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Open Price

The Open Price of a security is the price at which it begins trading on any given day, and it is determined through a Call auction mechanism. Traders first submit their orders, which are then matched to decide the opening value of the security. This process takes place during a pre-opening session from 09:00 AM to 09:15 AM on the Stock Exchange, and it is designed to efficiently realize prices without causing excessive volatility. The supply and demand of securities ultimately determine their opening prices. However, if a unique price cannot be discovered during the pre-opening session, the Open Price becomes the first price at which the security trades during the normal session. The trading activity of individual stocks also determines the opening prices of indexes such as SENSEX and NIFTY. It’s worth noting that the price at which trading starts on a given day could differ from the previous day’s Closing Price due to multiple reasons.

In general, terms, to calculate the Open Price of stocks on the Indian stock market, the following steps are done on the Stock Exchange:

StepDescription
Step 0Orders are placed in the pre-opening session, which runs from 9:00 AM to 9:15 AM
Step 1After receiving the orders, the buy and sell orders are batched together to find the cumulative orders
Step 2An equilibrium price and quantity are decided after batching, which is called the theoretical price
Step 3A price discovery process is initiated to find the open price that results in the maximum quantity of shares traded while minimizing the order imbalances
Step 4Eligible trades are executed on this single open share price, which is the final Open Price
Step 5Orders that were not executed are put in the pending Order Book for the normal trading session, which starts immediately after the pre-opening session

It’s worth noting that the trading activity in individual stocks will directly influence the opening of the benchmark indices, such as the SENSEX and NIFTY. The price at which trading starts in a day could be different from the previous day’s Closing Price of the stock, and there can be multiple reasons for a large change in these two prices. Additionally, some Buy orders and Sell orders may get executed at a better price, which is known as price improvement. If an investor places a buy order at INR 100, but the stock opens at INR 99, then the order will get executed at INR 99 in the pre-opening session. Similar price improvement can also be seen for sell orders.

Uses of the Opening Price

Here are some common applications where this price is used:

  1.  To analyze the market sentiment and volatility: A large difference between the opening price and the previous day’s closing price can indicate high volatility or a change in the market sentiment.
  2. To compare the performance of a stock with the market index: If a stock opens higher than the market index, it can indicate better performance, while a lower opening can suggest underperformance.
  3.  To determine the price at which a stock’s performance is measured for the day: For example, if an investor wants to track the daily performance of a stock, they can use the opening price as a reference point.
  4. To identify potential trading opportunities: Traders can use the opening price as a reference point for setting stop-loss and take-profit levels or identifying potential support and resistance levels.

Why Open Price is different from the Previous Close Price?

The Open Price of a stock when the market opens may often differ from the Closing Price from the previous day. This is a common observation for regular traders and investors. For instance, if a stock’s closing price today is INR 100, it does not necessarily mean that the stock will open tomorrow at the same price. The primary reason for this difference lies in the method used to calculate these prices. Additionally, external factors can also contribute to the price mismatch.

The Close Price refers to the price at which the last trade happened on any given day, while the Closing Price of a stock is calculated by taking the weighted average of the stock prices in the last 30 minutes. On the other hand, the Open Price is determined through a call auction mechanism (Pre-Open). The supply and demand at the start of the day can move the prices in either direction, leading to a potential mismatch between the Closing Price and the Open Price.

External Factors which impact Opening Price of Instrument- 

External factors that impact the opening price of an instrument are:

  1. Sudden price movement before market close
    The closing price is a volume-weighted average price (VWAP) of the last 30 minutes of trading time. If there are no other factors involved, the trading on the next day should resume from the last traded price (LTP) and not the closing price. This is because the closing price could be significantly different from the LTP.

    Example: If the LTP of a stock is INR 150, but the closing price is INR 140, the opening price on the next day may be closer to INR 150.
  2. Block deal window
    Block deal refers to a large trade that happens on a single order. In the stock markets, there are two windows available in the day when these trades can be done. The morning window takes place from 08:45 AM to 09:00 AM, before the markets open.
    In the block deal window, the reference price used for the deals is the previous day’s closing price. The deals are allowed at a price within +/- 1% of the previous closing. Therefore, since these deals take place before the market opens, the opening price can easily move by 1% in either direction from the previous closing price.

    Example: If the previous closing price is INR 100, block deals can take place at any price from INR 99 to INR 101. This can lead to a small difference in the opening price and the previous close price of the stock.
  3. Post-close session
    After the markets close at 03:30 PM, a closing price is calculated for all the stocks. Another post-close trading session takes place from 3.40 PM to 4.00 PM, where all trades happen at the closing price. However, the demand and supply dynamics can change during this time period, before trading resumes the next day.


    Example: If a security closed trading at INR 50 and there are still some sellers at this price, but the buyers start buying out all securities at INR 50 in the post-close session, then the opening price on the next day will tend to move higher as there are no more sellers left at this price.
  4. News about the company
    One of the major reasons for a gap-up or gap-down opening in the stock price is the release of news about the company. If these corporate announcements become public after the markets have closed, then they have the potential to significantly change the market demand overnight.

