate changes? Below are
charts of AUROPHARMA in intraday with 4 charts plotted in a single image:

1. The histogram of 15 minute price movement, up or down

2. A SuperFast Stochastics

3. MunafaSutra MRSI

4. Price action plotted as a line chart.

Notice how the price line and histogram have touched both the targets given for the day? Target one
(T1), and target two (T2)

More about these target lines in the intraday section below.

SuperFast Stochastics is calculated using original stochastics formula, but instead of using previous highs
and lows, it only uses current day HIGHS and current day LOWS to generate stochastics line.

However, we are interested in sudden changes in the MRSI line. Unlike daily MRSI, intraday MRSI can
reach very close to its top ranges. We want to buy at a bottom level, and sell at a top level.

Look at these charts below for a better understanding.

Notice how both SuperFast Stochastics and MunafaSutraRSI are moving in a similar fashion? We had 2
trading opportunities in the same stock, in one day itself! Only one opportunity was visible on the price
action chart though...
Its important to point out here that just like other indicators, MunafaSutraRSI is also just an indicator. It
should be used along with price volume action, and not as a standalone tool.

In the next part we'll see some patterns that can be found on the charts.

Answer this question before we go any further. Until now what is the one thing we have concluded? Be
it Trend lines, Moving averages, Cross overs, or anything else. What is one thing that is common in all?

Take a minute, and then answer.

Doesn't matter which tool we use, all we are doing is trying to determine "Support and Resistance", isn't
it?

In Cross overs, the longer time line acted as support or resistance, and as soon as the shorter time line
crossed it, we took a call, didn't we?

In Trend lines, as soon as the line was broken, we took a call, didn't we?

The line acted as a support resistance, isn't it?

Remember this same thing while trying to analyse chart patterns. Your single job is to find support and
resistance points, and trade according to the 4 golden rules of stock markets.
 Reading charts:

If you have been in stock markets for sometime, I'm sure you've seen a chart, a point chart specially.

What is a point chart?

Its simply a chart of daily closing points plotted on a chart. Daily points are the most common one, but
you can also plot charts for other time periods like weekly, or monthly, or even yearly.

If you look at one, you'll see a zig-zag line travelling from left to right. But what can those zig-zag lines
tell us?

Those lines can tell us buying and selling behaviour in a stock. This is what we will discuss here.

Suppose you see a straight line moving from left to right, and then slowly the line starts moving
downwards. Doesn't this tell you something? Prices are moving down, aren't they?

Likewise, if the line started pointing upwards, it means the prices are moving up.

But only if it was that simple. Stock prices don't move in a straight line.

However, they do move in a pattern!

Some common patterns that you can find on a point chart are:

1. Double bottom: A bull pattern

2. Double top: A bear pattern

3. Triple bottom: Another bull pattern

4. Triple top: Another bear pattern

5. Cup and handle: A bull pattern

6. Head and shoulder: A bear pattern

7. Reverse Head and shoulder: A bull pattern

8. Pennant pattern

9. Flag pattern
Lets take them one by one

Double bottom:

This is probably the most frequent appearing pattern on any chart.

The line drops a little bit, rises little bit, drops again and rises again. Finally, it moves up

It looks like a “W”. Sometimes, one low point is higher than the other, and this is even better. It means
the stock is making higher lows.
When you draw a straight line joining the two lowest points, you get a support point, and also a
direction of the stock.

Likewise, you can join 2 highest points using a straight line and get another line. This is line of resistance.

These lines are called trend lines because they show you the direction of the stock.

Remember I told you the more horizontal the trend line, the stronger the trend? In this case, its
horizontal.

The two drops will form a low point, indicating that the stock is not going below this level.

The final straight upward line indicates a breakout and is an indication that the stock will move upwards
in the coming days.

The momentum will continue for how many days can be predicted based on the duration of chart you
are looking at.

For example, if you are looking at daily closing point charts, then you can expect the stock to move up
for a couple of days.

However, if you were looking at weekly or monthly charts, you can expect the momentum to continue
for a longer duration.

2. Triple bottom:
This is similar to double bottom, but there's a third fall and a third rise before the breakout

This pattern indicates slightly stronger upward momentum as compared to double bottom.

Before we continue any further, I have a question for you.

Did you understand the reason behind the up move in the above cases?

Think about it for a second and then read the reason below.
The two-three low points clearly indicated a "support" point. And what do we know about support
points?

If a stock doesn't break its support point, it is most likely going to move higher.

Remember, this is not always true. Sometimes, the stock just keeps moving sideways. This is why we
waited for a long breakout.

3. Double top:
A double top is just like a reverse pattern of a double bottom. Here the stock forms 2 high points, and
the final breakout is in the downward direction, suggesting that the stock is going to fall from here.

Can you tell why?

Doesn't this indicate a resistance point being formed? And we know about resistance points that stocks
which cannot break resistance might start falling.

We have already discussed this in previous sections in this book, remember?

However, you need to wait for a breakout for any confirmation.

Wait for a Breakout

This is the important line. Wait ffor a breakout. The stock can breakout in any direction. It can even go
up. In which case it broke a resistance. Meaning? Its going much higher from this point!

Most people just see a pattern in the making and take a trade based on it. And when it goes wrong, they
say that technical analysis doesn't work.

You did not wait for the most important part. You did not wait for a breakout. Breakout defines the
direction, not the pattern.

Read this line 1000 times

Pattern is only marking a support or a resistance point.

Breakout decides the direction of the stock based on the 4 golden rules.

Breakout could be in any direction. Wait for it before taking a trade.

Triple top:

Just like double top, a triple top also indicates a bearish momentum, but a slightly stronger one.

In case of a triple top, the stock tried three times to break the resistance, but has not been able to break
the resistance, thus causing the fall.

Even in this pattern, breakout is the most important part. And in case of triple patterns, its going to be
an even stronger breakout.
Other than a "Breakout", there is one more way to use these patterns in your trading. That is,
"Reversal".

This simply means that a previous trend existed, and the stock formed one of these patterns at the end
of the previous trend, thus indicating a reversal.

So in case of a double bottom reversal, the chart might look something like the image below.

Notice that the stock was falling previously, it formed a double bottom support and gave a trend
reversal signal at this point.
Likewise, double top and triple top patterns are also used to determine "end" of a previous bull trend.

Look at this image below. The stock was moving up, and it formed a "new" resistance point on the top,
indicated by a Triple top, thus causing a fall from here.
Head and shoulder pattern:
This too is a reversal pattern and can be used to determine a breakout. Look at the image. Small upside,
followed by consolidation or small profit booking, followed by a bigger upside, followed by downside.
Consolidation once again, and then large sell off.

Can you tell what this pattern is indicating?

It indicates that although buying started, but the stock was not able to hold its top positions resulting in
the large sell off.

Also note that the top point has now become a resistance point, and the shoulder at your left hand is a
support.
As soon as the stock broke this support, it fell.

These two support points, marked by shoulders are now a very strong resistance points.

Reverse Head and Shoulder:

A duplicate of actual head and shoulder, but instead of marking a top resistance, it's marking a bottom
support.

The exact same thing is happening, but at a bear level.

The stock fell, consolidated, fell some more, and then moved up close to previous consolidation point.
Consolidated here for a while and finally a breakout in the upper direction.

Pennant pattern:

This pattern as the name suggest is preceeded by a long upside, followed by a few sessions of ups and
downs. And finally there is a breakout in the upward direction. The breakout must come with volumes
or else its not considered sustainable.
Flag pattern:

This pattern too looks like a pennant, with a small difference that the ups and downs which are followed
by a long upside (pole), keep getting smaller and smaller.

In both the cases, the ups and downs are merely profit booking and not an indication of a sell off.
Did you notice that in both these cases the stock has now formed a strong support level and was
retesting it again and again before the breakout?

Cup and Handle:

Unlike previously discussed bottom and top patterns, a cup and handle is not a "reversal" or a
"breakout" pattern. It is a "continuation" pattern.
This means that if a trend existed previously (bull or bear), (up or down), then that same trend will
"continue" and this is not the time to sell or buy.

How is it useful for you? Imagine this situation.

You've seen a stock falling from a certain point, and then you found a double bottom at a low point. You
bought the stock.

The stock kept moving up, and is now trading at the same point where it started falling in the first place.
At this point, the stock showed some profit booking, meaning some sell off. Prices are going down,
aren't they?

Won't you think that "I should sell here"?

You are not wrong. Everyone is thinking the same thing. This is why the selling...

But what if in a day or two, the stock starts moving up again? You've already sold it...

A cup and handle pattern indicates that there is nothing to fear, and there are high chances that the
stock will move up once again.

The small handle formed after a deep cup indicated that this is just profit booking, not a reversal, and
the uptrend will continue.

I have a question for you.

Have you noticed something similar in all these charts? What are they doing? Think for a second.

Right! They are all marking a support or a resistance point.

That is the whole purpose of analysing a closing point chart.

Read it again. 100 times.

The whole purpose of analysing a closing point chart is to find strong support and resistance points.

Then trading in the direction of the Breakout.

Every single time when you look at a closing point chart, always try to find a point where the stock is
reversing its movement. These will be your support and resistance points.

As soon as a stock breaks its support, more downside is possible. Book your loss here.

Likewise, as soon as a stock reverses at its resistance, more downside is possible. Book your profits here.

The opposite is true as well:

As soon as a stock reverses at its support, more upside is possible. Stay or get in this stock here.

Likewise, as soon as a stock moves above its resistance, more upside is possible. Stay or get in here.

Do you remember those 4 thumb rules we read about earlier?

1. Buy a stock when it moves above a support point

2. Sell a stock when it goes below support points

3. Sell a stock when it starts falling from a resistance point

4. Buy a stock if it crosses resistance points

These are the 4 pillars on which the building of trading stands.

If you don't have these 4 pillars in place, you cannot have a strong trading system in place.

Every other method, charts, moving averages, or anything else, is based on these 4 principles.
Everytime you read a chart, always and always ask this question, "where is support and resistance", and
"where is the stock going".

Is it going near support, or is it going near resistance?

Once you have an answer to those questions, you will automatically have answers to any other
questions.

Remember, all patterns formed must be supported by volumes. If volume is missing, then the moves will
not sustain.

Volume is king!

A sharp upmove, without volumes, or very less volumes is a useless move. The quick upmove will not
stay, and prices will come down.

Likewise, a sharp downfall, not supported by high volumes, will reverse.

Whenever you come across those patterns discussed above, always check what is the volume. If the
reversal has volumes, the move will continue. Otherwise, the stock come back to its original testing
points again.

Generally, a volume twice of regular volumes is considered good. However, some traders prefer if
volumes are 4-5 times.

So if a stock normally has 50,000 volumes on a daily basis, and suddenly you see that there were
2,50,000 volumes, then its clear that suddenly many traders took a position in the stock, isn't it?
 Candle Sticks:

Just like closing point charts, candle sticks too are just a tool that helps you analyse movement of a
stock. The difference being that candle sticks also show you opening, highs, and lows, along with closing
points.

Some candle stick charts also show you volumes. This is done by using thick and thin candles. The thick
candle represents high volumes, while thin candles reflect low volumes.

However, the most important thing that candle sticks can tell us is the behaviour of buyers and sellers.
In a minute about it.

Here's what a basic candle looks like:

Look at the green colored candle first.

A green color represents that the stock closed higher than opening point. Example, the stock opened at
100 points and closed at 105 points

This is shown as the "actual" body of the candle.

The wick of the candle at the top, sometimes also called top shadow represents the "high" point during
the time.

Likewise,, the lower wick represents the low point the stock touched during the period.
So in case of a green candle, the point where the "body of the candle" starts is the opening point, and
the end of the body is the closing point.

The vertical line on the top is the high the stock made, and the vertical line at the bottom is the lower
point made by the stock.

Different softwares use different colors to represent a green candle. Some use a white candle, some a
blue one.
Now look at the red candle.

Everything else is the same, but with one small difference.

A red candle means that the stock closed lower than the opening point. Example, it opened at 105, and
closed at 100 points.

Unlike a green candle, a red candle starts at the top and ends at the bottom.

The high and low wicks are still the same, and represent highs and lows respectively.

Different softwares use different colors to represent a red candle. Some use a black candle, some a dark
color.

In any case, you'd be able to distinguish between a red and green candle easily.

The length of the body or the wick represent the "how much" factor. So if a stock moved 2 points, then
it'll have a short body compared to a stock that moved 10 points in the same duration.

Like a closing point chart, candle sticks also form certain patterns which we will see in a minute.

This will be a good place to tell you that while analysing candle sticks, never make the mistake of trying
to find a pattern.

Then why analyse candle sticks, you'd ask?

Candle sticks are a better judge of "market behaviour" than closing point
charts.

Read it again.

You should use candle sticks to understand the "behaviour" of buyers and sellers. Do you remember
that I told you that market movements are governed by sentiments?

Let me explain this to you with an example:

Once again look at the candle stick image above.

Look at the green one first.

The stock opened, and because the closing is higher, so we assume that before making a high, the stock
made a low first.

So it fell as soon as it opened, or during the first few hours of trading.

Alright, so the sentiment was negative. People "feared" a further fall, which is why they were selling the
stock.

However, at some point, something happened. Could be a good news, good corporate results, or may be
the stock found its support. Buying started.

Now people are buying the stock. They expect the prices to move up further higher. Greed has replaced
fear.

At some point, the opening point was crossed upwards, and further buying is coming in.

Finally, at a certain point, some sell off was seen, and the stock started coming down again. Fear is in
place once more.

The highest point is marked by the top wick.

The stock closed slightly lower than its high point.

The fear is temporary or permanent will be confirmed in tomorrow's session. How?

If the stock shows buying once again tomorrow, then the fear was temporary, but if it shows selling,
then the fear was permanent.

At this point its important to point that small difference between high and close in a green candle, or
small difference between open and low in a red candle are seen as "no difference" at all.

Now think about this. If you were just looking at candle sticks, trying to find patterns, you'd have seen a
long green candle, and thought:

Hmmm... Bullish, So its a buy!

You jumped in the next day, but to your surprise, the stock is falling... Why?

Because fear was already in place in this stock.

It was already destined to come down, and you jumped on it.

What should you have done instead?

Wait, and see which sentiment is ruling this stock in tomorrow's session.

Is it Fear, or is it Greed?

Is the sell off continuing or is buying taking over?

Once you have confirmed that buying is dominating, get in!

Remember this line below, and you will never make a mistake in analysing a candle stick:

Is the market in fear, or is it in greed?

What was the "last minute" sentiment that dominated this stock.

Once you have an answer to this question, you can successfully predict stock movement in the near
term future.

In the patterns we will see below, this is exactly what we'll try to do. We will try to figure out which
sentiment was dominating this stock.

To make things easier, we are using "daily" candles, meaning today's opening, closing high and low.
okay?

Shaven top candles:

A shaven top candle looks like the image above. Did you notice that there is no "high" wick?

All those candles are shaven tops, meaning no high wick.

This means that the stock closed at its highest point today in case of a green candle.

In case of a red candle, the stock opened and started falling. It did not go up at all.

In case of a green:
Once it recovered from the fearful sell off from the low point, it never saw that fear again. Greed
dominated. Meaning?

There is a very high chance that greed will dominate again tomorrow. However, it still needs
confirmation before you take an action.

This confirmation will come tomorrow, within the first hour or first few minutes of trading.

Shaven bottom candle:

Unlike a shaven top, a shaven bottom is a candle with no lower wick.

In case of a red candle it means that the stock closed at its lowest point. Fear dominated.

In case of a green candle it represents that the stock opened and started rising. The sentiment is decided
based on where it closed.

If it closed very near to its highest point, then the sentiment is bullish.

However, if it closed near its opening price, then you can say that during the last few hours of trading,
fear dominated the market.

Once again, a confirmation comes tomorrow.

This sell off could be just profit booking, and not a permanent fear.

Watch the stock in pre-opening, or in the first few minutes/hour of trading and make your decision!

MaruBozu candle:
A MaruBozu candle is a combination of both shaven top and shaven bottom, meaning it has no wicks.
Neither high, nor low.

The length of the body decides how strong the sentiment was during the session.

Suppose a stock opened, and started moving up. Finally, it closed at the highest point. What is the
sentiment during the last few minutes? Greed or Fear?

Greed, right?
Likewise, a stock opened, and kept falling. Finally, it closed at the lowest point. What is the sentiment
here?

Fear, right?

The length of the body determines how strong the sentiment was, and the color decides which
sentiment was dominant. A red candle represents a sell off, meaning fear dominated. Similarly, a green
candle represents buying, meaning greed.

Just like other candles, a MaruBozu too requires a confirmation the next day because sometimes it could
be a bluff.

For example, there was extremely low buying during the entire day, but the stock showed a sudden
jump during the last 30 minutes because of a single, but large order. This too will form a MaruBozu
candle, but there is no confirmation if the "large" buyer will return tomorrow, or is he already filled in...

The stock might open gap up, but because of a lack of strong buyer, might start falling from that point
on.

This is why, wait for confirmation of the sentiment.

Doji Candle:
All those candles are Doji candles.

Notice how there is either very small body or no body at all?

Also notice how the high and low wicks are almost similar in size?

So if we have to break down the trade, we'd conclude something like this:
The stock opened, and either it fell or moved up. Not sure which happened first.

Finally, it closed where it started. So what is the end-of-the-day sentiment?

Answer: Not sure, “undecisive”.

This is the meaning of the Doji candle. Nothing is clear. You need to wait for the next candle to decide
which sentiment was stronger.

When a doji is formed after an existing trend, bull or bear, the sentiment becomes unclear. After a bull
run, it might be an early indication of a fall.

Likewise, after a bear run, it might indicate that the bear run is over and prices might move up now.

In any case, wait for the confirmation the next day.

And you will get this confirmation in the first few minutes (15-30 minutes), or within the first hour itself.

Hammer candle:
First candle:

Stock opened and fell. Fear

Showed recovery from low point and finally closed higher than opening price. Greed!
Candle 2:

Stock opened and moved up. Greed

However, it showed a sell off at highest point. Fear

Closed above open point.

Candle 3:

Opened and fell. Fear

Showed recovery from its lowest point. Greed

Closed just below the open price.

Candle 4:

Opened and moved up. Greed

Showed sell off at highest point. Fear

Closed just below its open price.

Notice how a hammer always has "greed" as its end-of-the-day sentiment.

While, an inverted hammer (downward facing hammer), always has fear as its end-of-the-day
sentiment.

A hammer, or an inverted hammer always has a small body, with either a long high wick, or a long low
wick. The other wick is either too small, or completely missing.

Like a Doji, hammers also indicate a bull or bear reversal, depending on where they are formed.
If a hammer, (greed), is formed after a bear run, its an early indication of a reversal, and a possible
future bull run.

Likewise, if an inverted hammer, (fear), is formed after a bull run, then its an early indication of a future
bear run in the stock, isn't it?

Fear is taking over now. Prices moved up, but were not able to hold that point.

The candles we discussed so far were single candle patterns. Now lets look into patterns which are
formed by a combination of two or more candles.

Engulfing candles:
This is formed when the second candle completely covers the previous candle. Ideally, even the high and
low points are covered, but in general terms these are left out, and only the body of the candle is
considered.

Wait a minute here. Try to decide the sentiment of these two candles put together.

Candle 1:
Stock opened, fell a little bit. Fear

But it moved up, and made a high. Greed.

Finally, there was some sell off and it closed slightly lower than its highest price. Fear

End-of-the-day sentiment? Fear!

Now we are waiting to confirm this sentiment the next day.

Next day, candle 2:

Stock opened, and started falling. Fear confirmed!

It kept falling and made a low, and finally closed slightly higher than the lowest point.

Fear is confirmed.

Also note that today's lowest point is lower than previous day's lowest point. This means that sellers are
driving the prices lower and lower. Fear further confirmed.

This might be the beginning of a bear run.

Likewise, engulfing patterns can also confirm bull runs. Look at the second pair of candles in the same
image.

