A Brief Notebook That Guides You Right

Welcome to “Stocks Unveiled" a concise guide designed to

simplify the intricacies of the stock market. In a world inundated
with financial literature, this book stands out by offering practical
insights without overwhelming the reader. Whether you're a novice
or a seasoned investor, this guide provides a streamlined approach
to understanding and thriving in the dynamic world of stocks.
Explore key concepts such as market trends, risk management, and
strategic decision-making with straightforward explanations and
real-world examples. "Stocks Unveiled" is your passport to a
clearer understanding of the financial landscape, empowering you
to make informed decisions and achieve your investment goals. In
just a few pages, this book serves as your concise companion,
guiding you through the market's ebb and flow with confidence.
 STOCK MARKET ANALYSIS
Stock analysis is primarily divided into three parts:
 Fundamental Analysis
 Technical Analysis
 Statistical Analysis
However, considering today's demand, we will discuss Fundamental, Technical, and Statistical
Analysis.

TECHNICAL ANALYSIS
Technical Analysis involves the study of price action through charts to forecast the future
movement of stocks. The main objective is to detect the existing trend in the market where traders
are buying and selling. The market is a cross-section where traders' different attitudes are reflected
in the price. Hence price action is always the primary thing to consider.
All prices are represented on a chart, which is a pictorial, graphical representation of the trading
history. A chart reflects the behavior over a certain period during which the future movement can be
predicted. It can be said that the past price action helps us understand the future movement of a
particular stock. Technical Analysis considers that what has happened in the past will repeat in the
future, though not necessarily in an identical manner, but with unique patterns. It is said that, all else
being constant, human beings tend to behave almost identically because human psychology does not
change.
The buying and selling behavior in the market is influenced by two psychological factors – "Hope"
and "Fear." When prices are rising, traders become greedy, hoping for further gains, and may lose
rationality. Conversely, when prices are falling, fear sets in, and traders may panic, leading to
irrational decisions.
Traders often anticipate the future movement of stocks based on past behavior. However, it's
important to note that emotions can override rationality, leading to impulsive actions. For instance,
when prices are continuously rising, traders may become overly optimistic, anticipating further
gains. On the other hand, when prices are falling, fear may drive traders to sell, anticipating further
losses.
In conclusion, Technical Analysis recognizes the influence of human psychology on market
behavior and aims to use historical price data to predict future movements. Understanding these
patterns can help traders make informed decisions in the dynamic stock market environment.
All actions by traders are reflected in the price action, making it the source of information about a
particular stock. It's important to note that price action discounts everything, providing insights well
in advance. A chart serves as the graphical representation of price action.
  BAR Charts (High-low charts): In BAR charts, we observe two extremes—the high and
the low. The high represents the maximum price for a given period, while the low indicates
the minimum. The range between the high and the low illustrates the intensity of conflicts
between bulls and bears. In bar charts, we can refer to the high point as the "top point." The
top point in the chart is where the upward journey of price movement faces resistance, and
the direction reverses. It's a point where the supply surpasses the demand, indicating a
potential reversal. On the other hand, the bottom point is where the downward journey finds
support, and the direction reverses. This is a point where demand is greater than supply.
 Point and Figure Chart (Hybrid Chart): The Point and Figure chart is a hybrid chart type.
 Renko Chart: Renko charts use a series of bricks to represent price movements.
 Three-line Break Chart: Three-line break charts focus on price movements without
considering time.
 Mountain Chart: Mountain charts visually represent the rising and falling trends in a stock's
price.
 Heikin-Ashi Chart: Heikin-Ashi charts smooth out price movements to identify trends more
easily.
 Range-Bar Chart: Range-Bar charts focus on price movements within a specified range.
 Candlestick Chart: Candlestick charts provide a detailed view of price action, indicating
open, close, high, and low prices.
Among these, the Candlestick chart is particularly popular for its comprehensive representation of
price movements.

It's a well-known principle that if demand exceeds supply, prices will likely continue to rise.
Conversely, if supply surpasses demand, prices are expected to fall. When demand and supply are
nearly equal, the price tends to move in a straight-line pattern.
From charts, we observe various periodicities, including daily, weekly, monthly, quarterly, and
yearly, along with intraday intervals. These charts provide insights into market trends and chart
patterns, volumes, Support/Resistance. Additionally, from charts we can find arithmetic or semi-
logarithmic scales.
When analyzing charts, it's crucial to pay attention to volume patterns and resistance levels. A
profitable trader should keep a lookout for various factors, including RBI policies, foreign
investments, currency exchange rates (USD/INR), global market indices like NASDAQ, Dow
Jones, NIFTY, and S&P, as well as indicators such as inflation rates.

Benefits of using Charts

The benefits of utilizing charts in trading are manifold.

1) Charts offer a concise visual representation of a stock's price history, serving as an essential tool
for traders.
2)They help assess market volatility, define risk levels, and are crucial for risk management.
3) Understanding repetitive patterns in charts is essential for making informed decisions about
market behavior.
In short, the use of charts is a fundamental aspect of trading. They provide a realistic and
meaningful depiction of market behavior, serving as a valuable tool for developing profitable
technical trading systems. Therefore, a sound understanding of charts and their patterns is a
prerequisite for traders aiming to develop successful strategies.

In technical analysis price and volume chart pattern to discover the police and bear is sentiment of
the market and to find out right entry and exit level history repeats itself is the main thing in
technical analysis.

TREND
Direction of the movement of a stock is normally known as its strained at any given point of time a
stock price either has to rise or has to fall or remain stand still which is known as its Trend.

It is divided as per basis of direction

1) Up-trend
2) Down trend
3) Choppy or flat Trend
Up Trend: in an after and the price action continues to create higher top and higher bottom and so
long as the higher top and higher bottom is maintained uptrnd is said to be intact and trend is Up.
Where demand is greater than supply higher tops and higher bottoms are also known as Swing
Ups and Swing Down.
Down Trend: In a downtrend, price action consistently forms lower troughs and lower bottoms.
This pattern continues as long as the supply exceeds demand. The downtrend is clearly visible on
the chart.
Flat Trend: In a flat trend, the price action neither establishes clear higher tops nor distinct lower
bottoms. This occurs when demand and supply are nearly equal, resulting in a sideways movement
of prices.

Identifying Trend Changes:

Understanding how a trend changes is crucial for traders.
- Transition from Up Trend to Down Trend:
When the price action breaks the pattern of forming higher bottoms and starts creating lower
troughs and lower bottoms, the transition from an uptrend to a downtrend occurs.
- Observing Trend Changes:
Trained traders keenly observe changes in price action. The shift from forming higher bottoms to
lower troughs signals the end of an uptrend and the beginning of a downtrend.
Key Takeaways:
Down Trend Characteristics:

 Lower troughs and lower bottoms.

 Continues as long as supply exceeds demand.
 Clearly visible on the chart.
Flat Trend Characteristics:

 Lacks clear higher tops or lower bottoms.

