FIBONACCI RETRACEMENT

INTRODUCTION:

Fibonacci Retracements are ratios used to identify potential reversal levels. These ratios are found in the Fibonacci sequence. The most popular Fibonacci Retracements are 61.8% and 38.2%. Note that 38.2% is often rounded to 38% and 61.8 is rounded to 62%. After an advance, chartists apply Fibonacci ratios to define retracement levels and forecast the extent of a correction or pullback. Fibonacci Retracements can also be applied after a decline to forecast the length of a counter trend bounce. These retracements can be combined with other indicators and price to create an overall strategy.

THE SEQUENCE AND RATIOS:

This article is not designed to develop too deep into the mathematical properties behind the Fibonacci sequence and Golden Ratio. There are plenty of other sources for this detail. A few basics, however, will provide the necessary background for the most popular numbers. Leonardo Pisano Bogollo (1170-1250), an Italian mathematician from Pisa, is credited with introducing the Fibonacci sequence to the West. It is as follows:
0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377, 610……
The sequence extends to infinity and contains many unique mathematical properties.
After 0 and 1, each number is the sum of the two prior numbers (1+2=3, 2+3=5, 5+8=13 8+13=21 etc…).
A number divided by the previous number approximates 1.618 (21/13=1.6153, 34/21=1.6190, 55/34=1.6176, 89/55=1.6181). The approximation nears 1.6180 as the numbers increase.
A number divided by the next highest number approximates .6180 (13/21=.6190, 21/34=.6176, 34/55=.6181, 55/89=.6179 etc….). The approximation nears .6180 as the numbers increase. This is the basis for the 61.8% retracement.
A number divided by another two places higher approximates .3820 (13/34=.382, 21/55=.3818, 34/89=.3820, 55/=144=3819 etc….). The approximation nears .3820 as the numbers increase. This is the basis for the 38.2% retracement. Also, note that 1 - .618 = .382
A number divided by another three places higher approximates .2360 (13/55=.2363, 21/89=.2359, 34/144=.2361, 55/233=.2361 etc….). The approximation nears .2360 as the numbers increase. This is the basis for the 23.6% retracement.
1.618 refers to the Golden Ratio or Golden Mean, also called Phi. The inverse of 1.618 is .618. These ratios can be found throughout nature, architecture, art and biology. The proportion of .618034 to 1 is the mathematical basis for the shape of playing cards and the Parthenon, sunflowers and snail shells, Greek vases and the spiral galaxies of outer space. The Greeks based much of their art and architecture upon this proportion. They called it the golden mean.

ALERT ZONES:

Retracement levels alert traders or investors of a potential trend reversal, resistance area or support area. Retracements are based on the prior move. A bounce is expected to retrace a portion of the prior decline, while a correction is expected to retrace a portion of the prior advance. Once a pullback starts, chartists can identify specific Fibonacci retracement levels for monitoring. As the correction approaches these retracements, chartists should become more alert for a potential bullish reversal. Chart below shows retracing around 50% of its prior advance.

The inverse applies to a bounce or corrective advance after a decline. Once a bounce begins, chartists can identify specific Fibonacci retracement levels for monitoring. As the correction approaches these retracements, chartists should become more alert for a potential bearish reversal. Chart below shows retracing around 50% of its prior advance.


Keep in mind that these retracement levels are not hard reversal points. Instead, they serve as alert zones for a potential reversal. It is at this point that traders should employ other aspects of technical analysis to identify or confirm a reversal. These may include candlesticks, price patterns, momentum oscillators or moving averages.

COMMON RETRACEMENTS:

The Fibonacci Retracements Tool shows four common retracements: 23.6%, 38.2%, 50% and 61.8%. From the Fibonacci section above, it is clear that 23.6%, 38.2% and 61.8% stem from ratios found within the Fibonacci sequence. The 50% retracement is not based on a Fibonacci number. Instead, this number stems from Dow Theory's assertion that the Averages often retrace half their prior move.

Based on depth, we can consider a 23.6% retracement to be relatively shallow. Such retracements would be appropriate for flags or short pullbacks. Retracements in the 38.2%-50% range would be considered moderate. Even though deeper, the 61.8% retracement can be referred to as the golden retracement. It is, after all, based on the Golden Ratio.

Shallow retracements occur, but catching these requires a closer watch and quicker trigger finger. The examples below use daily charts covering 3-9 months. Focus will be on moderate retracements (38.2-50%) and golden retracements (61.8%). In addition, these examples will show how to combine retracements with other indicators to confirm a reversal.

MODERATE RETRACEMENT:

Chart below shows with a correction that retraced 38% of the prior advance. This decline also formed a falling wedge, which is typical for corrective moves. The combination raised the reversal alert. it turned positive as the stock surged in late June, but this first reversal attempt failed. Yes, there will be failures. The second reversal in mid July was successful. Notice that gapped up, broke the wedge trendline and stock turned positive (green line).

Chart below shows with a moderate 38% retracement and other signals coming together. After declining in September-October, the stock bounced back to around 28 in November. In addition to the 38% retracement, notice that broken support turned into resistance in this area. The combination served as an alert for a potential reversal. William %R was trading above -20% and overbought as well. Subsequent signals affirmed the reversal. First, Williams %R moved back below -20%. Second, formed a rising flag and broke flag support with a sharp decline the second week of December.


GOLDEN RETRACEMENT
Chart below shows bottoming near the 62% retracement level. Prior to this successful bounce, there was a failed bounce near the 50% retracement. The successful reversal occurred with a hammer on high volume and follow through with a breakout a few days later.



Chart below shows topping near the 62% retracement level. The surge to the 62% retracement was quite strong, but resistance suddenly appeared with a reversal confirmation coming from MACD (5,35,5). The red candlestick and gap down affirmed resistance near the 62% retracement. There was a two day bounce back above 44.5, but this bounce quickly failed as MACD moved below its signal line (red dotted line).



CONCLUSIONS
Fibonacci retracements are often used to identify the end of a correction or a counter-trend bounce. Corrections and counter-trend bounces often retrace a portion of the prior move. While short 23.6% retracements do occur, the 38.2-61.8% covers the more possibilities (with 50% in the middle). This zone may seem big, but it is just a reversal alert zone. Other technical signals are needed to confirm a reversal. Reversals can be confirmed with candlesticks, momentum indicators, volume or chart patterns. In fact, the more confirming factors the more robust the signal.

ELLIOTT WAVE THEORY

Elliott Wave Theory


R. N. Elliott believed markets had well-defined waves that could be used to predict market direction. In 1939, Elliott detailed the Elliott Wave Theory, which states that stock prices are governed by cycles founded upon the Fibonacci series (1-2-3-5-8-13-21…).

According to the Elliott Wave Theory, stock prices tend to move in a predetermined number of waves consistent with the Fibonacci series. Specifically, Elliott believed the market moved in five distinct waves on the upside and three distinct on the downside. The basic shape of the wave is shown below.

Waves one, three and five represent the 'impulse', or minor up-waves in a major bull move. Waves two and four represent the 'corrective,' or minor down-waves in the major bull move. The waves lettered A and C represents the minor down-waves in a major bear move, while B represents the one up-wave in a minor bear wave.