A small red candle, which was completely swallowed by a green candle. The length of the green candle
determines how strong the "sentiment" was.

Did you notice how the stock made a higher high point in the second candle? This might be an indication
of a new bull run.

Harami candles:
Unlike engulfing candles, Harami candles are themselves engulfed by the previous day candle.

They too represent a reversal.

Look at the candles above: Try to determine the sentiment.

Candle 1:
Stock opened, moved up slightly, and fell. Fear.

Made a low, and finally closed slightly higher than its lowest point. Greed might be coming in.

Next day: candle 2:

Opened a lot higher than previous close. Greed confirmed. Remember gap up opening?

Fell a bit, but buying returned. Greed confirmed again

Finally, made a high, and closed slightly lower than its highest point.

Can you figure out the sentiment that is shown in the second pair?

Give it a try.

Evening stars:
An evening star is a pattern that uses 3 candles. Its considered a bearish pattern.

Now look at the image again

A long green candle indicating a good upside.

This is followed by "undecision", or a better yet, a doji candle. This doji may or may not be a gap up doji.
Then a bearish fear follows the doji.

Isn't it clear that fear has taken over greed, and its time to sell?

When the doji is formed at a distance (gap up), the same pattern is also called an abandonned child. Call
it whatever you want, the end result is the same. Fear taking over.

Some other triple candle patterns are "white soldiers" where 3 green candles are formed one after
other, and each closing higher than previous close. Sometimes each is a green marubozu candle.

Likewise, "black crows" formation, a bearish pattern, is a combination of 3 red candles, each closing
lower than previous close. If each is a red marubozu, then its considered a stronger bearish pattern.
Once again, remember, doesn't matter what patterns are formed, or what they are called.

Focus on the sentiment that is dominating.

Try to figure out the sentiments in each of these candles individually, and then in pairs:

Remember, if the wicks are too small, then that does not change the sentiment of the body, okay?
And here are few real stock charts:

When analyzing candles remember, wait for the next day candle to confirm the sentiment.

When looking at closing point line charts, try to find the patterns you read about earlier. See what
happened when the pattern was formed.
These are a few weekly charts. Remember, if a sentiment can last for an entire week, it means that the
sentiment is strong, isn’t it?
Practice with these charts above. Try to notice which candles are formed before a stock starts moving
up, or starts moving down. Figure out the sentiment in the candle.

I hope you are confident now, but I'd like to point out one more point here.
You will still not make a profit each time even now.

You will still make losses.

There are no methods in stock markets that are full proof.

If there was one, don't you think that everyone would be following that?

Some people believe that there is a strategy, which is closely guarded, and only big traders, elephants
know about it, and they use it to make money.

Let me burst that bubble as well.

There is no such method which is full proof in stock markets. There never was, and there never will be.
It's a myth like the existence of zombies, draculas, and mermaides. If you even so much as try to find a
method like this, you will ruin your life. The stock market is not for you.

You'd ask, so how are all these elephants making so much money?

First, they use hedging methods discussed in FnO section later in this book.

Second, they have very low brokerages.

Let me ask you. How much brokerage are you paying? 25 paise? 50 paise? 75 paise? And that's per
transaction.

If you are trading in foreign markets, then these brokerages can even go upto 5-7-10-15 dollars per
transaction.

You buy, you pay 75 paise per 100 rupees.

Now when you sell, you pay the same brokerage again for the same stock.

Total brokerage? 1.5%

What do these elephants pay? A lot less, Sometimes, less than 1 paise. They trade in crores and millions,
and so the broker still makes a lot, which is why he offers such negligible brokerage rates.
You'd ask. So what? They save some money in brokerage.

You don't understand. To make profit, we need a stock to move up 2% and even then, it's the broker
who takes most of the profit. We get a small amount.

In case of elephants, they don't need a stock to move up 2%.

The stock can just move up 1 point, 2 points, and they have already made a huge amount.

Take an example:

ICICI BANK, stock price 200 points

You bought worth 100,000 and got 500 stocks. Brokerage (at 50 paise, 0.50%): 500/-

Elephant bought worth 10,000,000 and got 50,000 stocks. Brokerage (at 1 paise, 0.01%): 1000/-

To make a profit, you need the stock to move up to 204 points, 4 points up.

You sell, got 102,000/- and paid a brokerage of 510/-

So your total brokerage is 1010/- and your net profit is 990/-

Elephant sold at: 201 points and got 10,050,000/-

Paid brokerage: 1005/- and total brokerage: 2005/-

Net profit: 48,000/- approx. ( 47,995/- to be accurate )

Do you see the difference?

1. Most your profit was taken away by broker.

2. You had to wait longer to make sure your stock reached 204 points before you can sell, or else you
make a loss.

3. The longer wait made you vulnerable to volatility, up and down, higher risk.
The elephant on the other hand, sold on a small movement, lower risk, less volatility, and bagged his
most of the profit.

Even if the brokerage for the elephant was 5 times than what we used, (5 paise), still he pays just
10,000/- and still makes a profit of 40,000/-

That is the only difference between you and an elephant. They don't have special powers, special
methods, special strategies. Just low brokerages.

So what can you do?

Do you watch "Discovery" channel?

Have you seen a cheetah hunt?

It's not always successful in it's attempts. It fails many times. The fastest animal doesn't want to fail. It
does it's calculations, and then makes a run, But it fails sometimes.

Stock markets are similar.

You might have done all your calculations, all your "tracking ", but still you might make a loss
sometimes.

So what is that you can do? The answer is simple.

Keep your losses to a minimum. Use a stoploss point and sell without thinking twice if your stoploss
point is met.

Likewise, keep your profits maximum. Use the resistance levels to determine when to sell. "Track" these
levels closely. Use the method listed above to sell when the stock has hit it's resistance levels.

Stock markets are like a business. Sometimes you make a loss, and sometimes you make a profit.

But if you are successful or not will depend on the following equation.

Total = Profits - Losses.

If your profits are higher, your "total" is a profit. But if you don't use stoplosses and sit on a stock that is
rotting, then your losses will be higher and the "total" will be a loss.

This is why you must stay focused in stock market. This is specially true in today's world where you have
TV anchors and various broking firms suggesting you stocks in a colorful fashion. They will tell you it's a
"rocket" stock, or a "bumper" stock, or a "jackpot" stock.

But you need to stick to your own list of 10-20 friends.

You will see stocks going up, while your 10 friends are not showing any significant movement. This is the
biggest temptation to beat in stock markets. It's your own greed which is making you move towards a
stock which you know nothing about. You have never tracked this stock, and neither do you know
anything about the business model. If you jump on this stock, be prepared to fall in the stock market
trap. You might eventually end up buying at high levels and then selling at lower levels, thus making a
loss.

However, if you are still making a loss in a stock and wish to average it, then use the below strategy.
Never average a stock at every dip.

`Averaging in a loss making stock.

If you are already stuck in a stock that has fallen a lot, don't average at every dip. If its still falling, then
whats the point of averaging?

Where should you average then?

There are 4 places where you can average a stock. These are:

1. At a strong support level

2. When stock starts trading above its 50 day Simple Moving average

3. When stock starts trading above its 100 day Simple Moving average
4. When stock starts trading above its 200 day Simple Moving average

These points are where a stock generally becomes attractive to buyers. Averaging at these points
increases your chances of recovering from a loss faster. Sometimes even bring in a profit.

I promised you that this book will give you exact pointers to follow. Here they are:

1. Track the stock. Track the support and resistance points, and not just price moving up and down.

2. Buy near support, and use a stoploss point to minimize your loss. Do not hold a rotting stock.

3. When you want to sell, wait, and watch if the stock is reversing or not. If it does not, hold it and keep
moving your stoploss point a bit higher.

4. Stick to your own strategy. Remember, a move you practiced 1000 times is better than a move you've
practiced 1-2 times.

Don't be a slow cooked frog in stock markets. Instead, become a judo fighter who practiced a move or
two 1000 times.

FUTURES & OPTIONS

Everything you need to know to make money in Futures and Options

The concept sounds really simple, isn't it? Buy a CALL when you expect the markets to move up, and buy
a PUT when you see its coming down.

Similarly in futures, take a LONG position when you expect things to move up, and take a SHORT
position when you expect things to come down.

Really simple, but you still made a loss. Do you know why?
That is exactly what this book will tell you with easy to understand examples.

Although you'll see technical terms every now and then, but I have tried to keep them to a minimum,
and have used easy to remember and understand terms instead.

So far we've covered

1. How to select stocks

2. When to buy and exit from stocks

3. Trend lines, trend indicators, pivot point calculations, Cross overs etc.

4. 9 chart patterns which I look for when buying or selling, and why they work

5. How to successfully read candle sticks and make future predictions of stock movement

6. How to use candle sticks to determine market sentiment

7. How to use candle sticks to determine demand and supply

In this next section, I'll show you two more types of charts.

1. Renko Charts

2. Point and Figure charts, also known as PnF charts

So far all the charts you've seen, were using two things to plot a chart.

1. Time

2. Price

Price was making the Y axis, and time made the X axis of the chart.
In case of both Renko and PNF charts, we do not use the time axis at all.

We simply plot a chart based on price action. Absolutely nothing else, just price action.

How does it work?

In both those types of charts, we turn our line based on the amount of price change, and not based on
the number of days passed.

Say for example, Nifty is trading at 10,000 points.

1% of this is 100 points.

Suppose if if we are plotting a "1% Renko" chart of Nifty, we will only plot the next point when a 1%
move happens in Nifty.

Which means that Nifty has to go to 10100 or above for us to plot the next point upwards. Likewise, we
plot a point below only if Nifty goes down to 9900 or lower.

In Renko charts, we plot "bricks", basically a rectangle bar. And just like candles, we color it. Light color
box means an upward move, and dark color box means downward move.

Point and Figure charts are also plotted in a similar way. The only major difference is that here we plot
signs like "X" and "O" instead of dark and light colored bricks. Another major difference is that in Renko
charts, we do not plot bricks at all in case the specified amount of move has not happened.

However, in case of PNF charts, we keep plotting "X" and "O" in the same line until a reversal happens.

Fortunately, we are in computer ages, and you do not have to plot these charts manually on a bar chart
paper, like we were taught in school. Today all these charts are available for free all over internet.

I personally use either www.BullKhan.com or www.MunafaSutra.com to view these charts.

Charts on BullKhan.com use a longer time period data to plot charts compared to MunafaSutra.com

Both the charts look very different from each other, and I personally find point and figure charts slightly
better than Renko charts. First, take a look at both these charts, and then I'll explain each. First one is
Renko, second is Point and Figure. Both Nifty, of same duration.
Lets talk about the Renko chart first.

Please remember that both the charts are plotted using a less than 1% difference. This difference is
called "box" size.

Look at the chart from right hand side.

The latest bricks are all white in color.

This means that Nifty is currently moving upwards. And yes, Nifty is moving upwards as on till 19 April,
2018. Today it closed near 10560.

There are 4 white bricks, one after another. Which means that from the day Nifty turned up, it has given
4 large moves in up direction.

Before this time, we were seeing blue bricks (dark colored boxes), and the last one was seen on 04 April,
2018. On this day Nifty closed around 10120.

So in just a small period of 15 days, Nifty gave you a rally of 440 points.

That is right, we did nothing. No analysis, no reading charts, nothing.

All we did was selected a percentage, and kept watching our renko charts after each day of closing.

As soon as the color of the box changed, we took a trade and got in!

Did you know you can apply this method in intraday as well?

Renko intraday charts are difficult to find. But I got them on www.BullKhan.com

Open the website, and click "Live Nifty charts" tab towards the right hand corner of the screen, on the
top

Here in drop box select renko charts.

 Point and Figure Charts

Now take a look at the Point and Figure chart of Nifty, plotted for the same duration.

In PNF charts:

"X" means stock is moving up.

"O" means stock is falling.

In our example chart above, you'll notice a long line of "X" towards the right hand side.

This means that Nifty is moving up. And in this chart, you can see that the line of "X" started between
10017 and 10120.

Basically, the same point where Renko charts changed colors. The chart is below for easy reference.

The idea is again the same.

Take a trade as soon as the sign changes.

Did you notice that in Renko charts, we simply had 4 bricks since the turn till today?

But in PNF chart, there is a long line of "X" going on?

This is the reason why I prefer PNF charts over Renko charts.

So that I can keep track of levels on a more live basis, instead of waiting for the sign to change.

Of course, this would completely depend on you as to which charts to use, and what percentages (box
size) to use. I prefer a box size slightly less than 1% for either charts.

PNF intraday charts are also available on www.BullKhan.com under the "Live Nifty charts" tab. Click the
tab and select PNF from the drop box.
Until now we completed:

1. Various indicators

2. Line charts, and 9 type of line chart patterns

3. Candle sticks and various patterns of candle sticks

4. Renko charts, and PNF charts, and how to use them.

Now its time to start trading in FUTURES and OPTIONS

In this section you'll find:

1. What is FUTURES?

2. How to use futures to hedge your position in equity or options

3. What are OPTIONS.

4. What are different types of OPTIONS.

5. Easy way to remember CALL and PUT options. You just need to remember the example, and rest will
automatically be clear to you.

6. How to use options to hedge your position in options, futures, or equity

7. Strategies you can use when trading in options

 What is FUTURES:

Futures, as the name suggests is taking a trade in a stock or an index at a specified date in the future.

Just like regular stocks, Futures too need a buyer and a seller. A seller will make an offer, and a buyer
who finds the offer attractive will sign a contract (agreement) with the seller.

Its like buying a house or a property. Think about it like this:

You have a piece of land you want to sell. You go to an online property website and list your property
there.

Someone finds your offer attractive, and contacts you.

You both agree on a fixed price, a date of payment, and sign a contract.

The buyer gives you a certain amount as token money. This amount could be 10% of the total agreed
amount.

The whole price is not given to the seller right now. Only a contract is signed.

At this point, the seller has a "obligation" (liability) to sell the property at that fixed price.

Likewise, the buyer has the liability to pay the agreed amount at the fixed date.

At this point, 3 things can happen.

1. Everything remains the same, and the buyer pays the amount to the seller, and acquires the property.
No profit, no loss.

2. The cost of the property moves up.

The buyer pays the agreed amount, acquires the property, and sells the property in the open market at
the increased price. Profit for buyer, but a loss for the seller.
3. The price of the property falls down.

The buyer pays the agreed amount, and sells the property in the open market at a much less price. Loss
for buyer, but profit for seller.

Taking a position in Stock market Futures is very similar to this example above.

You see a stock trading at a certain price in the stock markets. Say 100 points.

You think that this stock will fall down in the future.

So you go into the FUTURES market, and you "sell" the stock at 100 points.

"I" think that the stock will move up in the future, and so I take your offer at 100 points.

Both of us sign a contract.

The quantity decided is 50.

You agree that you will sell me 50 stocks at 100 points at the end of this month.

I agree that I'll buy 50 stocks from you at 100 points at the end of this month.

At this point, I pay you a small amount as token money.

Remember, you are selling, and I'm buying.

The date decided is the end of this month. This date is called "date of expiry". Contract becomes useless
at this date.

The amount I paid is called "margin money".

The quantity decided is called "LOT size".

These are the three things involved in a FUTURES contract. Expiry, margin money, and lot size.

All these three things are decided by the stock exchange.

Last thursday of this month is decided as the date of expiry, also called settlement date, or expiry date.
Lot size is also decided by stock exchanges and is different for different stocks. You can only trade in
multiples of lot size. So if lot size is 50, you can buy 50, or 100, or 150 and so on. You cannot buy 56, or
60, or 75, and so on.

Think about it like this. If you go to a fruit seller, and say:

Give me "one" grape.

What will the fruit seller say? Get out, isn't it?

You'll say, okay give me 2 grapes then.

The fruit seller will say, Take at least 100 grams, or get out of here.

You cannot buy 100 grams and one grape, can you? You need to move in multiples like 100 grams, 200
grams etc.

LOT sizes are just like this.

That is the minimum amount you can buy, and you can only buy in multiples of that minimum size.

Now returning back to our example.

You thought that the stock will fall down from 100 points and sold it.

I thought it'll rise up, and bought your offer.

Please note that "right now" I have only purchased your "offer", and not the "stock" itself.

The stock will change hands at the date of expiry. Okay?

Expiry date approached, and as you expected, the stock is now trading at 90 points.

However, you can still sell me the stock at 100 points because we agreed at that price of 100.

You will simply go in the open market, buy 50 stocks at a price of 90 points each, and sell them to me at
100 points each.

You are making a profit of 10 points per stock. You sold 50, didn't you?
What if the stock had moved up, say to 120 points?

You can't do anything now. You have to sell the stock to me at 100 points.

I, on the other hand am happy because now I got the stock from you at 100 points, and immediately
sold it in open market for 120 points.

20 points of profit per stock!

You can choose to buy a contract of 1 month, or 2 months, or 3 months.

One month contract expires on the last thursday of current month. This is called "near month contract".

Two month contract expires on the last thursday of the next month, called "Middle month contract".

Three month contract expires on last thursday of 2 months away from the date of contract, called "far
month contract".

So if you made a 3 month contract (far month) in October, it expires on the last thursday of December.

Two month contract (middle month) expires in November.

One month expires on last thursday of October itself.

In this book we will use one month contracts in our examples.

OPTIONS follow the exact same "basic" principle as FUTURES do.

Everything is the same. You and I agree to sell and buy a fixed amount of stocks, at a future date, at a
fixed price.

There are other factors involved in OPTIONS which are discussed in the OPTIONS section of this book.
You might have a question here:

How are FUTURES different from OPTIONS?

In FUTURES, you have an obligation to respect the contract.

This means that you "have to" fulfill the order you agreed on. Doesn't matter if you are making a loss or
a profit.

I have to buy, and you have to sell.

In case of OPTIONS, the buyer can walk away at any time, cancelling, or squaring off the contract at any
time.

Do you see the difference? The buyer in OPTIONS can walk away any time. The buyer in FUTURES "has
to" buy.

In both FUTURES and OPTIONS, the seller has to sell.

So we can say that if you are a buyer, then OPTIONS are a better place for you, isn't it?

Read this line 100 times. Read it until you remember it by heart.

I'll tell you the reason behind this in the OPTIONS section. Just by heart this line for now.

In OPTIONS contract, the "buyer" can walk away any time. Nobody can
"force" you to buy. Not even the exchange.

In our "property" example above, when the stock moved down to 90 points, the buyer was making a
loss. So he can just walk away. No need to actually buy.

When trading in FUTURES, you pay a margin, remember?

There are different kinds of margins. These are usually prescribed by the exchange as a percentage of
the total value of the derivative contracts. Without

margins, you cannot buy or sell in the futures market.

Here’s a look at the four different margins in detail:

Margin Payofs on Futures Contracts

Initial Margin:

Initial margin is defined as a percentage of your open position and is set for different positions by the
exchange or clearing house. The factors that decide the amount of initial margin are the average
volatility of the stock in concern over a specified period of time and the interest cost. Initial margin
amounts fluctuate daily depending on the market value of your open positions.

Exposure Margin:

The exposure margin is set by the exchange to control volatility and excessive speculation in the futures
markets. It is levied on the value of the contract that you buy or sell.

Mark-to-Market Margin:

Mark-to-Market margin covers the difference between the cost of the contract and its closing price on
the day the contract is purchased. Post purchase, MTM margin covers the daily differences in closing
prices.

Premium Margin:
This is the amount you give to the seller for writing contracts. It is also usually mentioned in per-share
basis. As a buyer, your pay a premium margin, while you receive one as a seller.

Margin payments help traders get an opportunity to participate in the futures market and make profits
by paying a small sum of money, instead of the total

value of their contracts.

Why do people trade in FUTURES?

First of all, as you might have already noticed, you do not need a lot of money to take a position in
FUTURES. This is because you are not paying the whole amount now. You are only paying a small
percentage of it.

Suppose you decide to take a trade in a stock XYZ which is currently at 1000 points, and you want to buy
100 quantity.