 Occurs when demand and supply are balanced, leading to sideways movement.
Transition from uptrend to downtrend involves breaking the pattern of higher bottoms.

Observing price action for a shift from higher bottoms to lower troughs and vice versa
 Identifying Trend Reversals
Down Trend to Up Trend:

When the price action starts forming higher troughs and bottoms, it indicates a reversal in the
existing downtrend. This transition signifies a shift from a bearish market to a potentially bullish
one.

Counter Trend:

A counter-trend occurs when, at any given point, there is an interruption in the prevailing trend by a
secondary trend moving against the main trend.

- Characteristics of Counter Trend:

 Opposite direction to the main trend.
 In an uptrend, the counter-trend is downward.
 In a downtrend, the counter-trend is upward.

Understanding Trends Based on Time Frames:

1. Primary Trend (Major/Long-term Trend):

The primary trend represents the major and long-term direction of the market. It is a foundational
trend that influences overall market sentiment.

2. Intermediate Trend (Mid-term Trend):

The intermediate trend is a mid-term trend that occurs within the broader context of the primary
trend. It may exhibit fluctuations within the overall market direction.

3. Short-term Trend (Minor Trend):

The short-term trend is a minor trend that occurs within the intermediate trend. It reflects temporary
shifts in market sentiment and may be influenced by short-term factors.

Characteristics of Short-Term Trend:

1. Tick by Tick Analysis:

 Analyzed on a tick-by-tick basis for real-time insights.
2. Hour by Hour Variations:
 Examined for hourly variations in market movements.
3. News-Oriented Spikes:
 Influenced by news events leading to sudden spikes.
4. One Day to Three Day Duration:
 Typically lasts between one to three trading days.
 5. Limited to Eight Trading Sessions:
 Rarely extends beyond eight trading sessions.
6. Manipulative Nature:
 Prone to manipulation due to its short-term nature.
7. Full of Unpleasant Surprises:
 May involve unexpected and abrupt market changes.
8. Fast-Moving:
 Exhibits rapid and dynamic price movements.
9. Validity of 0 to 21 Days:
 Validity period ranges from 0 to 21 days.

Trading Tip: Use Moving Averages (M.A.) and implement stop-loss strategies when trading based
on short-term trends.

Characteristics of Intermediate Trend:

 Formation from Short-Term Trends:

 Typically evolves from a cluster of short-term trends.
 Duration of Three Weeks to Three Months:
 Theoretically lasts for three weeks to three months.
 Dependence on Primary Trend:
 Duration may vary based on the direction of the primary trend.
 Moving Averages (M.A.) Analysis:
 Analyzed using M.A. with periods ranging from 13 to 30. If above 13 DMA, it is in
uptrend, if below 13 DMA, it is in downtrend.
 Identification through Formations:
 Recognized through higher and lower formations.
 Suitable for Swing Trading:
 Ideal for swing trading, providing excellent results when synchronized with the
primary trend.

Characteristics of Primary Trend:

 Formation from Intermediate Trends:

 Originates from a cluster of intermediate trends.
 Signal Timing Challenge:
 The major disadvantage is the signals can be delayed.
 Identified on Daily Closing Basis:
 Identification is based on daily closing charts.
 Duration of Three Months to Many Years:
 Theoretically lasts from three months to many years.
 TREND LINE
Trend lines are graphical representations on charts that depict the prevailing trend in the market.
They serve as instruments for detecting trends and come in two types: up trend lines and down trend
lines.

An Up trend line is drawn by connecting rising bottoms. As long as the price action remains above
this upward-sloping line, the trend is considered upward. When drawing a trend line, it is essential
to extend it to the right side as much as possible. The extended portion on the right functions as
potential support or resistance in the future. Once the price validates this up trend line, it signals that
the uptrend might be encountering resistance at this line.

Conversely, a down trend line is drawn by connecting descending tops. When the price encounters
resistance on this downward-sloping line, it tends to fall. As a rule of thumb, as long as the price
remains below the down trend line, the trend is considered downward.

VALIDITY OF A TRENDLINE

The validity of a trendline depends on several factors:

1. Minimum Requirement:
 At least two bottoms are required to draw a trendline. For it to remain valid, a
minimum of two tops must also be considered. The inclusion of a third touch
enhances the reliability of the trendline.
2. Time Duration:
 The age of the trendline impacts its strength. Older trendlines tend to have a more
significant impact. Whether it's used for intraday or on daily/weekly charts, the longer
the time frame, the stronger the potential impact.
3. Number of Hits:
 Consider the number of times the price touches the trendline. A greater number of hits
generally strengthens the impact, while fewer hits may weaken the trendline's
significance.
4. Angle of Trend:
 The angle of the trendline is a crucial factor. An angle greater than 45° indicates a
trend moving at a high speed, potentially suggesting a correction around the corner.
Conversely, a trendline with an angle below 45° may signify a more sustainable and
steady trend. It is also said that if at an angle where the trend picks up, it will fall
somewhere near to the more or less same angle.
5. Measuring Objective:

 A trendline serves a measuring objective. Once violated, the distance it had before violating
this trendline is called the "travelled projection of price." This measures how far the price
moved before breaking the trendline.
 The point on the chart where an uptrend line intersects with a downtrend line is a crucial
point. This intersection, also known as a sing point, can act as a strong support or resistance,
depending on the context.

KEY TO PROFIT USING TREND:

Profit with Minimum Risk:

 The primary objective is to profit with minimum risk. This is achieved by effectively
following these steps:
1. Control Capital Risk:
 Determine and control capital risk when entering a trade. Choose the optimal time to
enter a trend, considering the trend's strength and direction.
2. Select Appropriate Trends:
 Select and enter positions in appropriate trends, regardless of their direction. This
involves recognizing the right time to participate in a trend.
3. Close Positions at Trend End:
 Close positions when the trend is ending. This helps secure profits and avoids
potential losses as the trend loses momentum.

MOVING AVERAGE
In Technical Analysis, there are three types of indicators:

1. Trend Following Indicator (TFI):

 A TFI follows the trend, providing signals based on the current trend or potential
reversal points. It is a lagging indicator, meaning it reacts to price movements after
they occur. It cannot predict future price movements but is valuable for confirming
existing trends.
2. Oscillators:
 Oscillators are indicators that oscillate or move back and forth within a specific range.
They are useful for identifying overbought or oversold conditions in the market.
Characteristics of Trend Following Indicators:

 A TFI is a follower of the trend, providing signals that trail the actual trend movements.
 It gives signals after the trend has already started, making it a lagging or late indicator.
 The TFI always moves behind the trend, giving signals that can never go ahead of the actual
trend direction.

