What is a share ?

In finance a share is a unit of account for various financial instruments including stocks, mutual funds, limited partnerships, and REIT’s. In British English, the usage of the word share alone to refer solely to stocks is so common that it almost replaces the word stock itself.

In simple Words, a share or stockis a document issued by a company, which entitles its holder to be one of the owners of the company. A share is issued by a company or can be purchased from the stock market

By owning a share you can earn a portion and selling shares you get capital gain. So, your return is the dividend plus the capital gain. However, you also run a risk of making a capital loss if you have sold the share at a price below your buying price.

A company’s stock price reflects what investors think about the stock, not necessarily what the company is “worth.” For example, companies that are growing quickly often trade at a higher price than the company might currently be “worth.” Stock prices are also affected by all forms of company and market news. Publicly traded companies are required to report quarterly on their financial status and earnings. Market forces and general investor opinions can also affect share price.

Quick Facts on Stocks and Shares

  1. Owning a stock or a share means you are a partial owner of the company, and you get voting rights in certain company issues.
  2. Over the long run, stocks have historically averaged about 10% annual returns. However, stocks offer no guarantee of any returns and can lose value, even in the long run.
  3. Investments in stocks can generate returns through dividends, even if the price.

How does one trade in shares?

Every transaction in the stock exchangeis carried out through licensed members called brokers.

To trade in shares, you have to approach a broker However, since most stock exchange brokers deal in very high volumes, they generally do not entertain small investors. These brokers have a network of sub-brokers who provide them with orders.

The general investors should identify a sub-broker for regular trading in sharesand place his order for purchase and sale through the sub-broker. The sub/broker will transmit the order to his broker who will then execute it.

What are active Shares ?

Shares in which there are frequent and day-to-day dealings, as distinguished from partly active shares in which dealings are not so frequent. Most leading companies would be active, particularly those which are sensitive to economic and political events and are, therefore, subject to sudden price movements. Some market analysts would define active shares as those which are bought and sold at least three times a week. Easy to buy or sell.

Moving Average

The ideas of Charles Dow, the first editor of the Wall Street Journal, form the basis of technical analysis today.
Dow created the Industrial Average, of top blue chip stocks, and a second average of top railroad stocks (now the Transport Average). He believed that the behavior of the averages reflected the hopes and fears of the entire market. The behavior patterns that he observed apply to markets throughout the world.

Three Movements
Market has a tendency to fluctuate. Markets fluctuate in more than one time frame at the same time:

There are three well defined movements in market which fit into each other.

  • The first is the daily variation due to local causes and the balance of buying and selling at that particular time (Ripple).
  • The secondary movement covers a period ranging from days to weeks, averaging probably between six to eight weeks (Wave).
  • The third move is the great swing covering anything from months to years, averaging between 6 to 48 months. (Tide).
  • Bull markets are broad upward movements of the market that may last several years, interrupted by secondary reactions. Bear markets are long declines interrupted by secondary rallies. These movements are referred to as the primary trend.
  • Secondary movements normally retrace from one third to two thirds of the primary trend since the previous secondary movement.
  • Daily fluctuations are important for short-term trading, but are unimportant in analysis of broad market movements.

Various cycles have subsequently been identified within these broad categories.
Primary Movements have Three Phases
Some General Conditions in the market.

Bull markets

  • Bull markets commence with reviving confidence as business conditions improve.
  • Prices rise as the market responds to improved earnings
  • Rampant speculation dominates the market and price advances are based on hopes and expectations rather than actual results.

Bear markets

  • Bear markets start with abandonment of the hopes and expectations that sustained inflated prices.
  • Prices decline in response to disappointing earnings.
  • Distress selling follows as speculators attempt to close out their positions and securities are sold without regard to their true value.

Ranging Markets

  • A secondary reaction may take the form of a ‘line’ which may endure for several weeks.
  • Price fluctuates within a narrow range of about five percent.

Breakouts from a range can occur in either direction.

  • Advances above the upper limit of the line signal accumulation and higher prices;
  • Declines below the lower limit indicate distribution and lower prices;
  • Volume is used to confirm price breakouts.

Bull Trends
A bull trend is identified by a series of rallies where each rally exceeds the highest point of the previous rally. The decline, between rallies, ends above the lowest point of the previous decline.

Successive higher highs and higher lows.

The start of an up trend is signaled when price makes a higher low (trough), followed by a rally above the previous high (peak):

Start = higher Low + break above previous High.

The end is signaled by a lower high (peak), followed by a decline below the previous low (trough):

End = lower High + break below previous Low.

What if the series of higher Highs and higher Lows is first broken by a lower Low? There are two possible interpretations – see Large Corrections.

Bear Trends
Each successive rally fails to penetrate the high point of the previous rally. Each decline terminates at a lower point than the preceding decline.

Successive lower highs and lower lows

A bear trend starts at the end of a bull trend: when a rally ends with a lower peak and then retreats below the previous low. The end of a bear trend is identical to the start of a bull trend.

