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Preface.................................................................................. 5
Who should Read this book ...................................................... 6
Acknowledgement................................................................... 7
Chapter 1. Introduction............................................................ 8
Chapter 2. Understanding Charts – Convention used in the book . 11
Chapter 3. Moving Average Indicator ....................................... 17
Simple Moving Average....................................................... 17
Simple Moving Average Indicator....................................... 17
Advantages and Disadvantages of SMA indicator.................. 23
Exponential Moving Average ................................................ 23
Exponential Moving Average Indicator ................................ 24
Advantages and Disadvantages of EMA Indicator.................. 26
Comparison of SMA with EMA............................................... 27
Chapter 4. Fibonacci.............................................................. 30
Fibonacci Retracement Indicators ......................................... 30
Fibonacci Extension Indicators ............................................. 35
Fibonacci Numbers .......................................................... 36
Chapter 5. Bollinger Bands ..................................................... 39
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Buy & Exit Trigger pattern ................................................... 41
Short and cover trigger pattern ............................................ 43
Chapter 6. Spike and breakout pattern..................................... 45
Break out chart pattern for Investors .................................... 49
Chapter 7. Morning panic and Afternoon fade pattern................. 58
Chapter 8. Higher Top Higher Bottom Chart pattern................... 61
Why higher top higher bottom works? ................................... 62
Chapter 9. Lower Top Lower Bottom Chart pattern .................... 64
Chapter 10. Volume patterns .................................................. 67
Chapter 11. Cup and handle Pattern or U pattern ...................... 70
Chapter 12. Double bottom or W-bottom Pattern....................... 72
Non-W or M Pattern............................................................ 73
Significance of W’s and M’s .................................................. 75
Chapter 13. Application of Multiple Chart patterns ..................... 76
Chapter 14. Insider Trading Tips that Always works for me ......... 81
Earning Days ..................................................................... 81
Never ever decide after seeing on TV .................................... 82
IPO investing..................................................................... 85
Targets by finance groups ................................................... 86
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How to find right stock to short and when? ............................ 86
What if you miss a trade?.................................................... 89
How to plan your trades? .................................................... 89
Targets and stop losses....................................................... 90
Strategy that works almost every week................................. 90
What type of order to place - Market or Limit?........................ 90
Chapter 15. Summary ........................................................... 92
Table of Figures .................................................................... 93
Disclaimer............................................................................ 96
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Preface
I don’t have educational finance background and this was one of the
main reasons me not willing to be an author of a book in equity. I
always wanted to be into equity markets but more for a personal
hobby and as I buried myself into equity markets I found that there
is too much crap information available and it is very difficult to
understand who you should believe and who you should not. The
amount of noise in the finance domain leads me to my blog
shabbir.in. I always try to write article about what information
people should look for and where and how. This book is no
different. This book contains lots of chart patterns that I have learnt
over the years trading myself as well as reading lots of different
books that I am going to share.
This e-book comes with a lifetime free upgrades. If you purchased
the paper version of this book you can get the free copy of the e-
book version delivered right in your inbox. Just drop me an email at
[email protected] with the details of your purchase and I will
make sure you not only get your free copy of this e-book delivered
but also will make sure you receive free lifetime upgrade to this e-
book in the future.
The question may come to your mind as to why am I providing life
time free upgrades. I learn chart patterns reading them from
various books and trading myself. As I learn more patterns I will
add them to this e-book and I think you also deserve the new
patterns that I learn over the years.
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Who should Read this book
You may have heard “timing the market is not important but time in
the market is” which means if you are not able to get a stock at the
best possible price you can remain invested in the same stock for
long enough and still make decent return.
True provided you have selected the right stock at the
right price.
Again you may have selected the right stock but chances are that
you may have purchased it way too high. This can test your nerves
for sure. You may see losses for quite sometime which can actually
turn against you. Unless you are very experienced you will either
quit with a loss saying that stock market is not for you or wait for
your capital to return and then quit and still say the same. The end
result will be same. I have seen this happen to too many.
Looking at both the scenarios I think it is important that you invest
in the right stock at the right time and at the right price and this
book teaches you exactly that i.e. how to judge the best possible
time to invest in good stocks at the right price level and exit
accordingly.
So this book is for every trader and investor who wants to be in
equity markets and want to know when to buy, when to sell, when
to short sell and when to cover a stock based on chart patterns.
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Acknowledgement
Charts used in this book are from Interactive Brokers Trader Work
Station application. Apart from that I also use the one provided for
free by Yahoo Finance and Google Finance.