You'll need 100,000 bucks, won't you?

But in FUTURES market, you might only need 20,000 bucks to get in a contract for 100 stocks of XYZ.

Second reason, and a more important reason, is that in FUTURES market you can actually take a "sell"
position, without having the stock in your holding.

Equity market only allows you a one way trade. If you have something, you can sell it. You can only
profit if your stock is moving up. You cannot profit in a falling stock when you are trading in equity.

In FUTURES market however, you can profit from a falling stock by "selling" it first, and then "buying it
later" at expiry date from the open market.

Sounds extremely interesting, but there's a serious danger involved too.

What if the market doesn't move the way you expected it would?

Remember our first "property" example?

You thought that market will fall, and you sold. I bought.

The market actually went up, and you made a loss.

In our example, you "had" the property. You were holding it yourself.

What would have happened if you did not have the property and you sold it to me?

At the date of expiry, you'll be forced by the stock exchange to go and buy the property. Doesn't matter
how much it'll cost you. You'll have to buy and then sell it to me, at the "fixed agreed" price we agreed
on.

This is the biggest reason why people lose money in Futures and Options. However, there are ways to
minimize your loss as well. These are called "Hedging".

How to hedge your position using FUTURES?

You know that you can take a sell position in FUTURES without actually holding the stock. This is the
concept used by many traders to protect their equity holdings, or even a FUTURES "buy" position.

Here's how it works:

Suppose you bought a stock XYZ in the equity market in an expectation that prices of this stock will
move up from this point onwards.

However, there's still a slight risk that they might fall down too. In this case you don't want to lose too
much money. So here's what you do.

You go to FUTURES market, and take a SHORT (sell) position. This position can be taken in the same
stock, or a different stock. To keep things simple, lets say that you took a SHORT position in the same
stock.
Now if the prices move up as you expected, then you make a profit in the equity, and square off your
FUTURES position.

However, if the prices move down, then you start making a profit in the FUTURES.

The best way to use this method is two take position in two different stocks. This allows you to calculate
the difference between profit and loss positions and gives you the ability to let go the loss making
position.

OPTIONS trading gives you a better tool for hedging than FUTURES and we will see this in the OPTIONS
section.

What are OPTIONS?

Options are very similar to FUTURES but they allow you to profit in more ways than any other tool can.
You can profit using:

1. Two way profit

2. Profit from volatility

3. Profit from Time decay

All the three are explained in as simple terms as possible in the below section. But before that, here are
a few terms you should make yourself familiar with.

1. SPOT price

2. STRIKE price

3. PREMIUM price

4. TIME decay

5. INTRINSIC value
 SPOT Price:

SPOT price is the "current price" of the stock whose OPTION you are trading upon.

For example, if I'm trading in OPTIONS of stock XYZ, then current price of XYZ is called the SPOT price.

Really simple, nothing complicated here.

STRIKE Price:

STRIKE price can be a price lower, or higher than its current price.

For example, if stock XYZ is currently at 100 points, and you think that this same stock will be at 150 at
expiry, then you can select a STRIKE price of 110 or even 90.

The point at which "you" want to buy or sell the stock becomes your STRIKE price. This will become clear
when you see examples of both CALL and PUT options.

For now, simply remember that STRIKE price is a price of your choice where you want to buy or sell this
stock.

PREMIUM Price:

Just like you paid a small amount to get a FUTURE contract, likewise you pay a small amount in OPTIONS
as well.

In FUTURES, this amount was called margin, and in OPTIONS this is called a premium.
PREMIUM is made up of two things:

1. Intrinsic value

2. Time value

So if intrinsic value is equal to 20, and time value is equal to 10, then total PREMIUM is 30.

INTRINSIC value:

The difference between SPOT and STRIKE is intrinsic value. Intrinsic value cannot be less than zero. If the
difference is below zero, then intrinsic is considered as zero.

Intrinsic values are different in CALL options, and PUT options. In a minute about this. For now, just
remember this as "your profit value".

TIME Value:

Time value is the amount of time left from now to expiry.

For example, if today is 16 Nov, and expiry is at 24 Nov, then we have 8 more days of time value left in
the premium.

At 20 Nov, we have only 4 days of time value left.

Likewise, on 24 Nov, we have no time value left in the premium because expiry is today.

Here's the most important part:

Premium is made of both "your profit value" and "time value left".
So if there is no time left, and there is no profit as well, then premium is zero, isn't it?

Zero time, and zero profit. Total zero.

What if there is no profit, but there is time left?

Then premium is equal to time left, isn't it?

10 time left, zero profit.

Premium = time + profit = 10 + 0 = 10

Similarly, what if there was no time left, but has a profit?

Premium = Time + profit = 0 + 20 = 20

What does this mean?

It means that at the day of expiry, my OPTION should have a profit value in it. Otherwise, everything is
zero.

If there is no profit value at expiry, then because time is also zero, total value will be zero, isn't it?

Time value also has volatility in it. Suppose a stock that was moving only a few 2-3 points normally,
suddenly moved up 40 points, then volatility increased. Because time value has volatility in it, so as a
result the time value will also increase from yesterday.

As a result of this, even if there is no intrinsic (real) value in the option, still the premium will go up. But
remember because there is no intrinsic value in it, so at expiry even this option will become zero.

How do you calculate profit, or INTRINSIC value?

This brings me to the next section.

 What are the TYPES of OPTIONS

There are 2 types of OPTIONS:

1. CALL option

2. PUT OPTION

Read these line 1000 times. By heart it like your name.

1. In a CALL option, as a buyer, you profit when current price is higher than your buy price

2. In a PUT option, as a buyer, you profit when current price is lower than your buy price

3. In a call option, as a seller, you profit if current price is below your selling price.

4. In a PUT option, as a seller, you profit when your current price is higher than your selling price.

For a while you are the buyer of a CALL or PUT. In the later section we will see things if you were a seller.

We won't discuss them side by side because that is extremely confusing.

So right now, you are the buyer, and I'm the seller. Forget my profit, remember yours. Okay?

Remember, Premium = Profit + Time. Okay?

 CALL OPTION:

You profit when current price is higher than your buy (strike) price. Simple, isn't it? Just like when you
buy stocks in equity.

We will get back to our "property" example here.

I am selling a house, and you think that price of this house will go higher in a short time.

You come to me and we decide on a price at which you can buy the house from me.

We sign an agreement and agree upon the date of payment, and the price of purchase.

You pay me a small premium at this point.

3 things can happen now.

1. Value of property remains the same.

2. Value of property reduces. The opposite of what you expected.

3. Value of property increases just like you expected.

So as a buyer you have 2 options.

1. You come to me, pay the total amount as we decided, and take the house.

2. You decide not to come to me, and you forget about the premium you paid me.

Answer my question now:

In the three situations we discussed above, when will you come to me, and when will you forget the
premium?

In the first two conditions, you are not making a profit. So why will you come to me?

However, in the third condition, you are making a profit, and you will come to me, isn't it?

Current price of house is very high, and you are getting it at a cheaper price. So you buy from me at
cheap, and you sell it at a high price immediately.

This is your profit, isn't it?

This is the whole concept of "buying" a CALL option.

You think that the prices are about to move up even more and you can get an agreement at a cheaper
price.

suppose, stock XYZ is currently trading at 100 points. The available strike prices in the market are: 90,
100, and 110.

Which one should you choose? 90, isn't it?

However, when trading in real options markets, you'll be tempted to buy the CALL option of 110 strike,
because the premium of 110 CALL option would be a lot less than the premium of 90 Strike.

Do you know why?

Because the premium of 110 strike has no "profit" value in it. It has only "Time" value in it, which will
keep decreasing as you get closer to the day of expiry.

Premium = Profit (Intrinsic) + Time

And there is no profit in the CALL of 110 right now, because SPOT is 100.

CALL Profit = SPOT - STRIKE = 100 - 110 = -10 = 0

Remember, this is the formula to calculate Intrinsic value (profit value) in case of a CALL option. PUT
options use a different formula.

PUT OPTIONS:

Do you remember the 4 lines I told you to read 1000 times and by heart those like your name? Don't
turn the pages.

In a PUT option, as a buyer, you profit when current price is lower than your buy price.

This is exactly the opposite of a CALL option.

The more the price of an equity falls, the more profit you make as a buyer of a PUT option. Here's how

When you buy a PUT option, you are actually buying the right to sell the equity at a higher price.

Suppose you have a car which I decide to buy from you.

We got in an agreement, and decided on a price.

10 days later, the car was in an accident, and lost its value.

At this point, because you have an agreement to sell it to me at a higher price than its current value, so
you are making a profit.

In case of a PUT option, the Intrinsic value (your profit) is calculated using the following formula:

PUT Profit = STRIKE - SPOT

Remember, in case of a call option this was:

CALL Profit = SPOT - STRIKE

Strike is the price decided by you at which you bought the option, and spot is the current price in equity
market.

Suppose a stock XYZ is trading at 100 points, and you think that its prices are about to go down further.

Available STRIKE prices in the market are: 80, 100, 120

Which one should you choose?

Current price is 100, PUT Strike in profit is 120, isn't it? There is a 20 point intrinsic value in it.

However, this time too, the premium of STRIKE 80 will be a lot cheaper than the STRIKE of 120.

Reason is the same. 80 STRIKE has no profit value in it.

PUT Profit = STRIKE - SPOT = 80 - 100 = -20 = 0

Premium= Profit + Time = 0 + Time = time

The STRIKE of 80 has only time value in it, which will be zero at expiry. And if current price is still above
80 at expiry, then total Premium will be zero.

Until now we were seeing how things are when you are a "buyer" in options market. What if you are a
seller?

Warning: Selling options is too risky and you can end up losing everything you got in your trading
account.
I'll discuss this in a minute.

Selling CALL Options:

You already know that if you are "buying" a CALL option, and if SPOT goes above your STRIKE, then you
are in a profit. Why? Because you can buy something at a cheaper price (STRIKE), and immediately sell it
in the market at a higher price (SPOT)

However, as the seller of an option you've made a loss here, haven't you?

As a "seller", you'd profit if the SPOT price of the CALL stays below your STRIKE.

Spot price is 80, and you are selling it at 100.

Nobody will buy from you. They can just get it from the open equity market.

This is what we want as a seller.

By heart this line.

As a seller, I profit if at the day of expiry, the buyer never comes to us, and hence loses his premium,
which he has already paid us.

This is the whole base of selling options.

Suppose, in the middle of the month stock XYZ was trading at 120 points.

You sold a CALL at a strike price of 100

Remember, you are only selling a promise here, not the real stock.

Something that is selling in the market at 120, is being sold by you at just 100. Deal!

I bought the option from you.

By the time of expiry, the stock of XYZ fell down to 80.

So now you are selling something at 100, which has a market value of just 80. Voila...

I won't come to buy from you. Because I've already paid a premium to you, so you get to keep the
premium. Your profit!

However, the reverse of this is also possible.

What if the stock XYZ stays at 120?

Then you made a loss. You have to still sell it at 100...

Read this section 100 times.

If you do not already have the stock, and you've promised someone that you will sell it to them at 100
points, but current price in the market is 120 points, then what will you have to do?

To fulfill your promise, you'll have to buy it at 120 points, and sell at 100 points. A loss of 20 points.

Now remember, this loss of 20 points is for just one single stock of XYZ company.

When trading in options you do not trade in a single stock. You trade in LOTS. Lots have hundreds of
shares in it.

LOT size of NIFTY is 75.

So if you made a loss of 20 points per share, then multiply it with 75 to calculate your actual loss.

And this is just loss per single LOT. You could be trading in multiple LOTS...

In our example we used a difference of just 20 points. You could be making more loss than 20. May be
50, even 100 points per share.

This is the reason why selling options is risky. You cannot calculate "how much loss" you can make.
Remember, when buying options, the maximum you can lose is the total premium you paid. Not more
than that.

That is the amount you have already paid, and if you decide to walk away, you lose the premium.

But if you are a seller, you don't know how much you can lose.

Selling options, without holding the respective equity is called "naked option trading".

Because you do not have a cover. At the day of expiry, you'd have to buy from the market and
immediately sell at whatever price you've made a promise to deliver.

The price at which you buy could be in your favour, or not.

Selling PUT options:

Everything is the same as selling a CALL option. The only difference is how your profits are calculated.

As a "buyer" of a PUT option, you profit if SPOT falls below STRIKE.

Remember, PUT option gives you the right to "sell" something at a price of your choice.

So as a buyer, you profit if current price (SPOT) is lower than the price at which you are selling it
(STRIKE).

You bought something from the market at a low price, and immediately sold it at a higher price to the
person who promised to buy from you.

However, as a "seller" of a PUT option, its you who is making the promise to buy something at a fixed
price. So you profit when the current price (SPOT) stays above the price at which you are buying.

Suppose, stock XYZ is trading at 100 points.

You sold a PUT option at a STRIKE price of 100, and I bought it, paid you a premium.
At expiry, if the current price (SPOT) is 70, then I profit.

However, if the SPOT stays at 100, or goes up to say 120, then you profit because I'll never come to
execute the contract. Why would I? I'm making a loss.

In this case, you get to keep the premium I paid to you, your profit!

But remember, if the stock falls, just like I expected, then you start making a loss, and you do not know
how much the stock will fall. This is why you can really end up losing a lot of money.

By heart these rules:

1. As a seller of an option, the loss is unlimited, but the profit is limited to the premium earned.

2. As a buyer of an option, the loss is limited to the premium paid, but the profit can be unlimited.

This is why if you have limited risk capacity, then avoid selling options.

Stick to buying options where the maximum you can lose is the premium, but the maximum you can
gain is unlimited!

Here's an easy way to remember the relationship between CALL and PUT options
Look at the image above.

Look at the "buy" side first.

The small green arrow next to CALL means that you profit when current price stays above STRIKE.

The small red arrow next to PUT means that you profit when price goes below STRIKE

Do you see how things are reversed on the Sell side?

As a seller, red arrow next to CALL means that you profit when current price falls below STRIKE

As a seller, green arrow next to PUT means that you profit when price moves above STRIKE.

Look at that image for a minute, and take a mental picture of it.

Every single time you want to trade in options market, remind yourself of this image.

As you can see, selling a PUT is similar to buying a CALL.

Also, buying a PUT is similar to selling a CALL.

This is only the relationship, and remember, selling is way more risky.

You'd ask then why should you buy? Why not just sell?

Because when you are selling an option, your loss can be unlimited, specially if you are "trading naked."

You can really end up losing a lot of money, a lot.

But as a buyer, the only money you lose is the premium you have already paid. Nothing else, and your
profit can be unlimited.

Hedging, and trading equity using option data:

Remember, nothing is full proof in stock markets. I think I made this point very clear in the first section
of this book.
 Strategy:

This one works both ways, for PUT and CALL, and gives you an idea of the support and resistance of the
market.

Studying Open Interest.

What is open Interest?

Bluntly speaking, Open interest is the number of contracts available at a given STRIKE price.

Suppose, stock XYZ is trading at 100 points

Looking at OI (open interest) data, you see that OI of 120 Strike CALL is 1000.

The OI for the same CALL, at the same strike was just 500 yesterday.

Suddenly, a lot of interest has been generated in this CALL. What does it tell you?

As a novice, you'd immediately buy the CALL yourself, won't you? Lot of interest has been generated
suddenly. Looks good. Think again.

If someone is buying the CALL, then obviously is someone is selling too, isn't it?

And in any market, the seller must come first, isn't it?

If nobody is selling something, then you cannot buy, can you?

And who is taking more risk in options market? The seller, isn't it?

So if suddenly a lot of people sold a CALL of XYZ at a strike of 120, then what does it mean?

As a seller of a CALL, they think that price of XYZ will not cross above 120.

Look at the relationship image again. Seller of CALL profits if SPOT price stays below STRIKE.
If you bought the CALL, you'd have made a loss, isn't it?

This price of 120 of stock XYZ is now acting as "resistance."

Likewise, if similar open interest was seen in PUT option, then what would you conclude?

That the price is going to stay above 120 because sellers of PUT are confident that price will not fall
below 120, and that they will profit.

This price of 120 is now acting as "support."

How do you use this in equity?

You figured out the support and resistance of a stock, do I need to tell you more?

Read the 4 thumb rules in the first section. One of them was:

Buy at support, sell at resistance.

By heart these Option trading rules below:

1. If OI of a CALL is increasing, then it becomes resistance

2. If OI of PUT is increasing, then it becomes support

3. Always look at OI data from seller's point of view.

Strategy:

How can you hedge your position using options:

 Strategy: Hedging

The whole purpose of introducing Futures and Options was to provide traders a tool to hedge their
position. So they'll have a cover if the market is moving in the opposite direction.

This is exactly what you can do too. When you trade in equity, also buy take a reverse position in
Futures, or Options market.

Remember, this position needs to be taken simultaneously along with your equity position.

So if you are buying 100 stocks of XYZ,, and LOT size is also 100, then you can also buy a PUT of the same
stock for one LOT.

The interesting part here is the STRIKE price you'll select, and the time left to expiry.

Suppose, stock XYZ is trading at 200 points.

This is the beginning of the month.

PUT option of STRIKE 100 points is trading at just a premium of 2.

PUT option of STRIKE 150 is trading at a premium of 5.

PUT option of STRIKE 250 is trading at a premium of 55.

You don't need to spend a lot of money to hedge your position. Its just a safety net. In case the stock
starts falling, so you can cover your loss here.

By now you already know that if you are a "buyer" of a PUT, then you profit if the SPOT price goes below
STRIKE price.

Based on this its safe to conclude that both the PUT options given above (100 and 150), have no profit
(Intrinsic value) in them.
Because this is the beginning of the month, and there are days left to expiry, the only value you are
seeing is the "Time value."

And we already know that as we get closer to expiry, the Time value will keep decaying (vanishing)

However, the third PUT option, i.e 250, has both profit and time value in it.

Can you tell how much profit value is in it?

Remember the formula to calculate profit value of PUT options?

PUT Profit = STRIKE - SPOT

Profit= 250 (strike) - 200 (SPOT, current price) = 50

So in a premium of 55, only 5 is the time value which will vanish, but 50 is the profit value, which will
increase as the stock keeps falling.

LOT size is 100, so you'd need only 5500 bucks to buy one lot. This is the maximum you'll lose, because
you are a buyer, isn't it?

Now lets assume if by the end of the month the stock is at 270, then how much did you make, and how
much did you lose, equity and option together?

You made a profit of 70 points per share in equity. You had 100. Total = 7000

You made a loss of 5500 in the PUT option (entire premium), so total profit = 7000 - 5500 = 1500

However, what if the stock fell when you bought it?

Assuming its trading at 150, how much did you make or lose?

You made a loss of 50 points in equity per share. You had 100. Total = 5000

You made a profit of 100 points in the PUT option. Do you still need the math?
Time value = 0 (at expiry) It was 5 when you bought the option.

Profit value = Strike - SPOT = 250 -150 = 100

Lot size is 100, so total profit = 100 * 100 = 10,000

Profit of PUT - Loss of equity = 10,000 - 5000 = 5000 total profit!

But wait, its not that simple. You also need to subtract your investment from the profit you made in the
PUT option. Your total investment was 5500 ( 55 rupees x 100 shares )

So your final profit or loss would be:

5000 (profit from PUT) - 5500 (your investment) = -500 (Loss)

You still made a loss, but instead of making a loss of 5000 rupees (stock coming down from 200 to 150),
you just made a loss of rupees 500 only.

This is why you hedge, and at the time of hedging, you calculate the total amount of money you might
lose if the worst happens.

As a good practice, when hedging, you do not select a strike which is very far away from current price.
Cause if you select a strike which is very far away, then that option won't give you any profit, plus you
made a loss in equity. This doubles your loss instead of cancelling it.

Its all in the math!

Read those 5 words 100 times.

Its all in the math!

You'd say that you can just go and apply this strategy in any stock. NO, a big NO.

