Experimenting with Equity Markets

Technical Analysis: Timing Your Entries

While fundamental analysis answers “What to buy?”, technical analysis answers “When to buy?”

Core Principles:

1. Price Discounts Everything - All information reflected in price
2. History Repeats Itself - Patterns recur due to human psychology
3. Trends Exist - Prices move in identifiable directions

Candlestick Charting

Modern technical analysis relies on candlestick charts visualizing four key price points:

Candlestick Anatomy:

        │ ← Upper Shadow (High rejection)
        │
    ┌───────┐
    │       │ ← Body (Open to Close)
    │ BODY  │  
    │       │
    └───────┘
        │
        │ ← Lower Shadow (Low rejection)

Four Key Prices:

1. Open - Price at market open (9:15 AM)
2. High - Highest price during the day
3. Low - Lowest price during the day
4. Close - Price at market close (3:30 PM)

Green/White Candle (Bullish):

• Close > Open
• Indicates buying pressure
• Bulls dominated the session

Red/Black Candle (Bearish):

• Open > Close
• Indicates selling pressure
• Bears dominated the session

Reading Candlesticks:

Example Analysis:

Strong Bullish Candle:

• Open: ₹1,000
• High: ₹1,100
• Low: ₹990
• Close: ₹1,095
• Body: ₹95 (large green body)
• Upper Shadow: ₹5 (small rejection at top)
• Lower Shadow: ₹10 (buyers stepped in quickly)
• Interpretation: Strong buying pressure, bulls in control

Body Strength:

• Large body (>70% of range) = Strong conviction
• Medium body (40-70%) = Moderate movement
• Small body (<40%) = Weak, indecisive

Trend Identification

Uptrend - Series of higher highs and higher lows

Price going UP ↗
         H3 (Higher High)
        /
   H2  /
   /  /
  / L2 (Higher Low)
 /  
H1  
L1

Visual: Each peak is higher than the previous, each valley is higher than the previous

Downtrend - Series of lower highs and lower lows

Price going DOWN ↘
H1
   
  H2 (Lower High)
    
   L1
    
     H3
      
       L2 (Lower Low)

Visual: Each peak is lower than the previous, each valley is lower than the previous

Sideways/Ranging - Horizontal price movement within bounds

Resistance ────────────────
         ↕️ Range
Support  ────────────────

Visual: Price bounces between support and resistance, no clear direction

How to Identify Trends:

Check Last 5-10 Candles:

Example:

Last 5 Days Data:

Verdict: Clear UPTREND → Consider buying on dips

Trading Rules:

• Never sell in an uptrend
• Never buy in a downtrend
• Never trade in sideways trend - wait for breakout

Support and Resistance Levels

Support - Price level where buying interest prevents further decline

Resistance - Price level where selling pressure prevents further rise

How to Find Support & Resistance:

Step 1: Look for Reversals

• Support = Price bounces UP from a level multiple times
• Resistance = Price bounces DOWN from a level multiple times

Visual Example:

₹550 ──────  Resistance (price can't break above)
     ↓ ↓ ↓
₹500 ─────── Current Price
     ↑ ↑ ↑
₹450 ──────  Support (price bounces up from here)

Finding Levels on Chart:

More touches = Stronger level

Breakout Analysis:

Role Reversal:

• Broken resistance becomes new support
• Broken support becomes new resistance

Example: Stock at ₹100 resistance, breaks to ₹110. Now ₹100 acts as support!

Multi-Timeframe Analysis

The Father-Son-Grandson Analogy:

• Monthly Chart = Grandfather (long-term direction)
• Weekly Chart = Father (medium-term trend)
• Daily Chart = Son (entry/exit timing)

Strategy Decision Matrix:

Example Scenario:

Stock: TCS

• Monthly Chart: Clear uptrend (higher highs, higher lows)
• Weekly Chart: Uptrend continuing
• Daily Chart: Small correction/dip

Verdict: BUY ON DIP - Use daily dip as entry point in strong long-term uptrend

Why it works: Aligning timeframes increases probability - you’re buying in the direction of the bigger trend.

Bullish Candlestick Patterns

1. Bullish Engulfing

Day 1: Small Red Candle
Day 2: Large Green Candle completely engulfing Day 1

     ┌────┐
     │    │  ← Green candle
  ┌──┤    │
  │  │    │
  └──┤    │
     └────┘

Most powerful at downtrend bottom signaling reversal.

