ETF are Exchange Traded Funds which trades in stock exchanges like a companies stocks. ETFs are managed by Asset Management company (AMC) like a mutual funds.
ETFs can be buy and sell in stock exchanges through a broker. Value or net asset value(NAV) changes of an ETF changes as per the trades in the markets. Units of an ETFs are only listed on stock market so they cannot be buy and sell through AMC companies. Like a normal stock sell first time its shares in stock market through IPO, AMC lists its ETf same as stock. Anyone can apply in it like a IPO.
ETFs generally track the specific Index like Nifty, Bank Nifty, Nifty IT, etc. When any Investor buys an ETF he actually buys the specific Index and a fluctuation in that index fluctuates the ETF in same proportion.
ETFs do not try to beat or outperform the markets. The try to give the almost same percentage of returns as the Index generates. This is a main reason that ETFs have less expense ratio than mutual funds. Passively managed mutual funds have low expense ratio than actively managed.
Mutual funds try to beat the markets or Indexes but the less liquidity and more expenses are the disadvantages of it. Opposite of this ETFs have high liquidity and low expenses.
ADVANTAGES OF ETFs
👉 ETFs are considered to be the safer or low risk investment option as compared to specific stocks or securities.
👉 ETFs can be the low cost asset to diversify the portfolio with companies, sector, Index, etc.
👉 ETFs don't need to be managed wisely if it tracks to the large Index in a country, but it needs to be enter and exit timely
👉 The Index shuffling by the management of stock exchange is the part of process in forming the Index. This effects the ETF positively. Low returns or any kind of problematic stocks may decrease the weitage or replace by good one.
✍Candlestick charts are thought to have been developed in the 18th century by Munehisa Homma, a Japanese rice trader. They were introduced to the Western world by Steve Nison in his book, Japanese Candlestick Charting Techniques.
✍The colour of candle decides weather the candle is bullish or bearish. The bullish candle indicates that the closing price is greater than opeaning price. The bearish candle indicates that the opeaning price is greater than closing price.
✍As shown in the above image the candle formations consists of :-
1)upper shadow
2)lower shadow
3)real body
✍The time frame of the candle decides the time taken by a candle for formation. Eg. The candlestick time frame is on 2 hour then 2 hours is taken to form complete candle.
CONTENTS OF CANDLESTICK:-
1. LOWER SHADOW
This indicates that the low made by the stock/index in the specific time frame.
2. UPPER SHADOW
This indicates that the high made by the stock/index in the specific time frame.
3. REAL BODY
This indicates the opeaning price and closing price of the candle.
While trading in a candlestick pattern the weitage has to be given to either shadow or body of the candlestick whichever has size more.
MYTH BEHIND CANDLESTICKS
1. Candlesticks can be used in short term not in long term.
Candlesticks patterns can be used in both long term and short term trading. Many people can say that short term is trading and long term is investment, but this is not true. Trading can be more than 1 year or can be also more than 5 years. Long term trade is also possible in technical analysis.
Candlesticks pattern can be 1 minute, 5 min, 15 minute to 1 week and 1 month. 1 week candlestick chart patterns can be used to take trade for 3 to 6 months and 1 month candlestick pattern pattern can be used to take trade for 1 year.
On January 26, 2008, a 30-year-old man named Mike Merrill decided to sell himself in the stock market. Mike Merrill was born and raised in Detroit, Michigan,USA.
He divided himself into 100,000 shares and set an initial public offering price of $1 a share.
Over the next 10 days, 12 of his friends and acquaintances bought 929 shares, and Merrill ended up with a handful of extra cash.
He kept 99.1% stake to himself and 0.9% to others. The income earned by Mike should be distributed as a dividend to shareholders.
Each share would earn a potential return on profits he made of his day job as a customer service at a small Portland, Oregon, software company.
He sold 11823 shares publicly to 805 investors after the listing in stock markets.
The price of Mike Merrill share had made a high of $18 as the demand gets up.
The technical analysis exist in every part of our life. Eg. We see the clouds and predict weather and make the decision to take umbrella or not. This is based on our past performance. This is a part of technical analysis study.
The alternative approach to predict stock price behavior is known as technical analysis. It is frequently used as a supplement rather than as a substitute to fundamental analysis. Technical analysis is based on notion that security prices are determined by the supply of and demand for securities. It uses historical financial data on charts to find meaningful patterns, and using the patterns to predict future prices. Edwards and Magee formulate the basic assumptions Underlying technical analysis:
(1)The interaction of supply and demand determines the market value of the security.
(2) The various factors, both rational and irrational factors, govern the supply and demand of the securities.
(3) Stock price tend to move in trend which persist for an appreciable length of time.
(4) Changes in trend are caused by shifts in supply and demand.
(5) Shifts in supply and demand can be detected sooner or later in charts of market action.