    Example: If a company does a press release in the evening (after markets have closed) that they have received a huge order from the government, then the opening price will likely be higher than the previous closing price, as the market will expect a jump in revenues of the company.
  5. Off-market financial results
    Many times companies declare their quarterly or annual results in the evening or on weekends when the markets are closed.

    Example: If a company notifies the stock exchange that there will be a board meeting to declare the annual results on 20 April (assume it is a Saturday) and the results are very good, then the stock prices are likely to open higher on Monday. The stock exchange is usually notified in advance about the date on which the results will be released.
  6. Market sentiment and economic changes
    Economic factors and market sentiments can impact multiple companies and sectors at the same time.

    Example: If news breaks out in the evening that has a significant economic impact on Indian businesses, the markets may open lower the next day.

  7. Corporate actions
    Unlike other events which are virtually impossible to predict and control, corporate actions of companies are pre-planned events. These events are known before hand and the investors can be sure that the opening price will be massively different from the previous Close Price. Let us look at some of the corporate actions and how they directly impact the prices on the ex-date.
    1. Dividend – When companies pay out dividends, the price of the stock reduces by the dividend amount. This happens because the book value of the company has decreased as cash has moved out from the Balance Sheet.
      Example: Suppose the stock price closed at INR 1,000 just before the ex-date. The company pays out INR 25 as dividends. The investors will notice that the Open Price on the ex-date will be around INR 975.
    2. Stock Split and Bonus shares- When companies split their stocks or issue bonus shares, the share price will reduce by an equal amount as the stock split ratio or the bonus share ratio. This happens because splitting a stock or issuing bonus shares does not change the fundamentals of the company in any way.
      Example: Suppose a company announces a 2-for-1 stock split. This means that for every share held by the investor, they will receive an additional share. If the stock price before the split was INR 2,000, after the split, the price per share will reduce to INR 1,000. The investor will now hold two shares for every one share they held previously, but the total value of their investment will remain the same.
    3. Rights Issue – When companies issue new shares through a rights issue, the existing shareholders have the option to purchase the new shares at a discounted price. This dilutes the ownership of the existing shareholders. As a result, the stock price on the ex-date of the rights issue will typically drop by the amount of the discount offered to the shareholders.
      Example: Suppose a company announces a rights issue at a price of INR 100 per share, with a discount of 25% for existing shareholders. If the stock price before the rights issue announcement was INR 1,000, on the ex-date of the rights issue, the price may drop to around INR 925, reflecting the discount offered to existing shareholders.
    4. Merger and Acquisition- When a company announces a merger or acquisition, the stock price of both companies involved may be impacted. In a merger, the stock price of the acquiring company may go down, as investors may be concerned about the cost of the acquisition and the potential dilution of their ownership. Conversely, the stock price of the target company may go up, as investors may expect to receive a premium on the acquisition price. In an acquisition, the stock price of the acquiring company may go up, as investors may see the acquisition as a positive sign for the company’s growth prospects. The stock price of the target company may also go up, as investors may expect to receive a premium on the acquisition price.
    5. Share Buybacks- When a company buys back its own shares, the outstanding shares decrease, which can result in an increase in the stock price. This is because the earnings per share (EPS) of the company increases, as there are fewer shares outstanding to divide the earnings among. Additionally, share buybacks can be seen as a sign of confidence by the company in its future prospects, which can also boost investor confidence in the company.
      Example: Suppose a company announces a share buyback program to repurchase 10% of its outstanding shares. If the stock price before the announcement was INR 1,000, the price may go up after the announcement due to the reduced number of outstanding shares.
World-Stock-Market-Timings

Stock Market Timings India

Trade in the stock market can only be undertaken during a specific time interval in India. Retail customers have to perform such transactions through a brokerage agency between 9.15 a.m. to 3.30 p.m. on weekdays. Most investors undertake the purchase/sale of securities listed on the major stock exchanges in India – the Bombay stock exchange (BSE) and the National Stock exchange (NSE). Indian stock market timings are the same for both these major stock exchanges.

Indian stock market timings for trade are divided into three segments:
    • Pre-Opening Timing– This session lasts from 9.00 a.m. to 9.15 a.m. Orders to purchase or sell any securities can be placed during this time. It can be further classified into three sessions: 
    • 9:00 AM – 9:08 AM– During this stock market opening time in India, orders for any transaction can be placed. The order entry is given preference when actual trading begins, as these orders are cleared off in the beginning. Any requests placed during this time can be changed or canceled according to need, which is beneficial to investors, and no orders can be placed after this period of 8 minutes during the pre-opening session.
    • 09:08 AM – 9:12 AM- This segment of Indian share market timing is responsible for price determination of security. Price matching order is done by corresponding demand and supply prices to ensure accurate transactions among investors who want to purchase or sell a security, respectively Determination of final prices at which trading will begin during normal Indian stock market timing is done through a multilateral order matching system.
    • 09:12 AM – 9:15 AM- This time acts as a transition period between preopening and normal Indian share market timingNo additional orders for transactions can be placed during this time. Also, existing bets already placed from 9.08 a.m. – 9.12 a.m. cannot be revoked as well.
    • Normal Session– This is the primary Indian share market timing lasting from 9.15 a.m. to 3.30 p.m. Any transactions made during this time follow a bilateral order matching system, wherein price determination is done through demand and supply forces.