What if the series of lower Highs and lower Lows is first broken by a higher High? This is a gray area – see Large Corrections.

Large Corrections
A large correction occurs when price falls below the previous low (during a bull trend) or where price rises above the previous high (in a bear trend).

Some purists argue that a trend ends if the sequence of higher highs and higher lows is broken. Others argue that a bear trend has not started until there is a lower High and Low nor has a bull trend started until there is a higher Low and High.

For practical purposes:

Only accept large corrections as trend changes in the primary trend:

  • A bull trend starts when price rallies above the previous high,
  • A bull trend ends when price declines below the previous low,
  • A bear trend starts at the end of a bull trend (and vice versa).

 

Elliot Wave Theory

The Elliott Wave Theory is named after Ralph Nelson Elliott. Inspired by the Dow Theory and by observations found throughout nature, Elliott concluded that the movement of the stock market could be predicted by observing and identifying a repetitive pattern of waves. In fact, Elliott believed that all of man’s activities, not just the stock market, were influenced by these identifiable series of waves.Elliott based part his work on the Dow Theory, which also defines price movement in terms of waves, but Elliott discovered the fractal nature of market action. Thus Elliott was able to analyze markets in greater depth, identifying the specific characteristics of wave patterns and making detailed market predictions based on the patterns he had identified.

Definition of Elliott Waves

In the 1930s, Ralph Nelson Elliott found that the markets exhibited certain repeated patterns. His primary research was with stock market data for the Dow Jones Industrial Average. This research identified patterns or waves that recur in the markets. Very simply, in the direction of the trend, expect five waves. Any corrections against the trend are in three waves. Three wave corrections are lettered as “a, b, c.” These patterns can be seen in long-term as well as in short-term charts. Ideally, smaller patterns can be identified within bigger patterns. In this sense, Elliott Waves are like a piece of broccoli, where the smaller piece, if broken off from the bigger piece, does, in fact, look like the big piece. This information (about smaller patterns fitting into bigger patterns), coupled with the Fibonacci relationships between the waves, offers the trader a level of anticipation and/or prediction when searching for and identifying trading opportunities with solid reward/risk ratios.

There have been many theories about the origin and the meaning of the patterns that Elliott discovered, including human behavior and harmony in nature. These rules, though, as applied to technical analysis of the markets (stocks, commodities, futures, etc.), can be very useful regardless of their meaning and origin.

Simplifying Elliott Wave Analysis

Elliott Wave analysis is a collection of complex techniques. Approximately 60 percent of these techniques are clear and easy to use. The other 40 are difficult to identify, especially for the beginner. The practical and conservative approach is to use the 60 percent that are clear.

When the analysis is not clear, why not find another market conforming to an Elliott Wave pattern that is easier to identify?

From years of fighting this battle, we have come up with the following practical approach to using Elliott Wave principles in trading.
The whole theory of Elliott Wave can be classified into two parts:

  • Impulse patterns
  • Corrective patterns

Elliott Wave Basics — Impulse Patterns

The impulse pattern consists of five waves. The five waves can be in either direction, up or down. Some examples are shown to the right and below.The first wave is usually a weak rally with only a small percentage of the traders participating. Once Wave 1 is over, they sell the market on Wave 2. The sell-off in Wave 2 is very vicious. Wave 2 will finally end without making new lows and the market will start to turn around for another rally.

The initial stages of the Wave 3 rally are slow, and it finally makes it to the top of the previous rally (the top of Wave 1).

At this time, there are a lot of stops above the top of Wave 1.

Traders are not convinced of the upward trend and are using this rally to add more shorts. For their analysis to be correct, the market should not take the top of the previous rally.

Therefore, many stops are placed above the top of Wave 1.

The Wave 3 rally picks up steam and takes the top of Wave 1. As soon as the Wave 1 high is exceeded, the stops are taken out. Depending on the number of stops, gaps are left open. Gaps are a good indication of a Wave 3 in progress. After taking the stops out, the Wave 3 rally has caught the attention of traders.

The next sequence of events are as follows: Traders who were initially long from the bottom finally have something to cheer about. They might even decide to add positions.

The traders who were stopped out (after being upset for a while) decide the trend is up, and they decide to buy into the rally. All this sudden interest fuels the Wave 3 rally.

This is the time when the majority of the traders have decided that the trend is up.

Finally, all the buying frenzy dies down; Wave 3 comes to a halt.

Profit taking now begins to set in. Traders who were long from the lows decide to take profits. They have a good trade and start to protect profits.This causes a pullback in the prices that is called Wave 4.

Wave 2 was a vicious sell-off; Wave 4 is an orderly profit-taking decline.

While profit-taking is in progress, the majority of traders are still convinced the trend is up. They were either late in getting in on this rally, or they have been on the sideline.

They consider this profit-taking decline an excellent place to buy in and get even.