(6) Some chart patterns tend to repeat themselves. However, the fundamental analysis estimates the intrinsic of the stocks/securities.
Basic assumptions of Technical Analysis:
✍Price discounts everything
✍Prices move in trends
✍History repeats itself
✍Volume shows when investors are in and out
Myths Behind Technical Analysis
1. We can't time the markets
Many of you have listen many times that we can't time the markets or cannot anticipate the rise and fall in the markets. This is not a totally myth but neither its is a complete true statement.
The true statement is that we cannot exactly time the markets, but the cycles in long can be time with conviction. The end of a trending move especially the top of uptrend or the bottom of downtrend cannot be spotted easily. Opposite of that the end of correction can timed with most conviction.
2. Technical analysis is applicable only for short term, not for long term
This is a another myth of technical analysis that long term price analysis is not possible in the case of technical analysis. Technical analysis is more effective in a long term trade than a short term. If technicals are applied in shorter time frame than accuracy may reduced than long term weekly, daily or monthly candle charts.
Volitality in a shorter time frame is always more as compared to long term trades. Minites, hourly candle charts are more volatile compared to daily, weekly and monthly charts.
Focus of more on Long term trades or medium term trades rather than intraday or scalping increases the chances of profitability percentage. Long term or medium term positions are more accurate in technical analysis.
VOLUMES
Volume is the total number of shares traded on one side of the transaction. Volume should be kept in check, when you buy a share. Low volume stocks should be avoided.
➡When prices rise, and volume increase it is a positive sign.
➡When prices fall and volume rises, it is a negative sign.
➡When prices rise and volume falls, it indicates that the rally is not very healthy, and some speculation might be going on.
➡️If price falls and volumes are decreasing,it can be positive sign and upmove is possible.
SUPPLY & DEMAND
✍The fundamental basis for technical analysis is that prices shift with supply and demand.
✍If the demand exceeds the Supply, the price will rise. If the supply exceeds the demand, the price will fall.
✍Charts reflect this rise and fall. By studying this movement on a chart and using the technical studies, you can make predictions on which way the price is likely to go.
To trade supply and demand methodology in securities you should:
Buy when the price bounces upwards from a demand area.
Sell when the price bounces downwards from a supply area.
Hold your trade at least until the price action reaches an opposite level on the chart or use price action rules to manage the trade.
👉Any downmove in uptrend and upmove in downtrend is simply called as correction. Correction can be in the form of chart patterns.
👉It can also be price wise correction, time wise correction or it can be complex correction. Correction in any form after a move in market is considered as healthy one till the certain point.
👉Volitality plays a significant role in correction time and correction size. Some will think ideal correction can be 10%, 20%, 25%, etc but it varies to each stock.
👉Some will also consider fibonacci numbers like 38%, 61.8%, 78% for the end of correction which is ideal and logical case.
👉Many traders and investors feel fear of correction and enjoy the upmove but we have to bare both. Not to excite more in upmove and not to feel bad in correction.
👉One should be always ready to bare the small corrections in stock market while investing.
👉An ideal correction takes place when the price and time both are properly involved. This means the stock or index has fallen down in uptrend and also consolidates at the end of correction.
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Trend v/s correction
Trend and correction both can be seen in price. Correction can be in the form of down move or bounce in a uptrend or downtrend respectively. As a simple analysis part no one can identify the top and bottom of price but the price can be timed efficiently. Finding a top cam be hectic part but to find the end of correction can be simple and effective with practice and experience.
The earning or profit can be made only in trend not in correction. But the focus should be keep more on correction rather than trend.
EXAMPLE :- 1
As you can see in the above chart in the big uptrend there is small corrections in between. The first correction is more time wise correction and the second one is price wise correction. By taking small healthy corrections price is moving up.
EXAMPLE:- 2
This is second example of correction in uptrend. After a upmove price takes a correction. This is typical time wise correction.
EXAMPLE :- 3
This is a example of correction in a downtrend. The first correction in a downtrend is a price wise correction and the second one is time wise correction. Both time wise and price wise corrections can be seen in an uptrend and downtrend too.
EXAMPLE :- 4
This is also a example of several corrections in a downtrend. All three are price wise corrections in a downtrend.
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Types of correction
Correction is broadly divided into 2 parts :-
1. Price wise correction
2. Time wise correction
The difference between price wise correction and time wise correction is discussed below. Both corrections starts after a trend but both are different in characteristics. Price wise correction also involves time in it and time wise correction also involves price in it. Ideal correction takes place where the time and price both have involved in a it.
1. Price wise correction
The price wise correction name itself suggests that the price falls after the uptrend and bounce after the downtrend is clearly called the price wise correction.
The reason behind the price wise correction can takes place due to many Global or country specific reasons. Eg. Covid 19 fall in world markets, 2008 leaman crisis, political instability, financial crisis, etc.
Price wise correction can be 10%, 20%, 30%, or fibonacci numbers retracement percentage. But the time has to be involved in the price wise correction.