      The bilateral order matching system is volatile, thereby inducing several market fluctuations which are ultimately reflected in security prices. To control this volatility, the multi-order system was formulated for the pre-opening session and was incorporated into Indian stock market timings.

    • Post-closing Session- Stock market closing time in India is marked at 3.30 p.m. No exchange takes place after this period. However, the determination of the closing price is done during this time, which has a significant effect on the following day’s opening security price.
Stock market closing time in India can be divided into two sessions:
    • 03:30 PM – 03:40 PM– The closing price is calculated using a weighted average of prices at securities trading from 3 p.m. – 3.30 p.m. in a stock exchange. For determining the closing prices of benchmark and sector indices such as Nifty, Sensex, S&P Auto, etc. weighted average prices of listed securities are considered.
    • 03:40 PM – 04:00 PM-This period is the post-stock market closing time when bids for the following day’s trade can be placed. Bids placed during this time are confirmed, provided adequate buyers and sellers are present in the market. These transactions are completed at a stipulated price, irrespective of changes in the opening market price.
      Thus, capital gains can be realized if the opening price exceeds the closing price by an investor who has already placed their bids. In case the closing price exceeds the opening share price, bids can be canceled during the narrow window of 9.00 a.m. – 9.08 a.m.
‘Muhurat’ Trading 
    • Indian stock market is generally closed for any transactions on Diwali, as it is a religious festival celebrated all across the country. However, every year on account of Diwali, the market opens for one hour. This year, on October 24, 2022, a one-hour trading session will be conducted from 6.15 p.m. to 7.15 pm as it is considered to be auspicious.

Pre-Open Session

The pre-open session is for a duration of 15 minutes i.e. from 9:00 am to 9:15 am. The pre-open session is comprised of the Order collection period and an order matching period. The price band applicable shall be the same as the normal market.

The order collection period of 8* minutes (9:00 AM to 9:08 AM) shall be provided for order entry, modification, and cancellation. (* – System driven random closure between 7th and 8th minute). During this period orders can be entered, modified, and canceled.

What is the Pre-Open Market Session?

The Pre-Open market session is utilized to arrive at the ideal opening price of a stock for the current trading session.

The duration of the pre-open market session is from 9:00 a.m. to 9:15 a.m. which is 15 minutes before the trading session starts on: NSE and BSE. Pre-open market strategy is provided to stabilize heavy volatility due to some major event or announcement that comes overnight before the market actually opens for trading.

Special events, like merger and acquisition announcements by a company, de-listing of stocks, debt-restructuring, credit-rating downgrades, etc., can have an impact on investors.

The session helps the market to stabilize the prices of various companies’ shares by determining the actual demand and supply of the shares. In the process of determining demand and supply, the equilibrium price is decided. This helps in bringing stability as the price and trades are not decided on the basis of trends.

Timing Schedule of Pre-Opening Session

The 15 minutes of the pre-open market session is broken into three sub-sessions:

How Is the Stock’s Opening Price in the Pre-Open Market Session Achieved?

During the pre-open market session, a call auction takes all orders and then arrives at an equilibrium price. The equilibrium price is the price at which the maximum number of stocks can be traded based on the demand and supply quantity and the price.

In a call auction price mechanism, the equilibrium price is determined as shown below. Assume that NSE received bids for particular stock XYZ at different prices between 9:00 am and 9:15 am. Based on the principle of the demand-supply mechanism, the exchange will arrive at the equilibrium price – the price at which the maximum number of shares can be bought/sold. In the below example, the opening price will be 105 where a maximum of 27,500 shares can be traded.

During order matching, period order modification, order cancellation, trade modification, and trade cancellation are not allowed. The trade confirmations are disseminated to respective members on their trading terminals before the start of the normal market. After the completion of order matching, there is a silent period to facilitate the transition from the pre-open session to the normal market. All outstanding orders are moved to the normal market retaining the original time stamp.

Limit orders are at a limit price and market orders are at the discovered equilibrium price. In a situation where no equilibrium price is discovered in the pre-open session, all market orders are moved to the normal market at the previous day’s close price or adjusted close price/base price following price-time priority. Accordingly, the Normal Market / Odd lot Market and Retail Debt Market open for trading after the closure of the pre-open session i.e. 9:15 am. Block Trading session is available for the next 35 minutes from the opening of the Normal Market.

Calculation of Index Price-

As can be seen in the above steps, the Opening Price of the stock is decided in the order matching period. Therefore, the Open Price of individual stocks will only be displayed to the traders after 09:08 AM. However, investors would have noticed that the price of the index (SENSEX, NIFTY, etc.) starts moving from 09:00 AM itself, as soon as the order entry begins. This is possible because the stock exchanges calculate an indicative price for the index, based on the live orders being received for the stocks in the index.