What would have happened if the stock had settled at 240? Do the math.
Your loss would have been more than your profit, thus resulting in a total loss.

This is the reason why you should read the first section of this book. Find out the levels that a stock can
rise to. Find out where it falls.

Concentrate on chart patterns. Buy when a stock is at a support and is showing signs of recovery.

And then hedge using your math skills to calculate your profit and loss at different STRIKE prices.

There's one more thing I'd like to point out here.

You saw that the PUT of 100 is trading at a premium of 2, extremely cheap.

With a lot size of 100, you need only 200 bucks to take a position here. But would that do any good to
you?

What will happen to this PUT at expiry?

Time value = 0 (at expiry)

Profit = 0 i.e STRIKE - SPOT = 100 - 150 = -50 = 0

Total = Profit + Time = 0 + 0 = 0

And on top of this, your loss in equity = 5000, so total loss= 5200

Instead of a profit of 5000 you made a loss of 5200 because you hedged in the wrong STRIKE price...

This is the biggest mistake most people do when trading in options. They go for cheap. This is the reason
why you need to study charts. To figure out the levels of support and resistance.

Instead of buying the equity itself, you could have bought a CALL option, and hedged your CALL using a
PUT option. The most important thing is to select the right STRIKE price.

And as I already pointed out, you can always use Open Interest data to figure out what the marjet is
thinking. Where does market see a support, and where does it see a resistance.
There's a section at www.MunafaSutra.com that allows you to see OI data for free.

Its located here:

Options:

http://www.munafasutra.com/nse/optionsHome/

Futures:

http://www.munafasutra.com/nse/futuresHome/

You can just go to MunafaSutra.com and click on "Futures Derivatives", or "Options Derivatives" to
reach appropriate sections.

The options data is sorted in a way that it shows you ITM, ATM, OTM options based on current SPOT, so
its easier to decide and take a position.

You'd ask what is ITM, ATM, OTM position?

I did not discuss this earlier because simultaneously discussing them only confuses people.

Here's the concept.

ITM, ATM, OTM Options:

ITM is the position that has a profit.

ATM, and OTM are the positions that do not have a profit.
ITM stands for in-the-money

ATM stands for at-the-money

OTM stands for out-the-money

Now that you've read this book, you tell me which of the following STRIKES are a ITM CALL?

Remember, we are talking about CALL here, and assuming its expiry, so time value is zero.

Make a decision in both cases. First as a buyer, then as a seller.

CALL Option for stock XYZ:

Current price: 200

1. STRIKE: 150

2. STRIKE 100

3. STRIKE 250

4. STRIKE: 200

Don't look at the answers below. Make a note on a paper, and then check with answers below

As a buyer:

Current price: 200

1. STRIKE: 150

CALL Profit = SPOT - STRIKE = 200 - 150 = 50 Profit, means ITM

2. STRIKE 100

CALL Profit = SPOT - STRIKE = 200 - 100 = 100 Profit, means ITM

3. STRIKE 250

CALL Profit = SPOT - STRIKE = 200 - 250 = 0 Profit, means OTM

4. STRIKE: 200

CALL Profit = SPOT - STRIKE = 200 - 200 = 0 Profit, means ATM

The only difference between an ATM and an OTM is that in ATM the SPOT is the same as the STRIKE.
Doesn't matter. Still a loss...

Situation reverses if you were a seller of the CALL, doesn't it?

Remember, a seller profits if the buyer never returns to execute the order, and thus loses his premium.

So in all the 4 cases above, if the buyer is in a loss, the option becomes an ITM for the seller. Can you tell
which ones?

Third and fourth are loss making positions for the buyers, aren't they?

So they are ITM CALLS for the seller because the buyer will not come back, and the seller bags the
premium that was paid to him/her.

What if these were PUT options and not CALL options?

PUT Option for stock XYZ:

Current price: 200

1. STRIKE: 150

2. STRIKE 100
3. STRIKE 250

4. STRIKE: 200

Once again, calculate the profit, and make a note on the paper. Then compare your answers from
below.

Calculate as a buyer

PUT Option for stock XYZ:

Current price: 200

1. STRIKE: 150

PUT profit = STRIKE - SPOT = 150 - 200 = 0 profit, means OTM PUT

2. STRIKE 100

PUT profit = STRIKE - SPOT = 100 - 200 = 0 profit, means OTM PUT

3. STRIKE 250

PUT profit = STRIKE - SPOT = 250 - 200 = 50 profit, means ITM PUT

4. STRIKE: 200

PUT profit = STRIKE - SPOT = 200 - 200 = 0 profit, means ATM PUT

And the reverse is true if you were the seller. ITM of buyer becomes OTM of seller. OTM of buyer
becomes ITM of seller.

This is the whole concept of trading in options. The easiest way to remember all this is simply by
remembering these few lines below
 Remember these lines like your name:

1. I'm buying CALL option, and I profit if current price goes "above" my STRIKE

2. I'm buying PUT option, and I profit if current price goes "below" my STRIKE

3. Opposite is true if I was the seller.

That's all you need to remember. Everything else will automatically fall into place.

Just like equity, you need practice to become an expert in all this. With enough practice, you won't have
to think. It'll become your nature, automatic.

Proven Strategy that Works in any Market Scenario:

As promised, here's a strategy that works in almost any market scenario.

Disclaimer: Stock markets are unpredictable, and individual results might vary from person to person
depending on a person's own intelligence, entry level, exit level. Below is just a basic idea using an
example.

We'll use ASHOKLEY in our example to explain how the method works.

Current price of Ashok Leyland, as on 24 March, 2017 is: 87 rupees

LOT size of ASHOKLEY is 7000

meaning if you buy or sell an option of ASHOKLEY, you are actually taking a trade in 7000 stocks of
ASHOKLEY.
Because there is no STRIKE of 87 itself, so we'll look into STRIKES closest to 87, which are:

STRIKE of 90

STRIKE of 85

You already know that if you sell an option, you can make unlimited loss. However, if the option is
covered, meaning you actually hold the equity, then the loss can be reduced to a negligible point.

Look at this image below. This is a black and white screenshot of option data of ASHOKLEY taken from
www.MunafaSutra.com as on 24 March, 2017
First look at the CALL option of 90. The one on the left.

Premium for CALL is 0.60 paisa

Question: Is this OTM or ITM if you are "selling" it?

Don't turn the pages. Answer quickly. I told you to practice. And if you want to be successful in trading
options, then this should come to you like your name...

Its an ITM sell CALL option, isn't it?

As a CALL seller, you make money if price stays below your STRIKE, isn't it?

As a buyer of a CALL you are making a loss, but you are the seller here.

So as long as the price stays below 90 in this case, you make a profit because you get to bag the
premium paid to you by the buyer of the CALL.

However, if the price moves above 90, you start making a loss, and this is what we'll bring down.

Cover the loss by buying equity of ASHOKLEY as soon as we sold the option.

Till now, here's what we did:

1. Sold a CALL option of ASHOKLEY at a STRIKE of 90

2. Bought the stock itself from equity, same amount as LOT size, at a price of 87/-

Now suppose if the stock went up and at expiry it closed at 92. What will happen?
You made a 2 rupee loss in the CALL you sold, but you made a profit of 5 rupees in the equity.

Net profit: 3 rupees!

And that is per single share. Remember the LOT size was 7000 shares!

So total profit is 21000 rupees per LOT

What if the stock fell instead of moving up?

This is the third point in this strategy.

We know that we'll profit if we had "bought" a PUT option.

Look at the option data image again. This time STRIKE price of 85
The Premium of PUT option is 0.45 paisa for a STRIKE of 85

So upto now we did:

1. Sold a CALL option of ASHOKLEY at a STRIKE of 90

2. Bought the stock itself from equity, same amount as LOT size, at a price of 87/-

3. Bought a PUT option of ASHOKLEY at a strike of 85

If the stock would have moved up like we first saw, then this last PUT option will become zero, isn't it?

Its a buy PUT. We profit if stock price goes below our STRIKE, isn't it? In this case 85.

So if stock moved up to say 92, then our total profit or loss balance sheet looks like below.

1. Sell CALL = 2 rupees loss

2. Equity = 5 rupees profit

3. buy PUT = 0.45 paisa loss (premium was lost because PUT is zero now)

Net profit: 5 - 2 - 0.45 = 2.55/- per share

Total LOT size was 7000 so net profit:

7000 * 2.55 = 16,750/- rupees per LOT!

Coming back to our question. What if the price fell? Say for example, at expiry the price was 80 rupees?

What will profit loss balance sheet look like?

1. Sell CALL becomes zero for buyer. You get full premium = 0.60

2. Equity is in loss = 7 rupees (you can hold the equity, no worries)

3. Buy PUT is in profits = 5 rupees

Net = 5 (put) + 0.60 (call) - 7 (equity) = -1.40/-

7000 * -1.40 = 9,800/- if you sell the equity, which you do not have to.

You can hold equity for as long as you want, isn't it?

And if you do not sell the equity, then this is what balance sheet looks like

1. Sell CALL = 0.60 profit

3. Buy PUT = 5 rupees profit

Net profit: 5 + 0.60 = 5.60 rupees per share!

7000 * 5.60 = 39,200/- per LOT!

And because you still hold the equity, and its the beginning of a new expiry month now, you can re-
enter the market at a new STRIKE, with this same strategy, can't you?

Remember at the beginning of this book I told you to view stock market as a business ground and not as
a gamble?

Every Business needs Investment, doesn't it?

This equity is your investment. You'll lose the equity if the "sell CALL" goes bad, meaning if prices move
up beyond the STRIKE of sell CALL option.

That is how you'll cover for the loss in the CALL. But you still made a profit there as well, didn't you,
when the stock moved up to 92?
You sold your equity, and paid the 2 rupee difference to the buyer of the CALL, but you kept a profit of 3
rupees, didn't you?

You bought at 87, you sold at 92, and you paid 2 rupees to buyer of sell CALL. Total profit = 3 rupees
minus the premium of PUT you bought.

Nothing is Full Proof in Stock Markets

But nothing is full proof in stock markets. SO where do you make a loss?

If the prices goes nowhere.

Say it only went to 86 rupees.

Profit loss balance sheet:

1. Sell CALL = profit of 0.60 paisa

2. Equity = loss of 1 rupee

3. Buy PUT = loss of premium = 0.45 paisa

or if you do not sell the equity:

1. Sell CALL = profit of 0.60 paisa

3. Buy PUT = loss of premium = 0.45 paisa

Total = 0.60 - 0.45 = 0.15 paisa profit

What kind of profit is that...

You ended up paying more brokerage than you made in profits...

Imagine one more situation.

Instead of buying a PUT of 85 Strike, what if you bought the PUT of Strike 90 itself?

Cost of that PUT is over 3 rupees. Look at the Option data image again.

Using the balance sheet above, calculate profit and loss in each case.

Calculate for both the cases i.e when stock closed at 92, and when it closed at 80

Stock closed at 92

1. Sell CALL = 2 rupees loss

2. Profit in equity = 3 rupees

3. Premium lost in PUT = 3 rupees loss

Total loss = 2 rupees per share = 7000 * 2 = 14,000/- rupees per LOT

Just because you selected the wrong STRIKE price to buy the PUT. Instead of making a profit of 3 rupees
per share, you instead made a loss of 2 rupees per share...

Whenever you are buying options, spend only what you are ready to lose. Do not lose your capital in
greed.

Remember that line above.

 Remember this line. By Heart it

Always remember. When buying options, spend only what you are "ready" to lose. Not what you are
ready to earn.

Loss of a buy option premium should not affect your total profits too much.

That is the whole idea here

Always remember this rule. Never get greedy. Make small profit, but make sure its profit. In an
expectation of big profits, don't make a loss...

Every trader who has survived in stock markets, and I mean every single one, follows this rule like a
Mantra!

Now that you know the Mantra to profit in stock markets, lets move to the most difficult section of stock
markets.

Intra Day Trading - Day Trading

What is day trading? Trades you close within the same day are called "intra day trades".

It simply means that you bought today, and also sold it today itself, before the market closed.

This is why its called, "day trading", or "intra day trading."

The trade was started within the same day, and was also closed within the same day.

It could be a buy and a sell later, or a sell first and a buy later.

Right, it works both ways.

In both the cases your "buy" price has to be "lower" than your "sell" price.

That is only when you can profit, isn't it?

Buy lower, sell higher.

In intra day, doesn't matter which comes first.

Buy first, sell later like a normal person

Sell first, buy later like an abnormal person

In both the cases, Profit = Sell - Buy

You'd say, I need to have the share first to sell it, isn't it? If I don't have it, how can I sell it?

You are right. But because the trade is "closed" within the same day, and all settlements in stock
markets take place after the market closes, so the share never comes in your account, and never leaves
your account.

In very simple words understand it like this.

Nothing "real" is happening. No shares are moving. Only a transaction record is getting written down.

So if you place a sell order, the exchange/broker makes a note that you sold. Now "before" the market
closes, you "have to" place a buy order as well, for the same stock, for the same quantity.

If you do not place a buy order, then your broker will place the order 15-30 minutes before the market
closes. He won't care if you are in a loss or in profit. He has to settle the trade.

Before diving in this section, there are a few rules you must know, by heart, and follow like a LAW. In a
minute about those. First things first.

Warning:

Intrea day trading is very tricky, and the most loss making place in stock markets if you don't know what
you are doing.
You can wipe out your entire capital money in a single day, specially if you are using margins given to
you by your broker.

What is margin, you'd ask? Margin is like credit given to you by your broker.

Let me explain this with an example.

Suppose you have only 10,000 rupees. You go to your broker and tell him to buy a particular stock.

He says that you can get only 100 quantity in 10,000 rupees.

He then says, but if you want I can give you 10 times margin. Meaning you can now buy 1000 quantity
with the same 10,000 rupees.

You just need to pay brokerage on the entire value, which is:

1000 quantity * price of stock * my commission percentage.

You agreed happily, and took the trade.

At the end of the day you saw that the trade did not make profit, and is making a loss.

So you asked your broker to "sell", "settle", "square off", "get out of the trade."

He did, and you made a loss of 10,000 rupees on the 1000 quantity you bought.

Your entire capital is gone now...

Who made profit here? Your broker did, didn't he?

Instead of getting a cut on 100 quantity (10,000 rupees), he got a cut on 1000 quantity (100,000 rupees)

The point is that if you are new to intra day trading, avoid using margins. Trade in CASH only until you
get used to how things work.

Now lets see:

1. Rules of Intra Day trading.

2. How to select stocks for intra day trading

3. How to decide entry levels, stoploss levels, and exit levels.

 Rules of Intra Day Trading

Just like everywhere else, there are a few key points you must remember when taking a trade in intra
day.

LAW 1. Don't take tips from TV, SMS, social networks etc.

This is the most important rule, and you already know why, don't you?

If you still don't know this, then stop right here, and read this entire book again.

When using these free tips, you cannot be sure which tip is a real tip, and which one is designed to "eat"
up your money. And even if its a real tip, still the stock might open up so high that its already too close
to the target. Take a trade at this point, and you are sure to lose your money...

Those tips on SMS, 100% trap. Run when you see one. A friend of mine lost 50% of his entire savings
account money following tips from one of these SMS tip providers. And he managed to lose it all in just
10 days...

LAW 2: Never get greedy in intra day trading.

Actually you should not get greedy anywhere, but getting greedy here is a punishable crime. You end up
paying a fine in the form of a "big fat loss."

When you have profits, take them. Don't wait for more. Don't wait for a reversal. 95% times, the
reversal will not happen.

LAW 3: Follow the equation:

Total = Profit - Loss

All your trades will not give you profits. But your job is to keep your losses to minimum, and book profits
whenever you can.
Remember, this equation was also given to you when we were discussing regular trading? Applies here
too!

LAW 4: Use a broker who charges very low commission.

If you are using one of those brokers who charge you 0.55% on intra day trades, then stop right here.
Intra day trading is not for you.

Why? 80%-90% times your total move in the stock will be around 1% to 1.5% only.

Stock of INFY, opened at 920, and went upto 940.

Thats a very good 20 points move there! But tell me how much of that will you be "able" to catch?

Will you be able to enter exactly at 920? NO

Will you be able to exit at exactly at 940? NO

If you are too fast, alert, and prepared, you might get in at 925, and exit at 935. A 10 point move.

Sounds good. But how much is 1% of 925? 9.25 rupees.

Thats all you made.

And your broker charged you 0.55% on the trade...

Let me get this. So basically, you took all that trouble, risked your money, and then gift wrapped a big
portion of your profits and gave it to your broker, with a 6 inch smile!!!

If you wait too much in the stock, then you start making a loss. If you don't wait for a big move, you
don't get enough profits. Whats the point?

So either get a good broker who charges very less, or stay from intra day trading.

Remember, when we discussed how big traders have low brokerages? So in this same trade, when you
gave away half your profits to your broker, they only gave a small percentage. Probably just 0.01%
LAW 5: Always place a "limit" order.

This is the most common mistake people do in intra day trading. They fear that they might not get the
stock if they place a limit, and because of this fear they place a "market" order.

Never do this. Why? Because in a "market" order, you might end up getting stuck at a very high price.
Your profit "range/percent" might decrease. You might get in a high risk zone.

Its better not to get the order fulfilled rather than getting the order filled, and getting stuck in it, waiting
for a loss...

LAW 6: Prepare beforehand

Always decide your strategy before market opens. Keep a watch list of stocks ready. When market
opens, verify your strategy, and take an entry on the "pre-decided" levels. From here, respect your
stoploss level.

LAW 7: Stay calm.

This can only be achieved if you follow LAW number 6 properly.

90% people lose money in intra day trading because they don't know which stock they will trade in. They
are waiting for the market to open and see which stock is rising. Then they jump on it.

They don't have their buying levels decided.

They don't have a stoploss level in mind.

They don't have a strategy in place. They just jump in.

Then they are in a hurry to buy the stock. There's a greed, and a fear of missing the "moment."

Eventually, when they finally manage to get the stock, its already at a very high price, and now they see
it coming down slowly. Goes below their buy price...

They get scared, and sell it off. This is pure gamble, isn't it?

Surprisingly, it rises up again!!! Why?

I'll tell you about this in a minute, when picking up entry points. There's an entry level for all strategies in
intra day. Learn it, verify it, and then follow it.
 To sum up all the LAWS:

1. No trading on tips from TV, SMS etc

2. No getting greedy

3. Follow the equation: Total = Profit - Loss

4. Get a good broker

5. Always use "limit" orders only

6. Prepare beforehand

7. Stay calm

I hope that now you are familiar with the risk of intra day trading, and mistakes you should avoid when
trading in intra day. So now lets see which methods you can use to pick stocks for intra day trading.

How to pick stocks for intra day trading

The best way:

The best way of intra day trading is to make a list of 10-20 familiar stocks, exactly like we did when we
were an investor, and track the stocks on a daily basis. When you intra trade like this, you automatically
start getting familiar with the movement of the stock. You automatically start defining its intra day
range. And when you see a chance, you get in. When you have a list like this one, it becomes a lot easier
to predict the movement of the stock for the next day, and depending on range, direction, etc you can
easily take a trade.

Trades taken on a list, which you have been tracking for some time now, are generally profitable.
Chances of a loss are reduced by a significant percentage.
However, there are other methods too. Like using a screener (data scanner software) to find stocks
matching a certain condition. These conditions are discussed below, and a link to each of the free
screener is also given below.

Condition 1: Stocks reversing from bottom after a significant fall.

Now remember, this is exactly what we were trying to do as a positional trader as well, didn't we? The
only difference was the "time" of the trade. Those were short-term to mid-term trades. And this is an
intra day trade.

And the reason is very obvious. When a stock starts moving upwards after falling significantly, its
assumed that the movement will continue for a day or two at least.

You have to remember that the screener is only a software which is crunching numbers. Its not an
analyst. Its you who has to decide whether to take a trade or not.

Once you have a list like this, take a look at the charts. Take a look at MACD charts specially. Use what
you learnt above.