As you can see the above chart in a big uptrend the first correction is time wise and the second one is price wise correction.
In a time wise correction if you compared low and high price has lower down but we will consider it as a time wise correction.
Another one is price wise correction but still time has involved in it.
In all of the above examples typical price wise corrections has been shown on the charts. The common thing in all of the charts that correction has been taken place after the trend. Price wise correction can also be a part of uptrend and downtrend both in the form of fall and bounce.
2. Time wise correction
Opposite of the price wise correction time wise correction involves more consolidation in a correction rather than price fall.
Mostly the flag patterns, range formation, consolidation between moving averages or in range mostly form a time wise correction.
Time wise correction can takes place in both uptrend and downtrend. Sideways price movement is also a example of time wise correction.
Time wise correction also involves price in it.
These are the few examples of proper time wise correction after a trend.
All the above charts is the examples of typical time wise correction. All have formed a specific range in a long time but the price fall is very low. Rectangle pattern, flag formation, etc are some chart patterns of time wise correction.
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CHART PATTERNS IN CORRECTION
This is one of the most informative part of this correction article.
The formation of any chart pattern takes place only ina correction. If the chart pattern has formed in a price this shows itself that the correction has taken place.
Chart pattern forms only in a correction, trend does not have a pattern. Trend can go up or down in a form of uptrend or downtrend. Pattern formation is possible in any trend.
Correction can take place in a uptrend or in downtrend, chart pattern remain same in correction.
Chart patterns can be reversal patterns, continuation patterns or can be both, but all chart patterns forms in a correction.
Many of people in stock market who knows about the chart patterns in technical analysis, very less traders or investors notice this point about correction and chart pattern connection.
Chart patterns can end the correction or continue it to some more extent.
These are some examples that chart pattern forms only in correction.
Eg. 1
Above example is a typical example of head and shoulder chart pattern. In this case after a uptrend head and shoulder pattern forms and the Corrective phase starts after it.
This pattern has started a correction itself and extends correction too. This shows the head and shoulder pattern is correction in a uptrend.
Same like this pattern double top, triple top, rising wedge, etc starts a correction and extends it too.
Eg. 2
Opposite like the head and shoulder, inverted head and shoulder pattern forms after or in a downtrend.
Inverted head and shoulder it is a correction but in downtrend. It also starts a new uptrend or correction in a downtrend.
Same like this pattern double bottom, triple bottom, falling wedge, etc starts a correction and extends it too.
Eg. 3
As we discussed earlier rectangle pattern is time wise correction pattern.
It mainly forms a range for a stock and act as a start and end of correction in majority of the cases.
Eg. 4
Triangle pattern formation can take place after both uptrend and downtrend. Triangle may act as a continuation of trend or as reversal of trend.
Breakout or breakdown in a triangle pattern can decide the next move of the price.
The triangle pattern is itself a correction. It is combination of both time wise and price wise correction.
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Fibonacci retracement and extension
Fibonacci numbers forms by adding previous two numbers and forming the third number.
Fibonacci numbers can be seen in nature in different forms. Growth in trees, human body structure, petals of flower, arm structure, etc
Fibonacci retracement can be used in stock market to identify the endpoint of correction in both uptrend as well as downtrend. It can used in time wise correction and price wise correction.
Fibonacci retracement cannot be used in isolation it must be combined with price and some other indicators.
Some examples of fibonacci retracements
Eg.1
In the above image correction has retraced at 38.2% of the total move of trend. Consolidation has formed at the bottom and previous uptrend continues after the correction.
Eg. 2
This chart is a combination of both time as well as price wise correction. The low taken at the 50% is a bottom and consolidates after it.
Eg. 3
This is proper time wise correction and retracement at the 50% and consolidation happens after it.
Eg. 4, 5, 6, 7.
All the above charts is a example of retracement of correction compared to previous trend.
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Moving averages in correction
The use of moving average to identify correction is the most important part of this article. We have to use mean reversion and mean deviation in finance to identify the ending point of correction. This helps to maximum profit from the point and low stop loss area for a buyer as well as seller.
Mean deviation means the price move far from the moving averages and the distance between the mean goes on increasing in a trending move. In a both uptrend as well as in a downtrend price deviates from its mean and gap goes on increasing till the start of correction.
Opposite of the mean deviation, mean reversion decreases the gap between price and moving averages. Mean reversion starts at the starting point of correction and gap keeps on decreasing till the meet of moving average and price.
In the above chart moving averages keep going far from price in a trending phase.
At the start of correction gap between moving average and price is too big and the Corrective phase starts.
Finding a top is almost next to impossible task for a trader or investor. But finding the end of correction is much simple as compared to identifying top.
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Time frame in correction
Time frame in correction is important for anyone to time the correction.
More in detail discussed on FINANCE FAMILY YouTube channel