Elliott proposed that the waves existed at many levels, meaning there could be waves within waves. To clarify, this means that the chart above not only represents the primary wave pattern, but it could also represent what occurs just between points 2 and 4. The diagram below shows how primary waves could be broken down into smaller waves.



Elliott Wave theory ascribes names to the waves in order of descending size:

1.Grand Supercycle
2.Supercycle
3.Cycle
4.Primary
5.Intermediate
6.Minor
7.Minute
8.Minuette
9.Sub-Minuette

The major waves determine the major trend of the market, and minor waves determine minor trends. This is similar to the way Dow Theory postulates primary and secondary trends. Elliott provided numerous variations on the main wave, and placed particular importance on the golden mean, 0.618, as a significant percentage for retracement.

Trading using Elliott Wave patterns is quite simple. The trader identifies the main wave or Supercycle, enters long, and then sells or shorts, as the reversal is determined. This continues in progressively shorter cycles until the cycle completes and the main wave resurfaces. The caution to this is that much of the wave identification is taken in hindsight and disagreements arise between Elliott Wave technicians as to which cycle the market is in.

Here is an example of an Elliott Wave cycle. Ideally, Wave Two would not retrace more than 66%, but you can get a real sense of the wave patterns in action from the chart, just as well

KELTNER CHANNELS

Keltner Channels

Keltner Channels are a set of three lines that are overlaid on top of the price bars of a chart. As with other channel overlays, the outer two lines define a region that generally "contains" the price action and helps you determine if the prices are "too high" or "too low" relative to a specified moving average. Here is an example:

In the chart above, the Keltner Channels are the thin blue lines above and below the candlesticks on the chart. The red line corresponds to the 20-day Exponential Moving Average that defines the center of the channel. Notice that the candles generally appear to "bounce" off the blue channel lines are return to the red central line.

History

The original version of Keltner Channels was described by Chester W. Keltner in his 1960 book How to Make Money in Commodities. Keltner called his channel concept the "Ten-Day Moving Average Trading Rule" and defined it as a pair of lines positioned above and below a 10-day simple moving average of the chart's "typical price" - i.e., ( high + low + close ) / 3. The distance between the channel lines and the central line was defined as the 10-day simple moving average of the chart's "range" - i.e., high - low.

This original version of Keltner Channels was relatively easy to calculate in the days before computers and worked pretty well for trading commodities. As time passed, other channel systems - such as Bollinger Bands - became more popular. In the 1980s, Linda Raschke introduced a newer version of Keltner Channels that was based on the Exponential Moving Average and the Average True Range (ATR) indicator. StockCharts.com uses this more modern version of Keltner Channels.

Formula

In the modern version of Keltner Channels, the central line is (typically) a 20-period Exponential Moving Average. The upper and lower bands are drawn at an equal distance from the central line. The distance is defined as a specified multiple (typically 2x) of the ATR(10) indicator.

the Keltner Channels take three parameters. The first one is the period of the central EMA. The second one is the multiplier for the bands. The last one is the period of the ATR indicator. The default parameter values are "20,2.0,10".

In the chart above, we've added the ATR(10) indicator below the price plot. You can see how the Keltner Channel expands as the ATR(10) value rises and contracts when it shrinks.

Note: Sometimes when using Keltner Channels on a log scale chart, the lower band will exceed the price scale and become cut off. To alleviate this, change the scale setting from "log" to "linear."

ACCUMULATION/DISTRIBUTION

Accumulation/Distribution Line

Introduction - Volume and the Flow of Money

There are many indicators available to measure volume and the flow of money for a particular stock, index or security. One of the most popular volume indicators over the years has been the Accumulation/Distribution Line. The basic premise behind volume indicators, including the Accumulation/Distribution Line, is that volume precedes price. Volume reflects the amount of shares traded in a particular stock, and is a direct reflection of the money flowing into and out of a stock. Many times before a stock advances, there will be period of increased volume just prior to the move. Most volume or money flow indicators are designed to identify early increases in positive or negative volume flow to gain an edge before the price moves. (Note: the terms "money flow" and "volume flow" are essentially interchangeable.)


Methodology

The Accumulation/Distribution Line was developed by Marc Chaikin to assess the cumulative flow of money into and out of a security. In order to fully appreciate the methodology behind the Accumulation/Distribution Line, it may be helpful to examine one of the earliest volume indicators and see how it compares.

In 1963, Joe Granville developed On Balance Volume (OBV), which was one of the earliest and most popular indicators to measure positive and negative volume flow. OBV is a relatively simple indicator that adds the corresponding period's volume when the close is up and subtracts it when the close is down. A cumulative total of the positive and negative volume flow (additions and subtractions) forms the OBV line. This line can then be compared with the price chart of the underlying security to look for divergences or confirmation.

In developing the Accumulation/Distribution Line, Chaikin took a different approach. OBV uses the change in closing price from one period to the next to value the volume as positive or negative. Even if a stock opened on the low and closed on the high, the period's OBV value would be negative as long as the close was lower than the previous period's close. Chaikin chose to ignore the change from one period to the next and instead focused on the price action for a given period (day, week, month). He derived a formula to calculate a value based on the location of the close, relative to the range for the period. We will call this value the "Close Location Value" or CLV. The CLV ranges from plus one to minus one with the center point at zero. There are basically five combinations:

( ( (C - L) - (H - C) ) / (H - L) ) = CLV

If the stock closes on the high, the top of the range, then the value would be plus one.
If the stock closes above the midpoint of the high-low range, but below the high, then the value would be between zero and one.

If the stock closes exactly halfway between the high and the low, then the value would be zero.

If the stock closes below the midpoint of the high-low range, but above the low, then the value would be negative.

If the stock closes on the low, the absolute bottom of the range, then the value would be minus one.

The CLV is then multiplied by the corresponding period's volume, and the cumulative total forms the Accumulation/Distribution Line.

The daily chart in abv ex gives a breakdown of the Accumulation/Distribution Line, and shows how different closing levels affect the value. The top section shows the price chart. The closing level relative to the high-low range is clearly visible. The second section with a black histogram is the Closing Location Value (CLV). The CLV is multiplied by volume, and the result appears in the green histogram. Finally, at the bottom, is the Accumulation/Distribution Line.

The close is on the low and the CLV = -1. Volume, however, was relatively light, so the Accumulation/Distribution Value for that period is only moderately negative.
The close is very near the high and the CLV = +.9273. Volume is relatively high, so the resulting Accumulation/Distribution Value is high.

The close is near the low and the CLV = -.75. Volume is moderately high, so the resulting Accumulation/Distribution Value is moderately high as well.

The close is about half way between the mid-point of the high-low range and the high, and the CLV = +.51. Volume is very heavy, so the Accumulation/Distribution Value is also very high.

Accumulation/Distribution Line Signals

The signals for the Accumulation/Distribution Line are fairly straightforward and center around the concepts of divergence and confirmation.

Bullish Signals

A bullish signal is given when the Accumulation/Distribution Line forms a positive divergence. Be wary of weak positive divergences that fail to make higher reaction highs or those that are relatively young. The main issue is to identify the general trend of the Accumulation/Distribution Line. A two-week positive divergence may be a bit suspect. However, a multi-month positive divergence deserves serious attention.

