Fundamental analysis ppt

1. Industry Trends:

● Industry Growth and Size: Check how much the industry has grown in the past
and its current size. Is it expanding, shrinking, or staying stable? Look at market
size, customer demand, and other specific factors.

● Economic Indicators: Pay attention to economic indicators like GDP growth,

interest rates, and inflation. These can affect some industries more than others
(e.g., luxury goods might suffer in a recession, but essential goods could remain
stable).

● Competitive Landscape: Analyze how competitive the industry is. Are there a
few dominant companies or many small ones? High competition can reduce
profits.

● Regulatory Environment: Know the rules and laws that apply to the industry.
Changes in regulations can have a big impact on company profits.

● Technological Advancements: Technology can disrupt industries. Companies

that adopt new technology may perform better than those that don’t.

● Consumer Trends: Keep an eye on changing customer preferences. These

shifts can create opportunities or problems for businesses.

● Supply Chain Dynamics: Look at how the supply chain operates. Any disruption
(e.g., shortage of materials) can affect production and increase costs.

● Financial Metrics: Analyze the financial health of companies in the industry by

looking at factors like revenue growth, profit margins, and debt levels. Compare
these to past performance and industry averages.

● Risk Factors: Identify risks specific to the industry, such as geopolitical issues,
supply chain problems, or environmental concerns.

● Long-Term Trends: Think about broader trends like demographics or

sustainability that could shape the industry over time.

2. Company Analysis:

● Study Company Characteristics: Look at the operating and financial

performance of the company, such as earnings and future prospects. For
 example, if you’re looking at the IT sector, you might compare companies like
Infosys, Wipro, TCS, and HCL.

● Intrinsic Value vs. Market Value: The intrinsic value of a company depends on
factors like dividends and growth rate, which come from the company’s earnings.
This value might differ from the market price, which is what investors are willing
to pay.

● Sources for Company Data: Key data comes from annual reports, including:

○ Balance sheet

○ Income statement

○ Cash flow statement

○ Auditor's reports

○ Corporate governance reports

3. Overvaluation and Undervaluation:

● Overvaluation: Happens when the market price of a stock is higher than its true
or intrinsic value. This can be due to hype, speculation, or irrational optimism.
Overvalued stocks can be risky because their price may fall when reality sets in.

● Undervaluation: Occurs when the market price is lower than the stock's intrinsic
value. This can happen due to fear or negative sentiment in the market. Investing
in undervalued stocks can be profitable if the market eventually recognizes their
true worth.

4. Key Financial Parameters:

● Price-to-Earnings (P/E) Ratio:

○ Undervalued: A low P/E ratio compared to industry peers may indicate

the stock is undervalued.

○ Overvalued: A high P/E ratio suggests investors are paying more for each
dollar of earnings, which may indicate overvaluation.
 ● Price-to-Book (P/B) Ratio:

○ Undervalued: A low P/B ratio means the stock is priced lower than the
company’s tangible assets.

○ Overvalued: A high P/B ratio indicates investors are paying a premium for
the company’s assets.

● Price-to-Sales (P/S) Ratio:

○ Undervalued: A low P/S ratio suggests that investors are paying less for
each dollar of sales.

○ Overvalued: A high P/S ratio indicates investors are willing to pay more
for each dollar of sales.

● Dividend Yield:

○ Undervalued: A high dividend yield might indicate the stock is

undervalued, offering more income relative to its price.

○ Overvalued: A low or nonexistent dividend yield could suggest

overvaluation.

5. CANSLIM Technique:

● This is a method that combines fundamental and technical analysis to identify

stocks with potential for strong price gains. It was developed by William O’Neil
and is detailed in his book How to Make Money in Stocks.

C: Current Quarterly Earnings

● The current quarterly earnings of a company are one of the most important
indicators of its growth. O'Neil suggests that investors should look for companies
whose earnings per share (EPS) have grown by at least 25% or more in the most
recent quarter compared to the same quarter of the previous year.

● Strong quarterly earnings growth can be a sign that a company is performing well
and is likely to continue growing. Investors should also compare the company’s
earnings growth to that of its competitors and the overall industry to see if it’s
leading the way.
● Why it's important: Companies with rising earnings tend to see their stock
prices rise as investors become more confident in the company’s future
prospects.