On the end of Wave 4, more buying sets in and the prices start to rally again.

The Wave 5 rally lacks the huge enthusiasm and strength found in the Wave 3 rally. The Wave 5 advance is caused by a small group of traders.

Although the prices make a new high above the top of Wave 3, the rate of power, or strength, inside the Wave 5 advance is very small when compared to the Wave 3 advance.

Finally, when this lackluster buying interest dies out, the market tops out and enters a new phase.

Elliott Wave Basics — Corrective Patterns
Corrections are very hard to master. Most Elliott traders make money during an impulse pattern and then lose it back during the corrective phase.

  • Simple Correction (Zig-Zag)
  • Complex Corrections (Flat, Irregular, Triangle)

Simple Correction (Zig-Zag)

There is only one pattern in a simple correction. This pattern is called a Zig-Zag correction. A Zig-Zag correction is a three-wave pattern where the Wave B does not retrace more than 75 percent of Wave A. Wave C will make new lows below the end of Wave A. The Wave A of a Zig-Zag correction always has a five-wave pattern. In the other two types of corrections (Flat and Irregular), Wave A has a three-wave pattern. Thus, if you can identify a five-wave pattern inside Wave A of any correction, you can then expect the correction to turn out as a Zig-Zag formation.

Fibonacci Ratios inside a Zig-Zag Correction

A simple correction is commonly called a Zig-Zag correction.

Complex Corrections (Flat, Irregular, Triangle)

The complex correction group consists of 3 patterns:

  • Flat
  • Irregular
  • Triangle

Flat Correction

In a Flat correction, the length of each wave is identical. After a five-wave impulse pattern, the market drops in Wave A. It then rallies in a Wave B to the previous high. Finally, the market drops one last time in Wave C to the previous Wave A low.

Irregular Correction

In this type of correction, Wave B makes a new high. The final Wave C may drop to the beginning of Wave A, or below it.

Triangle Correction

In addition to the three-wave correction patterns, there is another pattern that appears time and time again. It is called the Triangle pattern. Unlike other triangle studies, the Elliott Wave Triangle approach designates five sub-waves of a triangle as A, B, C, D and E in sequence.

Triangles, by far, most commonly occur as fourth waves. One can sometimes see a triangle as the Wave B of a three-wave correction. Triangles are very tricky and confusing. One must study the pattern very carefully prior to taking action. Prices tend to shoot out of the triangle formation in a swift thrust.

When triangles occur in the fourth wave, the market thrusts out of the triangle in the same direction as Wave 3. When triangles occur in Wave Bs, the market thrusts out of the triangle in the same direction as the Wave A.

Alteration Rule

If Wave Two is a simple correction, expect
Wave Four to be a complex correction.
If Wave Two is a complex correction,
expect Wave Four to be a simple correction.

Multiple Time Frame

When deciding on a trade or investment, be it short, intermediate or long term, multiple time frame analysis can help clear the noise and offer a balanced view.Multiple time frame analysis!?! It sounds complicated and fancy, but it simply refers to the same chart with more than one time compression (e.g. daily or weekly). When both the weekly and the daily charts are in harmony, the chances of success can be greatly enhanced.The essence of the strategy is easy: Use the higher time frame price activity to define the tradable trend as well as potential support and resistance levels.

Markets exist in several time frames simultaneously. They exist on a 10 minute chart, an hourly chart, a daily chart, a weekly chart, and any other chart. Traders often feel confused when they look at charts in different time frames and they see the markets going in several directions at once.

The market may look for a buy on a daily chart and a sell on the weekly chart, and vice versa. The signals in different time frames of the same market often contradict one another. Which of them will you follow? Most traders pick one time frame and close their eyes to others – until a sudden move outside of “their” time frame hits them.

Daily charts are great, but participants can get caught up in the move of the moment. Even though daily charts can contain random movements, they do have their strengths. Once an underlying trend is identified, daily charts can be useful to pick entry and exit points. On the other hand, weekly charts filter out the random movements and can help identify the stronger under currents that are driving the price.

The same idea applies if you are trading any security on a daily basis, in which case, the weekly bars will be the basis for the trend as well as the important support and resistance points. That is the foundation of multiple time frame trading. Besides the effectiveness of using a method based on a multiple time frame approach, another advantage is the method need not be complicated. A trader can make his or her method as simple or as complicated as desired.

The proper way to analyze any market is to analyze it in at least two or three time frames. If you analyze daily charts, you must first examine the weekly charts and so on.

Look at the daily chart of NSE Nifty below. What does it tell you. Most traders would say that it is just the beginning of a downtrend and would be happy to short the market all th way down. Well, most traders are not successful! To be successful in trading any market, one has to first examine the trend on a higher time frame.

Now look at the chart below of the same security. This is a chart of one time frame higher than the one above. What does it tell you? Simply, that the long term trend is bullish, and I should be looking to go long rather than short.