On the chart , the Accumulation/Distribution Line formed a huge positive divergence that was over 4 months in the making. Even though the stock fell from above 35 to below 30, the Accumulation/Distribution Line continued on a relentless march north. If one did not know better, it would seem that the two plots did not belong together. However, the stock finally caught up with the Accumulation/Distribution Line when it broke resistance in November.

Another means of using the Accumulation/Distribution Line is to confirm the strength or sustainability behind an advance. In a healthy advance, the Accumulation/Distribution Line should keep up or, at the very least, move in an uptrend. If the stock is moving up at a rapid clip, but the Accumulation/Distribution Line has trouble making higher highs or trades sideways, it should serve as an indication that buying pressure is relatively weak.






In above ex stock began a sharp advance in August that was accompanied by an equally strong move in the Accumulation/Distribution Line. In fact, the Accumulation/Distribution Line was stronger than the stock in early September. After a bit of a consolidation, both again started higher and recorded new reaction highs in early October. Volume flows were behind this advance from the very beginning and continued throughout. The stock ended up advancing from 40 to 60 in about 3 months. Interestingly, as of this writing (December 1999) the Accumulation/Distribution Line has started to move sideways and is indicating that buying pressure is beginning to wane.

Bearish Signals

The same principles that apply to positive divergences apply to negative divergences. The key issue is to identify the main trend in the Accumulation/Distribution Line and compare it to the underlying security. Young negative divergences, or those that are relatively flat, should be looked upon with a healthy dose of skepticism.

The chart shows a relatively flat negative divergence that is just over a month old. This negative divergence has yet to make a lower low, and should probably be given a little more time to mature. The relative weakness in the Accumulation/Distribution Line should serve as a sign that buying pressure is diminishing while the stock remains at lofty levels.

The chart shows a negative divergence that developed within the confines of a clear downtrend. The stock had clearly broken down, and the Accumulation/Distribution Line was declining in line with the stock. A deteriorating Accumulation/Distribution Line confirmed weakness in the stock. During the June-July rally, the stock recorded a new reaction high, but the Accumulation/Distribution Line failed, thus setting up the negative divergence.

Conclusions

The Accumulation/Distribution Line is good means to measure the volume force behind a move.

As a volume indicator, the Accumulation/Distribution Line will help to determine if the volume in a security is increasing on the advances or declines.

The Accumulation/Distribution Line can be used to gauge the general flow of money. An uptrend indicates that buying pressure is prevailing, and a downtrend indicates that selling pressure is prevailing.

The Accumulation/Distribution Line can be used to spot divergences, both positive and negative.
The Accumulation/Distribution Line can be used to confirm the strength and sustainability behind a move.

There are some drawbacks to the Accumulation/Distribution Line, though.

The indicator does not take gaps into consideration. A stock that gaps up and closes midway between the high and the low will not receive any credit for the advance off of the gap. A series of gaps could go largely undetected.

Because the Accumulation/Distribution Line is clearly tied to price movement, specifically the close, it will sometimes move in step with the underlying security, and yield few divergences.
It sometimes difficult to detect subtle changes in volume flows. The rate of change in a downtrend could be slowing, but it may be impossible to detect until the

Accumulation/Distribution Line turns up. This drawback has been addressed in the form of the Chaikin Oscillator or Chaikin Money Flow.

TIME DECAY IN OPTIONS

Options contracts are instruments that give the holder of the instrument the right to buy or sell the underlying asset at a predetermined price. An option can be a 'call' option or a 'put' option.

A call option gives the buyer, the right to buy the asset at a given price. This 'given price' is called 'strike price'. It should be noted that while the holder of the call option has a right to demand sale of asset from the seller, the seller has only the obligation and not the right. For eg: if the buyer wants to buy the asset, the seller has to sell it. He does not have a right.

Similarly a 'put' option gives the buyer a right to sell the asset at the 'strike price' to the buyer. Here the buyer has the right to sell and the seller has the obligation to buy.

So in any options contract, the right to exercise the option is vested with the buyer of the contract. The seller of the contract has only the obligation and no right. As the seller of the contract bears the obligation, he is paid a price called as 'premium'. Therefore the price that is paid for buying an option contract is called as premium.

The buyer of a call option will not exercise his option (to buy) if, on expiry, the price of the asset in the spot market is less than the strike price of the call. For eg: A bought a call at a strike price of Rs 500. On expiry the price of the asset is Rs 450. A will not exercise his call. Because he can buy the same asset from the market at Rs 450, rather than paying Rs 500 to the seller of the option.

The buyer of a put option will not exercise his option (to sell) if, on expiry, the price of the asset in the spot market is more than the strike price of the call. For eg: B bought a put at a strike price of Rs 600. On expiry the price of the asset is Rs 619. A will not exercise his put option. Because he can sell the same asset in the market at Rs 619, rather than giving it to the seller of the put option for Rs 600.


What Does Time Decay Mean?

The ratio of the change in an option's price to the decrease in time to expiration. Since options are wasting assets, their value declines over time. As an option approaches its expiry date without being in the money, its time value declines because the probability of that option being profitable (in the money) is reduced.

Also known as "theta" and "time-value decay".


Time decay of an option begins to accelerate in the last 60 to 30 days before expiry, provided the option is not in the money. But in the case of options that are deep in the money, time value decays more rapidly. The market finds these options too expensive compared to other strike prices or futures. As such, the holders of deep-in-the-money options nearing expiry discount the time value to attract buyers and in turn realize the intrinsic value.

The greater the certainty about an option's expiry value, the lower the time value. Conversely, the greater the uncertainty about an option's expiry value, the greater the time value.




What Does In The Money Mean?

1. For a call option, when the option's strike price is below the market price of the underlying asset.

2. For a put option, when the strike price is above the market price of the underlying asset.
Being in the money does not mean you will profit, it just means the option is worth exercising. This is because the option costs money to buy.


What Does Out Of The Money - OTM Mean?
1. For a call, when an option's strike price is higher than the market price of the underlying asset.

2. For a put, when the strike price is below the market price of the underlying asset.
Basically, an option that would be worthless if it expired today.


What Does Underwater Mean?
1. The condition of a call option when its strike price is higher than the market price of the underlying stock.

2. The condition of a put option when its strike price is lower than the market price of the underlying stock.

Also known as "out of the money."


Time decay, also known as theta, is defined as the rate by which an options value erodes into expiration. The value of the option over parity to the stock is called extrinsic value.
Since an option is a depreciating asset, meaning it has a limited life, the extrinsic value in the option will wither away daily until expiration. This decay is not a linear function meaning it is not equally distributed between all of the days to expiration.
As the option gets closer to expiration, the daily rate of decay increases and continues to increase daily until expiration of the option. At expiration, all options in the expiration month, calls and puts, in-the-money and out-of-the-money must be completely devoid of extrinsic value as noted in the time value decay charts below.
As more time goes by, the options extrinsic value decreases. Again, it is important to note that the rate of this decrease is not linear, meaning not smooth and even throughout the life of the option contract. An option contract starts feeling the decay curve increasing when the option has about 45 days to expiration. It increases rapidly again at about 30 days out and really starts losing its value in the last two weeks before expiration.
This is like a boulder rolling down a hill. The further it goes down the hill, the more steam it picks up until the hill ends.
By selling the option and owning the stock, the covered call seller captures the extrinsic value in the option by holding the short call until expiration.
As mentioned earlier, an options loss of extrinsic value over its life is called time decay. In the covered call strategy the options time decay works to the sellers advantage in that the more that time goes by, the more the extrinsic value decreases.
Key Point The covered call strategy provides the investor with another opportunity to gain income from a long stock position. The strategy not only produces gains when the stock trades up, but also provides above average gains in a stagnant period, while offsetting losses when the stock declines in price.
We have now seen how a covered call strategy is constructed and how it is supposed to work. Keep in mind that the trade can be entered into in two ways. You can either sell calls against stock you already own (Covered Call) or you can buy stock and sell calls against them at the same time (Buy Write).