A: Annual Earnings Growth

● This refers to the company’s annual earnings growth over the last 3 to 5 years.
O'Neil recommends focusing on companies that have strong and consistent
annual earnings growth of at least 25% or more during this period.

● It’s essential that the company shows sustained growth, not just a short-term
spike in earnings. This long-term growth trend suggests that the company has
solid fundamentals and can continue to grow in the future.

● Why it's important: Companies with a history of strong annual earnings growth
are often industry leaders or fast-growing businesses with competitive
advantages.

N: New Products, Services, or Management

● New products, services, or management are catalysts that can drive a

company’s growth and stock price higher. O'Neil emphasizes that investors
should look for companies that have recently introduced innovative products or
services, entered new markets, or undergone a positive change in management.

● New developments can often spark investor interest and result in significant
growth. For example, a tech company launching a groundbreaking product, or a
company expanding into international markets can lead to increased sales and
profitability.

● Why it's important: New innovations or leadership can propel a company to new
heights, increasing its competitiveness and market share.

S: Supply and Demand

● Supply and demand refers to the number of shares available in the market
(supply) versus the number of people willing to buy the stock (demand). A low
supply of shares with high demand can push the stock price up.

● O'Neil advises focusing on companies with a limited number of shares

outstanding, as this can create scarcity and drive prices higher when demand
increases. Additionally, he suggests looking at trading volume: if a stock’s price is
rising on heavy trading volume, it indicates strong demand.
● Why it's important: Stocks with strong demand and limited supply tend to
perform better, as increasing demand can lead to higher prices.

L: Leader or Laggard?

● Is the company a leader or laggard in its industry? O'Neil advises investors to

look for market leaders, which are companies that outperform their competitors
and lead their industry in terms of sales growth, profitability, and stock
performance.

● One way to measure leadership is by looking at the Relative Price Strength

(RS) Rating, a metric that compares the stock’s performance to the broader
market. Stocks with a high RS Rating (typically above 80 or 90) are considered
leaders. On the other hand, stocks with lower ratings are laggards, and may not
offer the same growth potential.

● Why it's important: Market leaders often have strong competitive advantages
and tend to outperform the broader market, making them attractive investments.

I: Institutional Sponsorship

● Institutional sponsorship refers to whether large institutional investors (such as

mutual funds, pension funds, and hedge funds) are buying shares in the
company. These big players can significantly influence a stock's price because
they trade in large volumes.

● O'Neil suggests looking for stocks that have strong institutional support but not
too much—typically between 3 to 10 institutional investors holding the stock.
Too much sponsorship can indicate the stock is already fully valued, while too
little might mean the company is not on the radar of major investors yet.

● Why it's important: Institutional investors often have the resources and
expertise to analyze companies thoroughly, so their interest in a stock can be a
sign that it’s a good investment.

M: Market Direction

● Market direction refers to the overall trend of the stock market. Even the best
stocks can perform poorly if the broader market is in a downtrend. O'Neil advises
investors to analyze the general market conditions and only invest heavily when
the market is in an upward trend (bull market).
 ● He emphasizes the importance of using technical analysis to identify market
trends and avoid investing during bear markets or market corrections, as even
strong stocks are likely to lose value during such times.

● Why it's important: Understanding market trends helps investors time their entry
into stocks, as investing in a rising market increases the likelihood of success.

6. Benjamin Graham's Formula:

● Benjamin Graham, known as the Father of Value Investing, introduced a formula

to calculate the intrinsic value of a stock.

● His formula is: Intrinsic Value=[EPS × (8.5 + 2g) × 4.4]/Y

○ EPS: Earnings per share

○ g: Estimated growth rate over 7-10 years

○ Y: Current yield on AAA corporate bonds

This formula helps investors identify if a stock is undervalued or overvalued compared

to its intrinsic value.

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Ipo ppt

1. What is an IPO?

● IPO (Initial Public Offering): An IPO occurs when a private company sells its
shares to the public for the first time to raise money. This capital is often used for
expansion, debt repayment, or other corporate goals. After the IPO, the
company’s shares are listed on the stock exchange, allowing the public to trade
them.