Direction of trade could be on the upside.

Buy first, sell later.

Screener link:

NSE: http://munafasutra.com/nse/intraDayLowReversal

BSE: http://munafasutra.com/bse/ intraDayLowReversal

Condition 2: Stocks reversing after a sharp upmove

Exactly opposite of the first method, and such stocks are a perfect "sell" candidate.

Direction of the trade could be on the downside. Sell first, buy later when its trading lower.

Screener link:
NSE: http://munafasutra.com/nse/ intraDayHighReversal

BSE: http://munafasutra.com/bse/ intraDayHighReversal

Condition 3: MunafaSutra HOE stocks

This is interesting. It simply means stocks where "Open & High are Equal"

Meaning the stock fell soon after it opened. Think about it. If a stock is falling immediately as soon as it
opened, then what is the sentiment ruling this stock?

Its fear. People want to get out of this stock as soon as they can, isn't it?

There's a very high chance that this stock will fall further during the day.

All you need to do is take a good entry, and wait to maximise your profits in the trade.

Direction of this trade would be, (good guess), Sell first, buy later.

What is a good entry? Here's the interesting part.

When a stock falls, it doesn't fall continuously. 90% times, it'll also show buying from lower levels. Will
fall again later. And will probably break the low it made earlier in the morning.

For the stocks that do not show buying, its almost guaranteed that they will hit a circuit level, and
trading will stop in the stock for the day. No use for us. We can't get in. Forget these stocks.

When you use MunafaSutra.com to view intra day charts for a stock, you'll see a "grey" line on the chart.
Its the "entry" point.

When a intra day bar gets close to this line, or the intra day price line gets close to this entry line, its
time to "sell" the stock.

And then when the stock falls again later, you can place your "buy" order, thus completing your trade.

Your target could be anything lower than the low made in the morning.
Your stoploss point is the "day opening" price.

Screener link:

NSE: http://munafasutra.com/nse/ intraDayHOE

BSE: http://munafasutra.com/bse/intraDayHOE

Below is chart of a HOE stock I was tracking this morning. SunTV

Look at the grey entry line ("E" line). Now look when line chart prices came close to it. Then see the fall
in the stock later during the day. Reached the lower target line ("T" line)

This is what we want to do with HOE stocks.

1. Sell when the stock is very close to the "E" line

2. Buy back when stock gets close to the "T" line

3. Keep a stoploss at the "Opening" price for the day.

Condition 4: Gap Down stocks

Like the name suggests, these are stocks that gave us a gap down opening. Meaning they opened
significantly lower than previous day closing.

Once again a "sell" candidate, and "buy" later.

Combine this screener with a HOE stock, and you almost guaranteed your profit!

Think about it. Open & High are Equal, and there is a huge gapdown opening.

The best way to use this condition is to look for stocks that have given a big gap down opening.
Something above 6% to 9% or so.

Same rules of HOE apply here as well.

Don't jump on it immediately.

Wait for when buying comes in. Place a "sell" order near the entry line you see on MunafaSutra.com
intra day charts.

And then watch the stock fall a lot! Don't get greedy though, okay?

Once you have a good profit in hand, square off your sell order by placing a "buy" order.

Ultimately, you bought at a very low price, and you had already sold at a very high price. Profit!

Screener link:

NSE: http://munafasutra.com/nse/intraDayGapDown

BSE: http://munafasutra.com/bse/intraDayGapDown

Here's a intra day chart I was following which had a Gap Down opening.

The stock opened 7%-8% gap down. Buying came in immediately. See how the second bar is very close
to "E" line? Line chart is touching "E" line. Look at where the stock closed. At a "T" line. Thats the target
line!
We sold at 797 in the morning, and later bought at 753. Profit: 44 points = 5%-6% approx, in a single
trade!!!

If you'd have checked MunafaSutra HOE screener for the day, and also Gap Down screener, you'd have
seen this stock listed in both those results.
Condition 5: MunafaSutra OLE stocks

Exact opposite of HOE stocks.

Here Open & Low are Equal.

The direction of the trade is upside.

You buy when stock touches "E" line, and sell at a later time. Somewhere close to the "T" line.

The basic concept is the same. At the opening the stock will shoot up suddenly. It'll come down at a later
time. This is where we enter. But because of the sentiment, the stock will soon recover, and shoot up
again. There is a very high chance that this second recovery will take higher than the high it made during
the morning hours.

Screener link:

NSE: http://munafasutra.com/nse/ intraDayOLE

BSE: http://munafasutra.com/bse/intraDayOLE

Here's a chart for a OLE stock I was tracking. The stock opened & shot up immediately.

As a newbe, someone will just try to jump in here. But the stock came down from there...

This is where we enter, at the "E" line. We place a buy order here. See the third bar. Its just below the
"E" line

And then look at the profits. It even shot up beyond our "T" lines!!!

We might have booked profits at the "T" line, or as the bars are not falling from the "T" line
immediately, we might have as well held for a little while. Until we see a smaller bar after reaching "T"
line.
Condition 6: Gap Up stocks.

Exact opposite of Gap Down, and best when combined with MunafaSutra OLE stocks

Direction of the trade will be an upside trade. Meaning Buy first, Sell later.

The idea is the same. We wait for the stock to go close to the "E" line.

We place a BUY order here

Then we place a SELL order near our "T" line, or above it.

A word of warning though.

Gap up stocks that open up too high tend to fill in the gap. Meaning they tend to fall down after the gap
up opening. In this case the HOE condition might be met.

And we already know about HOE that its a "sell" first, and "buy" later strategy.

Here's an example of a Gap Up with a HOE together.

See how the stock opened up almost 9%

Then it fell immediately. Making a HOE.

It went up minutes later, but only till our "E" line.

Then it fell again later.

So considering the HOE condition, we could have sold the stock at the "E" line,

and later booked our profits when it came down.

It never touched our "T" line, but closed a lot lower than our entry point. Gave us a profit of about 12
points, which is roughly 2% of move.

This is a classic example of switching strategies based on price movement. We expected a upmove. It
gave us a downmove. We switched, and instead of buying the stock, we sold it and made our profit!
Condition 7: Stocks near 52 week high

This is another method of selecting stocks for intra day trading. Probably one of the oldest ones.

All you have to do is find a stock which is near its 52 week high, and see which direction the stock is
taking. Then trade accordingly.

If you remember, we discussed about "resistance". A 52 week high in itself is a very strong resistance,
and difficult to cross.

This is the reason why the stock can go near the high, and reverse from there. Or it might try to break
the resistance and move ahead.

This stock can go either way, and you must be prepared for a trade in both the directions.

See the charts below.Its 52 week high is 416.

Stock opened, but fell immediately.

It went exactly to our "E" line. At this point two things are possible.

1. It'll fall again, going lower than the low it made earlier.

2. Break the opening resistance and try to reach new highs.

So what do we do?

We place a "sell" order with a stoploss of our opening price.

Why sell? Because we know its at a resistance and chances of coming down are higher.

It did come down. But we saw it recovering before it touched our "T" line.

We book profits in the sell order. Meaning, we place a buy order and get out of the trade.

Minutes later it broke the stoploss of opening and shot up.

You could have taken a buy trade when it broke stoploss, and placed a buy order there.

Book profits later on the upper side.

However, its never recommended to re-enter the same trade in the same direction.
Screener link:

NSE: http://munafasutra.com/nse/nearYearLow

BSE: http://munafasutra.com/bse/nearYearLow
Condition 8: Stocks near 52 week Low

Exact opposite of 52 week high, but exact same rules apply.

The trade can go in either direction. Simple reason that 52 week low is also a good support point.
However, you have to remember one thing.

Fear is a stronger sentiment than greed.

And if previous day candles are still showing a negative sentiment, then a further downside is possible.

Remember, we discussed about analysing candles to figure out the end of the day sentiment? Do the
same with the previous day candle.

Look at the opening direction of the stock. Wait till it gets near "E" line and then trade in the same
direction.

Look at these charts below. The stock has a 52 week low at 539.

See how it opened lower, and then showed recovery till our "E" line?

This is where we can take a trade, and in the same direction as the opening.

The stock fell from our "E" point and gave us about 11 points, which is about 2% of returns.
Screener link:

NSE: http://munafasutra.com/nse/nearYearLow

BSE: http://munafasutra.com/bse/nearYearLow
Condition 9 and 10: Golden cross & Dead Cross

You have already learnt about these in the Moving averages section.

You already know the direction of the stock once one of these crosses are formed.

In intra day however, the stock might give a contra movement.

Use the "E" line to decide an entry point, and trade according to the movement of the opening.

Screener links:

NSE Golden cross: http://munafasutra.com/nse/intraDayGoldenCross

BSE Golden cross: http://munafasutra.com/bse/intraDayGoldenCross

NSE dead cross: http://munafasutra.com/nse/intraDayDeadCross

BSE dead cross: http://munafasutra.com/bse/intraDayDeadCross

All these 4 screeners are based on previous day closing data, so they can used for positional trades as
well.

Condition 11, 12, 13, and 14:

These are all very similar so its better to discuss them simultaneously.

11. Volume Up, Price up.

Price expected to move up further, Direction of trade would be Buy first, sell later.
12. Volume Up, price down

Price expected to fall further. Direction of trade could be Sell first, buy later.

13. OI UP, Price Up.

OI is short for "Open Interest"

Effect of an increasing OI is the same as increasing volumes.

So if OI is increasing, and price is rising too, then price is expected to move up further.

Do you see the similarity of OI with volume & price relationship?

Direction of trade could be Buy first, Sell later.

14. OI increasing, but price going down

Same as Volume up, price down.

Price is expected to come down further.

Direction of trade could be Sell first, buy later.

Now look at these charts below.

Allahadabad bank was selected based on increasing volumes and increasing price.

Cholamandalam was selected based on OI increasing and price falling.

In Allahadabad bank, notice how price suddenly moved up at opening, and came back exactly to our "E"
line.

Then it stayed there for almost the rest of the day with small advances.

Only for just one hour, it went up, to the "T" line.

We could have bought at the "E" line, and sold at the "T" line.

And this is a perfect example of the rule: Don't be greedy in intraday.

If you would have waited at the "T" line for the stock to move up more, you'd have made a huge loss.
Because within 45 minutes to an hour, the stock fell and went below the "E" line...

This is why its important to follow those rules strictly in intraday trading.

When working in intraday, always remember that "major" actions don't happen all day long.

It happens quickly, and settles quickly. This little quick window is all you have.

Screener links:

Volume up & price up:

http://munafasutra.com/nse/intraDayVolumePriceUp

http://munafasutra.com/bse/intraDayVolumePriceUp

Volume up & price down:

http://munafasutra.com/nse/intraDayVolumePriceDown

http://munafasutra.com/bse/intraDayVolumePriceDown

OI up & price UP:

http://munafasutra.com/nse/intraDayUpOI

http://munafasutra.com/bse/intraDayUpOI

OI up & price down:

http://munafasutra.com/nse/intraDayDownOI

http://munafasutra.com/bse/intraDayDownOI
In these next charts of Cholamandalam, we expected a fall in price because Open Interest was increasing
and price was decreasing.

We prepared our trade for a sell first, and a buy later.

Look at the charts now.

Opened and fell immediately. What do we know about such stocks?

Right, some recovery will come. It did.

Went very close to our "E" line.

This is our quick entry window.

We place a "sell" order here.

Then during the day, the stock never recovered.

Kept falling. Went below our "T" line.

I have a question for you here.

What are these "E" and "T" lines?

Aren't these lines working as support and resistance levels?

Every time the stock reaches the "E" line, the stock reverses its direction.

And when it breaks the "E" line, it falls too much. Like we saw in Allahabad bank charts above.

This is what we know about "Support", don't we?

Remember those 4 rules of trading?

Similarly, when it reaches "T" line, it reverses again. Like a resistance.

But when it breaks the "T" line, it goes further a lot.

Exactly what a stock does when it breaks a resistance line, isn't it?

The 4th rule.

And doesn't matter which method we use for selecting the stock, this is exactly what is happening, isn't
it?

Check the charts of below CholaMandalam below, and then read the 4 golden rules again and again.
Until you remember them like your name.
Every technical analysis method you use, every method you use to select stocks, they are all doing the
same thing. They are all marking Support & Resistance points. That is all you have to do too!!!

A list of all the screeners is here:

http://munafasutra.com/nse/intraDayTrading/

http://munafasutra.com/bse/intraDayTrading/
I've promised you 2 proven methods that work in both bull and bear markets. Here's the second one &
an additional intra day trading method.

Let's look at the intra day trading method first. Please note that this in addition to the 14 mentioned
previously.

The difference between this method and 14 others is that all those 14 methods can only be traded once
in a day. This is because they either require tracking opening price, or day highs, or lows etc.

This method on the other hand depends totally on the current candle formation, or a run up in the last
10-15 minutes.

Additional Intra Day Trading Method

Just like the other methods, this one is also very simple.

However, remember that when using this method, you cannot hold the stock for a long time like you did
in those other methods.

You need to get in quickly, and also come out quickly. If you have a profit of one percent, or two
percent, book your profit and move on to another stock.

Don't hold the position for too long either. Hold it for 15-20 minutes, or 30 minutes at the maximum.

And the most important part, follow the stoploss strictly.

If the stoploss is triggered, then the move you expected is not going to happen. Let it go, book your loss,
and move on to another stock where you can make a profit. If you do not book your loss, you will make
a bigger loss.

All you need to do is find a stock that was quite until now, but suddenly gave up a upmove

That's right. This is that simple. However, the problem is "how do you track 2000 stocks for a upmove"
and do it every 15 minutes?
To make things easier for you, we developed a scanner at www.BullKhan.com which does exactly this.

The scanner is called "30 Minute Trading Scanner."

1. It scans the market every 10 minutes

2. Finds stocks that gave a sudden upmove in the last 10 minutes, or made a reversal candle formation.

3. Calculates possible stoploss levels and expected targets, and shows you the list.

Note, the scanner scans stocks you can SHORT, and also stocks where you can go LONG in!

All the stocks it tracks are listed in Futures and Options, which means that instead of taking a position in
cash, you can take a position in FnO segment and multiply your profits!

If you read the FnO section of this book, then by now you know that in FnO segment you can trade in a
much bigger amount of shares in the same amount of money.

So if you could trade in 100 shares of stock XYZ in cash segment using 10,000 bucks, then in FnO
segment, you'd probably be able to trade in 1000 shares, or even 10,000 shares of the same stock, with
the same amount of money i.e 10,000 bucks...

Plus you also pay less brokerage percentage in FnO compared to cash. Generally its a flat brokerage
structure in FnO. Changes from from broker to broker...

If you are using this scanner, I'd suggest you start trading in FnO segment, and even better go with
options.

For example, if the scanner showed you 2 stocks you can go LONG in, then instead of buying them in
cash, you just buy a CE (CALL option) of the same stock, with a strike price which is nearest to the
current price.
Likewise, if it showed you 5 stocks you can go SHORT in, then you can buy a PE (PUT option) of the stock
with a strike price which is nearest to the current price of the stock.

When buying a PE, go with the one which is just below the current price.

When buying a CE, go with the one which is just above the current price.

If this is difficult to understand, go with simple FUTURES. No need to select a strike price or anything.
Just a simple BUY or SELL order in FUTURES instead of a BUY or SELL in equity cash segment. Really
simple.

The only difference between trading in FUTURES and trading in EQUITY CASH is the amount of stocks
you'll trade in. In CASH you might spend 10,000 rupees to buy 100 stocks. In FUTURES, you will spend
the same amount to buy 1000 stocks, and the best part, your profits are calculated on 1000 stocks!

You'll be able to make 10 times more profit , with the same trade, using the same investment money!

Go to www.BullKhan.com and subscribe to the "30 Minute Trading Scanner" to start using it.

The link to the scanner is in your dashboard.

Process of subscription can be found here:

http://www.BullKhan.com/post/all

Disclaimer: I personally use this scanner for day trading myself, and your profits or losses will depend on
your personal trading skills. The scanner is totally automated and is not an advice of investment.
 Proven FnO Strategy 2:

Now lets take a look at the second FnO strategy that is almost certain to give good profits!

If you look at the strategy number one, it requires you to buy the same quantity of equity as the LOT
size. This could get really costly.

Like in our example above, if we had to buy 7000 shares of ASHOKLEY in equity at 85 rupees per share,
we'd need more than 500,000 (5 lakh) rupees just to initiate this trade.

You might not have that kind of money. So what do you do?

Here's the solution!

You can choose to use this second strategy which does not require that huge amount of capital to
initiate the trade. This strategy does not involve selling options, so we do not need large sums of money
to cover our option.

Here we are simply buyers of options.

Requirements for Strategy 2:

1. Enough money to buy two options

Depending on the premium of the options, this would probably be less than 10,000 rupees per option. A
total of less than 20,000 rupees.

2. A stock that is either expected to rise too much, or fall too much

Although the strategy will give profit in either direction, but the amount of profit will depend on
volatility of the stock price.

The higher the volatility, he better.

3. Time to take the trade should be close to expiry.

The idea here is to keep our total premium to minimum, as low as possible. But also as close to spot
price as possible.

But remember, don't trade too close to the expiry. Like avoid trading in the same week of expiry using
this strategy.

Points to Remember:

Remember these two key points.

1. Keep the total premium as low as possible.

2. Make sure that you trade in a stock that is about to show a big move.

Method of selecting such stocks are in the Munafa Stock market training material. You are probably
reading the 300 page material itself, or if you are not, then you can download it here:

http://www.MunafaSutra.com/page/ebook
You can use the scanner of "30 Minute Trade" at

http://www.BullKhan.com/post/all

to find stocks that are about to show a big move.

There are 2 strategies you can use to profit in such stocks. Although both strategies are similar,, the
difference is the strike prices you will choose.

In a minute about why will we select different strike prices.

The names of these strategies are:

1. Long Straddle

2. Long Strangle

If you've been trading in stock markets for a while, you are probably already familiar with these names.

This material was written for both novice and advanced stock market traders, so I had to include these
for the novice traders.

Here's how it works:

Step 1: You buy an ATM CALL or an OTM Call as close to the SPOT price as possible.

Now remember, this is an ATM/OTM CALL. Meaning there is no "real value" in the premium. There is
only "time value" in it. The real value is either zero, or extremely low.

Step 2: Buy an ATM PUT or OTM PUT, again as close to the SPOT price as possible.
Again, remember, this is an ATM/OTM PUT. Meaning there is no "real value" in the premium. There is
only "time value" in it. The real value is either zero, or extremely low.

Because we are initiating this trade close to expiry, a week before expiry, so even the time value is
extremely low. Generally premium of such ATM options would be between 2-10 rupees only.

This method is called a straddle.

Please note that the strike prices are very close to each other, generally the same strike price for both
PUT and CALL is selected.

In case of a strangle, we will select different strike prices. In a minute about that.

If you are confused at this point, or you are thinking what is ATM, what is OTM, then I strongly suggest
that you turn the pages and read the CALL and PUT sections again. To work in FnO segment you need to
remember these things like your name. No second thinking.

Here's what we are trying to do in our strategy. We know that the stock is going to show a lot of
volatility. Meaning its either going to fall too much, or its going to rise too much. This could be because
of various reasons like:

1. Bad or Good results

2. Bad or Good news for the sector

3. Is at a strong support or resistance

4. Is making a reversal candle on charts after touching a support or resistance.

5. There has been a sudden jump in Open Interest.

Reason could be anything. Doesn't matter. All we know is that there is going to be a sharp movement in
the stock prices.

And that is what we are trying to benefit from, in "either" direction.

I personally use the scanner in "30 Minute Trade" at:

www.BullKhan.com/post/all

to find such stocks.

Below is a real working example of this strategy with SUNPHARMA stock, but understand the concept
first.

We bought our ATM CALL at a low price. Say 3 rupees for example.

We bought our ATM PUT at a low premium. Say 7 rupees for example.