Moving Averages (M.A.):

 Taking a signal from a Moving Average (M.A.) will not give an early entry. M.A. is a
lagging indicator that follows the trend rather than leading it.
 A key point is that even if a signal from M.A. is taken late, it is still valuable for confirming
the trend direction.
 M.A. is particularly useful for identifying the slope of the price movement. If the M.A. is
sloping downward, it indicates a downtrend, and if it is sloping upward, it indicates an
uptrend.

Using Moving Averages:

 While M.A. may result in a late entry, it is effective in confirming the trend direction.
 Traders can use M.A. for swing trading or as part of a broader strategy.

M.A. are mainly of 3 types:

1. Simple Moving Average (SMA):

 Invented by Mr. Hrust and Donchenko.
 Easy to calculate.
2. Exponential Moving Average (EMA):
 A type of weighted moving average that gives more weight to recent prices, making it
more responsive to price changes.
3. Weighted Moving Average (WMA):
 Assigns different weights to different data points, providing flexibility in emphasizing
certain periods.

Other Types of Moving Averages:

 McGinley's Dynamic Moving Average

 Time Series Moving Average
 Triangular Moving Average
 Volatility Index Dynamic Average
 Wells Wilder Smoothing Average
Calculation and Period:

 Among the three, SMA is easy to calculate.

 The minimum period to calculate M.A. is typically 2 days.

Understanding Trend:

 To understand the trend, it is crucial to compare the closing price with the M.A.
 In an uptrend, the closing price is typically higher than the M.A., indicating a rise.
 In a downtrend, the closing price is usually lower than the M.A., suggesting a fall.

Consideration of Time Frame:

 The number of days considered for M.A. depends on the trendiness of the time frame.
 For instance, when considering a 200-day M.A., it reflects the trend for 100 days in either
direction.

Basic Concept:

 In an uptrend, the closing price tends to be higher than the M.A., signalling a rise.
 In a downtrend, the closing price is often lower than the M.A., indicating a fall.

The Best Way to Understand the Trend:

The most effective approach to comprehend the trend is by examining Moving Averages (M.A.)
across two different time frames: the Short-Term Moving Average (S.T.M.A) and the Long-Term
Moving Average (LTMA).

Relative Comparison:

 The relative comparison of these two M.A. provides a clear direction of the trend in the
market.
 When the short-term M.A. aligns with the long-term M.A., it is considered a perfect or ideal
scenario for decision-making.

Perfect Uptrend:

 In a perfect uptrend, the price will be greater than the short-term M.A., and both will
consistently rise.
 As long as this picture is maintained, indicating the trend is intact, it serves as a
recommendation to BUY.
 (BUY SIGNAL) (Sell Signal)

Perfect Downtrend:

 In a perfect downtrend, the short-term M.A. will be less than the long-term M.A., and both
will consistently fall.
 As long as this picture persists, reflecting the trend is intact, it serves as a recommendation to
SELL.

If STMA is greater than LTMA but LTMA is falling we cannot say it is a valid signal to buy. We
have to wait for the LTMA to rise to generate a buy signal.

4) Kissing Point and Trend Validation:

When the short-term Moving Average (S.T.M.A.) is below the Long-Term Moving Average
(L.T.M.A.), but the L.T.M.A. is rising, it's not an immediate signal. Validation is required before
generating a proper signal for either Buy or Sell.
M.A. Merge Point:

 At any time, the S.T.M.A. may rise to meet the L.T.M.A., creating an M.A. merge point, also
known as the kissing point.
 Rather than assuming an immediate signal, it is crucial to wait for a valid kissing point. This
is an essential decision-making point.

Trend Established:

 The most important consideration when using Moving Averages is the establishment of the
TFI. TFI should be used only when the trend is established.
 M.A. should be used when the trend is established, whether it is upward or downward. In a
choppy or indecisive market, M.A. may provide false signals.

Key Points to Note:

 The kissing point is significant and should not be overlooked.

 Waiting for the trend to be established is crucial for reliable signals.
 Using M.A. during an established trend is essential for accurate decision-making.
Another M.A. System: Triple M.A. System

The Triple M.A. System is a combination of three Moving Averages with different time frames: 4,
9, and 18. This system aids in understanding trends effectively.

Key Guidelines for Triple M.A. System:

1. Uptrend:
 In a perfect uptrend, the 18-day Moving Average (18D.M.A.) should be above the
9D.M.A., and both should be above the 4D.M.A.
 If these conditions are met, it suggests a valid uptrend where prices will consistently
rise.
2. Downtrend:
 In a perfect downtrend, the 18D.M.A. should be below the 9D.M.A., and both should
be below the 4D.M.A.
 This alignment signals a valid downtrend, indicating that prices will consistently fall.
If any of these conditions are not met, the signal may not be accurate.

Best Combinations for Understanding Trends:

 Short-Term Trend: 13D.M.A. & 30D.M.A.

 Intermediate Trend: 50D.M.A. & 100D.M.A.
 Primary Trend: 100D.M.A. & 200D.M.A.
Checkpoints for M.A.:

1. Slope of M.A.:
 Observe whether the slope is upward or downward. An upward slope suggests a
bullish trend, while a downward slope indicates a bearish trend.
2. Key Moving Averages:
 Always check 13D.M.A. and 30D.M.A. for a broader sense, and consider longer time
frames like 50, 100, and 200.
3. Confluence of M.A.:
 When all Moving Averages converge, it suggests a significant market direction. The
market is likely to move according to this alignment.
4. In the Case of Low-Liquidity Stock: When dealing with low-liquidity stocks, it's crucial to
check the 200-Day Moving Average (200-D.M.A.) and the 25-Day Moving Average
(25D.M.A.). If the price falls below a certain M.A., and the slope suggests a downtrend, the
market will likely follow that direction.

5. Combination Action: Act in combination with both the Short-Term Moving Averages
(S.T.M.A.) and Long-Term Moving Averages (L.T.M.A.). Utilize the combination of Short-
Term Moving Averages (e.g., 8,18) and Long-Term Moving Averages (e.g., 50, 100, 200)
for a more comprehensive analysis.

6. Moving Averages and Price Action: Consider the interaction of price action and Moving
Averages (M.A.). Observe the M.A. slope and its relation to price action. Combine this with
other factors such as support and resistance levels (SL) for a more informed decision-making
process.

7. Long-Term M.A. Check: For long-term analysis, consistently check the Long-Term
Moving Averages (L.T.M.A.), specifically the 50, 100, and 200-D.M.A. These provide
insights into broader market trends.

8. Short-Term M.A. Check: Always check the Short-Term Moving Averages (S.T.M.A.),
including the Simple Moving Averages (SMA) with periods of 13 and 30 days. These offer
valuable insights for short-term market movements.

9. Caution on Exponential Rise: Exercise caution when considering buying during a period of
exponential rise. Sudden and extreme rises may not be sustainable and could lead to market
corrections.

Another M.A.: Exponential Moving Average (EMA)

The Exponential Moving Average (EMA) is calculated using the formula:

EMA= Price today x K + MA of yesterday x (1-K)
K=2/(n+1), where n=number of days
Advantages of EMA:

 It assigns more weightage to the latest data, reflecting the present market mood more vividly.
 EMA responds much better to price changes compared to Simple Moving Average (S.M.A.).