● Approval: To launch an IPO, the company must get approval from a regulatory
authority. In India, this is the Securities and Exchange Board of India (SEBI),
which ensures that the company follows the required guidelines to protect
investors.
2. How an IPO Works:

1. Application: The company submits an application to SEBI, detailing how many

shares it plans to issue, the price (if it’s a fixed price IPO), and its previous
financial performance. The company also explains how it plans to use the funds
raised.

2. Prospectus: Once SEBI approves, the company publishes a red herring

prospectus. This document contains all relevant information about the IPO, such
as the company’s history, financials, and details about the shares being offered.

3. Lead Manager: The company hires a lead manager (typically an investment

bank or brokerage) to manage the IPO. The lead manager’s job is to market the
IPO and attract investors.

4. Bidding: Investors, including financial institutions and retail investors, place bids
when the IPO goes live, indicating how many shares they want to buy and at
what price (in a book-building IPO).

5. Subscription: If the investor’s bid is accepted, the shares are credited to their
demat account.

● Timeframe: The IPO bidding process typically lasts 3 to 21 days, during which
investors can submit their bids.

3. Important Terms Related to IPOs:

● ASBA (Application Supported by Blocked Amount): This SEBI-approved

process allows investors to block the amount needed for the IPO in their bank
account. The funds are only debited once the shares are allotted, and the
blocked money cannot be used until then.

● Red Herring Prospectus: A preliminary prospectus that includes important

information about the company and the IPO. It doesn’t have the final price but
provides all the details potential investors need to make informed decisions.

● Underwriter: The financial institution (investment bank or brokerage) that helps

the company conduct the IPO by managing the process and ensuring the shares
are sold.
 ● Oversubscription: This happens when the demand for shares is higher than the
number of shares available. Popular IPOs often experience oversubscription,
meaning not all investors who applied will receive shares.

● Float: Refers to the number of shares offered to the public. These are the shares
that will be traded in the stock market after the IPO.

● Flipping: The practice of buying shares during an IPO and quickly selling them
on the first day of trading to make a fast profit.

4. Book Building Process (For IPO Pricing):

● Issuer and Lead Managers: The company (issuer) appoints lead managers
(also called book runners) to manage the IPO. They set a price band (a range)
instead of a fixed price for the shares.

● Bidding: Investors place bids within the price band during the bidding period
(usually 5 days). They indicate the number of shares they want and at what price.

● Evaluation: After the bidding period, the book runners analyze the bids to decide
the final issue price based on demand.

● Allocation: Shares are then allotted to the successful bidders. Those who didn’t
get shares receive a refund.

5. Types of IPO Bidders:

● Retail Investors: Individual investors, including small-scale investors like the

general public.

● Non-Qualified Institutional Investors (NQII): Corporates, trusts, NRIs, and

others who do not meet SEBI’s criteria for institutional investors.

● Qualified Institutional Investors (QII): Large financial entities like banks,

mutual funds, and foreign institutional investors who have significant expertise
and financial resources.

6. Grey Market:
The grey market is an unofficial, unregulated market where shares of an IPO are
traded before the shares are officially listed on the stock exchange. This trading takes
place outside the normal, formal channels of stock exchanges like NSE or BSE, and it
operates without oversight from SEBI (Securities and Exchange Board of India). While
the grey market is legal, it is not formally recognized or controlled by regulatory
authorities, so it carries higher risks.

● Grey Market Premium (GMP): This refers to the price at which IPO shares are
traded in the grey market, prior to their listing on the stock exchange. The grey
market premium gives investors an idea of how the stock might perform once it's
officially listed. For example, if the IPO price of a share is ₹200 and the grey
market premium is ₹100, it suggests that the share might be listed at around
₹300 on the official stock exchange.

○ Example: If you see an IPO with a GMP of ₹100 and its issue price is
₹200, it means that there’s strong demand, and buyers are willing to pay
₹300 (₹200 + ₹100) per share even before it officially lists. However, this is
just an indication, and the actual listing price can be different. If demand is
higher than expected, the price may rise even further; if demand falls, the
price might drop below the GMP.