Total we have spent is just 10 rupees to get in the trade, and our STRIKE prices are very close to the
SPOT price. Generally, the strike price will be the same for both the options.

Sometimes the SPOT price will be in between the two strikes you chose.

Say for example, the stock might be trading at 102 points.

Then your STRIKE for CALL could be 105

and your STRIKE for PUT could be 100

At this point, if there is a sharp movement in the stock price, say 5%-6% then one of these options will
become an ITM option.
Suddenly the premium of that ITM option will shoot up. Why? Because all that 5%-6% value got added
in the premium. This is where we square off our position and get out of the trade.

Lets see this with a real example of SUNPHARMA stock, 25th MAY expiry, 2017.

Look at the price table below. These are real option prices of SUNPHARMA taken from

www.MunafaSutra.com options section.

Remember expiry is at 25th May, and we are taking the trade 2-3 days before it so that our premium
cost is very low because of "no real value", and "low time value." Lets say on 22nd May. Okay?

Remember & understand this point very carefully.

Our first job is to make sure that the premiums are very low.

If you use this strategy on very high premiums, then its almost sure that the strategy will give you a loss.

Why? Because although one side will get into profit, but the decay in the other side will be so large that
it'll eat up your profits of the profit making side.

However, when premiums are low, the maximum loss the loss making side will make is a total erosion of
the "small" premium. Premium cannot go below zero.

A premium of 100 can fall down to 20. But a premium of 3 rupees can fall down to maximum where?
Zero. Not less than that.

In case of a 100 rupee premium falling to 20, you made a loss of 80 points. But in case of premium of 3
rupee falling to zero, you made a loss of just 3 rupees, isn't it?

This 3 rupees is all you have to cover on the profit making side.

Now look at this premium price table of SUNPHARMA stock for a real time example:
When you'll check Option prices on MunafaSutra.com it automatically shows you OTM and ITM options
separately like in the first image above.

If SPOT is 640.15, the STRIKE nearest is the one just below that is ATM PUT. In this case strike of 640. The
cost of which is 7.10 rupees

Thats a really close STRIKE price, isn't it?

The CALL option of the same strike price is at 6.95 rupees. That is the strike of 640.

So the total we spend to buy both these options is: 6.95 + 7.10 = 14.05 rupees only

Well it'll actually be in thousands like 14,050 rupees depending on LOT size...

This was the time when SUNPHARMA's results were expected, and they were expected to be poor.

Based on this we knew that SUNPHARMA will show a sharp downside, and our PUT will become ITM.
But as nothing is guaranteed in stock markets, so we took an opposite trade as well just to secure
ourselves.

The results were not yet declared, but see how the stock fell in the next 2-3 days.

It went down to 614, then to 603, and finally expired at 591 rupees.

That is about 8%-9% down from our PUT strike price. And all this value got added in the premium of the
PUT.

The PUT option we bought at just 7.10 rupees is now worth 50.10 rupees!!! Here's the Premium image
again:
Total we spent to buy both the options was 14 rupees, and we are now getting back 50 rupees for the
trade. A 3 times profit. That's right. Its not 3% profit. Its 3 times. 300 percent!

This method can be applied to almost any stock where you think there is going to be a sharp move,
either up, or down.

You'd ask what if the results were good, and stock went up? Lets check that too. Now we don't have real
numbers for that because that did not happen. So lets say that it went up 50 rupees instead of falling 50
rupees.

In this case your ATM CALL would have shown you a profit of 50 rupees.

Stock went from 640 to 690, and our STRIKE for CALL was 640. 690-640=50.

Our PUT will go waste. We spent only 14 rupees, and we got back 50 rupees. Still 3 times profit!

Why was this trade Successful?

1. We kept our premium cost price very low. Because there was no real value in the options, and time
value was also extremely low, so the total premium we paid was low.

We bought ATM options, so there was no real value.

We bought too close to expiry, so time value was low.

2. We knew that a sharp move is expected in the stock in any direction, and because our STRIKE price is
very close to SPOT, so that little gap will get filled in quickly, and our ATM option will become ITM.

In this case we knew this because of bad results, but reason could be anything else. News about sector,
price rise of products, government policy, reversal candles on charts, support or resistance level reversal
or breakout, sudden increase in open interest, or just about anything else... Doesn't matter what the
reason is. All we need is a sharp move.

3. We were able to book our profits in time, and we did not get greedy.

This is the most important thing. May be you did not wait for 591 levels. May be you booked profits at
603. Don't get greedy.

Remember, whenever there is a sharp move in a stock, there is a high chance that it'll reverse quickly. So
don't get greedy, and book profits when you have a chance.

Lets see one more example. This time on the upside. Same time Period, same expiry. Different stock.

INFY: Infosys Ltd.

SPOT price was 961.45 on 22nd May, 2017

Nearest Strike is 960

Look at the price premium table below of INFY.

This too is taken from MunafaSutra.com

CALL of strike 960 is at 8.95 rupees

PUT of strike 960 is at 6.05 rupees

Total = 8.95 + 6.05 = 15 rupees approx

At expiry on 25th May, the total of both these options was:

20.95 + 0.95 = 22 rupees approx

Still a 50% profit!

So far we saw stocks with an ATM option. Meaning the STRIKE was extremely close to the SPOT

Now lets take a look with some OTM options.

Remember, that even in case of OTM options, we will not go very far away from our SPOT price.

The method you learned till now is called STRADDLE.

This method below is called STRANGLE.

The only difference between the two methods is that instead of selecting at-the-money strike prices, we
will select an out-the-money strike price option.

Our primary intention is not to make huge profits.

Our primary intention is, "not to get stuck in loss".

Read those 2 lines again. 100 times. Until they are stuck in your head like a poster.
We are not looking for very huge profits.

We are looking for consistent profits.

We are looking to get out quickly from our positions

This example below is of AUROPHARMA stock, and uses OTM options.

Look at the price table of AUROPHARMA:

Notice the price on 23 August, 2017.

The stock opened at 697, and closed at 698

During this entire day, we had enough time to enter into new positions.

The strike prices we choose:

STRIKE for CALL: 700

STRIKE for PUT: 680

As you can see, both of those are OTM options. Stock is near 690, and our STRIKE prices are 10 points
away on both sides.

Premium we paid for these options is as follows:

680 PUT: 5.95

700 CALL: 14.95

You can select a strike of 720 as well.

Look at the price of both these options on the very next day i.e on 24 August, 2017

700 CALL: 34.65

This has 20 points added in it.

We bought at: 14.95

680 PUT: 0.85

This has 5 points taken away from it.

We bought at: 5.95

In just one day, we made a profit of 15 points, with a single stock!

We invested close to 20 rupees, and we got our 20 rupees back, plus 15 rupees on top of it, in a single
day!

That is a return of 75% on our investment in a single day.

LOT size of AUROPHARMA is 800. So if we traded in a single LOT, then we made a profit of 800 x 15 =
12,000/-

And if you traded in 2 LOTS, then 24,000/- and keeps increasing as you increase the number of LOTS!

Warning about this strategy:

Just like anything else, nothing is 100% guaranteed in stock markets. You can make a loss in this strategy
as well. Lets see when:

1. Trying to keep your premium very low, you selected STRIKES that were far away from SPOT
The gap never got filled, and you made a loss on both sides. In case of SUNPHARMA, suppose if you
would have bought a PUT of STRIKE 580 instead of 640? The stock expired at 591, and both the options
became zero at expiry...

Likewise, in case of AUROPHARMA, if you selected STRIKES of 740, and 640, then although you are not
making a loss, but your profit has reduced significantly.

STRIKE 740 CALL: bought at 3.35

Sold at 7.45

Profit in this option is 4 points

STRIKE 640 PUT: Bought at 1.50

Sold at 0.50

Loss in this option is 1 point

Total Returns = Profit - Loss

4 - 1 = 3 points of total profit

which is very less compared to the 15 point profit we made if we selected strikes of 700 and 680

2. The sharp move was not as much as you expected it to be.

Lets say the stock expired at near about the same strike price where you had the options. Your return
will be minimum in this case.

This is why it is important that the stock you select should be a stock that is expecting a very big move.
 Most Important Rule:

This literally is the most important rule when using this strategy.

The stock you select should be a stock that is expecting a big move.

And second most important rule is that in case of a STRANGLE, the strike prices should not be very very
far away.

Although some distance is required, still not too much.

Like in case of NIFTY, if you select a strike price which is 1000 points away, and you choose current
month expiry, then take it for granted that you are throwing your money away...

There could be other reasons too for loss. But if you are careful, you can still minimize your loss. That is
the whole point when you work in stock markets.
 Remember this in stock markets

1. Keep loss to minimum

2. Maximize the profit

3. Always calculate your loss before you enter in the trade.

In the SUNPHARMA or INFY case above, the maximum loss we could have made is about 15,000 rupees
in each example. The total premium we paid.

The risk to reward was in our favour. We took the trade. And if we saw a loss in the trade, we could have
squared off the trade at anytime we wanted, thus minimizing our loss.

Stock markets is all about calculating your Risk To Reward Ratio.

Nobody can predict markets except GOD. And we are not GOD. The best we can do is calculate our Risk
Reward Ratio and enter into trades where Rewards are greater than the Risk involved.
 Key points to Remember

As a trader, you must remember these points.

1. Never carry a loss position over a weekend.

Sometimes traders tend to hold on to a loss making position only to find that the loss has further
widened.

This is why you should make a rule for yourself, about holding a loss making position.

Sometimes a stock will reverse after you sold it and cut your losses, but situations like these are rare.

In most of the cases, the stock will fall further, and you won't regret cutting your loss.

2. Avoid carrying a loss position for more than 2-3 days

This could be an alternate rule to the above one.

The idea being the same i.e to minimize your loss.

3. Look for a weekly, monthly, or an yearly range breakout and trade in that direction

When stocks come out of a range, they tend to pick a direction.

The longer the time period you are watching, the stronger the move will be.

Say for example, if a stock is stuck between 100 and 110 for a week now, and suddenly it went upto 115,
then there are high chances that it'll move in this direction for a while.

Likewise you can watch a monthly range of a stock.

Or even an yearly range.

Some traders use a multiple year range i.e 2-3 years.

Of course, the longer the time period you'll watch, the wider the range would be.

So if you were watching a monthly time period, then the stock could be moving within a range of 90 and
120

And with an yearly time period, it could be moving within a range of 60 and 120

A general rule of thumb is that when a stock breaks its range, you can expect a move of HighRange
minus the LowRange added or subtracted from the price.

Like in our yearly range example, the stock was moving within a range of 60 and 120.

So the difference is 120 - 60 = 60

Now if the stock breaks the upper side of the range, and goes to 130, then another 50-60 points of move
can easily be expected in it.

Likewise, if it breaks the lower range, then another 50 points of move can be expected in it.

But remember, stocks cannot go to zero...

There's a good chance that the stock will take a support near 20-30 points in this case.

These are called breakouts.

Various people have given various names to this, but the basic idea is the same.

Look for a stock which is stuck inside a range, and wait for it to break out of that range.

4. Don't book profits just because you have some. Have a reason for booking profits

The second part of stock market trading is maximising your profits.

Generally people book profits whenever they have some, and they get out of the stock. Only to find out
later that the stock has literally doubled from the level where they sold it off.
They do it in fear of losses.

But that is the purpose of this book. To give you confidence and remove fear and greed from your
trading style, isn't it?

So how do you know if its time to book profits?

I already gave you a method in the beginning of this book.

You can wait for a certain stoploss level. Like if a stock fell and broke its previous week's closing or low.

Or you can wait until a trend reversal is confirmed.

Below are conditions I use to confirm trends and also to confirm trend reversals.

Trend identification & Reversals:

Uptrend identified:

20Day moving average is above 50Day moving average

50Day moving average is moving upwards

Price is above 50Day moving average

If price is above 20Day moving average, then the uptrend is strong

Condition 2: Uptrend identified:

The stock prices are making higher HIGHS and higher LOWS .

This simply means that when a stock rallies, it breaks the previous high point it made in upward
direction

Likewise, when a correction came in, it did not fall as much as it did the last time.

Downtrend identified:

20Day moving average is below 50Day moving average

50Day moving average is coming down

Price is below 50Day moving average

If price is below 20Day moving average, then the downtrend is strong

Condition 2: Downtrend identified:

The stock is making lower HIGHS and lower LOWS

This simply means that when a stock is moving upwards, it is not able to break its previous peak level

Similarly, when its falling, its going deeper and deeper.

 Trend reversals:

High volumes, but very less price change

Trend continuation:

High volumes and high price move

Low volumes, and small price moves

Trend Reversals:

Just before a trend is about to shift, price and volumes start giving you signs of it.

You'll see high volumes in the stock, but the price won't seem to be going anywhere.

If a stock has been in uptrend, and moves like this start happening, then it should be used a warning
signal.

Not an exit signal, but a warning.

Generally, the price will get stuck inside a small range. Sometimes this range can be as small as 5% up or
down, and other times it can be 20% up/down or more.

In a situation like this, you will start seeing "Triangular" chart patterns.

Remember, triangle chart patterns are not signals of a direction (bullish or bearish)

They are simply suggesting that a breakout is about to happen. The direction is still unknown.
These chart patterns have not been discussed in the 9 major chart patterns because they generate a lot
of false signals.

For example, you might identify a "ascending triangle pattern", which by its definition is suggesting a
breakout in the upward direction. But for some reason, when the breakout happened, it happened in
the opposite direction, meaning downward.

If you were constantly buying this stock in hopes that there is an ascending triangle pattern forming,
then you could lose a lot of money if it gives a breakout in downward direction.

Generally, the breakouts that happen after triangle patterns are strong and continue for a while.

Similarly, a descending triangle pattern is suggesting that a downward breakout can happen, but you
cannot be sure until it really happens.

This is the most important point when trading on triangle patterns.

Wait for a Breakout & then trade

Not before that.

How to draw triangle patterns?

Drawing triangle patterns is fairly simple, and any software or website that allows you to draw trend
lines is good enough.

Both MunafaSutra.com and BullKhan.com allow you to draw trend lines.

Step1: Join 2 HIGH peaks to draw a straight line between them.

Step 2: Join 2 LOW points to draw a straight line between them.

If the price is squeezed between these 2 lines you just drew, then there is a triangle pattern on the
chart.
Another important point here is the "duration" of the chart you are using. These patterns give best
results when you use a long term chart. Like one year, or more.

And when you use a chart of that time frame, then it'll be difficult to find these patterns too.

If you use a smaller time frame chart, like a 3 month chart, you'll find these patterns very easily. But
remember, chances of a false signal are also highly increased

Take a look at the charts below.

First one is a descending triangle pattern. This is formed when 2 low points are more or less equal. But
the difference between 2 high points is quite significant.

Second one is a Symmetrical triangle pattern. Difference between 2 high points is quite significant and
difference between 2 low points is also significant.

Third is ascending triangle pattern which is just reverse of descending triangle. Meaning difference
between 2 low points is significant, but 2 high points are more or less equal.
Did you notice how the descending triangle pattern gave you a false signal?

In a descending triangle pattern, prices are supposed to fall when they come out of the triangle.

Instead they shot up!

This is why when you are trading a triangle pattern, wait for a breakout.

Generally, these patterns are formed when a trend is about to reverse.

That is the reason why I discussed these patterns here and not in the major 9 patterns.

Remember, when trend reversals are to happen, we will also see high volumes, but very little price
change.

Can you guess what kind of candles will be formed when this trend reversal happens?

Think about it for a minute.

There has been high volumes, meaning that the stock traded a lot. It could not have been trading at the
same level for an entire day, can it?

No. Then what happened?

It opened somewhere, went up, or fell, and then came back near its opening point, isn't it?

Don't you think that this will make one of the following candles in this case?

1. Doji. Small body, but long high wicks and long low wicks.

2. Hammer. Long low wick, and a small body

3. Inverted Hammer. Long high wick and small body

And what do you know about all these three types of candles?

There is undecisiveness in the stock, and a reversal might be in the making, isn't it?

As in the case of all these candles, you should wait to see the direction the stock picked up in the next
trading session.

You could either be watching weekly candles, monthly candles, or even daily candles, but in either case,
wait for a confirmation.

And remember, you are not just interested in the candle. You are interested in a candle with high
volumes. Volumes higher than average volumes.

When you look at "All in One" charts on MunafaSutra.com , you'll notice that some candles are a lot
thicker than other surrounding candles.

These thick candles represent high volumes.

The thicker the candle, the better.

Volume is the key difference between Trend reversal and Trend continuation.

Trend Continuation
Sometimes you'll notice that the stock prices are not going anywhere, and you might think that the
trend might be reversing.

This is not true.

After a long run up, the stock is just waiting, or showing tiney corrections. Thats all.

It might even appear that prices are falling bit by bit.

This is very normal after a breakout candle is formed.

Look at these charts below.

Look at candle sticks.

Notice how after a long green thick candle, we saw prices falling, but with thin candles, and low
volumes.

Notice when red candles were thick, they were not a doji or a hammer.

All the small price move candles are thin and have very low volumes.

And then, a breakout, with high volumes!

 Remember this point. Volume is key.

Charts are foot prints of masses.

And if there is no volume, masses were not there.

I summarized these key points so you won't have to scroll through the entire material every now and
then. Use these as a checklist.

But Remember One Thing

If you wish to make a consistent income from stock markets, then FnO is better because of the
following:

1. FnO allows you to hedge your position and lets you make profit both ways. In fall or in Rise.
2. FnO allows you to take benefit of volatility in a stock prices.

On the other hand,

1. Equity allows profitting in just one direction. In a rise.

2. Volatility in Equity increases risk and is not favourable.

There is no need to fear FnO. Its not scary at all.

On the other hand, it gives you a security blanket in case the stock reverses, doesn't it?

There is only one thing to remember when trading in FnO.

As someone who has less experience in FnO, avoid "selling" options.

Stick to buying options and squaring off your options for a while.

If you start writing and selling options without even understanding the basics properly, you are
guaranteed to lose all your money.

With that said, now lets move to basics of Fundamental Analysis.

 Basics of Fundamental Analysis.

1. What is fundamental analysis

2. Which documents & financial statements are used in fundamental analysis

3. How to analyse those financial statements

A major part of fundamental analysis involves diving into financial documents of a company. Looking
into revenue numbers, assets, liabilities, earnings etc. This is also known as quantitative analysis.

Here you'll learn how to read balance sheets, income statements, cash flow statements and the like.

What is Fundamental Analysis?

Fundamental analysis is a method to determine a company's real value based on analysis of the factors
that affect the company's real business.

You'll try to find answers to questions like:

1. Is the company profitable?

2. Is the company in a strong position to sustain its business in the future?

3. Is the company able to repay its debts, loans?

These are just a few questions, but it all comes down to one single question:
Is it a good company to invest in?

There are two parts of fundamental analysis. These are:

1. Quantitative

2. Qualitative

1. Quantity: As the name itself suggests its a analysis of numbers. Numbers of profit, loss, cash flow etc.
Basically anything that can be expressed as numbers.

2. Quality: This includes a measurement of factors that cannot be expressed in numbers like brand
value, quality of board members. Their reputation, character etc.

For example, you can look at balance sheets of Infosys to determine its value, but can you put a number
on Narayan Murthy's reputation in the board of Infosys?

The basis of fundamental analysis is an assumption that the price of a company's share listed in stock
market is not reflecting its real value.

Makes sense. Why would you perform any kind of analysis if the price in the share market is the real
value?

This real value is called Intrinsic value.

When performing fundamental analysis, all we are trying to do is find companies which have a higher
intrinsic value than its price in stock market.

For example, if stock of TCS is trading at 2300, and we got an intrinsic value of 2000 then we know that
the stock is already trading higher than it should be.

Likewise, if we find that TCS is trading at 2300, but its intrinsic value is 2400, then we know that it still
has 600 points of worth left in it!
Here is the real catch. We found intrinsic value, but we know for sure that prices of this share have
never reflected this value in the stock market. We do not want companies like these. Why?

