ONLINE TRADING AND

STOCK RESEARCH TECHNIQUES

RESEARCH OBJECTIVE

•To qualitatively view the prevalent analysis techniques used for selecting a Company’s stock for investment purpose. •To identify the factors to be considered while selecting a particular stock.

RESEARCH METHODOLOGY

RESEARCH DESIGN EXPLORATORY

DATA COLLECTION Secondary Data

TOOLS USED MetaStock

Period of Study 8 weeks

A Stock Exchange is an organized market for purchase and sale of

existing or second hand securities.

STOCK EXCHANGE

SIGNIFICANCE OF STOCK MARKETS

Stock markets are true indicators of the economy of a country wherein they take into consideration factors such as GDP growth, Industrial growth, Global cues, Government policies, Budget, Inflation(WPI) and Demand & Supply to reflect the growth of the economy by showcasing the variations as fluctuations in the Index; NSE and the BSE.

•

Surplus capital.Speculative instincts.High risk appetite.

Stock Market provides them with a platform wherein the variations in its Index levels amounts to huge gains/losses in a short span of time (minutes to several days).

The quick and high returns from Stock Market lures Traders and Investors to invest.

A variable RoR.

Why Invest in Stock Market?

PARTICIPANTS

An investors attitude makes him synonymous to animals in the market.

Bull – If a person is optimistic, believing that stocks are going up, he or she is called a “bull" and said to have a "bullish outlook".

Bear - If a person is pessimistic, believing that stocks are going to drop, he or she is called a "bear" and said to have a "bearish outlook".

Chicken - Chickens are afraid to lose anything. Their fear overrides their need to make profits, so they avoid the market completely and never take any risk.

Pig – Pigs are impatient, greedy, and emotional investors who blindly invest in high-risk securities without strategizing.

Traders- are those people who invest in the market with an aim to earn quick money in a short term.

Investors- are people who invest their capital in a fundamentally solid company for a long term.

• DOW THEORY• ELLIOTT WAVE THEORY

THEORIES OF RESEARCH

DOW THEORY

DOW THEORY

1. The market has three trends- Up trend, Down trend and Sideway

2. Major trends have 3 phase - Accumulation - A public participation- A distribution

3. The stock market discounts all news. 4. Trends are confirmed by volume

Accumulation

Participation

Distribution

Reliance Industries 1/9/06- 29/8/08DOW THEORY

ELLIOTT WAVE THEORY

Proposed by Ralph Nelson Elliott in the 1930s.

•Market prices unfold in specific patterns known as the Fractal Pattern

•5 waves up.

•3 waves down.

Dominant Trend Corrective Trend 

Motive waves

Corrective waves

ELLIOTT WAVE PATTERN

ELLIOTT WAVE: A PRACTICAL EXAMPLE

Technical Analysis

Philosophy or Rationale•Market action discounts everything•Prices move in trends•History repeats itself

•Candlestick charts are the oldest type of charts use for price prediction•Date back to the 1700’s,when they were used for predicting rice price•Sokuta Honma is said to have executed over 100 consecutive winning trades!!•Sakata’s method is the first verifiable beginning of pattern recognition

CANDLESTICK

CANDLESTICK PATTERN

The signals are created by the change in investor sentiment

Type of Chart

White Candlestick

Black Candlestick

Hammer

Doji Line

Common Candlestick Terminology

HAMMER

Engulfing

STAR FORMATION

CANDLESTICK PATTERN

Reliance Industries 4 month Chart

Hanging Man

Piercing Pattern

Dark Cloud

Crow Pattern

• Support and Resistance

• Trendlines

• Trading Range (Channel)

• Price patterns

• RSI

TOOLS FOR TECHNICAL ANALYSIS

SUPPORT AND RESISTANCE

•Draw a trendline through the edges of congestion areas•The most important feature of a trendline is its angle•Trendlines show the action of bulls and bears

TREND LINES

TRENDLINES

A S O N D 1999 A M J J A S O N D 2000 A M J J A S O N D 2001 A M J J A S O N D 2002 A M J J A S O N D 2003 A M J J A S O N D 2004 A M J V

200

250

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350

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450

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550

600

650

700

750

800

850SET (591.480, 614.990, 591.480, 614.990, +32.4800), pp (Dow 30) :: Retrace (2 Plots) *, pp (Dow 30) :: Fibonacci Ladder *, pp (Dow 30) :: Fibonacci Ladder *