The grey market helps some investors and traders make early predictions about the
IPO’s potential performance, but it's speculative and operates without transparency.

7. Kostak Rates:

● Kostak Rates: In the grey market, Kostak rates represent the price at which an
investor can sell their entire IPO application (not just the shares) to another party
before the actual allotment of shares happens. The Kostak rate locks in a
guaranteed profit for the seller, regardless of whether they receive any shares
during the allotment process.

○ Example: Let’s say the Kostak rate for an IPO is ₹300. If you sell your IPO
application at this rate, you will get ₹300, even if you are not allotted any
shares when the final allotment happens. This provides the seller with a
fixed, risk-free return.

The Kostak rate is useful for people who don’t want to wait for the IPO allotment result
or who want to avoid the risk of not receiving shares. It allows them to exit with a
guaranteed profit.
8. Subject to Sauda:

● Subject to Sauda: This is another grey market agreement where the seller
agrees to sell their IPO application if and only if they receive shares in the
allotment. If the seller doesn’t receive any shares, the deal is canceled, and no
money is exchanged.

○ Example: Let’s say you apply for shares in an IPO, and you strike a
"subject to sauda" deal at ₹5,000. If you get shares in the allotment, you’ll
sell your application to the buyer for ₹5,000. However, if no shares are
allotted to you, the deal falls through, and no payment is made.

This type of agreement involves more risk for the buyer because it only works if the
shares are actually allotted to the seller. The subject to sauda price is usually higher
than the Kostak rate because there’s a better chance of profit if shares are allotted.

9. Are Grey Market Stocks Safe?

The grey market operates outside of formal stock exchanges and without regulatory
oversight, making it riskier than trading in the regular stock market. Since it is
unregulated by SEBI or any stock exchange, transactions in the grey market lack
transparency, and prices can fluctuate significantly based on rumors, hype, or
speculative demand.

● Risks of Grey Market:

○ Price Volatility: Since grey market prices are not officially regulated, they
can change drastically based on market sentiment, making it hard to
predict actual outcomes.

○ Lack of Legal Protection: Investors do not have legal protection if

something goes wrong. Unlike formal exchanges where SEBI can
intervene in cases of fraud or manipulation, grey market trades are not
subject to these rules.

● Safety Recommendation: It is always safer to trade in the regular stock market

after the IPO is officially listed. In the official market, prices are transparent, and
you are protected by SEBI regulations. While the grey market can offer early
insights into the potential performance of an IPO, it is speculative and should be
 approached with caution. It’s wise to be careful when trading in the grey market
and consider participating in the primary (official) market for more secure
transactions.

____________________________________________________________________________

Types of trading

1. Day Trading

● Description: In day trading, traders buy and sell financial instruments (stocks,
currencies, etc.) within the same trading day, aiming to make a profit from
short-term price movements. All positions are closed before the market closes to
avoid overnight risks.

● Time Horizon: Intraday (positions last from a few minutes to several hours but
are closed before the day ends).

● Strategy: Day traders often rely on technical analysis (charts, price patterns,
and indicators) and real-time data. They execute multiple trades in a day, making
quick decisions based on small price changes.

● Risk: Day trading carries a high risk because of the fast pace and frequent
trades. Even small market fluctuations can lead to losses if not managed
carefully.

2. Swing Trading

● Description: Swing traders aim to capture short- to medium-term price

movements by holding positions for several days to weeks. They look for stocks
or other assets that are likely to experience a "swing" or significant price
movement within that time frame.

● Time Horizon: Short to medium term, typically a few days to a few weeks.

● Strategy: Swing traders use both technical analysis (to identify trends or
reversals) and fundamental analysis (looking at a company’s earnings, news, or
macroeconomic factors). They aim to catch trends as they develop and profit
from price swings.
 ● Risk: Moderate risk as traders hold positions longer than day traders, exposing
them to overnight market movements and sudden news events.

3. Position Trading

● Description: Position traders hold positions for weeks, months, or even years,
focusing on long-term trends. They are less concerned with short-term price
fluctuations and instead focus on broader economic or market trends.