Disadvantages of S.M.A.:

 It changes the Latest data twice, causing distortions when old data is deleted and the new
data is entered.
 This can lead to big distortions because the deletion of old data occurs when new data enters.

EMA vs. S.M.A.:

 EMA, with its focus on the latest data, is considered a better Trend Following Indicator (TFI)
than S.M.A., providing more accurate insights.

Bar Reversal:

 Bar Reversal occurs when a bar or a group of bars together speaks for a significant change in
the trend.
 There are four types of Bar Reversals:

1. Key Reversal: Indicates a potential reversal pattern after a sharp move either upward
or downward. A bottom key reversal occurs after a sharp fall in the market.

Suppose one finds that the price suddenly opens below the low of the previous day
and continues to fall further. After constantly falling for some time, the price stops,
reverses its journey, and starts going up. First of all, it crosses the opening price and
keeps on rising until it gets into the body of the previous day's bar. Finally, it closes
near the high of the day, which should definitely be higher than the last day's close. It
should also get into the body of the previous day's bar, at least by 50%. This reversal
can also occur at the top, which is called a top reversal. In any case, one must reverse
all the rules in the case of an upward key reversal. In any case, this key reversal is a
strong and reliable pattern.
2) Perfect upward reversal: A Perfect Upward Bar Reversal is also a strong bottom reversal
pattern, much like the Key Reversal. It occurs after a sharp decline, indicating that the previous
trend has been decisively down. This pattern consists of two parts:

1. The first part involves the closing price being lower than the opening price, with both lower
highs and lower lows compared to the previous day.
2. In the second part, the second day's bar opens below the low of the first day but rises higher
than the high of the previous day. In fact, it completely covers and engulfs the worst in the
market, suggesting that the downward trend is, at least temporarily, over, and the price is
likely to rise.

This pattern can also occur at market tops, known as a Perfect Downward Bar Reversal. In this case,
all the rules are reversed, indicating a potential reversal in the upward trend."

3) Two-day reversal: A Two-Day Reversal is another robust bottom or top reversal pattern,
depending on the context. The pattern comprises two bars, each almost equal in size. In a bottom
two-day reversal pattern, the first day's closing price is lower than the opening, while the second
day's closing price is higher than the opening, and both days are equal in length. This pattern can
occur at the top or bottom of a short-term trend. After the formation of this pattern, there is an
indication that the trend is likely to reverse its direction.

4) Island Reversal - An Island Reversal is essentially a revised edition of a two-day reversal. The
key difference lies in the fact that the Island Reversal is preceded by a price gap. If there is a gap,
the following day forms an island, indicating a change in price action. Similar to the two-day
reversal, the Island Reversal can also be preceded by a price gap.
 THEORY OF GAP
When there is a price difference between two consecutive day’s high and low a gap is said to have
occurred. A gap is caused when there is a sudden change in the mood of the traders overnight.
Generally, Gaps are of 2 types-
1) Positive Gap or (+) Gap Plus Gap
2) Negative Gap or (-) Gap
1) Positive Gap – When there is a price difference between yesterday’s high and today’s low, a
positive gap is said to have occurred. This gap indicates bullishness of the stock, always trade
in the direction of the gap.
2) Negative Gap – When there is a price different between yesterday’s low and today’s high, a
negative gap is said to have occurred. This gap indicates bearishness of the stock. Always
trade in the direction of the gap.
So, we can say, a gap is the point or place in the chart where no official transaction has occurred.
Gaps are of 4 types, as per technical significance.
 Common Area Gap – This gap occurs when market is in choppy trend. This type of gap
does not have any technical significance. Hence, this type of gap should not be paid much
importance. This type of gap normally gets very quickly filled up. It occurs in the thinly
traded stocks, low volume stocks, cannot create any new high or new low in the chart.
 Breakout Gap – This sort of gap occurs when the price comes out any confinement with
heavy volume. This sort of gap tells us that the market is highly trending, normally it is
found that after creating a breakout gap, price often comes back to fill up the gap and
takes support and again rises up or down. (if breakout is in negative side) as the case may
be. Any breakout from a confinement with a gap, it is obviously more important than a
breakout without gap. It creates a new high for several days and volume maybe double
the average volume of that stock.
 Runaway or Measuring Gap- The gap which occurs after a breakout gap is called
runaway gap. This gap tells us that there is a strength in the existing trend in the market
and still there is a lot way to go. This gap is not filled up very quickly. This gap is also
known as measuring gap, because it has got measuring implication.

We have to measure the distance between the breakout gap and the runaway gap and project
the same distance from the point of runaway gap to get the next possible target of movement.
There could be more than one runaway gap in the same direction. We must note once again
that the runaway gap does not get quickly filled up, volume will increase in this case, volume
confirms this gap.

 Exhaustion Gap – This gap will definitely occur either at the top or at the bottom of the
present rally. This gap tells us that this is the end of the movement. We must note that an
exhaustion gap gets filled up maximum within 3 days.
 Theory of Retracement
Retracement means correction of the earlier movement. Theory of Retracement tells us about the
possible points where the corrections are likely to halt. According to the theory, the first correction
level is 33%, or 1/3rd of the previous movement. (as per software it is 23.8 or 38.2%) But in any
case, if the correction goes below 33%, it can go up to 50%. This 50% level is known as half-way
level correction. Let us note that if the previous trend is strongly up or down, whatever the case
might be, the correction level should not extend beyond 50% of the earlier journey. Although it has
been said in theory that a correction beyond 50% might go up to 67%. But practically it has been
observed that, any correction beyond 50% can take the price to the point from where it had started
its earlier journey. This 100% correction, is known as Double Bottom. This level is strongly
supported level for that stock. Stock price can rise further from this level.
To define a double bottom we can say that, it is a level from where the price had made its earlier
bottom and any testing to that level, for the second time is called Double Bottom, for third time it is
called Triple Bottom.
Similarly, a top level or a top price from where, the price started falling is known as single top, and
any testing to that level for the second time is called Double Top and the third time is called Triple
Top. This is a strong resistance level any time price can fall from this level.
It had been said by world masters that to buy at a single bottom, double bottom and also triple
bottom and to sell at single top, double top and triple top but nobody has recommended either to buy
at the fourth bottom or to sell at the fourth top because fourth attack on either side, may it be top or
bottom normally gets violated.