Dec 2002 Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2003 Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2004 Feb Mar Apr May Jun W

5000

10000

15000

x1000

25

30

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40

45

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65

70

75

80

85

90

95

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105

ADVANC (80.5000, 84.0000, 80.5000, 83.5000, +3.50000), zz (82.6667)

CHANNEL

•Five most major reversal patterns:

•Head & Shoulder

•Triple top and bottom

•Double top and bottom

•Spike top and bottom

•Rounding

PRICE PATTERNS

1997 1998 1999 2000 2001 2002 2003 2004 W

150

200

250

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1050SET (604.870, 614.990, 576.630, 614.990, +5.27002), pp (Dow 30) :: Retrace (2 Plots) *, pp (Dow 30) :: Fibonacci Ladder *, pp (Dow 30) :: Fibonacci Ladder *

H & S

November December2003 February March April May June July August September October November December 2004 February March April May JuneV

50001000015000200002500030000350004000045000

x1000

45

50

55

60

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75

80

85

90

95

100

105

110

115

BBL (88.0000, 91.0000, 87.0000, 91.0000, +4.50000)

DOUBLE TOP

A S O N 1998 A M J J A S O N D 1999 A M J J A S O N D 2000 A M J A S O D 2001 A M J J A S O D 2002 A M J J A S O N D 2003 A M J J A S O N D 2004 A M J A

500010000

15000

2000025000

3000035000

x100000

0

10

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120

130

140

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160

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190

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320PROP (129.170, 129.170, 116.450, 127.950, -2.21001)

ROUNDING

RSI

Relative Strength Index does not compare the relative strength of two securities, but rather the internal strength of a single security.

FUNDAMENTAL ANALYSIS

Data collected from Company’s Balance Sheet.

Factors considered:

•Dividend•PAT•Reserves and Surplus•EPS•PE ratio

FURTHER RESEARCH

•Fiscal Policy of Governmento Varied tax slabs for different sectors

•RBI’s Monetary Policyo Repo Rateo CRRo SLRo FOREX policy

•Tracking Global Cues•Inflation – 5p.m every Thursday

•Imported inflation •Domestic Inflation

•Speculative Instincts

Contd.

•Sector specific announcements•Windfall tax•Corporate Tax on IT companies•Subsidy to Agri sector•Ban on Iron Ore to control inflation•Increased export duty on metals

•Re-Dollar equation•FII Turnover•Domestic turnover•Keeping a check on Commodity driven stocks•Keeping a check on Demand-Supply of Crude oil

WORLD BOURSES

The markets the world over

•Japan Nikkei•China Shanghai composite•Thailand Set•India Nifty 50/Sensex•London FTSE•USA Nasdaq/Dow Jones•Brazil Bovespa•Korea Kospi

SAMPLE ANALYSIS

Inflation is receding as threat.

New problem :Liquidity and Growth

What can the banks do:

•Cut interest rates•Increase liquidity

India caught in a ripple of financial crisis.

High counter party risk and thus no lenders resulting in reduced liquidity

Current Market Scenario

Bull markets are born in despair, rise in skepticism and die in mania.

By- John Templeton

Famous Quote

ONLINE TRADING MECHANISM

1. Open a DEMAT Account for Equity Trading with their Depository Participant (DP) who is their Stock Broker or the Online Trading Company registered with the Stock Exchange. Negotiate Brokerage

Requirements for opening a Demat a/c are as follows:•Fill the DEMAT Form provided by the Stock Broker. •Provide the PAN number with it. •Provide residence proof.•Draw a cheque in favour of NSCCL as the a/c opening fee.

2. After the DEMAT a/c has been opened and mapped to a Stock Broker’s VSAT terminal, one can commence trading.

TRADE EXECUTION

1.ORDER PLACING2.Bids are communicated to the mainframe of the

Stock Exchange.3.Bid entered is first TIME stamped and then PRICE

stamped.4.TRADE -Stock Exchange mainframe automatically

matches the orders and as soon as the price quotations are matched, Order is converted into Trade.

5.Trade confirmation is given to the Broker or the Client immediately.

6.CONTARCT NOTES are issued by the Brokerage Houses.

QUESTION AND ANSWERS