ICHIMOKU CLOUDS

Introduction
The Ichimoku Cloud, also known as Ichimoku Kinko Hyo, is a versatile indicator that defines support and resistance, identifies trend direction, gauges momentum and provides trading signals. Ichimoku Kinko Hyo translates to "one look equilibrium chart". With one look, chartists can identify the trend and look for potential signals within that trend. The indicator was developed by Goichi Hosada, a journalist, and published in his 1969 book. Even though the Ichimoku Cloud may seem daunting on the price chart, it is really a straight forward indicator that is very usable. It was, after all, created by a journalist, not a rocket scientist! Moreover, the concepts are easy to understand and signals are well-defined.

Calculation
Four of the five plots within the Ichimoku Cloud are based on the average of the high and low over a given period of time. For example, the first plot is simply an average of the 9-day high and 9-day low. Before computers were widely available, it would have been easier to calculate this high-low average rather than a 9-day moving average. The Ichimoku Cloud consists of five plots:

Tenkan-sen (Turning Line): (9-period high + 9-period low)/2))
The default setting is 9 periods, but can be adjusted. On a daily
chart, this line is the mid point of the 9 day high-low range,
which is almost two weeks.

Kijun-sen (Standard Line): (26-period high + 26-period low)/2))
The default setting is 26 periods, but can be adjusted. On a daily
chart, this line is the mid point of the 26 day high-low range,
which is almost one month).

Senkou Span A (First Leading Line): (Turning Line + Standard Line)/2)) This is the midpoint between the Turning Line and the Standard Line. The First Leading Line forms one of the two Cloud boundaries. It is referred to as "Leading" because it is plotted 26 periods forward.

Senkou Span B (Second Leading Line): (52-period high + 52-period low)/2)) On the daily chart, this line is the mid point of the 52 day high-low range, which is a little less than 3 months. The default calculation setting is 52 periods, but can be adjusted. This value is plotted 26 periods forward and forms the slower Cloud boundary.

Chikou Span (Lagging Line): Close plotted 26 days ago
The default setting is 26 periods, but can be adjusted.

This tutorial will use the English equivalents when explaining the various plots. The chart below shows the Ichimoku Cloud plots. The Turning Line (blue) is the fastest and most sensitive line. Notice that it follows price action the closest. The Standard Line (red) trails the faster Turning Line, but follows price action pretty well. The relationship between the Turning Line and Standard Line is similar to the relationship between a 9-day moving average and 26-day moving average. The 9-day is faster and follows the price plot closer. The 26-day is slower and lags behind the 9-day. Incidentally, notice that 9 and 26 are the same periods used to calculate MACD.

Analyzing the Cloud
The Cloud (Kumo) is the most prominent feature of the Ichimoku Cloud plots. The First Leading Line (green) and Second Leading Line (red) form the Cloud. The First Leading Line is the average of the Turning Line and the Standard Line. Because the Turning Line and Standard Line are calculated with 9 and 26 periods, respectively, the green Cloud boundary moves faster than the red Cloud boundary, which is the average of the 52-day high and the 52-day low. It is the same principle with moving averages. Shorter moving averages are more sensitive and faster than longer moving averages.

There are two ways to identify the overall trend using the Cloud. First, the trend is up when prices are above the Cloud, down when prices are below the Cloud and flat when prices are in the Cloud. Second, the uptrend is strengthened when the First Leading Line (green cloud line) is rising and above the Second Leading Line (red cloud line). This situation produces a green Cloud. Conversely, a downtrend is reinforced when the First Leading Line (green cloud line) is falling and below the Second Leading Line (red cloud line). This situation produces a red Cloud. Because the Cloud is shifted forward 26 days, it also provides a glimpse of future support or resistance.

Chart 2 shows with a focus the uptrend and the Cloud. First, notice that stock was in an uptrend from June to January as it traded above the Cloud. Second, notice how the Cloud offered support in July, early October and early November. Third, notice how the Cloud provides a glimpse of future resistance. Remember, the entire Cloud is shifted forward 26 days. This means it should be plotted 26 days past the last price point to provide indications for future support or resistance.


Chart 3 shows Boeing (BA) with a focus on the downtrend and the cloud. The trend changed when Boeing broke below Cloud support in June. The Cloud changed from green to red when the First Leading Line (green) moved below the Second Leading Line (red) in July. The cloud break represented the first trend change signal, while the color change represented the second trend change signal. Notice how the Cloud then acted as resistance in August and January.


Trend and Signals
Price, the Turning Line and the Standard Line are used to identify faster, and more frequent, signals. It is important to remember that bullish signals are reinforced when prices are above the cloud and the cloud is green. Bearish signals are reinforced when prices are below the cloud and the cloud is red. In other words, bullish signals are preferred when the bigger trend is up (prices above green cloud), while bearish signals are preferred when the bigger trend is down (prices are below red cloud). This is the essence of trading in the direction of the bigger trend. Signals that are counter to the existing trend are deemed weaker. Bullish signals within a bigger trend and bearish signals within a bigger uptrend are less robust.

Turning-Standard Line Signals
Chart 4 shows stock producing two bullish signals within an uptrend. First, the trend was up because the stock was trading above the Cloud and the Cloud was green. The Turning Line dipped below the Standard Line for a few days in late June to enable the setup. A bullish crossover signal triggered when the Turning Line moved back above the Standard Line in July. The second signal occurred as the stock moved towards Cloud support. The Turning Line moved below the Standard Line in September to enable the setup. Another bullish crossover signal triggered when the Turning Line moved back above the Standard Line in October. Sometimes it is hard to determine exact Turning Line and Standard Line levels on the price chart. For reference, these numbers are displayed in the upper right of each chart. As of the January 8 close, the Turning Line was 62.62 (blue) and the Standard Line was 63.71 (red).


Chart 5 shows stock producing a bearish signal within a downtrend. First, the trend was down as the stock was trading below the Cloud and the Cloud was red. After a sideways bounce in August, the Turning Line moved above the Standard Line to enable the setup. This did not last long as the Turning Line moved back below the Standard Line to trigger a bearish signal on September 15th.


Price-Standard Line Signals
Chart 6 shows stock producing two bullish signals within an uptrend. With the stock trading above the green cloud, prices moved below the Standard Line (red) to enable the setup. This move represented a short-term oversold situation within a bigger uptrend. The pullback ended when prices moved back above the Standard Line to trigger the bullish signal.