Example: Let us consider SENSEX for understanding as it is a market index that is comprised of 30 stocks. When the orders are submitted for these 30 stocks in the order collection period, an indicative value of all the stocks can be calculated through supply and demand. Depending on the weights of these stocks in SENSEX, the indicative price of the index can be calculated. This indicative price continuously changes as the orders keep flowing in till 09:08 AM. The opening price of SENSEX is then calculated once the Open price of the 30 stocks is finalized. If no trade happens in any of the 30 stocks in the pre-opening session, then the previous day’s Closing Price is used for the calculation of the index price.

Special Pre-Open session

The special pre-open session is applicable to the below type of securities:

  1. IPOs securities – first day of trading. This also includes SME IPOs
  2. Re-listed Securities first day of recommencement of trading. (as defined under para 1(C) of SEBI circular no. SEBI/Cir/ISD/1/2010 dated September 2, 2010)
  3. Stocks having derivatives contracts on the Ex-date of trading after undergoing corporate restructuring*

*Corporate Restructuring: Merger, demerger. Amalgamation, capital reduction/consolidation, scheme of arrangement, in terms of the Companies Act and/or as sanctioned by the Courts, in cases of rehabilitation packages approved by the Board of Industrial and Financial Reconstruction under Sick Industrial Companies Act and in cases of Corporate Debt Restructuring (CDR) packages by the CDR Cell of RBI.

Below are the timings for the special pre-open session:

02. Introduction of Technical Analysis

Dow Theory

Dow Theory is named after Charles H Dow, who is considered the father of Technical Analysis. Dow Theory is very basic and more than 100 years old but still remains the foundation of Technical Analysis.

Charles H Dow(1851-1902) ,however, neither wrote a book nor published his complete theory on the market, but several followers and associates have published work based on his theory from 255 Wall Street Journal editorials written by him.

The Dow Theory is made up of six basic principles. Let’s understand the principles of Dow Theory.

1. The Average Discount Everything

The market Price takes everything into consideration, all of the time. The value of the stock price, for example, reflects all investor sentiment – the hopes, fears, concerns, optimism, and pessimism – of all its participants. It also reflects everything else that is known about a market at any given moment. Interest rates and expectations for them are known. The current business climate is well documented, as are predictions for the future. Company earnings, and expectations, are already in the marketplace. The politics of the day and impending electoral change is already priced in. Shocks to the market, unexpected events, wars, or political upheaval, may occur. These will affect the market in the short term, but then it will return to a trend.

2. Market has Three Trends

A trend is a general movement in a particular direction. Trend analysis is a technique used in Technical analysis that attempts to predict future stock price movement based on recent obscene data. Trend Analysis is based on the idea that what has happened in the past gives traders an idea of what will happen in the future.

Trends classifications:-

  1. Based on Price Movement
  2. Based on the Time Period
Based on Price Movement
I. Uptrend- 

In an uptrend, both the peaks (tops) and troughs (bottoms) of a stock chart keep increasing successively. So, every day or so, the stock price touches a new high and falls lower than it did previously. Don’t be a mistake; this need not be a lifetime high. It could be the highest the stock touched in the past few days, weeks, or months too. This steady rise in tops and bottoms indicates that the market has a positive sentiment. It expects the stock has a higher chance to appreciate more than depreciate. So, more investors buy, thus driving the price higher. Similarly, each time the stock falls, investors see it as an opportunity to buy even more. They don’t wait for it to fall to the previous level. They buy the stock before that. This arrests the fall.

II. Sideways Trend- 

In finance and economics, a sideways trend, also known as a horizontal trend or a range-bound market, refers to a situation where the price of an asset or security moves within a relatively narrow range over a period of time. This can be seen in the movement of a stock’s price on a chart, where the price is not generally moving upwards or downwards, but rather staying within a specific range. A sideways trend can last for various lengths of time, and is often a sign of uncertainty or indecision among investors. It is important for investors to carefully monitor the market and be prepared to adjust their investment strategies if the trend changes

III. Downtrend- 

A downtrend is a pattern, where a stock is falling constantly. Not only are successive peaks lower, but successive troughs are also lower. This means that investors in the market are convinced that the stock will fall further. Each little rise in the stock’s price is used by investors to sell their existing quota of shares. No further buying takes place at these levels. Such a stock must not be bought, no matter how much its price has fallen especially if you are a short-term investor. If you are a long-term investor, you may want to wait until the stock price falls further.

Based on Time Frame
Based on Time Frame
I. Primary Trend

The Primary trend can either be a bullish (rising) market or a bearish (falling) market. This is the longest and the most important trend of the three. This is because it has the ability to influence the other two trends. Basically, the primary trend sets the tone for the other two trends. A primary trend generally lasts for one to three years. That said, it can go beyond this timeframe sometimes. Unless there is a clear sign of a trend reversal, the primary trend is considered to be the main trend. A primary trend may be in the form of a constant increase in stock prices for a period of one to three years.

In such a case, peaks would be constantly higher than previous ones. (A recap, this is when the stock price touches higher highs consecutively.) Similarly, a primary trend may also be marked by a constant fall in stock prices for multiple years.