2. Morning Star

Three-candle pattern at downtrend bottom:

Day 1: Large Red Candle
Day 2: Small Doji (indecision)
Day 3: Large Green Candle

  ┌──┐
  │  │          ┌────┐
  │  │   ──     │    │
  │  │          │    │
  └──┘          └────┘

3. Hammer

Long lower shadow (2-3x body length)
Little/no upper shadow
Forms at downtrend bottom

     ┌─┐
     └─┘
      │
      │  ← Long shadow
      │

Hammer Identification:

Requirements:

1. Lower shadow = 2-3x the body length
2. Little to no upper shadow
3. Color doesn’t matter
4. Must appear at BOTTOM of downtrend

Example:

• Body (Open to Close): ₹20 range
• Lower Shadow: ₹60 range (3x body) ✓
• Upper Shadow: ₹2 (negligible) ✓
• Location: Bottom of downtrend ✓
• Next candle: Green confirmation ✓

Verdict: Valid HAMMER → Bullish reversal signal

Important Distinction:

Same shape, different meaning based on location!

4. Inverted Hammer

Long upper shadow (2-3x body)
Little/no lower shadow
At downtrend bottom

      │
      │  ← Long upper shadow
      │
     ┌─┐
     └─┘

Bearish Candlestick Patterns

1. Bearish Engulfing

Large red candle completely engulfing previous green candle, most powerful at uptrend peaks.

2. Evening Star

Three-candle pattern at uptrend top:

Day 1: Large Green Candle
Day 2: Small Doji (indecision)
Day 3: Large Red Candle

3. Shooting Star

Inverted Hammer at uptrend top = Bearish reversal

      │  ← Rejection of higher prices
      │
     ┌─┐
     └─┘

Technical Indicators

Moving Averages

Moving Averages - Smooth price data to identify trends

Two Types:

1. SMA (Simple Moving Average)

• Gives equal weight to all prices in the period
• Smoother but slower to react to price changes
• Good for identifying long-term trends

2. EMA (Exponential Moving Average)

• Gives more weight to recent prices
• Reacts faster to price changes
• Better for short-term trading signals

Standard EMA Periods:

Trading Signals:

Visual Example:

Price Chart:
     /  ← 5 EMA (fastest, hugs price closely)
    / /  ← 13 EMA (medium speed)
   / /   
  / / /  ← 26 EMA (slowest, smooth)
 / / /

When 5 EMA crosses above 13 EMA = Bulls taking control → Buy signal When 5 EMA crosses below 13 EMA = Bears taking control → Sell signal

Note: Moving averages are lagging indicators - they confirm trends after they’ve started, not predict them.

MACD (Moving Average Convergence Divergence)

MACD Components:

1. MACD Line (Blue) = 12-day EMA minus 26-day EMA 2. Signal Line (Orange) = 9-day EMA of MACD line 3. Histogram (Bars) = Difference between MACD and Signal line

How to Read MACD:

MACD Interpretation Guide:

Divergence Signals (Advanced):

Bearish Divergence:

• Price makes new HIGH
• MACD makes lower HIGH
• Signal: Momentum weakening → Sell warning

Bullish Divergence:

• Price makes new LOW
• MACD makes higher LOW
• Signal: Momentum strengthening → Buy potential

Real Example:

• Stock rises from ₹100 → ₹120 → ₹130
• MACD: 2.5 → 2.0 → 1.5 (decreasing despite price rising)
• Warning: Price up but momentum down → Reversal coming!

Volume Analysis

Volume confirms or denies price movements - Never trade without checking volume!

The Volume Confirmation Matrix:

How to Check Volume:

1. Look at volume bars below price chart
2. Compare today’s volume with previous 5-day average
3. Volume surge = Today’s volume > 1.5x average (50% higher)

Example:

• Last 5 days average volume: 10 lakh shares/day
• Today’s volume: 18 lakh shares (1.8x average) ✓ Volume surge!
• Price: Rose 3%
• Verdict: Strong buy signal - Institutions accumulating

Remember: Price can be manipulated, volume harder to fake. Trust moves with volume!

Practical Trading Framework

Combining ALL Indicators for Best Results:

Step-by-Step Analysis Checklist:

1. ✅ Identify Trend

• Check last 5-10 candles
• Determine: Uptrend / Downtrend / Sideways

2. ✅ Mark Support & Resistance

• Find levels where price bounced multiple times
• Note breakout/breakdown points

3. ✅ Check EMA Signals

• Is 5 EMA above or below 13 & 26 EMA?
• Any crossovers recently?