● Time Horizon: Long term, often from several weeks to years.

● Strategy: This style relies heavily on fundamental analysis (company

performance, industry trends, and macroeconomic factors) and less on
short-term technical patterns. Traders look for opportunities based on long-term
growth potential.

● Risk: Lower risk compared to day or swing trading because the focus is on
long-term movements. However, unexpected market shifts can still cause losses.

4. Scalping

● Description: Scalping involves making a large number of small, fast trades

throughout the day, seeking to profit from tiny price movements. Scalpers aim for
small gains on each trade but execute many trades to accumulate profits.

● Time Horizon: Extremely short term, from a few seconds to a few minutes.

● Strategy: Scalpers use technical analysis, focusing on charts, order flow, and
very short-term indicators. The goal is to quickly enter and exit trades to minimize
exposure to market risks.

● Risk: High risk due to the rapid pace of trading and reliance on small price
movements. Scalpers need precise timing and discipline to succeed.

5. Algorithmic Trading (Algo Trading)

● Description: In algorithmic trading, computers automatically execute trades

based on pre-set algorithms. These algorithms can be designed to follow specific
 market conditions, using data and patterns to make decisions without human
intervention.

● Time Horizon: Varies from milliseconds (in high-frequency trading, HFT) to

longer-term strategies.

● Strategy: Algo trading strategies are based on quantitative models, statistical

arbitrage, or other predefined criteria. They can operate across different markets
and time frames.

● Risk: The risk varies depending on the algorithm used. Poorly designed
algorithms or technical errors can lead to significant losses.

6. Options Trading

● Description: Options traders buy and sell options contracts, which give the
right (but not the obligation) to buy or sell an underlying asset at a specified price
before a certain date (expiration date).

● Time Horizon: Can be short or long term, depending on the type of options
strategy.

● Strategy: Options can be used for:

○ Speculation (betting on price movements)

○ Hedging (protecting existing investments from risk)

○ Income generation (through strategies like covered calls).

● Risk: The risk level varies depending on the strategy. For example, buying
options can be low risk (limited to the premium paid), while selling options can
carry higher risk.

7. Forex (Foreign Exchange) Trading

● Description: Forex trading involves buying and selling currencies in pairs, such
as EUR/USD or USD/JPY. Traders speculate on changes in exchange rates
between two currencies.
 ● Time Horizon: Time frames can range from short-term (minutes to hours) to
longer-term (days to weeks).

● Strategy: Traders use technical analysis (charts, indicators) and fundamental

analysis (news, economic reports, geopolitical events) to predict currency
movements.

● Risk: Risk is variable, influenced by currency volatility, leverage (borrowed

funds), and geopolitical factors. Forex markets are highly liquid but can be
unpredictable.

8. Commodity Trading

● Description: Commodity traders buy and sell physical commodities like oil,
gold, or wheat, or trade commodity futures contracts that represent the price
movement of these physical goods.

● Time Horizon: Can be short term (days) to long term (months or years).

● Strategy: Commodity traders analyze supply and demand dynamics,

geopolitical events, and specific commodity factors (e.g., weather affecting crops)
to make trading decisions.

● Risk: Commodity prices can be highly volatile, and risks depend on the specific
commodity being traded.

9. Cryptocurrency Trading

● Description: Cryptocurrency traders buy and sell digital currencies such as

Bitcoin, Ethereum, and others through cryptocurrency exchanges. They
speculate on price changes of these digital assets.

● Time Horizon: Can be very short-term (minutes to hours) to long-term (months

to years).

● Strategy: Most traders use technical analysis (price charts, indicators) to

predict short-term movements, but some may also consider fundamental
factors (like blockchain developments or regulatory changes).
 ● Risk: High risk due to the extreme volatility of the cryptocurrency market and
lack of regulation. Prices can fluctuate drastically within a short period.

10. Tools of Technical Analysis

Trend Identification:

● Technical analysis helps traders and investors identify the general direction in
which a market or stock is moving. There are three main types of trends:

○ Uptrend: Prices are consistently moving higher. This is characterized by

higher highs and higher lows, indicating a bullish (rising) market.