II. Secondary Trend

A secondary trend is a temporary price movement in the contrary direction to the primary trend. It is hard to find a one-to-three-year phase in history during which stock prices only went up without a single decline. This is because of secondary trends.

Let’s look at an example. Suppose stock prices constantly moved up for a period of 2 years. However, during these two years, there was one phase during which stock prices constantly declined for three months.

This phase will then be called the secondary trend. Similarly, if the primary trend is a fall in stock prices, the secondary trend would be a short-term rise in stock prices.

Each primary trend contains many secondary trends within it. A secondary trend normally lasts for three weeks to three months. It is a weaker trend than a primary trend. This is because it cannot reverse the primary trend and lasts for a smaller period. If the primary trend is upward, a secondary trend may be able to cause a temporary downward movement.

However, it cannot cause a decisive downward movement that would last for years. For example, markets are bullish about the potential of the Indian economy. So, the market is primarily moving up. Yet, there are phases when markets fall because say, lackluster corporate earnings or because a particular reform Bill is not passing in Parliament. This causes a secondary trend.

III. Minor trend

A minor trend is a phase within a secondary trend. It is to a secondary trend, what a secondary trend is to a primary trend. In other words, it is a short-term movement that is contrary to the direction of the secondary trend. However, it lasts for an even smaller duration. Its duration typically ranges from a few days to a week. As such, if the secondary trend is a two-month-long downward movement, its minor trend would be an upswing that would only last a few days at best.

3. Trends have 4 Phases

Trends have 4 Phases
Trends have 4 Phases
I. Accumulation Phase

The first stage of a new bull market is referred to as the accumulation phase. To get you to thinking market psychology a little, try to imagine after a considerable sell-off, the buyers that step back in to pick up the bargains are the Pros. They have seen this type of market action before and recognize the stock prices are ‘on sale’ so to speak. They are normally the ones buying in the Accumulation Phase. No, they didn’t rupee-cost-average all the way down as the market kept declining; they didn’t buy in at the previous market top and sell out at the bottom. No, they were sitting on the sidelines with cash in hand waiting for the market to hit bottom. Once it became reasonably apparent the bottom was in place, that the risk of further decline was minimal, and the chance of a future advance was very good, then, and only then, did they risk their money.

Accumulation Phase
II. Participation Phase

As the accumulation phase materializes, a new primary trend moves into what is known as the Public Participation Phase. This phase is usually the longest-lasting of the three phases. This is also the phase you want to be invested in, an advancing market.

During this phase, earnings growth and economic data improve and the public begins to tip-toe back into the market. As the economy and the related news improve, more and more investors move back in, and this sends stock prices higher. These advances can last several years. Historically, there is a bear market on average every three and one-half years. Therefore, an advancing bull market should last around three years before another bear market begins.

Participation Phase
III. Distribution Phase

The third phase is the distribution phase. This phase is the one that seems to always catch investors and traders unaware. The market has been in an advancing primary trend, and many think it will continue to move higher.

Dow correctly named this phase because of the trading activity going on during this phase. Remember the smart money buyers who were ‘accumulating’ during the accumulation phase, buying while there was blood in the streets? They are the ones selling in the distribution phase. The investors and traders that are often caught unaware are the ones normally doing all the buying during the distribution phase, buying from the smart money investors and traders.

Some say it is harder to call a market top than a market bottom. That is somewhat true. But a market top always has certain characteristics that can be recognized. Market tops form after a long advance. The market seems to get tired and stops advancing and begins moving sideways. The market stops making new highs. It no longer has the momentum to push higher, so it starts trading sideways and then begins to rollover. Volumes also dry up.

Distribution Phase
IV. Participation Phase

The participation phase is characterized by declining fundamentals, rising corporate losses, and declining public sentiment. More and more trader participates in the market, sending prices lower. This is the longest phase of the primary trend during which the largest price movement takes place. This is the best phase for the technical trader.

Participation Phase

4. Volume Must Confirm the Trend

Dow recognized volume as a secondary but important factor in confirming price signals. Simply stated, the volume should expand or increase in the direction of the major trend. In a major uptrend, the volume would then increase as prices move higher, and diminish as prices fall. In a downtrend, the volume should increase as prices drop and diminish as they rally. Dow considered volume a secondary indicator. He based his actual buy and sell signals entirely on closing prices. Today’s sophisticated volume indicators help determine whether the volume is increasing or falling. Savvy traders then compare this information to price action to see if the two are confirming each other.

5. Average Must Confirm Each other

Dow, referred to something called Industrial & Rail Averages- this meant that no important bull or bear market signal could take place unless both averages gave the same signal, thus confirming each other.

To understand this better- the Dow Transportation Index was seen as a key gauge of economic activity- as the US rail network was extensively used to ship goods. With factories dotted throughout the country, the rise or fall of rail use was considered an important indicator. Dow said one should correlate the Dow index & Dow transport index.