I follow Timothy Sykes blog as well as his DVD’s to learn about
many of the chart patterns and apply the same in the Indian
Market.
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Chapter 1. Introduction
I have read it in a well known magazine sometime back that 90% of
people are not able to make money from the stock market. Isn’t
this shocking for you? I was really shocked. Indian stock markets
are hitting all time high and things like Indian growth story and
other such big jargons and yet 90% of people don’t make money in
stock market.
I did not believe it but finally I was forced to agree to it.
Just tune in to any financial news channel for entertainment
purpose, verify what I am talking about and see for yourself. See
how many people ask questions like what they should do for xyz
stock? They have purchased it at some very high price and now it is
almost down to earth. They can hold the same stock for years to
get the money back.
Do you expect those people are making money from the stock
market? The answer is No.
Now verify how many calls you see on TV from people who don’t
make money and you will be forced like me to agree that 90% of
the people don’t make money from the stock market.
One basic rule of investment is that you should research before you
invest and not after but people tend to do just the opposite. They
ask experts what they should do now and not before.
You may be wondering why I am telling you all this. The answer is I
was among those 90% for quite a long time.
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I was also certain that there’s lot of money to be made in stock
market if I am willing to learn the right way. I have learnt few ways
(I cannot say all but yes definitely some) to make money from
markets the hard way i.e. loosing my own hard earned money and I
am trying to teach my blog readers what they should & should not
be doing if they are trying to make money from stock market.
The first thing you should follow is not to rely too much on stock
tips. Being in the market for almost five years now, I know for sure
that it’s not the tips that matter but the knowledge coupled with
tricks that matter more than the tips. Stock tips are good and I also
prefer to get them but before I jump into those tips I prefer to do
my own research and find why I should follow the tips and execute
the trade.
Let me be honest. I never do the financial research myself and I
don’t have the right kind of knowledge to do that as well but what I
do is if I get some tips to invest or trade in a particular stock I apply
my knowledge of charts. I am fine buying the stock later than to
buy and then lament.
The next thing you should understand is never execute a trade
immediately on your broker’s tips. It is not that they provide bad
tips or I have something against them but the model is a bit flawed
because they provide the same tips to all their customers. So think
about it. If you react immediately to those tips you may end up
buying a stock at much higher price because all of your broker’s
customer may do the same. More buyers can inflate the stock price
considerably.
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My main source of stock ideas (I don’t prefer calling them tips) is
from my broker and you can be rest assured I have account with
almost all the major Indian brokers. I always use them for stock
ideas but never execute the trade without applying my own
research on the stock.
I prefer Motilal Oswal, ICICIDirect and Sharekhan but if you have a
very large trading portfolio you can use Interactive Brokers but I do
not recommend them for investment purposes. You can read my
personal experiences about all the brokers in my blog here.
One more thing I think I should clarify in the introduction is a
misconception about chart patterns. Many think that charts are only
for trader’s and not for investors but I can tell you that as I learn
chart patterns from trading and apply them into my investment I
started to see a lot less downside into my investments which helped
me to make a lot more money from the markets and shift myself
from the 90% of people not making money into those 10% of
people who actually make lots of money.
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Chapter 2. Understanding Charts – Convention
used in the book
Before we can begin understanding the chart pattern it is important
that we understand chart conventions in general and conventions I
have used in this book. What kind of information exists in each
chart and how to understand all those information and use to your
advantage?
You can see a sample chart of Dish TV India Limited or in short
DITV in Interactive Brokers Application. You can see the company
code in the top left corner of the figure.
Figure 1 - Dish TV - Intraday [5 Minutes]
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In the top right hand corner you can see some more numbers like
L: 66.55 CH: +1.50 CH%: 2.31% V: 1.529M
L: means the last traded price.
CH: Is the change from the previous close.
CH%: is the percentage change from the previous close.
V: is the amount of shares traded in the given period i.e. 1 day in
this case.
Now let me explain each of the parameters in the above chart.
Dotted line is the previous close price.
On X-Axis we have time.
On Y-Axis we have volume as well as price. Actually we have 2
charts. Top we have price and volume at bottom. Let me now split
the charts into two for understanding purpose.
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Figure 2 - Price Chart for Dish TV
In the price chart you can see three coloured candle sticks. Each
candle stick for the price here is a five minute time frame.
Remember this is an intraday chart with five minute time of each
candle stick.
Figure 3 - Candle Stick
Each candle stick has four parameters. Width, height, entry level
and exit level. We have five minutes time frame and so width of
each candle stick is five minutes. Height is the range of price traded
for the stock in that five minute time gap.