○ Downtrend: Prices are consistently moving lower. This is seen when

there are lower highs and lower lows, indicating a bearish (falling) market.

○ Sideways/Flat Trend: The price moves within a range, with little upward
or downward movement. This type of trend suggests indecision in the
market or consolidation before the next major move.

Trendlines:

● Trendlines are simple but powerful tools used to draw straight lines on price
charts. These lines follow the peaks (highs) and troughs (lows) of price
movement, helping to visualize the current trend direction.

○ Uptrend line: Drawn by connecting two or more rising lows.

○ Downtrend line: Drawn by connecting two or more falling highs.

● Reversal signals: If a trendline is broken (prices move below an uptrend line or

above a downtrend line), it may indicate a potential reversal in the current trend.

Volume Analysis:

● Volume refers to the total number of shares, contracts, or units traded during a
given time period.

○ Volume Moving Averages: Similar to price moving averages, volume

moving averages smooth out volume data over a specified period. They
 can help identify trends in volume, which may provide insights into the
sustainability of a price trend.

○ Volume divergence: When prices are rising but volume is decreasing, it

indicates that fewer traders are supporting the upward movement, which
may signal a coming reversal.

11. Moving Averages

Simple Moving Average (SMA):

● A Simple Moving Average smooths out price fluctuations by calculating the

average closing price of an asset over a set number of days (e.g., 10-day,
50-day, or 200-day moving average).

○ How it works: For example, in a 10-day moving average, the sum of the
last 10 closing prices is divided by 10. The SMA helps traders identify the
overall direction of a trend, filtering out the daily noise (short-term volatility)
and giving a clearer view of the price movement.

○ Larger time frames (e.g., 50-day or 200-day) give a broader view of the
trend and are more commonly used to identify long-term trends.

Exponential Moving Average (EMA):

● The Exponential Moving Average is similar to the SMA but gives more weight
to recent prices. This makes the EMA more responsive to new information or
price movements compared to the SMA, which treats all past prices equally.

○ How it works: Because the EMA focuses more on recent prices, it reacts
faster to market changes, making it a useful tool for short-term traders
looking to capture quick price movements.

○ Key advantage: The EMA is considered more effective in fast-moving

markets because it adjusts to changes in price momentum more quickly
than the SMA.

12. MACD (Moving Average Convergence Divergence)

MACD:
 ● The MACD is a popular technical indicator that measures momentum by
comparing two Exponential Moving Averages (EMAs). It shows the relationship
between a shorter-term EMA (e.g., 12-day EMA) and a longer-term EMA (e.g.,
26-day EMA).

○ How it works:

■ The MACD line is calculated by subtracting the longer-term EMA

from the shorter-term EMA.

■ A signal line (usually a 9-day EMA) is then plotted alongside the

MACD line, which helps to identify buy or sell signals.

○ Momentum Signals:

■ Positive MACD: When the MACD is above the zero line, it

indicates that the shorter-term EMA is higher than the longer-term
EMA, suggesting that upward momentum is building.

■ Negative MACD: When the MACD is below the zero line, the
shorter-term EMA is lower than the longer-term EMA, indicating
that downward momentum is building.

■ Crossovers: When the MACD line crosses above the signal line, it
is considered a bullish signal (potential buy opportunity). When it
crosses below the signal line, it’s considered a bearish signal
(potential sell opportunity).

● MACD as a Trend Indicator: MACD is useful for identifying changes in the

strength and direction of a trend. For example, if the MACD moves from positive
to negative, it may signal a trend reversal.

13. Oscillators

Relative Strength Index (RSI):

● The RSI is a momentum oscillator that measures the speed and change of price
movements, ranging from 0 to 100. It helps traders identify whether an asset is
overbought or oversold.

○ How it works:
 ■ Above 70: The asset is considered overbought, meaning it may
be due for a price correction or pullback.

■ Below 30: The asset is considered oversold, meaning it may be

undervalued and due for a rebound.

○ RSI Divergence: This occurs when the price of an asset moves in one
direction, but the RSI moves in the opposite direction, signaling that the
trend may soon reverse. For example:

■ Bullish divergence: When the asset makes a lower low, but the
RSI makes a higher low, indicating potential upward movement.