Because if intrinsic value is higher, but shares of the company have never traded at that value, then
there might be something else wrong. Something that we did not consider.

So we need companies which have a higher intrinsic value, and have traded at those levels in the past,
but are now trading at a "discounted" price.

We know that the market has realized the "real" value of the stock, but right now the stock is trading
way below those levels. And this could be because of various reasons like for example, an overall slow
down of the economy, a bad quarter or just about anything else. Anything temporary.

This is the company we want to pick and invest in.

However, its almost impossible to just go through balance sheet after balance sheet of each company
listed in stock markets. There are about 1600 companies listed in NSE, and about 3000 in BSE. Can you
check balance sheets of each of those? No.

So we first filter out some of the bad ones out.

So what do we do?

Do you remember I told you to make a watch list of a few 10-20 stocks? Your close friends?

Do you remember the criteria we used to select those?

These are the companies we will evaluate.

We already know that these are all good companies. Now all we have to do is check some basics and
find their intrinsic value. Check if prices are below those levels. Check if prices traded close to those
"real" levels in the past. And if any of these are at a "discounted" price now, we get in!

One thing I'd like to point out here. This method is not full proof. Why?

1. We don't know whether our estimate of intrinsic value is accurate.

Its quite possible we neglected some numbers. Its quite possible we do not have real numbers in our
hands to work in the first place.

We don't know if the company released correct numbers, or they manipulated something. Remember
Satyam Computers?

2. We don't know how long it'll take for the stock market to realize the real value and move prices back
to those levels.

This is one reason why we use "Technical analysis." To determine if this is the correct time to get in.

We don't want to invest and sit for ages and get a 10% return on our investment, do we?

We could have as well put our money in a fixed deposit if we wanted to wait for this long, for this small a
return...

This is the very first aim of any investment i.e beat the returns of bank deposits.

Think about it.

If your investment is not even giving you a little more returns than a bank deposit, then:

1. You risked your money.

2. You got lower returns than a "safer" alternative.

What kind of investment is that?

This is the myth of fundamental analysis. That it gives returns in a longer term, and "not" in a shorter
term.

Doesn't matter which method you used to decide the company, technical or fundamental, your goal is
to get higher returns than a bank deposit.
Reading this book, you've already found out different methods of technical analysis, so I'm not going to
repeat those here. For example, you saw in the MACD section how we found that INFY is now trading at
really bad evaluations. In the same section we also found out the time when it was about to reverse and
move back up. And we didn't even look at the balance sheet of INFY, did we? That is the power of
Technical Analysis!

This is the reason why there has always been an ongoing dispute about which is better. Technical
analysis, or Fundamental analysis.

My answer is:

They are both equally important.

You need fundamentals to find good companies.

You need technicals to find good entry and exit points in these good companies.

You cannot just invest your money and go to sleep. Absolutely not.

Now that we have settled the dispute, lets move on to our analysis using fundamentals.

Qualitative factors:

I'll discuss Qualitative factors first, but I won't be going in too much depth. This section is purely theory
and can get really boring for some.

By definition, as we already know that qualitative factors cannot be put into numbers, and do not really
change the intrinsic value, but still, these cannot be neglected.
Here are the basic qualitative factors about a company that you should not ignore in your fundamental
analysis.

1. Business model:

This is probably the most important of all qualitative factors.

This is what decides what the company does.

This decides how the company is making money.

This is also what decides "how long the company will stay."

Think about it. There are two companies:

Company 1: Sells e-cards

Company two: Sells consumer goods like soap, oil, toothpaste etc.

Which of the two do you think is here to stay? Which has a stronger business model?

The second one, isn't it?

How dependable is an "e-card" selling business, compared to another business which sells day-to-day in
use products?

This was an easy example. Lets take another one. Something which is more difficult to understand.

Company one: A chain of hotels

Company two: A chain of hotels

Huh what? That is the same thing, isn't it? Sure looks like that, but wait.

What if I tell you that company 2 is merely giving out " franchisees"?
Company 2 in itself doesn't really have hotels of their own. They depend on their income coming from
their franchisees. Once a few of these franchisees collapse, the entire company comes down. Why?
Because they cannot compensate the loss with profits of their own.

They don't have profits of their own. All the profits were coming from these smaller franchisees...

I'll give you a nice real world example of this.

The word PatanJali rings a bell?

They have very few manufacturing units of their own. Most of their business is based on buying
products from local manufacturers, labelling them as their own, and dumping it in the market.

Likewise, the shops you see are also based on this "franchisee" model.

A major portion of Patanjali's income comes from lakhs of rupees they charge people to open a shop in
the name of Patanjali.

A major portion of their income is not coming from direct sale of their products. Its coming from the
money given to them by their franchisees...

Fortunately, its not listed in stock markets...

But wait, there was another company that was listed in stock markets, and followed a similar model.

Remember Reliance Communication?

When they launched the phone, they charged a handsome amount to their franchisees. It was not in
lakhs like patanjali, but still a major portion of their income in the beginning years came from these
franchisees. Not the sale of the real product itself.

The stock was a favorite of traders and investors just a few 10 years back. It traded at levels above 800
points!

But only until the house of cards started to come down. New franchisees stopped coming in. Income
started going down, and stock market never shows any remorse. Its trading at levels close to 30 points
as of writing this...

By the way, in just about 2 years, the company has declared bankrupcy, and its stock is at rupees 2 per
share now...
You can find out about the business model of any company by going to their website, and reading the
first few lines of the 10-K filing. More about 10-K filing is below, but in short, a 10-K filing is the annual
financial reports submitted by companies.

Remember how in the beginning of this book I told you to make a list of companies you know about?
Sounded like a waste of time then, didn't it? Is it a waste of time now?

All you had to do was write down names of companies, products of which are used much. Used by you,
used by your friends, people around you.

And you thought what good is that going to do, didn't you?

But if you'd have done that, then right now you'd have had a list of companies which are based on a
"solid direct sales" model!

They don't depend on someone else to promote, or sell their product. They depend on their own ability,
quality of their product, trust in their product. They depend on forces of demand and supply of the
market.

As long as the demand for their product stays in the market, the company stays.

This brings me to the second factor in "qualitative analysis"

2. Competitive advantage:

A company's long term growth depends majorly on how good it is in keeping its competition at bay.

How difficult or easy it is for its competitors to break the customers of this company.

Companies that have sustained long have managed to break their competition. The method they used
could be different. Could be by building a brand, by modifying their product a little bit, or just about
anything else.

Take Colgate for example.

How many toothpaste companies came and went in the market? Everytime someone came up with a
new toothpaste, colgate matched their product with its own new product.

Different companies came up with anti-sensitive toothpastes, and colgate launched its own product of a
toothpaste that does just that. They didn't let another company snatch their market share.

Coca Cola made a brand for themselves by hitting the core psychology of their customer. "Thanda
matlab coca cola..."

Pepsi branded its product as a drink for celebration.

Each of these companies basically did the same thing, but with a difference.

Whether a company will stay or be washed away by the wave of time depends majorly on this one
factor alone.

Competition will come. But will they be able to overcome it or not?

3. Management:

This is another important factor that decides how the company will perform in the future. Just like a
movement needs a leader, an army needs a general, a country needs a PM, likewise, a company needs a
strong management.

A management that can take decisions in difficult times to bovercome the problem, and bring back life
in the company.

Now as an individual, small investor, you cannot set up a meeting with the management of the
company, but here are a few ways you can still get a glance at what is in store.

Board meetings, and Annual General Meetings (AGM):

Most companies publish a transcript of the entire AGM on their website, and even if they don't, still a
summary is posted.
This is where companies tell about their future growth prospects, what they lacked in, where they
gained an advantage and so on.

Another way is to listen to their interviews on TV channels. Thats right. TV channels are not completely
useless...

Listen to the questions put up by the anchor. Listen if the management gave a clear answer, or did they
beat round the bush. Basically we are trying to find out if the management is clear or vague about the
company's growth.

Management Discussion and Analysis (MD&A), which is found at the beginning of the annual reports, is
supposed to be a clear outlook of the management. A good way is to read this section for a couple years
back as well, along with the most recent one.

Verify if the management really implemented plans, or are they just repeating what they said in the
past...

Ownership:

This information is publically available on websites of Stock exchange boards. If the management is
selling its holding, but blabbing about plans of growth in the media, then it doesn't take a genius to
figure out that something is not the way it should be.

Past performance of the management executives:

All the companies provide a short bio of their top management executives on their websites. Of course,
they won't write anything bad about the executive on their own website, but they do post names of
companies the executive has worked in the past. You can get an idea about the management by
checking out the past performance.

These are a few ways you can get a view about the management of the company. Now returning back to
our qualitative analysis factors.

4. Corporate governance:
These are the basic policies followed by the company. The bylaws, corporate laws and regulations. This
ensures proper checks are in place, making it difficult for someone to conduct illegal or unethical
activities.

This includes:

Transparency & Financial information: The timeliness of releasing financial information, and level of
transparency in the documents.

Rights of stock holders: Companies with good governance provide stock holders a right to vote & ask for
board meetings in case they fear something.

Structure of the board: A board is made of both representatives from within the company, and also
outside directors (Independent directors). The reason behind this is to provide a fair evaluation of the
working of "inside" management, and releasing that information to the stock holders.

5. Industry:

Understanding the overall industry within which a company operates is another important factor of
fundamental analysis.

This includes customers, market share, growth cycles, competition and the like.

Customers: If a company depends too much on a small group of customers for most of its sales and
revenues, then this is not a good sign for the company. The more diverse the customer base, the better.
For example, if the largest customer of company 1 is another company, and one day when this second
company gets a different "supplier", then company1 will be entirely wiped out.

Market share. Its needless to say that a company which has a very high market share is the dominant
company in that industry. MARUTI for example has the highest market share in AUTO industry. Likewise
ICICI Bank enjoys this benefit in the private banking industry.

Although there are benefits to this approach like these companies would be able to sustain through the
test of time, but its also quite possible that a new player might also cause a big dent in this market
share.
Industrywide growth. This is another way of examining a company's future prospects. Is the demand for
the product declining as a whole? For example, there was a time when "audio/video" tape
manufacturers ruled the industry. Then came CDs (Compact Discs), and an entire industry of audio and
video tape manufacturers was wiped out. And now this industry is getting replaced by manufacturers of
pen drives, and other portable storage systems.

Its also important to notice the "scope" of growth. Is it possible that the industry has already reached a
saturation point? Say mobile service providers for example. I remember the time when I was a kid, and
mobile phones made their first appearance in India. Things are very different today, aren't they? The 2-3
service providers are in a constant battle and "invading" each other's territories. If a company has to
grow, it can only do so by snatching another company's market share.

Competition: As mentioned above also, this is a factor that determines how and which companies will
"remain" in the market in the long run. However, when this concept is applied to an industry level, it
becomes a whole new game.

A highly competitive industry leaves very less scope for the companies operating within the industry.
Again, mobile service providers for example. These companies have very less scope of increasing their
prices, which ultimately reflects in their balance sheets.

Government laid Regulations is another factor that can seriously hamper the growth of an entire
industry. PHARMA for example is the highest regulated industry. Millions and millions need to be spent
to get an approval of a new medicine. And cost is just one side of the coin. The delay caused by the
approval process is the other side.

As an investor you should keep these regulation and delays in mind when calculating risk-to-reward on
your investment.

Now that we have discussed all the basic qualitative factors, lets dive deeper and take a look at the
Quantitative factors. Got your oxygen tanks ready? You gonna need those!!!

Quantative Factors:

All the listed companies release their quarterly results which have all the "quantitative" numbers we
need. Here's a brief introduction of the statements we are interested in.
1. Income statements,

2. Cash flow statements,

3. Balance sheets

Balance Sheets:

A balance sheet is a record of assets, liabilities, and equity of the company for a particular duration of
time.

Doesn't matter what duration is used, the two sides of a balance sheet should always balance each
other, hence the name Balance Sheet.

Assets = Liability + Equity (held by share holders)

Assets includes all the property, buildings, machinery, and cash that is owned by the company.

The other side, that is liabilities plus equity, is the total finance used by the company to acquire all the
assets it owns.

Liabilities is the debt (loans etc) that the company has to pay back in future.

Equity is the money that investors gave to the company in exchange for shares.

In case of banks, all the money held by its customers in the savings accounts, fixed deposits accounts etc
are all put under liability.

The bank has to repay all this money back to the customer at a later time in the future.

Income Statement:
If balance sheet is a window in a company's financial performance, an income statement is the door.

It is here that you'll find details of revenues, expenditures, and profit earned for a given duration of
time.

Cash Flow Statements:

If income statements was a door, then cash flow statements is the hall you'll walk in after going through
the door.

This is the total records of a company's cash in-flow and cash out-flow. All that came in. All that went
out.

Accounting tools can manipulate balance sheets, even income statements to some extent, but its very
difficult to manipulate cash statements for the simple reason that you cannot fake cash in your bank
account.

Typically, a cash flow statement is divided intothree parts.

Operating Cash Flow: This is a record of day-to-day inflow and outflow of cash, also called OCF.

Cash From Investing: The cash flow generated as a result of sale and purchase of assets, also called CFI.

Cash From Financing: Cash recieved as a result of a new loan, and cash paid as a result of debt payment
etc, also called CFF.

All these statements can be obtained on websites of stock exchanges.

10-k are the annual reports.

10-q are the quarterly reports.

In a 10-k report you can find a lot of information other than what is mentioned above. It includes a bio
of upper management, details of business model, number of employees, future plans etc.

Along with a 10-k report of the current year, you might also be able to download reports of previous
years. This is useful for comparison of past performance to current performance of the company.

A 10-Q is a smaller form of the 10-K report. Every year a company releases 3 10-Q reports, and a single
10-K report at the end of the year. Note that a fourth 10-Q report is not released because a 10-K report
is released instead of that.

Along with these, an auditor's report is also released along with the 10-K report. Think of this report as
an opinion by an independent audit firm about the other documents released by the company itself.
Note that this is just an "opinion", and not a "certificate" of validity.

Along with all the above, 2 other documents are released by the company. These are statements from
management, and foot notes.

Management statements will include details about future plans, risks etc.

Foot notes release information like dates of repayment of loans dates of other outstanding payments
like renewal of a lease, etc.

Don't skip reading footnotes. Its boring, but sometimes can give you something important.

Numbers in Income Statements:

When results are announced, it is numbers in this report that are most talked about. Numbers like
Earnings, Earnings per share, Revenue, Profit etc.

This report tells you how much money was generated by the company (revenue). How much was spent
(expenses), and how much is left now at the company (profit).
Revenue, also known as total sales, can either be a single large number, or sometimes its divided into
parts depending on the company's business. For example, sales inside the country, sales outside the
country (exports).

An ongoing revenue is better than revenues that spiked the number once in 5 years. For example,
revenues generated as a result of a sale of an asset are temporary revenues. Details of such revenues
will be available in CFI, and CFF.

Expenses:

Just about anything that lead to a payment is under this section. It could be cost of raw material,
advertising cost, salaries & wages etc.

These are divided into two parts:

1. COGS: Cost of goods & services. Cost of raw material etc are put under this heading.

2. SG&A: Selling goods & administrative expenses. Research cost, cost of advertising, salaries & wages,
are all put under this heading.

The difference between the two is that COGS are expenses which are directly responsible for generating
revenues, while SG&A are indirectly related.

Profits:

In its simplest form is just this equation below:

Profits = Revenue - Expenses

Remember this as well for a minute.

Expenses = COGS + SG&A

The Profit section is divided into further sub-sections which help investors better understand the overall
business.

Gross Profit: Revenue - Direct costs

Notice how SG&A expenses are removed from the profit equation?

Based on this we can say that a company that has high gross profit numbers have enough money left for
other expenses like advertising for example.

If a company is constantly posting "falling" gross profits, then it indicates that they are compromising on
their gross margins for some reason. This could be because of rising cost of raw material which the
company is not able to pass on to its customers.

Operating Profit: Revenue - SG&A

This gives us an idea about how fast is the company able to move along with its operational costs.

A recent example would be the lay offs in the IT industry. WIPRO, INFY, and other IT companies
including BPOs are all in the process of laying off a major portion of their employees, and replacing them
with an automated software.

At the end of the day, the reduced expenses of salaries & wages will reflect in an increase of "operating
profit."

A constantly falling operational profit is also an indication that the company is not able to pass on its
increasing SG&A expenses to its customers.

Exactly what is happening with the IT industry of India at the time of writing this.

They are not able to pass on these cost to their customers because of competition, and other global
factors.
NET Profit:

This is the final profit that the company earned. This is Profit minus Taxes.

When you talk about profits, earnings etc, its this number which you are generally talking about.

Needless to say, the higher this number is, the better it is...

Check list of reading income statements:

When looking at INCOME statements, look for the following:

1. Total revenues going up or down? This gives you an idea about total sales.

2. Increasing or decreasing GROSS profit.

3. Increasing or decreasing OPERATIONAL profit.

Moving on to balance sheet now.

BALANCE SHEET:

Balance sheet tells an investor what a company owns, and what a company owes to its lenders.

Equity owned by share holders is the difference between these two.

A balance sheet can give you a clear picture of how much debt the company has to pay, how much cash
it has, profits and net profits of the company over a duration of time.

Three main components of a balance sheet are:

1. Assets

2. Liabilities

3. Equity

Lets see what kind of fundamental information each of those can tell us.

ASSETS:

Assets are of two types. They are Current, and non-current

Current assets include inventory, cash, and recievables. Anything that can be converted into liquidity
within a specified business cycle, one year for example.

For obvious reasons, investors are drawn towards companies which have large sums of cash. However,
there is a downside to this as well. If cash amount lays in a balance sheet for a very long time it raises a
question on management's ability to re-invest the cash for expansion purposes.

Inventory is any finished product that has not yet been sold. A growing inventory number, but a not so
fast growing profit number clearly says that the company is not able to sell its inventory at a rate they
should be. Too much inventory is always a sign of bad fundamentals.

Recievables are funds that the company needs to collect from customers. Note that these funds are not
yet collected. A growing number of recievables is a clear sign of growing cash deficiency at the
company's level.

The sooner the the funds are collected, the better. A delay might result in non-payment, or partial
payment. This is the reason of growing "non-performing-assets" as well.

Non-Current Assets are just about anything else. Property, plant, equipment, also known as PP&E.

This figure doesn't get important until a company decides to sell its non-current assets.
Like assets, LIABILITIES too are of two types, current and non-current.

Current liabilities include payments that the company has to make within a business cycle, one year for
example. This might include payments for raw-material, etc.

Non-current liabilities are payments that are due for a longer time like bank loan repayment etc.

A company with falling liabilities is always good as it represents that the company has enough cash flow
to repay its loans and dues.

An easy way to check if a company has enough cash is by using this formula below:

( Current Assets - Inventory ) / Current Liability

If the number you get is one or higher, then its safe to conclude that the company has enough ability
and has been repaying its short-term liabilities.

Notice the word "short term"

You can further refine the formula by subtracting "recievables" from the equation above.

( Current Assets - Inventory -Recievables ) / Current Liability

This is pretty much the same as:

Cash at hand / current liabilities

gives you the cash figure that is left at the company after paying their short-term debts.

Can you tell why?

Remember, current assets had three things in it, cash, inventory, recievables. Once you remove the
latter two, you are just left with cash, isn't it?

Its very rare to find companies with a good CL ratio specially if the nature of the business is B2B
(business to business), as most of the clients of the company are other businesses which may be paying
their dues on time, or may not be paying.

Let me clarify this with an example.

A bank loans money to a business, say 10 million, 10M.

In the balance sheet of the bank this amount will be reflected under "current assets", and further into
"recievables."

Its outstanding payment, right? The repayment of the loan has not yet been recieved by the bank.

So when we subtract this amount from bank's current assets, all we have is cash that is available to the
bank. Cash they will use to pay "interest" to its account holders, fixed deposit holders etc. That is the
current liability they have, isn't it?