Entry point is the first trade in this time period. Exit point is the last
trade in this time period. Exit point for previous candle stick may
not be same as entry point of next time candle stick because in real
time trade may not have been executed at the same price between
two points and so they can vary.
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The colours of the candle stick define the price action. Yellow stick
means price is un-changed, green means positive tick and orange
means negative tick in the given time frame.
Now let us look at the second part of the chart which is volume
chart.
Figure 4 - Volume Chart of Dish TV
Volume is a histogram and each bar means the amount of share
traded in given time period.
Here there is no special meaning to the colours but they are used
inline with the price candle sticks.
I have used Interactive Broker’s application to generate most of the
charts for this book but you can also use Google Finance and Yahoo
Finance to get similar charts.
Let us see the charts of Dish TV for 29th November 2010 in all the
three applications.
With Google Finance and Yahoo Finance you may need to change
the default settings to show candle stick because they have default
as line charts. Also the colours from various charting software can
vary slightly.
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Figure 5 - Dish TV Intraday [5 Minutes] by Google Finance
For Google finance you will see setting buttons under the chart to
customize candle stick interval of candle sticks and view type.
Figure 6 - Dish TV Intraday [5 Minutes] by Yahoo Finance
Yahoo Finance does not allow candle stick of variable width and it
has default set to 5 minutes for intraday charts.
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In this book each chart will be labelled with square [] brackets. The
time in square brackets represent candle stick interval.
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Chapter 3. Moving Average Indicator
Simple Moving Average
Let us begin understanding our journey of chart patterns with the
simplest possible pattern i.e. simple moving average pattern.
Though it is very simple and is not very widely used as stand alone
pattern, it is used in conjunction with other advance patterns and so
it is important for us to understand.
Before we get into the patterns let me define Simple Moving
Average first.
A simple moving average is average price over a specific
number of periods. A 50-day simple moving average is fifty
day sum of closing prices divided by fifty. Similarly A 200-day
simple moving average is the two hundred day sum of closing
prices divided by two hundred.
Simple Moving Average Indicator
Simple moving average indicator means applying various simple
moving averages on charts for better understanding of the market
sentiments and to an extent predict the future market sentiments.
Widely used simple moving average indicators are
1. 50 Day Simple Moving Average
2. 200 Day Simple Moving Average
Many prefer to use the combination of 20 day moving average with
8/9 day moving average and many others prefer to use three
indicators aka 50, 20 and 8/9.
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No matter what number you use the concept is same which is we
predict the future of the stock movement based on how it has
performed in the short term average over longer term average. I.e.
in 2 indicators how the stock has moved for 50 days compared to
200 days.
Chart patterns are better understood with examples and so let us
take our first example of Infosys between 2008 and 2009. We all
know for sure that in the tough time of 2008 and 2009 stock
markets and especially IT stocks had lots of issues on account of
problems in US. The sentiments were so bleak that many people
started to believe that technology companies may have hard time
finding orders. So this is what we see in charts.
Figure 7 - Infosys Yearly [Daily]
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In the above chart blue line represents 50 DMA and purple line 200
DMA. When the smaller moving average i.e. 50 DMA moves below
the larger moving average i.e. 200 DMA we assume the stock is in
bearish pattern. This means stock has not performed well enough in
the last 50 days compared to its performance over last 200 days
and so it would not be a wise decision to hold on to the stock.
Selling it off can turn out to be better decision or if you are a trader
going short on the stock is more advisable.
When the smaller moving average i.e. 50 DMA moves above the
larger moving average i.e. 200 DMA we assume the stock is in
bullish pattern which means stock has performed well enough in the
last 50 days compared to last 200 days and either we should hold
on to the long positions or can even buy the stock.
Let us tabularize the simple moving average concept to
make it easier to understand.
Pattern Indicator
Smaller moving average is above
larger moving average
Sign of Bullish pattern
Smaller moving average is below
larger moving average
Sign of Bearish pattern
Smaller moving average is above
larger moving average but they
Best time to move out of your
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cross over i.e. smaller moving
average dips below the larger
moving average.
investment.
Smaller moving average is below
larger moving average but they
cross over i.e. smaller moving
average peaks above the larger
moving average.
Time to re-invest.
DMA does not necessarily mean you have to have the day’s closing
average. You can use any needed closing value like hourly values or
even minutes.
In the above example we have seen a daily closing average to
determine the trend but let us see an intraday chart of Infosys.
Here each candle stick represents 1 minute of trade.
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Figure 8 - Infosys Intraday [1 min]
We can see that the stock is in bullish trend all day long but a sharp
downfall in the closing hours. It can be avoided with the trend
reversal idea. You can easily move out of your position near 3085
levels.