Dow’s idea of seeing confirmation between two stock indices holds value even today. Taking those two indices as an example, Dow said that when both were moving in the same direction, it provided greater confidence compared to times when there is a divergence between the two. It makes sense to look for confirmation utilizing the case of whether both create higher highs and higher lows for an uptrend. Nowadays traders may wish to look for alternate markets, yet the notion of using correlated and related markets to find confirmation remains valuable.

Participation Phase

6. A Trend Is Assumed to Be Continuous Until Definite Signals of Its Reversal

This tenet forms much of the foundation of modern trend-following approaches. It relates a physical law to market movement, which states that an object in motion (in this case a trend) tends to continue in motion until some external forces cause it to change direction. A number of technical tools are available to traders to assist in the difficult task of spotting reversal signals, including the study of support and resistance levels, price patterns, trendlines, and moving averages. Some indicators can provide even earlier warning signals of loss of momentum. All of that notwithstanding, the odds usually favor the the existing trend will continue.

Uptrend to Downtrend Reversal
Downtrend to Uptrend Reversal
02. Introduction of Technical Analysis (1)

Introduction of Technical Analysis

Technical analysis is a widely used method for evaluating securities in the financial markets. By analyzing market statistics, such as past prices and volumes, traders and investors can gain insights into market trends and patterns that can help inform their investment decisions. Technical analysis is based on the belief that charts and technical indicators can provide valuable information about the direction of prices. However, it is important to note that technical analysis is not foolproof, and should be used in conjunction with fundamental analysis to fully understand the underlying factors driving the market. This introduction provides a brief overview of technical analysis and highlights its importance as a tool for traders and investors.

Price and volume are two key concepts in the world of trading and investing. Price refers to the amount of money that is charged for a product or service, and volume refers to the number of units of a product or service that are traded in a given period of time. In the context of the financial markets, price and volume are often used together to analyze the performance of a security, such as a stock or bond. For example, if a stock has a high price and a high volume, it may indicate that there is strong demand for the stock and that investors are willing to pay a premium for it. On the other hand, if a stock has a low price and a low volume, it may indicate that there is weak demand for the stock and that investors are not willing to pay a high price for it. By analyzing the relationship between price and volume, traders and investors can gain valuable insights into the market and make more informed investment decisions.

Derivation of Price

Market/Price Action-

The world of trading and investing is constantly evolving, and understanding market and price action is essential to making informed investment decisions. Price data, which is also known as “market action,” encompasses a variety of data points for a specific security over a certain time frame. This includes the open, high, low, close, volume, or open interest for a stock, commodity, or currency.

The time frame for price data can vary and can be based on intraday (1-minute, 5-minutes, 10-minute, 15-minute, 30-minute, or hourly), daily, weekly, or monthly intervals. The longer the time frame, the more reliable the trend analysis can be.

Technical Analysis Working

Technical Analysis Working Technical Analysis is basically the study of an asset’s current and previous prices. The main underlying assumption of technical analysis is that fluctuations in the price of an asset are not random and generally evolve into identifiable trends over time.

At its core, Technical Analysis is the analysis of the market forces of supply and demand, which are a representation of the overall market sentiment. In other terms, the price of an asset is a reflection of the opposing selling and buying forces, and these forces are closely related to the emotions of traders and investors (essentially fear and greed).

To expand on technical analysis, it involves analyzing price charts and other market data to identify patterns and trends that can help predict future price movements. Technical analysts use various tools and techniques to make sense of this data, such as moving averages, trend lines, and momentum indicators.

One key concept in technical analysis is the idea of support and resistance levels. These are levels at which the price of an asset has historically shown a tendency to bounce off of or break through. Technical analysts also look for chart patterns such as head and shoulders, double tops and bottoms, and triangles, which can signal potential price reversals.

While technical analysis has its critics who argue that it relies too heavily on past performance and doesn’t take into account fundamental factors that can impact the price of an asset, many traders and investors use it as a tool in combination with other forms of analysis to make trading decisions.

Effective Technical Analysis –

Technical Analysis is considered more reliable and effective in markets that operate under normal conditions, with high volume and liquidity. The high-volume markets are less susceptible to price manipulation and abnormal external influences that could create false signals and render Technical Analysis useless.

Liquidity- Market liquidity is the extent to which a market allows for assets to be bought and sold at fair prices. These are the prices that are the closest to the intrinsic value of the assets. In this case, intrinsic value means that the lowest price a seller is willing to sell at (ask) is close to the highest price a buyer is willing to buy at (bid). The difference between these two values is called the bid-ask spread.

 

Liquidity

Quick & Time Saving –

Quite simply, technical analysis is a fantastic tool for making and saving you money. Nowadays everyone wants to trade day by day or swing basis (10/15 Days position), here we can’t apply fundamental analysis so we need to analyze stock trends with the help of price. It saves you bundles of time (over the fundamental analyst). You will find it removes huge chunks of the ‘psychological’ game of trading and investing from the equation. It creates discipline and is essential for the risk and trade management of your portfolio – whether that be knowing when to take profits, setting stops, or getting out of bad trades.