Chart 7 shows stock producing two bearish signals within a downtrend. With the stock trading below the red cloud, prices bounced above the Standard Line (red) to enable the setup. This move created a short-term overbought situation within a bigger downtrend. The bounce ended when prices moved back below the Standard Line to trigger the bearish signal.


Signal Summary
This article features four bullish and four bearish signals derived from the Ichimoku Cloud plots. The trend-following signals focus on the Cloud, while the momentum signals focus on the Turning and Standard Lines. In general, movements above or below the cloud define the overall trend. Within that trend, the Cloud changes color as the trend ebbs and flows. Once the trend is identified, the Turning Line and Standard Line act similar to MACD for signal generation. And finally, simple price movements above or below the Standard Line can be used to generate signals.

Bullish Signals:

•Price moves above Cloud (trend)
•Cloud turns from red to green (ebb-flow within trend)
•Price Moves above the Standard Line (momentum)
•Turning Line moves above Standard Line (momentum)

Bearish Signals:

•Price moves below Cloud (trend)
•Cloud turns from green to red (ebb-flow within trend)
•Price Moves below Standard Line (momentum)
•Turning Line moves below Standard Line (momentum)

Conclusions
The Ichimoku Cloud is a comprehensive indicator designed to produce clear signals. Chartists can first determine the trend by using the Cloud. Once the trend is established, appropriate signals can be determined using the price plot, Turning Line and Standard Line. The classic signal is to look for the Turning Line to cross the Standard Line. While this signal can be effective, it can also be rare in a strong trend. More signals can be found by looking for price to cross the Standard Line.

It is important to look for signals in the direction of the bigger trend. With the Cloud offering support in an uptrend, traders should also be on alert for bullish signals when prices approach the Cloud on a pullback or consolidation. Conversely, in a bigger downtrend, traders should be on alert for bearish signals when prices approach the Cloud on an oversold bounce or consolidation.

The Ichimoku Cloud can also be used in conjunction with other indicators. Traders can identify the trend using the Cloud and then use classic momentum oscillators to identify overbought or oversold conditions. Click here for a live example using the Ichimoku Cloud.

Ichimoki cloud default settings
Default settings are 9 for the Turning Line, 26 for the Standard Line and 52 for the Second Leading Line. The First Leading Line is based on the Turning Line and Standard Line. The number for the Standard Line (26) is also used to move the Cloud forward (26 days). These numbers can be adjusted to suit individual trading and investing styles. Sometimes it is necessary to add extra bars to the chart when increasing the Standard Line, which also increases the forward movement of the Cloud.

Day Trading Dictionary

ACTIVE SHARES: Shars in which there are frequent and day to day dealings, as distinguished from partly active shares in which dealings are not so frequent. Most shares of 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, East to buy or sell.

AUTOMATED SCREEN TRADING: Electronic Trading in Stocks through visual display units. The associated computer unit enters, matches, and executes deals. It makes possible a floor less exchange and brings transparency to deals.

BLOCK TRADE: Trading large blocks of shares, usually by mutual funds or institutional investors. There are specialist brokers who carryout the trade discreetly, without unduly affecting the price movement of shares.

BLUE CHIPS: Shares of particularly well known and established companies which have shown consistent growth over the years, have bright future prospects, and are expected to continue sustained growth in the future.

BOND: An instrument of loan raised by the government, bank or a company against a specified interest rate and a promised date of repayment. Company bonds are called Debentures, which are secured by mortgage against company assets, as distinguished from fixed deposists accepted by companies, which are un secured.

BOOK CLOSURE: A company before declaring a Dividend, Issue of bonus or rights shares, closes its register of members for a certain period during which no transfer of shares is registered. Only those share holders whose names appear on the register after the book closure are eligible to receive dividends and bonus shares and entitlement to rights shares.


BOOK LOSS: A trader will sustain loss only when he sells shares whose prices are fallen. Until then he will incur only book loss. Loss not actually sustained.

BOOKING PROFIT: Practically earning profit by selling the shares whose prices are appreciated. When the prices of shares which a trader holds go up in price, the trader has made only book profit. When he actually sells them he practically earns profit.


BOOM: The continous movement of share prices in upward direction.


BOTTOM: Bottom is the lowest price of a share within a day, week, month, year or any other stipulated time period.


BOTTOM OUT: When share prices hits their lowest price level and recovers slowly from that level, they are called as bottomed out.


BOZU: A stock either achieving new high or falling to a new low in a trading cycle, indicating a bull or bear dominance.


BREATH OF THE MARKET: It indicates the percentage of advancing stocks with that of the declining stocks. If the total advancing number of stocks is more than the declining number of stocks, it indicates that the market breath is positive. If the total advancing number of stocks is less than the declining numbe of stocks, it indicates that the market breath is negative.


BULL: A stock market operator, who keeps buying shares to sell later at much higher price to earn profits believing that the share prices are going to rise.


BULL MARKET: A continuous upward movement of share prices sustained by buying pressure of actual investors or Bulls.


BUSINESS DAY: When the stock exchange is open for trading. It is also called as Trading day.


BUYING CLIMAX: When a rapid rise in price of shares has attracted most of the buyers and reaches certain stage leaving hardly anyone to buy at even higher prices, it is called as Buying climax. From this stage share prices will fall sharply.


CHARTIST: A Technical analyst who forecasts the future prices of shares by analyzing the price and volume charts of shares. Chartists believe that share price movements have meaningful patters which reflects the demand and supply forces of shares to understand the future price movements of shares.


CIRCUIT BREAKER: A system to check excessive speculation in the stock market applied by the stock market authorities when the index rises or falls by more than 5% Trading is suspended at Circuit Breaker level for some time to let the market cool down.


CLOSE: The last traded price of a share transaction on a particular trading session in the Stock Exchange.


CONTRARIAN: A trader who does the exact opposite of what every one else is doing. He buys shares when every one is selling and sells shares when everyone is buying. The contrarian believes that the markets perform the opposite of what the majority of traders think.


CORRECTION: A sharp reversal in downwards direction of the majority of share prices after a bull run.

CRASH: A share fall in share prices within a short period of time generally due to panic among traders and investors due to certain sudden factors.

DAISY CHAIN: A large quantity of buying and selling among themselves by a group of Stock Market Manipulators to give the impression that the share is being largely traded and that the price is risking. After certain point, the manipulators sell their shares to innocent investors, who then discover that there is no one to buy from them at high prices.

DART BOARD INVESTING: The strategy of investing in roughly selected stocks in thebelief that this stocks will also perform at par or better than carefully selected stocks which is selected basing on fundamental and technical analysis. This theory became popular when a group of poeple in New York inh the year 1967, selected a page of stock market quotations and threw darts at the share prices. They picked all the twenty eight shares the darts had hit and notionally invested equal amounts in each share. Fifteen years later their investments had far out-performed the stock market average of appreciation.

DEAD CAT BOUNCE: A temporary recovery in share price basing on deceptive factors.

DEFLATION: It is opposite to inflation. Deflation is a reduction in national income and output, accompanied by a general fall in prices. During a deflationary period the stock market usually suffers form Depression.

DELTA STOCKS: The least liquid stocks in a Stock Exchange.

DEPRESSION: A state of falling economic activity reflected by falling prices, excess of supply over demand, low economic activity, increased un-employmentand Deflation. An economic depression administers shocks to the stock market causing prices to fall drastically.

