Trader Pyramid

 

If you know nothing, then you are Gambler

If you know one thing so you are Dabbler

If you know two things, then you are Survivor and 

If you know all things, then you are Trader

Happy Trading & Happy Investing

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Important Factors to Consider when picking the right Penny Stocks for Investing

 

Penny stocks are those stocks that trade at a very low market price and have a very low market capitalization. These kinds of stocks in the Indian stock market have low liquidity and are speculative.

The stock market investors are interested in investing in penny stocks as they are low prices; they believe prices can double easily and because of a good convincing narrative.

But before investing in penny stocks, an investor should note that several key factors affect the way these stocks are traded and should have a solid understanding of the inherent risks that follow.

What are Penny Stocks? 

Penny stocks are stocks of those companies which trade with a low share price and are issued by those companies whose market capitalization is less than 100 crores. But one should note that every stock having a low price does not mean that it is a penny stock. The company’s market capitalization should be small and less than 100 crores. One should note that the classification for the US and that of the European market would be different.

 

For example, Vodafone Idea Ltd. trades around Rs. 13, but it is not a penny stock as the company market capitalization is around 31,500 crores. 

Factors to consider when picking the right Penny Stocks for Investing

1.       Price Behavior – Price behavior is one of the ways to judge whether the price is becoming or not.

2.      Change in business - One should also note what the changes in the business are? Is the company doing an expansion? Or has the management changed? Or whether revenues are growing? So, the impact of all these things can be seen on performance. So, if we find out companies around the performance of its business that is a penny and any type of recovery can be seen.

3.      Fundamentals of the Company - Also, checking the fundamentals of the company is essential. Below are some of the essential fundamentals that one should check before investing in any company:

Ø  Market Capitalization 

First of all, one should check the company’s market capitalization to know whether the stock falls under the small market capitalization criteria. We have taken an example of California Software Company Ltd:

As we can see, this company’s market capitalization is below Rs. 100 crores i.e. 63.37 crores. So it is a penny stock.

Ø  Net Sales/EBITDA

We should check whether the Net sales and EBITDA of the company is rising or not. As in the case of California Software Company Ltd., we can see both increasing as shown below:

 

Ø  Shareholding Pattern

Also, we should check whether the promoter of the company is increasing or not and who is the non-institutional investing in the company.

Ø  Cash from Operation 

 

We should also check cash from operations from which the company is generating its business, so in the previous quarter, the company generated cash from operations in this case:

 

Ø  Company’s Website

You also need to study the company’s website a little bit as it will give you an idea of whether the company is genuine or is it a shell company?

Shell company means it’s not a company. It is only making us feel about its presence. 

Ø  Management of the Company

Checking the company’s management is one of the most significant criteria for investing in penny stocks. Therefore, one should doubt that company that does not have details of its management on its website. 

Typically, good management has a LinkedIn profile on the page. If there is no LinkedIn here, then we can doubt that company.

Advantages and Disadvantages

Ø  Although they are highly volatile, they can also yield good rewards.

Ø  They have the potential of high growth in a short span and thus have become popular choices among investors.

Ø  Also, massive profits can be earned from small invested capital.

Disadvantages

Ø  Lower liquidity makes it difficult for the holders to cash out. When an investor wants to sell the shares, he/she might not sell them immediately because of the lack of buyers available in the market.

Ø  Penny stocks are usually thinly traded.

Ø  As there is a lack of company history, penny stocks make it difficult for the investors to choose their purchase as such companies would possess a poor track record or no record.

Ø  Artificial inflation of share prices may lead to false statements regarding the company’s situation, a form of fraud in the microcap stocks.

Ø  When the price is falsely and sufficiently inflated, the people who are ready to commit fraud will dump the shares and record instant profits.

Ø  The lack of information about penny stocks to the public makes it hard to make informed decisions about investments.

 

 Happy Trading & Happy Investing

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Terminology of Moving Averages Scans

Bullish Golden Crossover (SMA)- Stocks where short term moving average has crossed above the longterm moving average indicating a bullish breakout.

Inputs settings will be: SMA (20) crosses above SMA (50)

Bullish Death Crossover (SMA)- Stocks where Short term MA has crossed below the Long term MA indicating a bearish breakout.

Inputs settings will be: SMA (20) crosses below SMA (50)

Price crosses Above SMA- Stocks where price has crossed above the MA indicating a bullish crossover.

Inputs settings will be:  SMA (20) crosses below price

Price crosses below SMA- Stocks where price has crossed below the MA indicating a bearish crossover.

Inputs settings will be: SMA (20) crosses above price

Now in EMA same as SMA but selection of indicator of MA sma we should select MA ema

You can used Tradingview.com for use a indicator like Moving averages and many more.

Difference Between SMA and EMA

SMA means Simple Moving Average which is called a slower moving average usually used to confirm a trend rather than predict it. 

EMA means Exponential Moving Average which is called a faster moving average that places more emphasis on recent price data.

Happy Trading and Happy Investing

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Price Action Analysis

 

Price action forms the basis of technical analysis and helps you in timing entries and exits better without relying on news or opinions. Price action can be analyzed using charts that plot prices over time.