Assumptions in Technical Analysis –

Quite simply, technical analysis is a fantastic tool for making and saving you money. Nowadays everyone wants to trade day by day or swing basis (10/15 Days position), here we can’t apply fundamental analysis so we need to analyze stock trends with the help of price. It saves you bundles of time (over the fundamental analyst). You will find it removes huge chunks of the ‘psychological’ game of trading and investing from the equation. It creates discipline and is essential for the risk and trade management of your portfolio – whether that be knowing when to take profits, setting stops, or getting out of bad trades.

Technical Analysts don’t care whether a stock is undervalued or overvalued. In fact, the only thing that matters is the stock’s past trading data (price and volume) and what information this data can provide about the future movement in security. Technical Analysis is based on a few key assumptions. One needs to be aware of these assumptions to ensure the best results.

Assumptions in Technical Analysis
1. Price Discount Everything –

Demand and supply create price and this price includes all things. Technical Analysis assumes that the company’s fundamentals, along with broader economic factors and market psychology, are all priced into the stock, removing the need to actually consider these factors separately. This only leaves the analysis of price movement, which technical theory views as a product of the supply and demand for a particular stock in the market.

Price Discount Everything is not the discount act of god.

Nasdaq was down before 9/11 Attack
Election result was discounted even before announce market and market moved by 27% before result.
2. Price Moves in Trend –

One of the biggest assumptions technical analysis makes is that prices follow trends and aren’t random. They follow a given trend, which can be either bullish/long or bearish/short, following identifiable patterns that tend to repeat over time. Whenever a trend is established, the underlying asset is likely to continue moving in a given direction until a new trend is established.

When it comes to price movements, technical analysts believe that price moves, in short, medium, and long-term trends. For long-term traders who hold trades for days, weeks, or months, long-term charts such as hourly, daily, and weekly charts become most valuable. Short-term traders who hold trades for minutes should pay attention to short-term charts, which can be in five- and 15-minute periods.

Market movement aren't random
3. History Tends to Repeat Itself –

The basic idea in technical analysis is that history will always repeat itself, be it in the short term or long term. For this reason, technical analysts spend most of their time trying to understand past price movements to try and accurately predict future price movements.

The repetitive nature of price movements makes it possible to predict future price movements. The repetitive aspect is based on the fact that both human behavior and human history repeat themselves.

Classic chart patterns, such as channels and trends as well as rectangles, ranges, tops, and bottoms, are some of the results of predictable human behavior. Technical analysts look for these patterns because most of the time they provide a predictable outcome.

History Tends to Repeat Itself
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Markets Sanmi No Den by Munehisa Homma

According to Munehisa Homma, “the method of looking at rice market price movements to predict the following day’s movements, was first thought up by a man by the name of Sokyu Honma and was called the Sakata Constitution”.

The port of Sakata was the primary distributor of one of the most important commodities in Japan; rice. Homma carefully studied the rice market and began to notice tendencies and patterns. This method was divided into two groups called the “Markets Sanmi No Den” and “Sakata strategies”.

The markets Sanmi no den contained a set of rules for actions to take based upon different market scenarios. His original method predated the Japanese candlestick charts however he later created the candlestick chart and applied his patterns to them.