DERIVATIVE: A financial instrument which derives it value from an underlying asset like Stocks, Index, commodities, Bonds, Currency, Foreign exchange etc.,

DISCOUNTING: The stock market reacting quickly to news or other factors that have an impact on stock makrket either directly or indirectly.

DOW JONES OR DOW JONES INDUSTRIAL AVERAGE: First stock market index in the world comprising of US Blue chip companies.

DRY RUN PORTFOLIO: An imaginary portfolio maintained by an investor without actually buying and selling of shares. This dry run portfolio gives experience to an investor to invest wisely in stock market.

DULL MARKET: A period in which little buying and selling activity take place in stock market.

FII: Foreign Institutional Investor. Foreign Institutions or Foreign Financial companies are ow permitted to operate in the Indian Stock Market. With large amounts of funds their participation gives strength to the stock markets.

FOLLOW UP SUPPORT: In strong uptrend of stock prices, the price increases for many reasons. This needs to be followed up by further purchases in bulk quantities. If this is lacking, the share price may remain struck at the slightly higher price or it may fall.

FORMULA PLANS: Stock market investment plans with clear courses of action which overcomes the problems of timing the buying and selling decisions.

FREE LUNCH THEOREM: The theorem states that if one wishes to make money in the stock market, one must work hard and take calculated risks.

GAP: A gap is noticed when the intra day high and low price of shares out distance the previous trading day's high and low. A gap is usually a sign of over bought and over sold market and indicates a correction.

HAMMERING: Continuous selling of shares by operators to bring the stock prices down, often short selling heavily generally done by bears.

HEAVY MARKET: A market with larger quantities of shares for sale with ery few buyers resulting in falling prices.

HIT THE BID: If Ask price of a share is higher than the Bid price, the seller of share hits the bid price if he accepts the lower bid price.

HORIZONTAL PRICE MOVEMENT: The movement of share price within a narrow range of upsand downs.

IMBALANCE OF ORDERS: Too many people trying to buy or sell the same share without opposite matching orders to balance the trades.

INACTIVE SHARES: Shares which are brought and sold rarely in the stock market. A listed share which is transacted less than four times a year may be called as inactive shares.

IN-AND-OUT TRADER: A trader who buys and sells the same share in the course of the trading day to profit from sharp price movements.

INFLATION: A general and sustained price increase across the market resulting in the fall of the real value of money which can buy only less and less.

LIQUIDITY: In Stock market Bid is the buyer's price. It is this price that you need to know when you have to sell a stock. Bid is the rate/price at which there is a ready buyer for the stock, which you intend to sell. The Ask (or offer) is what you need to know when you're buying i.e this is the rate/price at which there is seller ready to sell his stock. The seller will sell his stock if he gets the quoted Ask price.
The difference in the prices of the best bid and ask is called as the Bid-Ask spread and often is an indicator of liquidity in a stock. The narrower the difference the more liquid or highly traded is the stock.

LISTED COMPANY: A company which has a listing agreement with a stock exchange and whose shares are quoted and listed at the Stock Exchange.

LONG TRADES: In long trades you buy stocks first wait for some time till the price increases and sell it afterwards at higher price to make profit. You will have long position if you buy first and you close your long position by selling stocks which you have purchased. In long trades you buy stocks expecting that the price will increase and you will earn profit if the price increases as expected by you. On the other hand if the price falls you will incur loss on that trade. In long trades you keep you stop loss below your purchase price.

MARKET FORCES: The forces of demand and supply which influences the prices of stocks. The imbalance in demand and supply results in rise and fall of stock prices.

MARKET TIMING: Taking a decision regarding when to buy or sell a share.

MARKET TONE: Market Tone indicates the health of the stock market. It is good when the bid and offer prices have a small gap and the volumes are large. It is bad when there is little trading and the gap between bid and offer prices is large.

MELT DOWN: Fast and uncontrolled fall in share prices is referred as melt down.

MIDDLE PRICE: Centre price between Bid Price and Ask price.

MIXED TREND: If there is Bullish trend for some shares and Bearish trend for other shares, it is called mixed trend.

MURAT TRADING: Short session trading on the auspicious day of Diwali.

NARROW MARKET: Inactive market in which there is low volume of trading and great fluctuations in price compared to average trading volume.

NASDAQ: National Association of Securities Dealers Automated Quotation System. NASDAQ was the first screen based, floor less computer trading system, now the second largest stock market in the United States.

NERVOUS MARKET: Stock market which is reacting sharply to sudden news, policy announcements, budget presentation etc.,

NYSE: The New York Stock Exchange. Estabished in the year 1793, it is the oldest and the largest and the best known among the stock exchanges in the world.

NIFTY: A select group of fifty shares of the National Stock Exchange of India

NIKKEI: Index of share prices of Tokyo Stock Exchange.

OVER BOUGHT: It indicates a sharp rise in the price of a shares as a result of heavy buying by investors and speculators in the hope of further rise. If the price of a share reaches this over bought zone, it is prone to an imminent correction, as profit booking will take place at this level by the holders of shares.

OVER SOLD: It indicates that the prices of share has fallen too fast as a result of excessive selling and there are few sellers left. If the price of a share reaches this over sold zone, the price will start rising as the low prices attracts buying interest.

PANIC: Heavy selling out of fear.

PEGGING: Stabilizing the price through intervention by the Government controlled agencies which buy when the price falls sharply and sell when the price recovers.

PERFECT COMPETITION: A market condition in which no buyer or seller has the power to influence the price.

PIVOTAL SHARES: Shares of Blue Chip companies act as pivot on which the market is balanced. If they turn bullish, the market looks up. If they turn bearish, the market follows.

POOL: A group of speculators, who get together and use their combined strenght o manipulate share prices.

POSITION: An investors stake in a particular share. Long Position indicates number of shares owned and short position indicates number of share owed.

PRE-MARKET: Trading that takes place before the official opening of a stock market.

PROFIT BOOKING: Sellingshares to realize profit when their prices have risen above purchase price.

PUNTERS: Speculators who hopes to make quick profits by buying shares, holding them for short period and selling them to make quick profit.

QUOTATION: Highest bid price and lowest ask price of a share.

QUOTE DRIVEN: Electronic stock exchange in which quotations made by market players determine the prices of stocks.

QUOTED PRICE: The price at which a share was last bought and sold on the stock exchange.

QUOTED SHARES: The shares of a company which are quoted on the official list of the stock exchange.

RALLY: Continuous rise in the price of a share or in the overall stock market.

RAMPING: Heavy buying of a stock from the market to increase its demand and price. If the price rises, the ramper sells his holding and quits from the shares.

RANGE: The high and low of the price of a stock or the market over a period of time.

REACTION: Temporary reversals and changes in the market direction.

RECOVERY: Share prices increasing after a period of fall.

RESISTANCE LEVEL: Resistance defines that level where sellers are too strong to allow price to rise further. It is a level at which the rise in the price in the price of a share has repeatedly halted as there are more sellers at that price than buyers. If the price manages to move above this resistance level, it gains strength to move to further higher levels.

RETRACEMENT: The price of share moving in the opposite direction after sharp rise or sharp fall.

RIGGING: Manipulating the share prices to attract innocent investors to buy or sell shares.