Now let us see how to read the data with more than two indicators.
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Figure 9 - Infosys - 1 Year [Daily]
We see three lines in the above chart.
1. Orange line for 9 DMA
2. Purple line for 20 DMA
3. Blue line for 50 DMA
We have the same concept of how the smaller average performs
over the larger ones. Ideal buy signal is when we have averages
stacked rightly i.e. highest average at the bottom and lowest at the
top i.e. 9 at the top, 20 in between and 50 at the bottom.
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Advantages and Disadvantages of SMA indicator
The biggest advantage of simple moving average indicator is to help
you predict the trend i.e. bearish or bullish but it comes with lots of
disadvantages as well.
The biggest disadvantage is, you cannot predict the trend well
before the beginning of the trend and it has to be based on
historical data. Apart from that this method does not take into
account many other factors like volume, sentiments and interest.
The chart interval (1 min / 1 day) that you are looking at can
impact your decision to a great extent and so it needs a lot of
experience before you can settle into one perfect interval for your
needs.
Exponential Moving Average
Exponential moving average indicator is similar to simple moving
average indicator with the difference being in the calculation of
average. As the name suggests here we use the exponential
average and not simple average.
Let me define the exponential moving average first.
Exponential moving averages reduce the lag by applying more
weight to recent prices. The factor is (2/ (Time periods+1)). A
20-period EMA applies a 9.52% weighing to the most recent
price (2/ (20+1) = .0952). Similarly a 50-period EMA applies
a 3.92% weighing to the most recent price (2/ (50+1) =
.0392)
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Exponential Moving Average Indicator
Exponential Moving Average Indicator or EMA indicator is similar to
SMA indicator and can help predict the market sentiments. EMA
indicator like SMA indicator also works with more than one indicator
and widely used indicators are
1. 20 Day Exponential Moving Average
2. 50 Day Exponential Moving Average
But many prefer to use the combination of 20 day moving average
with 8 or 9 day moving average as well and many others prefer to
use three indicators aka 50, 20 and 8.
EMA is also termed as weigtage moving average or WMA.
No matter what number you use the concept is same. Predict the
stock movement based on how it has performed in the short term
average over the longer term average.
Again let us see the same example of Infosys in between 2008 and
2009 so it not only helps us understand EMA but we can also do a
side by side comparison of SMA with EMA.
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Figure 10 - Infosys 1 Year [Daily]
Looks pretty much similar to what we saw in SMA Right? But it is a
lot different. In SMA we used 200 and 50 to get much similar charts
and here we are using 50 and 20 respectively. Apart from that you
can clearly see that we get the trend reversal idea much before
than SMA indicates. You see that line cross over much before the
2009/04 and in SMA it was much later than 2009/04
The table for EMA is pretty much same as SMA.
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Pattern Indicator
Smaller moving average is above
larger moving average
Sign of Bullish pattern
Smaller moving average is below
larger moving average
Sign of Bearish pattern
Smaller moving average is above
larger moving average but they
cross over i.e. smaller moving
average dips below the larger
moving average.
Best time to move out of your
investment.
Smaller moving average is below
larger moving average but they
cross over i.e. smaller moving
average peaks above the larger
moving average.
Time to re-invest.
Advantages and Disadvantages of EMA Indicator
EMA indicator like SMA indicator is also used to predict the trend i.e.
bearish or bullish and though with EMA indicator you can predict the
trend somewhat before SMA indicator still it comes with lots of
disadvantages as well.
Again this method does not take into account factors like volume,
sentiments and interest.
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The interval (1 min / 1 day) that you use can impact your decision
to a great extent and so needs a lot of experience before you can
settle into one perfect interval for your needs.
Comparison of SMA with EMA
Let us first see SMA (50) and EMA (50) applied on Reliance
industries. I have especially chosen Reliance Industries because the
price action in Reliance industries has been to and fro in a range.
You can see that EMA is much closer to the actual price and that
EMA takes much sharper turn than simple moving average because
it gives more weight to the most recent price over the past unlike
SMA.
Figure 11 - Reliance Industries 1 Year [Daily]
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Many savvy analysts use only one single exponential moving
average to identify the trend as well. When using single average,
you should be using a very small number average, preferably 8 or
9. You can see in the below chart that direction of the blue line
(upward or downward) can also be used to identify the stock
pattern as bullish or bearish respectively.
Figure 12 - Reliance Industries 1 Year with 1 EMA [Daily]
I personally do not prefer using it but just for the sake
of explanation I have explained it in this book.
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