4. ✅ Analyze MACD

• MACD above or below signal line?
• Histogram increasing or decreasing?

5. ✅ Confirm with Volume

• Is volume above 5-day average?
• High volume on up move = Good
• High volume on down move = Bad

6. ✅ Check Candlestick Pattern

• Any reversal patterns (Hammer, Engulfing)?
• Strong body or weak/indecisive?

Signal Scoring System:

Example Analysis:

Stock: Infosys

• ✅ Trend: Uptrend (higher highs, higher lows)
• ✅ EMA: 5 EMA crossed above 13 EMA (+1 buy)
• ✅ MACD: Positive and rising (+1 buy)
• ✅ Volume: 150% of average (+1 buy)
• ✅ Candle: Green bullish candle
• ❌ Sell signals: 0

Result: 3 buy signals, 0 sell signals, uptrend → STRONG BUY

Putting It All Together: Holistic Investment Framework

The Complete Analysis Workflow

Your 4-Step Investment Process:

Step 1: Fundamental Screening ✅ or ❌

• Run all 8 Golden Ratios analysis
• Check 5-year trends (Reserves, FCF, EPS growing?)
• Verify sector-specific metrics
• Assess management quality (red flags?)

Decision:

• ✅ Passed → Proceed to Step 2
• ❌ Failed → REJECT - Move to next stock

Step 2: Valuation Analysis 💰

• Calculate intrinsic value using EV/EBITDA method
• Compare company P/E with industry average
• Check Price-to-Book ratio
• Determine target price with 30% margin of safety

Decision:

• ✅ Undervalued (current price < target) → Proceed to Step 3
• ⚠️ Overvalued → WATCHLIST - Wait for price correction

Step 3: Economy & Industry Check 🌍

• GDP growth trajectory (expanding or slowing?)
• Interest rate environment (rates rising/falling?)
• Industry lifecycle stage (growth/maturity/decline?)
• Regulatory environment (favorable/unfavorable?)

Decision:

• ✅ Favorable macro → Proceed to Step 4
• ❌ Unfavorable → DEFER - Wrong timing, wait

Step 4: Technical Entry Timing 📈

• Identify trend (buy only in UPTREND or consolidation)
• Mark support and resistance levels
• Wait for EMA crossover (5 EMA crossing 13/26)
• Confirm with MACD and volume surge
• Use candlestick patterns for precise entry point
• Set STOP LOSS before buying

Decision: ✅ Execute trade with predefined stop loss

Summary: All 4 steps must align for investment. Skip any step = Higher risk!

Risk Management Rules

The Golden Rules:

Position Sizing Example:

Your Portfolio: ₹10,00,000

Trade Details:

• Entry Price: ₹500
• Stop Loss: ₹475 (5% below entry)
• Risk per share: ₹25

Calculation:

Stop Loss Strategies:

Risk-Reward Calculation:

Given:

• Entry: ₹500
• Stop Loss: ₹475
• Risk: ₹25 per share

Targets:

Visual:

₹575 ──── Target 2 (+₹75 profit, 1:3)
₹550 ──── Target 1 (+₹50 profit, 1:2)
₹500 ──── Entry Price
₹475 ──── Stop Loss (-₹25 loss)

Rule: Never take a trade where potential loss exceeds potential gain!

Portfolio Construction Principles

Diversification by Market Cap:

Example Portfolio: ₹10 Lakhs (Moderate Profile)

Portfolio Guidelines:

Sector Diversification Example (₹10L Portfolio):

Remember: Don’t put all eggs in one basket. Diversify, but don’t over-diversify!

Key Principles Summary

Fundamental Analysis Commandments:

1. Quality Over Quantity: Own 10-15 well-researched stocks, not 50 random picks
2. Circle of Competence: Invest only in businesses you understand
3. Management Matters: Honest management with skin in the game is non-negotiable
4. Margin of Safety: Buy at significant discount to intrinsic value
5. Long-term Horizon: Compounding requires patience - minimum 3-5 years

Technical Analysis Commandments:

1. Trend is Friend: Only buy in uptrends, only short in downtrends
2. Volume Confirms Price: Price movements without volume are suspect
3. Support Becomes Resistance: Levels flip roles after breaks
4. Multiple Timeframe Alignment: Higher probability when all timeframes agree
5. Stop Losses Are Mandatory: Never trade without predefined exit