SCAM: Fraud or cheating committed by an individual or group for financial gains.

SCRIP: Share certificate.

SHORT TRADES: In short trades you sell stocks first, wait for some time till the price falls and buy it afterwards at lower price to make profit. In stock market you can sell stocks without possessing (having) them. Generally you should sell stocks first and enter into short trades if you expect that the stocks price will fall from the existing level. You will have short position if you sell stocks first and you close your short position by buying the same stocks which you have sold. In short trades you sell stocks expecting that the price will fall and you will earn profit in the price falls as expected by you. On the other hand if the price increases you will incur loss on that trade. In short trades you keep your stock loss above your selling price.
In both long trades and short trades, you will earn profit if you sell at higher price and buy at lower price. In case if your selling price is lower than buying price you will incur loss in both long trades and short trades. The only difference between long trades and short trades is, In long trades you buy stocks first and sell it afterwards and in short trades you sell stocks first and buy if afterwards.

SLEEPER: A share which has become inactive for a long time with little investor interest often selling below its value.

SLUMP: A period at which the prices and employment are at their lowest, reflected in the downward movement of share prices. Recovery from a slump is often slow.

SNOW BALLING: A sharply moving price action activates a number of stop orders, to buy or sell. This puts further pressure on the rising or falling price activating more stop orders creating further rise and fall in a snow balling effect.

SOFT MARKET: A market dominated by selling pressure without any buying interest. Further slight selling pressure causes the prices to drop further. Soft, because easily depressed.

SPECIFIED SHARES: The most widely and actively traded shares also know as Group A securities, Cleared Securities etc.,

SPECULATION: An activity in which a person assumes high risks to achieve large gains. The time span in which the gain is sought to be made is usually very short. The shorter the term, the more speculative the investment is.

SPREAD: The difference between highest Bid price and Lowest Ask price of a share.

STOP LOSS: An exit price level fixed by a trader to minimize his loss if the trade went against his expectations.

SUPPORT LEVEL: Support level defines that level where buyers are strong enough tokeep the price from falling further. It is a point at which the fall in price of a share has stopped since there is more demand for the stock than supply. If however the share price falls below this support level, it is expected to fall further.

TAKE A FLIER: Involving in a highly risky speculation, knowingly.

TAKE OUT: Withdrawing money from a trading brokerage account, when there is credit balance.

TARGET PRICE: When a trader has entered into a tade, usually he fixes a price which he expects the shae to reach. This is the target price. In stock market most gains are made by closing the trades at target price and most losses are result of holding on to a share hoping that it has an endless possibility of appreciating.

TECHNICAL ANALYSIS: A method of forecasting the future share price movements based on a study of price and volume charts and graphs, on the assumption that share price trends are repetitive, since investor psychology follows a certain pattern, what is seen to have happened before is likely to be repeated.

TECHNICAL CORRECTION: A small downward movement of share prices in a rising market, generally as a result of investors booking their profit because prices have reached either their target level or major resistance level.

TECHNICAL RALLY: A temporary rise in stock prices in a falling market, generally as a result of investors buying at current low prices, or the prices might have reached support levels.

THIN MARKET: Stock market in which there is a very think volume of trading.

TIGHT MARKET: Actively traded market with a narrow bid ask spread.

TRADING RANGE: The range within which, a share has been traded between high and low for quite sometime.

TREND: A short term, medium term or long term direction of the stock prices in upward, downward or sideways movement. This shows the direction of the market at that particular time.

TREND LINE: A straight line drawn connecting the successive higher points or lower points of a share price over a period in the immediate past.

TWO SIDED MARKET: A market in which both Bid and Ask prices are firm and both buyer and sellers are assured of finishing their transactions.

UNDER VALUED SHARES: Shares selling below their book value or the price earning ration.

UNREALIZED PROFIT: Unrealized profit. A trader will earn profit only when he sells shares whose prices are appreciated. Until then he will have only Book Profit. Profits not actually realized.

UN-LISTED SHARE: A share which is not registered with any stock exchange and therefore does not feature on any stock exchange list. These shares are very difficult to sell and carry a large risk.

UNLOADING: Selling shares when prices are sharply falling to avoid further loss. Bulls, when they get tired waiting for the price, unload when the market is falling, causing prices to fall to further lower levels.

UPTICK: A transactions ata highe price than the precedingone of the same stock.

VOLATILE SHARES: Shares subject to sharp and violent fluctuations in price, showing a considerable difference between their highest and lowest recorded prices.

VOLUME: The total numbe of shares traded on a particular day or over a particular time. It shows the strenght or weakness of the trend.

WALL STREET JOURNAL: The most distinguished journal of Finance and investment published fivedays a week by Dow Jones and Company in the United States.

WARE HOUSING: Accumulation of shares in large numbers.

WASH SALE: Buying and selling of a share in large numbers within a short period of time to generate artificial market activity and a rise in the share price for fraudulent gains.

WEAK MARKET: A stock market in which there are more sellers and very few buyers resulting in a decline in stock prices.

WHIPSAWS: Losing money by buying stocks just before price falls and selling stocks just before prices rise.

WIDE OPENING: Considerable difference between the bid price and ask price of a share at the opening of a day's trading.

YO-YO STOCK: Highly volatile stocks which go up and down like a YO-YO.

Basics of Stock Market

What is meant by a Stock Exchange?
A Stock Exchange is a constituted body for the purpose of assisting, regulating or controlling the business of buying, selling or dealing in Securities. Stock Exchange could be a regional stock exchange whose area of operation/jurisdiction is specified at the time of its recognition or national exchanges, which are permitted to have nationwide trading since inception.

What is a Equity Share?
Total equity capital of a company is divided into equal parts of small denominations, each called a Share. For ex in a company the total equity capital of Rs.2,00,00,000 is divided into 20,00,000 units of Rs.10 each. Each such unit of Rs.10 is called as a Share. Thus, the company then is said to have 20,00,000 equity shares of Rs.10 each. The holders of such shares are members of the company and have voting rights.

What is a Debt Instrument?
Debt Instrument represents a contract where by one party lends money to another on pre-determined terms with regards to rate and periodicity of interest, repayment of principal amount by the borrower to the lender. In the Indian Securities Market, the term "bond" is used for debt instruments issued by the Central and State Governments and Public Sector Organizations and the term "debenture" is used for instruments issued by private corporate sector.

What is a Derivative?
Derivative is a product whose value is derived from the value of one or more basic, variables, called underlying. The underlying asset can be equity, index, forex, commodity or any other asset. Derivative products initally emerged as hedging devices against fluctuations in commodity prices and commodity linked derivatives remained the sole form of such products for almost three hundred years. The financial derivatives came into spot light in post 1970 period due to growing instability in the financial markets. However, since their emergence, these products have become very popular and by 1990's they accounted for about two thirds of total transactions in derivative products.