■ Bearish divergence: When the asset makes a higher high, but the
RSI makes a lower high, indicating potential downward movement.

● RSI Timeframe: The default RSI is calculated over a 14-period window (days,
hours, etc.), but traders can adjust this timeframe depending on their strategy.

RS=Average Gain/ Average loss

Disadvantages of MACD (Moving Average Convergence Divergence):

1. Lagging Indicator:

○ Since MACD is based on moving averages, it reflects past price

movements and may lag behind real-time market changes.

2. False Signals:

○ MACD can sometimes give inaccurate buy or sell signals, especially in

volatile markets, leading to poor trade decisions.

3. Limited Use in Sideways Markets:

○ In flat or sideways markets (when prices are not moving significantly up or

down), MACD can be ineffective and generate unclear or unreliable
signals.

Disadvantages of RSI (Relative Strength Index):

1. Subject to False Signals in Strong Trends:

 ○ In strong upward or downward trends, the RSI can remain overbought
(above 70) or oversold (below 30) for extended periods, giving misleading
signals about reversals.

2. Ineffective in Sideways Markets:

○ Similar to MACD, the RSI can struggle to provide useful information in

markets where prices move within a narrow range without clear trends.

3. Limited in Predicting Trend Reversals:

○ The RSI may not accurately signal when a trend is about to reverse,
especially during strong momentum phases.

4. Overbought/Oversold Levels Can Be Misleading:

○ Just because the RSI crosses above 70 (overbought) or below 30

(oversold), it doesn’t always mean an immediate reversal will occur. Prices
can continue in the same direction for some time.

Disadvantages of Volume:

1. Not Always Reflective of Price Movements:

○ Volume increases or decreases do not always correlate with price

changes, making it difficult to interpret volume alone.

2. Difficulty in Interpretation:

○ A spike in volume can have multiple interpretations (e.g., it could signal a

continuation of the trend or a reversal), which can confuse traders without
additional context.

3. May Not Work in All Markets:

○ Volume analysis is less effective in certain markets, such as the forex

market, where volume data may not be as relevant or available.

4. Lagging in Certain Cases:

○ In some cases, volume changes occur after price movements, making it a

lagging indicator that doesn’t provide early signals for trade decisions.

____________________________________________________________________________
Session 8 ppt

Support:

● Definition: Support is a price level or area on a chart where the price of an asset
(such as a stock) falls to but struggles to go below. It acts like a “floor” that
stops the price from falling further.

● How It Works:

○ At this level, demand (buyers) becomes stronger than supply (sellers),

preventing the price from dropping further.

○ As the price gets closer to the support level, it appears cheaper,

encouraging more buyers to enter the market because they see a good
deal. Buyers believe the asset is undervalued and are more willing to buy.

○ At the same time, sellers are less willing to sell because the price is low,
making it less attractive for them to offload their assets.

● Result: When buyers become stronger than sellers at the support level, the price
is likely to “bounce” up from the support level, meaning it could rise again.

● Example: Imagine a stock that has fallen to ₹100 several times over a period,
but each time it reaches ₹100, it bounces back up. The ₹100 level is acting as a
support because demand increases at that price, stopping it from falling further.

Resistance:

● Definition: Resistance is a price level or area on a chart where the price of an

asset rises to but struggles to go above. It acts like a “ceiling” that stops the
price from rising further.

● How It Works:

○ At this level, supply (sellers) becomes stronger than demand (buyers),

preventing the price from rising any higher.

○ As the price gets closer to the resistance level, it becomes more

expensive, making it less attractive for buyers, who are now reluctant to
buy at such a high price.
 ○ Sellers, on the other hand, are more willing to sell because they believe
the price has reached a high point and they want to lock in their profits.

● Result: When sellers become stronger than buyers at the resistance level, the
price is likely to “bounce” down from the resistance level, meaning it could fall
again.

● Example: If a stock rises to ₹150 multiple times but then falls back each time, the
₹150 level acts as resistance because sellers are more active at that price,
keeping the price from rising higher.