Risk Management Commandments:

1. Never Risk More Than 2%: Per trade portfolio risk limit
2. Position Sizing Discipline: No single stock above 10% of portfolio
3. Cut Losses Quickly: Stop loss hit = Exit immediately, no hoping
4. Let Winners Run: Trail stop losses on profitable positions
5. Diversify Across Sectors: No sector above 25% portfolio weight

Advanced Concepts and Nuances

IPO Analysis Framework

Beyond regular fundamental analysis, IPOs need special scrutiny:

IPO Evaluation Checklist:

Scoring System:

Real Example: Zomato IPO

• ✅ Fresh Issue: 60% (raising growth capital)
• ✅ GMP: ₹50 premium (strong demand)
• ✅ RII: 7.45x (retail crazy about it)
• ✅ QIB: 51.79x (institutions love it)
• ⚠️ P/E: Loss-making (no comparison possible)
• ✅ Subscription: 38x overall

Score: 4-5 green flags → APPLY (and it listed at good premium!)

Book Value and Asset Plays

Book Value = What shareholders would get if company sold everything and paid all debts

Formula: Book Value = (Total Assets - External Liabilities) ÷ Total Shares

Calculation Example:

Price to Book (P/B) Ratio:

When Book Value Matters:

• Asset-heavy businesses: Real estate, manufacturing, infrastructure
• Banks: P/B ratio more relevant than P/E
• Distressed situations: Bankruptcy, asset sales

When Book Value Doesn’t Matter:

• IT/Services: No physical assets, all intellectual property
• Growth companies: Future potential > Current assets
• Consumer brands: Brand value not on balance sheet

Example: Page Industries (Jockey brand) trades at 20+ P/B because brand value >> physical assets!

Behavioral Pitfalls to Avoid

Your worst enemy in markets? YOUR OWN BRAIN! Here are common biases:

1. Recency Bias - Overweighting recent performance

Action: Track 50+ trades before judging your skill. Stay disciplined regardless of recent results.

2. Loss Aversion - Holding losers too long, selling winners too early

Rule: Cut losses quickly, let profits run. Don’t marry your losers!

3. Herd Mentality (FOMO) - Buying because everyone else is

Real Example: When your barber gives you stock tips, market top is near!

4. Anchoring - Fixating on past price levels

Truth: Analyze CURRENT fundamentals, not past prices. Market doesn’t remember your cost!

Self-Check Questions:

Before ANY trade, ask yourself:

1. ❓ Am I buying because of analysis or emotions?
2. ❓ Would I buy more if everyone was selling it?
3. ❓ Would I sell some if everyone was selling it?
4. ❓ Is my overconfidence from a few lucky wins?

Be honest. Your portfolio will thank you!

Continuous Learning Resources

The journey of mastering equity markets involves continuous learning and adaptation. Here are critical practices:

1. Daily Habits:

• Read financial newspapers (Economic Times, Business Standard)
• Track key indices and sector movements
• Review your portfolio and update watchlists
• Journal all trades with reasoning and emotions

2. Weekly Rituals:

• Analyze quarterly results of portfolio companies
• Screen for new investment opportunities
• Review technical charts on weekly timeframe
• Calculate portfolio returns and risk metrics

3. Monthly Discipline:

• Read annual reports of target companies
• Attend investor conference calls
• Rebalance portfolio if needed
• Review and learn from past mistakes

4. Continuous Education:

• Follow quality content creators (as referenced in the fundamentals)
• Study case studies of successful investors
• Understand macroeconomic indicators deeply
• Keep updating valuation models with new data

Final Thoughts: The Investing Mindset

This comprehensive exploration of equity markets provides the foundation for building wealth through equities. Key principles to internalize:

1. Analysis Over Emotion: Every investment decision must stem from rigorous analysis, not tips, FOMO, or greed.

2. Patience Compounds Wealth: The real money is made by holding quality businesses for years, not trading frequently.

3. Risk Management is Everything: Capital preservation comes before capital appreciation - you can’t compound if you blow up.

4. Continuous Learning: Markets evolve, businesses change, regulations shift - stay curious and adaptive.

5. Know What You Own: If you can’t explain why you own a stock, you shouldn’t own it.

6. Humility: The market is supreme. When proven wrong, accept it quickly and move on.

The difference between gambling and investing lies not in the assets themselves, but in your approach. Armed with fundamental analysis for selection, technical analysis for timing, you can expect to make money in the long run.