Fibonacci Series
The 18th century mathematician had discovered this series. He did not know what is the application
of the series. We apply this series in the stock market. This series is as below.
0,1,1,2,3,5,8,13,21,34,55,89,144,233,377,610,897,1597………….
This series came by adding the next number with previous number. This is called Fibonacci number.
This series is formed with a formula, it is as below.
1) If we divide 21/8, the quotient is 2 with remainder 5.
5 is the number immediately before the divisor 8.
Ex.- 55/21
13 is left, which is the previous number of 21.
2) 144/89= 1.618, 987/610= 1.618
The ratio of any number to its next highest number works out 1.618.
3) 34/55= 0.618, 233/377= 0.618
The ratio of any number to its previous highest number works out as 0.618
4) 144/55= 2.618, 89/34= 2.618
The ratio of each number to the second number below it is 2.618, so on applying this type of
formula we can get a series as below.
 0.238
0.382 If we calculate these ratios in percentage, the result will be, 23.8%, 38.2%,
0.618 61.8%, 1%, 1.61%, 2.62% and 4.24%
1
1.618
2.62
4.24
The original Fibonacci series is as below-
0.25, 0.38, 0.48, 0.50, 0.618, 0.75, 1, 1.618, 1.80, 1.918, 1.982, 2.618, 4.24, 6.85.
These levels act as support or resistance in future.

PATTERN

1) Head and Shoulder Pattern – It is a strong reversal pattern., it occurs at the top, here
at the top means previous trend was sharply up. It is made up of 3 tops. First one is known as
left shoulder, the higher one is called head and the third one is known as right shoulder. Right
shoulder can be less than or greater than or equal to the left shoulder. But in any case, it
should not be greater than the head. This is the structure of general head and shoulder pattern.
But in complex head and shoulder pattern, there could be two left shoulders or two right
shoulders. Volume is normally high during the formation of left shoulder and comparatively
less during the formation of Head. Volume is very low during the formation of right shoulder.
A trend line which is drawn by connection the bottom of left shoulder, head and right
shoulder is known as neckline. Once the price breaks the neckline, the trend is changed and
opposite trend starts. We must note that neckline should be broken with a very high volume.
Once the neckline is broken, price is expected to travel a distance which is equal to the length
of the distance between the head and the neckline. The most important point is to note that,
we are not supposed to sell, unless the neckline is broken.

Head and Shoulder can also occur at the bottom, after the fall of the price which is called
inverted Head and Shoulder. Needless to say, that an inverted head and shoulder is bullish by
nature, price can rise from the neckline. This pattern can be seen in the oscillator also.
2) Continuation Pattern – triangle is the main subject of continuation pattern. Triangle can be
seen in 3 forms-
 Symmetrical Triangle
 Ascending Triangle
 Descending Triangle
  Symmetrical Triangle – a continuation pattern here means that if the previous trend is
up, then the next trend will also be up. If the previous trend is down, the next trend will
also be down. These are the following characteristics of a symmetrical triangle.

1) A symmetrical triangle is made up of two trendlines- the upper one is falling and the
lower one is rising.
2) The two trendline met at a point which is called apex. The max distance between 2
trendlines is called base.
3) Volume is very low during the formation stage but very high at the time of breakout.
4) The upper trendline and lower trendline coverages at the same angle
5) Once the price is broken it is expected to travel a distance which is equal to the length
of the base.
6) In a symmetrical triangle price normally breaks out from a distance of 75% between
the base and the apex. So, it is possible in a symmetrical triangle to forecast the exact
date of breakout, which is not possible in any other pattern.

 Ascending Triangle -
Ascending Triangle is a continuation pattern, which tells us that the previous
trend was up and the next trend will also be up.an Ascending Triangle is made up
of two lines, the lower one is rising and the upper one is flat. Rising trendline
means bottoms are constantly higher and the flat trendline means tops are equal.
We can say that because the bottoms are higher so buyers are strong and equal
top means sellers are weak. So, it is a tussle between the strong buyer and a weak
seller. And finally, price breaks upwards. Like all the continuation pattern,
volume is very low during the formation stage and very high at the time of
breakout. Once price breaks out, it is expected to travel the distance which is
equal to the length of the base.
 Descending Triangle – is also a continuation pattern. In a descending
triangle, the previous trend was down and the next trend will also be down.
So, we can call it a bearish continuation pattern. We must reverse all the
rules of ascending triangle.

 Rectangle –
Rectangle formation is a very unpredictable pattern because from this pattern,
price might go up or down. So, it is very difficult to say, if it is a continuation
pattern or reversal pattern. There are two ways to check that direction of the
pattern of the stock.
1) 6th point reversal – In a rectangle formation price normally tends to breakout from a
6th point hit. If the 6th point hit its upside it is likely to go upside. If its downside then
its likely to go down.
2) We need to count the total number of candles in the rectangular formation. If the
number of white candles is greater than black candles, there are possibilities of a side
breakout, or vice versa. After the breakout from the rectangular pattern, the price is
expected to travel a distance equal to the width of the rectangle. Some experts
recommend measuring the height of the rectangle and multiplying it by three
Fibonacci ratios (1.68, 2.618, 4.236) and projecting those measurements in the
direction of the breakout to obtain a price target.

Rounding Top and Rounding Bottom Pattern

Both the rounding top and rounding bottom patterns are powerful reversal patterns. Rounding tops
typically occur after a sustained rise in the market, with 'sustainable rise' referring to a previous
uptrend. In a rounding top pattern, prices tend to move within a relatively confined area without
forming clear-cut higher tops. High volume is observed during the formation of this pattern,
signifying a phase of distribution where stocks transition from strong hands to weaker hands.

The rounding top pattern takes a considerable amount of time to complete, and interestingly, the
longer the time period, the stronger the potential impact.

On the other hand, the rounding bottom pattern represents a phase of accumulation. During this
pattern, the general public tends to sell their stocks, which are then acquired by intelligent investors.
In contrast to the rounding top, the volume is notably low during the formation of a rounding
bottom pattern. This pattern typically takes a minimum of six months to complete.

Pattern breakdown
In some instances, when a pattern fails to reach the anticipated level, it is referred to as a pattern
breakdown. In a larger time frame, when observing a rounding top or bottom, it may consist of
multiple tops or bottoms.

Phases of a market: In a smaller time frame, there are four distinct phases in the market:
Accumulation, Markup, Distribution, and Markdown.
BUMP AND RUN REVERSAL PATTERN
As the name implies the Bump and Run pattern forms after excessive speculation. It drives price up
too far too fast. Developed by Mr, Thomas Bulkowski, the pattern was introduced in June 1997
issue of Technical Analysis of Stock and Commodities. It was also included in his recently
published book “The Encyclopedia of Chart Pattern”
Bulkowski identified 3 main phases to this pattern, leading, bump, and run. Here are the three
phases that also looks at the volume and pattern validation.
1) Lead-in Phase – The first part of the pattern is lead in phase that can last one month or
longer and can form the base from which to draw the trendline during this phase price
advances in an orderly manner and there is no excess speculation. The trendline
should be moderately steep. Bulkowski advised for an angle of 30 degree to 40
degree.
2) Bump Phase – The bump forms with a sharp advance. price moves further away from
the leading trendline and the angle of the trendline is 45-60 degrees.
3) Bump Validity – It is important that the bump represents a speculative advance that
cannot be sustained for a long time. Bulkowski developed what he calls an Arbitrary
measuring technique to validate the level of speculation in the bump. The distance
from the highest high of the bump to the leading trendline should be atleast twice the
distance from the highest high in the lead in phase to the lead in trendline. This
distance can be measured by drawing a vertical trendline from the highest high to the
lead in trendline.
4) Volume- As the stock advances during the lead in phase volume is usually average and
sometime low when the speculative advances begin to form the left side of the bump
volume expands as the advance accelerates.
5) Run Phase – The run Phase begins when the pattern breaks support from the lead in
trendline price will sometime hesitate or bounce off the trendline before breaking
through. Once the break occurs, the Run phase takes over and the decline continues.
 The BARR can be applied to daily weekly or monthly charts. As stated above the pattern is
designed to identify the speculative advances that are unsustainable for a long period because price
rises very fast to form the left-side of the bump. The subsequent decline can be just as ferocious.