Support and Resistance

If the market is in an advancing phase, one can initiate long positions. If the market is in a downtrend phase, one can initiate short positions. After making this decision, one needs to analyze the support and resistance levels, i.e. the potential buying or selling pressure zones.

Support is a zone of potential buying pressure where buyers could step in and push the price higher, whereas resistance is a zone where sellers could step in and push the price lower.

The support and resistance zone tells us where to buy and sell. If the prices reverse back from the resistance level, one can short the stock.

And if the prices reverse back from the support level, one can buy the stock.

Entry Level

 

When the prices breakout from any price pattern, candlesticks, support or resistance levels, the price action trader can take a long/short position at that point.

 

Like in Candlestick pattern, if you see a Bullish Harami candlestick pattern after the downtrend, you should enter a long position if the prices open higher the next day.

 

Stop Loss

 

This helps you protect your position so that you don’t incur losses if the trade goes against your expectations.

Like, if you spot a Bullish Harami candlestick pattern, then you can place a stop loss at the support or low of the previous day’s candlestick.

Higher-Timeframe

 

If you trade by using daily charts, you should also look at the weekly charts to determine whether the trend is in uptrend or downtrend.

 Volume

 

If there is no rise in the volume when the breakout happens, then the price action trader should be doubtful in taking that position. A trend reversal should always be supported by an increase in volume. There are many volume indicators with the help of which you can analyze volume in the stock.

 

Exit Level

 

You should also determine the exit level before even entering the position, this is also called target. The exit level can be determined by a certain percentage, support/resistance level, or the price target in the case of chart patterns. After determining all these things, you are now ready to place your trading order, whether long or short.

Happy Trading and Happy Investing

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General Terminology of Stock Market

 From Bull Market when it is Down:

Minimum 5% drop then it is pullback

10% drop, it is correction

20% drop, it is Bear Market

35% drop, it is Crash

50% drop, it is Recession

Bid Price :- It is a price when buyer willing to pay for a stock.

Ask Price :- It is a specific price at which you are looking to sell a share.

Beta:- It is measurement of relationship between stock price of any stock and movement of whole market.

Happy Trading & Happy Investing

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Most used Intraday Trading Indicators

 

Intraday trading refers to short-term trading in which the traders take benefits of price fluctuations in the stock market and earn profits.

To be successful in the trading we need to analyse the technical charts using Price actions and Intraday trading indicators for making profits.

1.      VWAP

 VWAP- Volume Weighted Average Price. When trading intraday traders need to track the volume in the stock. VWAP is a volume indicator of the ratio of the value of a stock traded in a particular time to the total volume traded at that stock for a particular stock.

This indicator indicates a bullish trend when the price of a stock is above VWAP. This means that the price is above average volume and the trend is positive. We can enter the stock in this particular condition on a retracement to VWAP in the direction of the trend. 

Similarly, a bearish trend can be confirmed when the price moves below the VWAP line. You can sell at the VWAP in the direction of the trend.

2. Average Directional Index

 ADX indicator helps us in determining the trend’s strength.

ADX tells us whether the ongoing trend has the strength to continue going up or down. 

Its values oscillate between 0 to 100, and one should remember that the higher the value higher will be the strength of the trend. The default look-back period of ADX is 14 periods but can be changed according to the volatility of stock or index.

ADX value below 25 indicates a very weak trend whereas value above 75 indicates a very strong trend. ADX is generally not used alone, rather it is used along with other trend-following indicators like Supertrend for filtering the false signals.

            If values of ADX is between in this, then we should follow this:

10-20 = means nothing in this share, exit now

20-30 = it is medium we should wait for few months

30-40 = high probability to go up

Above 40 = very high 98% probability is going up, so pick the share in this movement

 

 3. Donchian Channel

 

When doing intraday trading one also needs to analyse volatility indicators that help us in analysing if the volatility in the stock is high or low. We can use the Donchian channel for this purpose in intraday trading. Donchian Channel is constructed by calculating Highest High and Lowest Low for a pre-defined period. 

When there is a breakout of the Donchian channel from the upper or lower band then it is considered as the starting of a new trend. The Donchian channel is also useful for studying the volatility of the price as shown in the above chart. If the price is stable then the Donchian channel will be narrow. But if the price fluctuates often then the channel will be wider.

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Three Outside Up and On-Neck Pattern candlestick patterns

 

Three Outside Up

The Three Outside Up is multiple candlestick pattern which is formed after a downtrend indicating bullish reversal.

It consists of three candlesticks, the first being a short bearish candle, the second candlestick being a large bullish candle which should cover the first candlestick.

The third candlestick should be a long bullish candlestick confirming the bullish reversal.

 

The relationship of the first and second candlestick chart should be of the Bullish Engulfing candlestick pattern.

Traders can take a long position after the completion of this candlestick pattern.

On-Neck Pattern

 

The on neck pattern occurs after a downtrend when a long real bodied bearish candle is followed by a smaller real bodied bullish candle which gaps down on the open but then closes near the prior candle’s close.

The pattern is called a neckline because the two closing prices are the same or almost the same across the two candles, forming a horizontal neckline.