Learnings or Rules from The Fountain of Gold Book

  1. In trading, the beginning is crucial If the beginning is bad, the ensuing course will continue in disorder. You should never rush when entering trading because rushing is the same as a bad beginning. When buying or selling, wait for three days from the moment you feel you could profit from a certain market condition. This is the rule. Consider the distribution condition of the rice in addition to the ceiling and bottom prices of it before you make your decision.
  2. The rise and fall of the rice price follows the law of nature, and it is hard to identify either the down or up moments while it goes up and down continuously. Those who are ignorant of this rule should not even attempt to try their hand at trading.
  3. Wait Calmly When You Have Missed the Perfect Time to Buy – If the rice price goes up by 2 koku just when you have decided to buy rice, you may think you missed the perfect time to buy and it is a better time to sell, but this would be a big mistake. When you have missed the best time to buy, you should wait for the next opportunity to buy.
  4. Aim for a Bigger Profit: Don’t Rest on a Small Profit – There are times when just as you have made your buy at the bottom and expected some profit, the price stagnates or goes down slightly. When this happens you think you have miscalculated the market and you regret that you didn’t sell when the price went up previously. But this is the wrong way to think. When you buy at the bottom, you should never sell until the trend makes a shift.
  5. When You Have Made a Wrong Decision, Sell Quickly and Rest – You should never distribute and accumulate at a time of bad luck. When you have made a wrong decision, quickly sell off and take a break for 4-50 days. Even if the trading has happened as you expected, take a break for 4-50 days after the trading, think of the distribution of the rice and the appropriate timing based on the “Three Methods” before you make your next move. Above all, remember you are sure to cause a loss when the trading concludes if you forget about this break upon seeing an opportunity for profit. However, taking a break after concluding a trade does not mean resting without any thought of the market; you closely watch the market movement with a calm mind during this break. If you find an opportunity to make a profit based on the selling method of the previous year, you are likely to become attached to it. But the best thing is to let go of your attachment to the previous year, and think of the current year’s harvest, the volume of offerings, and the market mood. 
  6. Don’t Be Carried Away by Winning- Never let yourself be carried away by winning when you have achieved 80-90% of your goal after several months. Instead, focus on making a profit naturally. You must never ever lose yourself in greed.
  7. Eye the Bottom, Aim for the Ceiling– When you buy and sell, you have to eye the bottom and aim for the ceiling. You must keep this in mind.
  8. You Will Succeed Only When You Sell Well- There is no major change within a year, except for a rise once, and a fall once. Even
    during the rise, the price goes down slightly, and during the fall, it goes up slightly. But this repeated cycle is not the market trend that is headed to the ceiling. Don’t be fooled by the repeating cycle of market action. The first step is more important than anything. The decision to buy should not be made lightly; don’t be dispirited when you see an opportunity for profit-making. The decision to sell may look easy but it is very difficult to handle. When the price starts going down, you have to buy back because you cannot tell how far down it is going to fall. When the price falls, don’t lose yourself in the commotion of others. The best thing to do is to let go of any greed, and buy out.
  9. Going Against the Trend is Not Allowed- There are times when you decide to sell off your offerings because your forecast for the market is gloomy, but your forecast turns out to be wrong and it leads you to loss. Intending to distribute,28 some people begin to sell off their rice when the price is moving upward, but this is very wrong. You must not go against the trend. The same applies when you buy. When you realize your market forecast was wrong, take your hands off the market and remain observant. 
  10. When Tempted to Enter Trading, Wait Two Days When your inner voice tells you, “the rice price is sure to go up, I must buy it today”, wait
    for two days. It is the same when it whispers “it is sure to go down”. This is a profound secret. When the price has reached the ceiling, the best thing you can do is to identify the time to sell. The best thought you can have when the price reaches the ceiling is the thought of selling. When it is at the bottom, the thought of buying is the best. You should not forget this.
  11. Do Not Buy at the Ceiling or Sell at the Bottom- Just remain mindful of the market. You can never tell either the ceiling or the bottom while the price is moving up or down, and besides you often become caught up in the hype and insist on either selling or buying without thinking of the time when the up or down action comes to an end until you cause a loss of money. When the price is going up unusually high, count on it to go down for certain. When it goes down, count on it to go up later, all the while waiting for an opportunity with determination, and letting go of greedy minds.
  12. Mindset is Everything- When trading futures in the eleventh month of frost, your mindset is the most important. For example, you should be ready, in your mind to make 500 koku of profit when you can make a thousand koku of profit, depending on your financial situation. You should also take 50 koku of profit when you could have made 100 koku of profit. Unless your mind is set in this way, you will be tempted and reckless, trade be it at the ceiling or at the bottom until you fail to make any profit after having worked so hard. Those who want to take this path have to have this kind of mindset.
  13. Do Not Rush to Trade- Don’t rush in trading. When you sell or buy based on your personal thoughts, it is because you have no skills and you think there is no tomorrow in the market. You make your move only when you are certain of the timing after waiting for days and even
    months, all the while remaining watchful of market fluctuation. You make mistakes because you make your move without being mindful of the ceiling and the bottom. All this is because you rush to trade.
  14. Decide on the Capital Before You Start– When entering the trade, you must decide on the source of your capital, and how much you are going to use for trading. If you are on the buying side, you can begin with just a little capital and buy rice in small quantities, and when you start making profits, you can increase the volume of your purchase until you buy the volume you had targeted originally. If everything goes the way you anticipated, you must wait until you are sure of the price increase. If the price increase is far more than you expected, you can easily
    become greedy and get carried away by a few wins.
  15. Do Not Start Trading As a Pastime- is a common piece of advice for individuals who are considering entering the world of trading and investing. Trading can be a complex and risky activity, and it is important for individuals to understand the potential risks and rewards before they get started. Trading should not be viewed as a simple way to make quick money or as a way to pass the time. Instead, it should be treated as a serious business venture that requires careful planning, research, and strategy in order to be successful. Individuals who are considering trading should be prepared to devote a significant amount of time and effort to learning about the markets and developing their skills, and should only trade with money that they can afford to lose.
92

Charles Henry Dow & History of Modern Technical Analysis

Charles Henry Dow was born on November 6, 1851, in the hills of Sterling, Connecticut to a farming family. His father died when he was six years old. Though he would never finish high school, he opted out of the family business and instead pursued journalism. Without much education or training, in 1872 he found […]

87

Munehisa Homma & History of Candlestick Patterns

Homma began recording price movements in the rice market on paper made out of rice plants. He laboriously drew price patterns on his rice parchment paper every day, recording the open, high, low, and close of each day. Homma began seeing patterns and repetitive signals in the price bars he was drawing and soon started […]

Chapter 7: Concepts in Taxation

Framework for Income Tax in India: Governing Legislation: The primary law governing income tax in India is the Income Tax Act, 1961. This Act lays down the rules, regulations, and provisions related to the assessment and collection of income tax. Ministry of Finance: The administration of income tax falls under the Ministry of Finance, which […]