1) The lead in phase formed over 3 month period from October 1999 to January 2000.
2) The trendline extending up from the lead-in phase formed 34 degree angle. It is
neither too steep nor too flat.
3) The bump phase began in early January 2000nwhen the advance accelerated with a
large increase in volume and the angle of trendline was 51 degree. It is larger than the
lead-in trendline.
4) The distance from the lead-in phase’s highest high to the TL was 13units. The distance
from the Bump phase’s highest high to the TL as 38 units. This is almost 3 times
larger and validates the speculative excesses in the bump.
5) After reaching the high around 130units price declines sharply and bounced off the
lead in Trendline . A lower high formed around 115 units and the TL was soon broken.
6) The decline continued after the TL broke and reached 67 units before a reaction rally
began. The rally advanced to around 95 and fell just short off the horizontal support
line before falling back to the new low.
 Oscillators
Oscillators are considered as advanced level indicator. It is called oscillator because it oscillates
between the two extremes one is overbought and another is over sold. It is basically momentum
indicator which measures the velocity of a trade. the most important message from an oscillator
is the divergence.
All oscillators are expected to move in tandem with the price line. There are certain times when the
priceline and oscillators does not move in parity. This is the point where divergence is said to have
occurred. Divergence are of two types:
1) Positive Divergence - The oscillators as well as the other indicators gives their best trading
signal when the divergence from price occurs. When price falls to a new low while an
oscillator refuses to decline to a new low. They show that bears are losing power. Price are
falling out of inertia and bulls are ready to seize control.
2) Negative Divergence – Bearish Divergence occurs in uptrend. they identify market tops they
emerge when price rally to a new high while an oscillator refuses to rise to a new peak. A
bearish divergence shows that bulls are running out of steam. Price arising out of inertia and
bears are ready to take control. It is the end of uptrend.

RSI (RELATIVE STRENGTH INDEX)

It was introduced by Mr. Wales Wilder in the year 1978 in his book New Concept in
Technical Trading. RSI indicates momentum only . It should never be confused with the
principal of relative strength. RS is commonly used to compare the performance of a stock
with the market average. RSI is a momentum indicator and it measures the velocity of a
trade. It compares the price of a stock relative to its present and past performance.

RSI = 100 - (100/1+RS)

RS = Average of ‘x’ day up close/ Average of ‘x’ days down close [x=number of days]

The most popular number is 14 days. RSI is plotted on a vertical scale of 0 to 100.
Movement above 70 is considered as overbought condition. Movement below 30 is
considered as an oversold condition. As RSI takes the averages of up and down days its
result are less affected by a sharp dip or rise on a specific day. As a result this method is a
more stable momentum indicator.
Trading techniques with RSI

1) When RSI is below 30 it tells us that the market is oversold and the reversal in the trend is very
near. Let us take a note that RSI below 30 cannot be a criteria for buying. RSI below 30 gives us the
advanced warning signal of a possible change in the trend. The valid buy signal will occur when the
movement of RSI goes above 30.
2)RSI above 70 cannot be a criteria for selling. Rather it is an advance warning that the present rally
in the market is getting over extended. The valid sell signal will occur when RSI is near 70 level.
3) The most important message of RSI is that it does not get overbought or oversold too often rather
sometimes it takes more than a year for RSI to become overbought or oversold. The most important
trading decision generated by RSI is divergence so we have to search for the divergence in RSI

Divergence
Divergence are of 3 types – A class B Class, C Class.

1) A Class Bearish Divergence – Price reaches a new peak while an indicator reaches a lower peak.
This is the strongest sell signal.
2) A class Bullish divergence – Price falls to a new low while an indicator stops at a more shallower
high than before. This is the strongest buy signal.
3) B-Class bearish Divergence - Price trades a double top while an indicator reaches a lower peak
this is the second strongest sales signal
4) B Class Bullish divergence - Price trades a double bottom while an indicator traces a higher
second bottom this is the second strongest Buy signal
5) C-Class Bearish Divergence -Price reaches a new peak while an indicator traces a double top this
is the weakest bearish divergence
6) C-Class Bullish Divergence - Price falls to a new low while an indiator makes a double bottom
this is the weakest Bullish divergence.
Special Method for Trading in RSI

1) Andrew Cardiff modified the system of 70 by 30 and stated that a better and clearer signal would
be the 60 by 40 overbought and oversold indicator to simplify he stated that one can freshly buy
above 60 instead of 70 and can freshly sell below 40 instead of 30.

2) In a more recent development it has been found that an RSI value of 13 in a weekly chart would
be better than 14 weekly period. This 13 weekly period RSI creates a Buy signal above 60 and a sell
signal below 55.

3) Plot the RSI normally on the chart and impose a 9EMA where the EMA crosses the RSI and
moves upward it should be a strong buy signal and if it moves down-ward it will be a sell signal.
 Stochastics
A stochastic oscillator was invented by Mr. George Lane the word stochastic as per the dictionary
means designated a process having an infinite progression of jointly distributed random variables
it tracks the relationship of each closing price to its high and low range or it compares where
security's price closes relative to its price range over a given period of time. it is indeed a potent
indicator it consists of two lines the main line or the first line is called percentage K and the second
line slow line is called percentage D. So percentage K is the main line and percentage D is the
trigger line.

Calculation: %K= (C today-LN/HN-LN)X100

C today = Closing price of today
LN = Loest price for selected no. of days
HN = Highest point oscillated no. of days
N= No. of days
%K will be plotted as the main line in the chart
%D = {3 day sum of (C today-LN)/3 day sum of (HN-LN)}X 100
%D is the MA of %K

This is also known as trigger line. The formula produces 2 lines that oscillates between a vertical
scale of 0 to 100. %K and %D both the lines continue together to give us a sense of direction above
80 is the overbought zone and below 20 is the oversold zone.