What is a Mutual Fund?
A Mutual Fund is a body corporate registered with SEBI (Securities Exchange Board of India)that collects money from individuals/corporate investors and invests the same in a variety of different financial instruments or securites such as equity shares, Government Securities, Bonds, Debentures etc., Mutual funds can thus be considered as financial intermediaries in the investment business that collect funds from the Public and invest on behalf of the investors. Mutual Funds issue units to the investors. The appreciation of the portfolio or securities in which the mutual fund has invested the money leads to an appreciation in the value of the units held by investors. The investment objectives outlined by a mutual fund in its prospectus are binding on the Mutual Fund Scheme. The investment objectives specify the class of securites a Mutual Fund can invest in. Mutual Funds invest in various asset classes like equity, bonds, debentures, commerical paper and government securities. The schemes offered by mutual funds vary from fund to fund. Some are pure equity schemes, others are a mix of equity and bonds. Investors are also given the option of getting dividends, which are declared periodically by the mutual fund, or to participate only in the capital appreciation of the scheme.

What is an Index?
An index shows how a specified portfolio of share prices are moving in order to given an indication of market trends. It is a basket of securities and the average price movement of the basket of securities indicates the index movement, whether upwards or downwards.

What is a Depository?
A depository is like a bank wherein the deposits are securities like Equity shares, debentures, bonds, government securities etc., in electronic form. A depository holds securities in an account. It transfers securities between accounts on the instruction of the accound holder. A depository further facilitates transfer of ownership of securities without having to handle securities. It also facilitates safe keeping of shares in electronic form.

What is Dematerialization?
Dematerialization is the process by which physical certificates of an investor are converted to an equivalent number of securities in electronic form and credited to the investor's account with his Depository Participant (DP)

Which are the depositories in India?
There are two depositories in India which provide Dematerialization of Securities. The National Securities Depository Limited (NSDL) and Central Securities Depository Limited (CDSL).

What are the benefits of participation in a Depository?
The benefits of participation in a depository are:
Immediate transfer of securities
No Stamp Duty on transfer of securities
Elimination of risks associated with physical certificates such as bad delivery, fake securities etc., Reduction in paper work involved in transfer of securities
Reduction in transaction cost
Ease of nomination facility
Change in address recorded with DP gets registered electronically with all companies in which
investor holds securities eliminating the need to correspond with each of them separately.
Transmission of Securities is done directly by the DP eliminating correspondence with companies
Convenient method of consolidation of folios/accounts.
Holding investments in equity, debt instruments and government securities in a single account,
automatic credit into Demat Account of shares, arising out of split/consolidation/merger etc.,

Who is Depository Participant?
The depository provides its services to investors through its agents called Depository Participants (DP's). These agents are appointed by the Depository with the approval of SEBI. According to SEBI regulations, amongst others, three categories of entities, i.e., Banks, Financial Institutions and SEBI registered trading members can become DP's.

What is the role of the Primary Market?
The Primary Market provides the channel for sale of new securities. Primary market provides opportunity to issuers of securities; Government as well as corporates, to raise resources to meet their requirements of investment and/or discharge some obligation. They may issue the securities at face value, or at a discount/premium and these securities may take a variety of forms such as equity, debt etc., They may issue the securities in domestic market and/or international market.

What is an Initial Public Offer (IPO)?
An Intial Public Offer (IPO) is the selling of securities to the public in the primary market. It is when an unlisted company makes either a fresh issue of securities or an offer for sale of its existing securities or both for the firsttime to the public. This paves way for listing and trading of the issuer's securities. The sale of securities can be either through book building or through normal public issue.

What is meant by Market Capitalization?
The market value of a quoted company, which is calculated by multiplying its current share price (market price) by the number of shares in issue is called as market capitalization. E.g Company A has 120 million shares in issue. The current market price is Rs.100. The market capitalization of Company A is Rs.12000 million.

What is meant by Secondary Market?
Secondary Market refers to a market where securities are traded after being initially offered to the public in the primary market and/or listed on the Stock Exchange. Majority of the trading is done in the secondary market. Secondary Market comprises of equity markets and the debt markets.

What is the role of the Secondary Market?
For the General investor, the secondary market provides an efficient platform for trading of his securities. For the management of the company, secondary equity markets serve as a monitoring and control conduit by facilitating value enchancing control activites, enabling implementation of incentive based management contracts, and aggregating information (via price discovery) that guides management decisions.

What is the difference between Primary Market and Secondary Market?
In the Primary Market, securities are offered to public for subscription for the purpose of raising capital or fund. Secondary Market is an equity trading venue in which already existing/pre issued securities are traded amond investors. Secondary market could be either auction or dealer market. While stock exchange is the part of an auction market, over-the-couinter (OTC) is a part of dealer market.

What is the role of a Stock Exchange in Buying and Selling Shares?
The Stock Exchange in India, under the overall supervision of the regulatory authority, the Securities and Exchange Board of India (SEBI), provide a trading platform, where buyers and sellers can meet to transact in securities. The trading platform provided by NSE is an electronic one and there is no need for buyers and sellers to meet at a physical location to trade. They can trade through the computerized trading screens available with the NSE trading members or the Internet based trading facility provided by the trading members of the NSE.

What is Screen Based Trading?
The trading on Stock Exchanges in India used to take place through open outcry without use of information technology for immediate matching or recording of trades. This was time cosuming and in-efficient. This imposed limits on trading volumes and efficiency. In order to provide efficiency, liquidity and transparency, NSE introduced a nation wide, on-line, fully-automated Screen based trading system (SBTS) where a member can punch into the computer the quantities of a security and the price at which he would like to transact, and the transaction is executed as soon as a matching sale or buy order form a counter party is found.

What is NEAT?
NSE is the first exchange in the world to use satellite communication technology for trading. Its trading system, called National Exchange for Automated Trading (NEAT) is a state of the art client server based application. At the server end all trading information is stored in an in memory data base to achieve minimum response time and maximum system availability for users. It has uptime record of 99.7%. For all trades entered into NEAT system, there is uniform response time of less than one second.

How does an investor get access to internet based trading facility?
There are many broker of the NSE who provide internet based trading facility to their clients. Internet based trading enables an investor to buy/sell securities through internet which can be accessed from a computer at the investor's residence or anywhere else where the client can access he internet. Investors need to get in touch with an NSE broker providing this service to avail of internet based trading facility.

What is the Bid and Ask Price?
The Bid is the buyer's price. It is this price that you need to know when you have to sell a stock. Bid is the rate/price at which there is a ready buyer for the stock, which you intend to sell. The Ask (or offer) is what you need to know when you are buying i.e., this is the rate/price at which there is seller ready to sell his stock. The seller will sell his stock if he gets the quoted Ask price.

What are various types of Derivatives?
Forwards: A forward contract is a customized contract between two entities, where settlement takes place on a specific date in the future at today's pre-agreed price.

Futures: A futures contract is an agreement between two parties to buy or sell an asset at a certain time in the future at a certain price. Futures contracts are special types of forward contracts in the sense that the former are standardized exchange traded contracts, such as futures of the Nifty Index.

Options: An option is a contract which gives the right, but not an obligation, to buy or sell the underlying at a stated date and at a stated price. While a buyer of an option pays the premium and buys the right to exercise his option, the writer of an option is the one who receives the option premium and therefore obliged to sell/buy the asset if the buyer exercises it on him. Options are of two types calls and puts options.

Calls: Call give the buyer, the right, but not the obligation to buy a given quantity of the underlying asset, at a given price on or before a given future date.

Puts : Puts gives the buyer the right, but not the obligation to sell a given quantity of the underlying asset at a given price on or before a given future date.