EQUITY too has two parts in it. Okay, this time its not current/non-current.

Its "paid-in capital" and "retained earnings"

Capital is the amount the company recieved when they offered the share to the public.

Retained earnings is what the company held back to reinvest in the business.

The important figure here is retained earnings. Its important to see how the company is reinvesting it.
Are retained earnings and cash held in assets increasing at the same rate?

If yes, then it means that the company is not paying its share holders, and instead piling on cash. Why?
CASH Flow Statements:

This is the statement that shows how much cash came in, and how much cash went out.

The primary difference between a cash flow statement and an income statement is that income
statement reflects the net profit or loss of the business, while cash flow statement is a record of over all
cash related activities.

Another major difference between the two is that money shown in income statements is either recieved
or is yet to be recieved (due). However, the money shown in cash statement is already recieved.

The important figure in cash flow statement is the figure of net cash from operations. This is the real
cash recieved by the company during the financial year.

Cash Flow Statement is divided into 3 parts. Cash flow from Operations, cash flow from Financing, and
cash flow from Investing.

Cash from operations is where you'll find figures that tell you how much cash came in from direct sales
of products and services, and also how much cash was spent buying raw material etc.

This figure might be negative for companies in certain industries in the beginning years. Shipping,
supplier to government, and companies which require large investment in the beginning like telecom for
example.

Cash flow from Investing shows expenditures done by the company on new acquiring new assets, and
even buying businesses. If a company is not reinvesting its cash, then it would shoot up other cash flow
figures, but that growth is not considered sustainable.

Cash flow from Financing is what shows figures related to bebt repayment, payment of dividend, stock
repurchase, or stock sale etc.

This is also where you'll find any new borrowings done by the company.

FCF, Free Cash Flow is what we are interested in here. Calculated as:
FCF = Operating Cash Flow - Capital Expenses

Operating cash flow, as you already know is cash generated as a result of direct sales of products and
services.

Capital expenses are expenses incurred by the company to maintain, or acquire assets

So for example, a company made 10M cash in a year, and they spent 8M in maintaining assets.

Then FCF would be:

10M - 8M = 2M

A good figure here represents that the company has enough cash for other activities, surplus cash.

Now you know how to analyse different financial documents released by companies. Lets cover some
basic Ratios you can use to draw conclusions about the health of a company.

Basic Ratios:

1. Price to Earnings Ratio, also called PE ratio.

You probably already know about this ratio. You have probably even been checking this ratio every now
& then.

Details of PE & EPS were covered earlier, , so am not going to dive deep here.

In a nutshell, this ratio tells an investor how much money he has to spend to make one rupee from the
company.
So if a company has a PE of 20, it means that to earn one rupee from the company, you are spending 20
rupees.

In other words, on your investment of 20 rupees, you are getting a return of one rupee.

So it makes sense if PE of a company is low. It means that for a smaller investment I can make more
money compared to some other company in the same industry.

PE ratio is calculated by diving current share price by EPS.

2. EPS, stands for Earnings Per Share.

When you were reading financial documents, you came across this term, Earnings. This was the total
earnings the company posted for the given duration of time.

When this number of earnings is divided by the total number of tradable shares, you get EPS, and hence
the name, Earnings "Per" Share.

The primary reason for doing this was also discussed in detail in the material. Please refer to that.

Unlike PE, which we wanted to be low, we want EPS to be high. The higher the better.

When you compare EPS of two companies in the same sector, you can conclude two things if EPS is high
for a company.

1. They had very high earnings

2. They had less investment, but still made bigger profits.

Total number of tradable shares is directly proportional to total investment the company raised, isn't it?

3. Debt Equity Ratio

Another ratio you want to be as small as possible. Its calculated by dividing total debts outstanding by
book value of equity.

Total debts will include both short term debts, and long term bebts

Short term debts can be outstanding loans that need to be paid within this financial year, while longer
term loans could be loans due for payment in a couple of years.
4. Return on Equity, ROE, also called the mother of all ratios reflects how much Return was generated on
how much Equity.

Its calculated by taking profits after taxes, subtracting dividends from it, and then dividing this number
by Equity.

For example, if Profit after taxes is 110, and devidend is 10, and equity is 1000, then ROE will be
calculated as follows:

( 100 - 10 ) / 1000 = 100 / 1000 = 0.10

Generally ROE is measured in percentages, so the above will be come 0.10 * 100 = 10%

This means that for every rupee invested, the company is generating a 10% return

Needless to mention, the higher ROE ratio is the better.

5. Quick Ratio, sometimes also called acid test is another way of checking a company's financial health.

This ratio tells you how good a company is at covering its liabilities against its liquid assets.

Calculated as:

( Current Assets - Inventory ) / Current Liabilities

Generally, a higher value of this ratio is considered good.

6. Working Capital Ratio, is another ratio which gives us a preview of a company's health.

Its calculation is relatively simple compared to other ratios:

Current Assets / Current Liabilities

A poin to remember here is that if two companies have similar working capital ratios, and second
company has more cash in their balance sheet, then second company is a better choice because second
company can better manage their short-term liabilities and debts.
Now that you have learnt different ways of comparing two companies that are working in the same
industry, let me now give you an easy way to calculate the intrinsic value.

Intrinsic Value:

Two ways of calculating intrinsic value are popular

1. Dividend Discount Model

This method is extremely complicated, and frankly speaking beyond the scope of this small material.

Large firms that evaluate companies mostly use this method, and charge thousands of dollars from
subscribed members to provide their analysis in the form of a report.

2. PE model:

This method is relativly simpler, and quick. This is what I'll cover here.

Now remember, we are not comparing PE of two companies here. We are trying to find the intrinsic
value of a stock using PE ratio.

For PE & EPS analysis comparison of companies, please refer to the earlier section of MunafaSutra Stock
Market Training Material.

All the following are covered in detail there:

1. How to calculate EPS, and why EPS. Why not something else.

2. Calculating PE from EPS.

3. Mistakes to avoid when comparing two companies based on EPS.

Here we will discuss how to calculate intrinsic value using EPS and PE that we calculated earlier.
Lets say for example, that two companies are producing similar products, and are operating within the
same industry (sector)

Company 1 declares an EPS of 10

Company 2 declares an EPS of 12

Based on our calculation of PE for the sector we know that:

1. Company that has the highest valuations in the sector has a PE ratio of 40, for example

2. Company that has the lowest, but positive, valuations in the sector has a PE ratio of 1, for example

So the average PE ratio for the sector should be close to 20.

Now take the EPS of this company you want to find intrinsic value of, and multiply the EPS with average
PE ratio.

Company 1:

EPS = 10

Average PE = 20

value = EPS * PE = 10 * 20 = 200

Intrinsic value = Value - Price of share

If the stock is already trading above the "value" we calculated, then intrinsic value will come out to be
negative. Meaning no value left in it.

However, its important to point out here that when using this method, you must also compare the EPS
of both this company, and company that has the highest valuations in the industry (sector)
See the EPS & PE section in MunafaSutra Stock Market Training material for details about this.

In a nutshell, if EPS of both these companies are similar, but this one is still too far away from the
highest valued company, then there is a better chance that soon this company too might show higher
levels.

Why? Because both the companies are posting similar Earnings, but that one is much more costly in
share market.

So either that is over-valued, or this is under-valued.

See the earlier chapters of training material about EPS & PE.

Returning back to our example:

Company 2:

EPS = 12

Average PE of sector = 20

Value = EPS * PE = 12 * 20 = 240

If the share price of company2 in stock market is just 200, then we know that it has an intrinsic value of
40 in it.

Intrinsic value = Value - Price of share = 240 - 200 = 40

Intrinsic value simply means "real" value. You learnt about this in the FnO section in the material, didn't
you?

Similarly, we can keep on calculating Intrinsic value for the companies that are posting a positive
Earnings number.

Word of caution:
1. Notice we are using EPS numbers, and not Earnings numbers directly.

2. No point wasting time with companies which have negative earnings numbers

When calculating the average PE for the sector, we used two companies. One that had the highest PE,
and another which had lowest, but positive PE.

I hope you figured why we just used a positive PE,didn't you?

Negative PE simply represents that Earnings were negative, isn't it? Meaning Loss making company.

There is another way of calculating average PE. Its more time consuming, takes more work, but is much
more accurate than this way.

What is it?

Simply take the PE of all the companies that have a positive PE, add them all up, and divide by the
number of companies you had.

Something like this:

Average PE = ( 40 + 36 + 30 + 20 + 10 + 4 + 1 ) / 7 = 141/7= 20.1

All those numbers are PE of different companies in the industry, and there were 7 companies in total

Here in the example, we didn't get too much of a difference, but things might be different in real world.

Here's all that we learnt in this chapter:

1. Types of financial documents

2. Qualitative & Quantitative factors of fundamental analysis

3. Importance of a business model

4. Importance of management

5. Importance of corporate policies

6. Basic analysis of Balance sheets, Income statements, Cash flow statements

7. How they are each different, and where you should focus upon as a fundamental analysis investor

Additionally, you also found out which method of analysis is of importance, and why, Technical or
Fundamental.

Fundamentals tell you which company is better.

Technicals tell you when to enter and exit from this good company.

In this MunafaSutra Stock Market Training Material you learnt:

1. 14 proven ways to select stocks for IntraDay trading

2. 9 chart patterns that never lie.

3. Candle stick analysis. The correct way. Not just green red patterns...

4. When to Average a stock for maximum benefit. Can turn a loss into a profit in a short time period.

5. Technical tools in details like MACD, Moving Averages, Trend analysis, Golden & Dead Cross overs

Each of these are discussed in detail, and pointed out the mistakes you do when using these.

6. Basic fundamental comparison of companies based on EPS & PE, and mistakes to avoid when using
this method

7. FNO introduction. Basic concepts discussed in a easy to remember way

8. Difference of CALL, PUT and easy way to remember the relationship as a buyer, and as a seller.

9. Math behind CALL & PUT options

10. One FNO strategy that works both in a falling market, and also in a rising market. Nothing extra to
do.

11. Various other FnO strategies you can use to make profits in volatile markets.

12. Various ways to select stocks for intraday, and take trades in them. 14 strategies, plus one
additional.

Isn't that Everything You Need to be Successful in Stock Markets?

You also learnt 4 Golden rules of trading. Everything comes down to this.

Whichever tool you used. Whichever method of analysis you used. All did the same thing. What is it?

Mark Support & Resistance points!

4 Golden rules of trading:

1. Buy a stock when it moves above a support point (Reverses from there)

2. Sell a stock when it goes below support points (Breaks it)

3. Sell a stock when it starts falling from a resistance point (Reverses from there)

4. Buy a stock if it crosses resistance points (Breaks it)

 Everything comes down to this

It does not matter which technical indicators you use, or which candle pattern you find, always and
always follow price action first.

So far you have learnt how to identify trend and momentum using indicators like Moving averages,
MACD, ADX etc, but here is the raw price action method.

All you will need is a simple line chart, nothing else. No indicators, nothing else, just a simple line chart.

Your entire trading will depend on how good you are at identifying trend of the stock.

If the stock is in uptrend, and you are placing sell orders, then guess what happens.

And if the stock is in down trend, and you are placing buy orders, then guess what happens.

So the most important thing you must and must know is the trend of the stock, if you want to make
money in stock markets.

Your only job in stock markets, can be summed up in 2 sentences, just 2.

1. Find out the trend of the stock,

2. Place an order in the direction of the stock, with a stoploss.

Remember, nobody can tell what will happen, nobody knows future. In stock markets we are simply
following the trend, and keeping a stoploss as a safety blanket in case the stock reverses. With that said,
first look at the chart below.
Focus on the line chart first. Notice how its divided into 2 parts,

1. Left side is Up Trend

2. Right side is Down Trend.

The thick shiny white color line is the "price line", rest are some common moving averages.

We will simply focus on the price line. Forget those other lines for now.

Look at the left side first. You will notice that the stock is slowly moving, then coming down a little bit,
then moving up again, then little bit down again and so on.

This is called an up trend.

Notice the "snake" like movement of the price line.

These ups are called HIGHS or PEAKS

These downs are called LOWS or TROUGHS

1. When the stock went up and made a HIGH, it was higher than the HIGH it previously made.

2. When the stock fell, then the LOW it made was also higher than the previous LOW it made.

This is the identification of an "uptrending" stock.

It makes higher HIGHS, and higher LOWS.

Basically, when its moving up, it goes up too much, and when it falls, it falls only a small amount.
Now look at the right side, where the line has started to come down.

This is almost same as the left side, but instead of going up, the line is coming down.

You will again see the same "snake" like movement.

What is the difference in downtrend then?

1. The stock is making lower LOWS, and

2.Its also making lower HIGHS.

In other words,

1. When its falling, its falling too much

2. When its moving up, its going up only a little.

This is the identification of a down trending stock.

Remember, there is no stock which will continuously move in a straight line. All up trending stocks will
show some profit booking from time to time, and all down trending stocks will show some pull back
from time to time.

These are called "retracements"

This is where new HIGHS and new LOWS get created, which define the trend of the stock.
1. Higher PEAKS and higher TROUGHS is a mark of an uptrend.

2. Lower PEAKS and lower TROUGHS are a mark of a downtrend.

Ok, so now we have identified the trend of the stock.

Now the question is when to get in.

Answer to that is, as soon as a retracement is over.

Remember, do not try to catch a falling knife, you might cut your hand.

Likewise, do not try to catch a fast speeding train either. You might get seriously hurt.

Wait for the train to slow down.

Its the retracement point where the stock slows down, people take some profit home, and then slowly
the stock will start its move again, up or down, depending on the trend it is in.

As soon as this retracement is over, you get in.

Remember, do not get in the trade while the stock is still in retracement mode, while its still falling. Wait
for the fall to end, and when it ends, then get in the trade.

Suppose the stock is in uptrend, went up 100 points, and then retracement started, and you saw the
stock falling.

It came down to 85. You immediately jumped in and took a trade.

In the next few days, it fell even more, and came down till 70. How much loss did you made?
What was your mistake? You did not wait for the retracement to end. You entered when the
retracement had just started. Do you see the mistake now?

Let the stock fall, let people take their profit home, and when it starts to move up again, its in up trend,
then enter the trade.

Sure, you will not enter at levels of 70, and you might enter at 85 itself, but in the next coming days, you
will be in profit, isn't it?

Instead of entering at 85 when the stock was falling,

you entered at 85 when the stock was moving up.

Do you see the difference now?

A general rule of thumb is that a retracement can pull back a stock about 30% or more, but again,
nothing is 100% in stock markets, and it can even fall down to 40%, or it might only fall 20% and start
moving up.

In any case, we get in when the run up starts again, not before that, when the stock "resumes its trend."

What is the stoploss point we will use?

The point where the retracement ended, that is our stoploss point. In our example it was 70.

So we took the trade at 85, used a stoploss point of 70, and waited for it to move beyond 100 once
again.

How much can it move up again this time?

It can easily give the same kind of move it gave the last time.
Suppose the stock was flat at 50 when it started running up.

And it went up till 100, then gave a retracement.

So the next target can easily be 130 or even 150 or more.

So what is our Risk Reward Ratio in this stock now?

Our Risk is 15 points, 85-70

And our Reward is 40 to 50 points, from 85 to 130 or more.

This is called a Risk Reward Ratio. You have already read about this in previous chapters, and you know
that we are looking for a Risk Reward Ratio of 1:3 or better. In this example, our Risk Reward Ratio was
1:3, that is, 15:50

Do you remember the story we started with in this material? Here it is again.

We saw a stock moving up, and it was moving up for a few days, and now it has reached 100. We
immediately jumped on it. But to our surprise it started falling as soon as we got in. Then we saw it
falling till 70, so we sold it. Shockingly, it started moving up again!

Do you remember the question you asked yourself?

Who is watching me trade? As soon as I got in, the stock started falling. As soon as I got out, the stock
started moving up again. Who is watching me?

What did I tell you in the beginning of this material? Do you remember that?

Nobody is watching you. You are simply trading against the trend and not watching support and
resistance levels.

Now did you understand what you did wrong in those trades where you made losses?
Remember the following points if you wish to make profits in stock markets.

1. Identify trend first. If you cannot find a trend in a stock, leave it. Most likely its in a side ways, range
bound moves, and nobody knows which side range it will break. Wait till it breaks the range and shows a
clear trend.

2. Once the trend is identified, then wait for the retracement, and then wait for the stock to resume its
trend. Enter trade here, with a stoploss. All retracement levels act as support and resistance levels.

This is all it takes to make money in stock markets. Just these 2 rules. Nothing else.

Everything else is a way of finding just these 2 things only.

All candle patterns, all chart patterns will only work when they are near these retracement levels.

Remember one more thing. A retracement level can easily become a trend reversal level.

This is also why its important to wait for the retracement to end, and wait for the trend to resume its
normal direction.

The place where trend changes, at that place you might see the following signs.

1. A side ways move for a while

Up and down, up and down, but not making new HIGHS or new LOWS.

2. Body of the candle getting smaller and smaller.

This is where you will see Doji, and hammer and shooting stars forming up.
3. Reversal patterns forming up

A Head and Shoulder, a triple top/bottom, a double top/bottom etc can easily be spotted where trend
reverses.

4. A reversal candle pattern forming.

Bullish or Bearish engulfing patterns, Morning and Evening star patterns can be seen at these trend
reversal points.

Remember, a pattern forming does not mean that the trend has reversed. These will form at any
retracement start or at retracement end points.

Trend will be defined by the HIGHS and LOWS made by the price line.

A higher HIGH and a higher LOW means that uptrend is going on

A lower HIGH and a lower LOW means that downtrend is going on

Up Trend reversal will happen when a higher HIGH was made, but it got followed by a lower LOW, and
not by a higher LOW. Meaning the stock fell too much and broke its previous LOW point.

Down Trend reversal will happen when a falling stock started moving up, and move beyond its previous
HIGH made. Meaning moved up too much. Lower LOW but a higher HIGH, not a lower HIGH.

Stocks can easily start moving side ways before trend reversal. They will get inside a range. Same HIGHS
and LOWS will get tested again and again, nothing new will happen.

And then one day, it will break one side of this range. Whichever side is broken, that is where the trend
will continue.

This range bound moves can be seen in Flag patterns, Triangles patterns. Wait for them to complete and
give a breakout.
 Nobody Remembers These Rules

This is the whole problem of traders who lose a lot of money in stock markets.

They do not remember these rules. These are the "defined" rules of stock markets, and whenever you
will break one of them, then you will lose money.

Just write down these things on a paper, and stick on a wall.

1. Identify trend

2. Wait for retracement

3. Wait for retracement to end and then enter trade.

4. Retracement levels are your support and resistance levels.

5. Use support and resistance levels as stoploss points.

It really is that simple. You keep looking for a sure shot thing in stock markets, you will never find it.

It does not exist, how will you find it?

All we can do is identify the trend, calculate our Risk Reward Ratio, and enter the trade in the direction
of the trend, using a stoploss.

That last line is what trading is all about.

Practice the knowledge you have acquired from this book on a list of stocks you made, like you were
supposed to do when you started reading it.

If you have still not made a list, do it now.

If you really wish to make money in stock markets, make the list now.

Every profession needs practice. Stock markets are no different.

Practice on your list.

That is your MunafaSutra - Your sutra for Profits!!!

 Copyright

This book is copyright. Future editions of this book will be available at:

http://www.MunafaSutra.com

And you can track stock market movements at:

http://www.MunafaSutra.com

or at:

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MunafaSutra.com - Your Sutra for Profits!

The idea behind www.MunafaSutra.com is to give you a 100% free resource for your technical analysis
needs. So you don't have to pay for softwares. This is why I keep adding new things to the website as
often as I could, or when one of you followers make a request for something new.

This is why always keep checking www.MunafaSutra.com for new additions, and follow the MunafaSutra
page on facebook to keep track!

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MunafaSutra - Your Sutra for Profits!