TRADING RULES
1) In an uptrend %K will be greater than %Dand both will constantly rise.
2) In a downtrend %K will be lesser than %D and both will constantly fall.
3) Both lines reaching below 20 tells us that the market is oversold but a buy signal will occur when
it rises over 20 level.
4) When both the lines reaching above 80 us that the market is overbought but a buy signal will
occur when it comes below 80 level.

Most important point in Stochastics is unlike RSI it becomes overbought and oversold very often,
So stochastics gives much more better trading opportunity than RSI. Let us also note that while RSI
can only be used for Long term, Stochastics can be used for short term as well.
%D = Red Line
%K = Blue Line

Combination Trade
1) Invest for long term when RSI is below 30
2) Sell for short term when stochastic is above 80.
3) Take back your investment when stochastic is below 20
4) Come out of your long term investment will RSI is above 70
5) At the same time always see the trend line
 MACD (Moving Average Convergence Divergence)
MACD is one of the most powerful indicator and it is made up of two exponential moving averages
and is represented by a solid line and a dotted line.

Calculation -- 12 days EMA is calculated then 26 days EMA is calculated. 26 days EMA is
subtracted from 12 EMA so 12 - 26 this figure provides the solid Line or the first line or MACD
line.

9 day EMA of the first line or MACD line is calculated which provides that trigger Line or dotted
line MACD is plotted on a vertical scale where zero is the central reference line and below zero it
is the bullish zone.

Trading technique

1)In an up trend solid line is greater than dotted line and both will constantly rise

2) in a down trend solid line is lesser than dotted line and both will constantly fall

3) solid line crossing the dotted line is definitely a bullish signal but if it remains below zero we
have to consider that although by signal has been generated it is below zero so the valid by signal
will only occur when both the line crosses zero and goes into positive zone or bullish zone

4) solid line coming below dotted line is a sell signal but if it occurs above zero we have to be
careful because it is the positive zone the valid sell signal will come when it crosses zero line and
comes down below zero
5) the first MACD line reflects mass consciousness over shorter period. The slower line reflects
mass consciousness over a longer period.

Many traders used 12,26, 9 EMA but some people use 5, 34, 7. It was invented by Mr Gerald
Appel. One can also check the MACD histogram model.

Support/Resistance
The movement of a stock mainly depends upon 2 factors one is support and the other is resistance.
However, they depend on these factors:

1) Psychological level
2) Trendline
3) Moving Average
4) major High and Low
5) Faps
6) Fibonacci and Gann levels

Support can be explained in the SITAR model

S – Support
I – Indicator
T – Trend
A - Average
R - Resistance

TSTS (Triple Screen Trading system)

It is a system of trading where it tells us which share is to be bought when it is to be bought what
should be the stop loss. It is basically system of trading which is having various filtering process. It
filters a stock in 3 different stages. In order to generate buy signal a stock has to pass these three
different stages.

First stage - check: the General Health of a trade of that stock (maybe it's volume or price)

Second stage- check present scenario of the market if right after correction investment can be done

Third stage- tells us at what price it should be invested and what is the stop loss it has three different
filter or screen

a) First screen - it identify the major health of a stock to understand the major health or trend of a
stock we have to open the weekly charts of a stock and plot at least 3 trend following indicator
1) we have to check 13th and 30 week MA
2) we have to check 4,9, 18 week MA
3) we have to check MACD on weekly charts it should have buy condition

If three of these MA generates buy signal then we can say that the trend is up. If anyone of these
three does not confirm then we cannot accept the trend to be in UPTrend.

So we prepare a table as follow:

Weekly Trend Daily Stochastics Reaction

Trend Up Up Don’t Buy
Trend Up Down Buy
Trend Down Down Don’t Sell
Trend Down Up Sell

Third screen - If the weekly trend is up then buy the stock under the following condition if the price
can cross High of the last 3 bar and place the stop loss only at the immediate low.

If the weekly trend is down then sell the stock. If the price breaks the low of the last three bar then
place a stop loss on the immediate high.

11 Golden Rules in Market

1)Divide your risk capital in equal 10 parts or minimum three parts

2) Trade only inactive and high-volume stock
3) Come prepared with the trading plan
4) Never Over trade
5) Trade into 2- 4 stocks at a time with stop loss
6) Don’t trade if you are not clear
7) Don't expect profit on everyday
8) Always withdraw a portion of your profit
9) Tips rumour can ruin your life don't follow
10) Don't think or jump immediately
11) Always be bearish than bullish

4 components of Price – Cyclicity, Seasonality, Volatility, Trendlines

8 best volatility indicator

1)Bollinger band
2) ATR (Average True range)
3) Donchian channel
4) Kelter Channel
5) Relative Volatility Indicator
6) Chai kin Volatility
7) Vix
8) Twiggs Volatility Indicator
Volume Indicator

1) Index
2) Oscillators

Volume Related Index

1) On balance Volume
2) William’s variables accumulation distribution
3) Chai Kin accumulation distribution
4) William’s accumulation distribution

Volume Related Oscillators

1) Volume Oscillators
2) Chai Kin Money Flow
3) Twiggs Money Flow
4) Chai Kin oscillator
5) Money Flow Index

PSYCHOLOGICAL LEVEL OF A TRADER

There are four types of trader in market

A) Gamblers - do not follow them

Characteristics of a gambler:

1) He wants unrealistic gain and take win credit and blames other for loss
2) no risk management
3) mentally weak
4) restless
5) urge to gamble
6) wants to recover losses
7) emotional and mood swings

B) Optimistic - Might follow

Characteristics

1) new entry less active

2) believe stock market can make riches
3) lacks experience and knowledge
4) open to experimenting
5) did not suffer heavy losses yet
6) operates in group
7) fearful and curious
8) by at high and sell at low
9) portfolio is full of bad stocks
10) searching for new ideas

C) Struggler -Might get success in future

Characteristics

1) lot of experience
2) lost huge money
3) he believe he has tried everything
4) share success but hides failure
5) searching for Secret formula
6) blames losses to operator
7) keep trying new things
8) Learner
9) tested success but unable to repeat

D) Master – Must Follow

Characteristics

1) Often contradictory
2) Avoids sharing his story
3) Understands the challenge
4) Strong risk management
5) Works in isolation
6) Can read between the lines
7) Waits patiently for opportunities
8) Does not blindly believe in new ideas.
 VWAP
1) Volume Weighted Average Price (VWAP) and Moving Volume Weighted Average Price
(MVWAP) are types of weighted averages that incorporate trading volume in their calculations.
They are plotted directly on the price chart.

2) VWAP is calculated by summing the Rupees traded for each transaction (price multiplied by the
number of shares traded) and then dividing the result by the total shares traded.

3) If a security's price hovers below VWAP, it may indicate that the security is relatively cheap or
undervalued on an intraday basis. Conversely, a price above VWAP may suggest that the security is
expensive on an intraday basis.

4) Retail traders often use VWAP as a trade confirmation tool. When VWAP is positive, they may
consider initiating long positions, and when the price is below VWAP, they may look to initiate
short positions.

5) VWAP can be applied to any time frame for intraday trading, including 1, 3, 5, or 10-minute
charts, but it is not typically used for position trading.

Risk Management
1) The minimum capital required to pursue trading as a full-time profession.

2) Risk profiling, a crucial step in understanding and assessing one's risk tolerance and preferences
before engaging in trading activities.

3) Equity model calculation, a method used to determine the optimal distribution of funds among
different asset classes within a trading portfolio.

4) Trade allocation model, a strategic approach for distributing capital among individual trades
based on factors such as risk, potential returns, and market conditions.

5) Percentage of trade allocation, a key component in the trade allocation model, representing the
proportion of total capital assigned to a specific trade.
6) Portfolio hit, an evaluation of the overall risk exposure and potential volatility of a trading
portfolio, considering the collective impact of all positions.

What is Trading Capital?

Trading capital is the financial amount required to buy or sell securities in the capital market with
the aim of earning profits through trading. This capital differs from funds set aside for day-to-day
living expenses and should be carefully allocated. It is recommended to allocate trading capital only
after securing at least 2 years' worth of living expenditures, covering essentials such as food and
clothing. This allocation should be distinct from your contingency fund.
This crucial decision faces every trader contemplating a full-time career in trading. Before
determining the trading capital, certain parameters need careful consideration. One key factor is
defining your annual income target. Additionally, assess the monthly return potential of the trading
system you are employing. For instance, if your system yields a 3% monthly return, the annual
return would amount to approximately 36%. Now apply this formula:
-- Annual target/System return (600000/36%) = 17LPA approx.

Risk profiling

The cornerstone of effective Risk and Capital Management lies in initially identifying your trading
style.

1. Conservative Trader:
 Primary emphasis on capital preservation.
 Engages in less risky trades to safeguard capital.
2. Moderate Trader:
 Adapts risk levels based on the probabilities or profitability of a specific trade.
 Willing to adjust risk levels proportionally, balancing caution and opportunity.
3. Aggressive Trader:
 Seeks rapid growth in the trading account.
 Takes directional bets and strategically positions skills as the odds of success increase.

Risk of Ruin - It is a concept prevalent in gambling, insurance, and finance, referring to the
probability of losing one's entire investment capital or seeing one's existing bankroll fall below the
minimum required. For instance, in a simple coin toss, the risk of ruin stands at 50%.
Trade Allocation - Fixed Risk Model

The following statistics are derived from trade simulations conducted by De Van Tharp in his book,
“Definitive Guide to Position Sizing Strategies." These statistics provide a foundational
understanding of the risk profiles associated with different percentages.

1. **0.8% Fixed Risk per Trade:**

- Risk of Ruin: 0.1%
- 0.4% chance of reaching a 300% profit objective over the first 100 trades.

2. **1.2% Fixed Risk per Trade:**

- Risk of Ruin: Close to 1%
- 8.5% chance of reaching a 300% profit objective.

3. **2.6% Fixed Risk per Trade:**

- Risk of Ruin: Not specified
- 53.9% chance of reaching a 300% profit objective.

4. **3.6% Fixed Risk per Trade:**

- Risk of Ruin: 22.6%
- 60.3% chance of reaching a 300% profit objective.

5. **4.6% Fixed Risk per Trade:**

- Risk of Ruin: 31.7%
- 58.2% chance of reaching the profit objective.

These percentages offer insights into the potential trade outcomes, emphasizing the importance of
risk management in achieving profit objectives while minimizing the risk of ruin.
 The Directional System
The Directional System is a trend-following method developed by Wallace Wilder in the mid-70s
and subsequently modified by several analysts. This system identifies trends and signals when a
trend is gaining sufficient momentum to warrant attention. It assists traders in capturing profit
opportunities by focusing on significant trends.

How to Construct the Directional System:

The Directional System is defined as the portion of today's trading range that extends beyond the
range of the previous day. This system assesses whether today's range exceeds the high and low of
the previous day, averaging this data over a period of time. Given its complexity, these calculations
are most effectively performed using a computer.

1. Identifying by Directional Method:

 Compare today's high-low range with yesterday's range.
 The Directional Method is the largest part of today's range outside of yesterday's
range.
 The Directional Method is always a positive number (+), indicating movement above
yesterday's range, while a negative Directional Method suggests movement below
yesterday's range.
Identifying the true range of a market involves determining the largest of three values:

1. The distance between today's high and low.

2. The distance from today's high to yesterday's close.
3. The distance from today's low to yesterday's close.
Calculation of Positive Directional Indicator and Negative Directional Indicator:
These indicators enable the comparison of different markets by expressing their directional
movement as a percentage of each market's true range. Each directional indicator is a positive
number. The Positive Directional Indicator equals zero on a day with no upward directional
movement, and the Negative Directional Indicator equals zero on a day with no downward
directional movement.

+DI = +DM/TR, -DI = -DM/TR

Smooth - DI and +DI are generated using a moving average. Most software applications provide the
flexibility to choose any smoothing method, with the 13-day exponential moving average (EMA)
widely considered as optimal. This results in two indicator lines.

 Positive DI 13 and Negative DI 30:

 Positive values are typically plotted in separate columns.
 When Positive DI 13 is on top, it indicates an upward trend.
 Conversely, when Negative DI 13 is on top, it signals a downward trend.
 The crossover of Positive and Negative DI provides buy and sell signals.
Calculate the ADX
This unique component of the directional system indicates when a trend is worth following and
measures the spread between the directional lines, Positive DI 13 and Negative DI 30. The
calculation involves two distinct steps.

1) Calculate the daily DI or DX

(a) DX = {+DI13- (-DI13)/+DI13+(-DI13)} X 100

2) Calculate the average DI (ADX) by smoothening DX with M.A. such as 13 DMA.

Trading rules

Trade only from the long side when +DI 13 is above -DI 13. Trade only from the short side when -
DI 13 is above +DI 13. The optimal time to go long is when both +DI 13 and ADX are above -DI
13, and ADX is rising. This signals a strengthening uptrend; initiate a long position and set a stop
loss below the latest minor low.

Conversely, the prime time to short is when -DI 13 and ADX are above +DI 13 and +DI 13. This
indicates increasing bearish strength; go short and place a stop loss above the immediate minor
high.

When ADX falls below both directional lines, identifying a flat market, refrain from using a trend-
following system. However, be prepared, as major trends often emerge from such consolidations.

If ADX rallies above both directional lines, signaling an overheated market, exercise caution. When
ADX turns down from positive, affecting both directional lines, it suggests a stumble in the major
trend—a suitable time to take profits.

1) If today’s range extends above yesterday’s range DM is +.

2) If today’s range extends below yesterday’s range DM is -.
3) If today’s range is inside yesterday’s range or extends above or below it by equal amount DM=0

(ADX value > 24 = Buy/Sell Signal)