How to trade on stock markets using using fibonacci retracement levels

 Fibonacci retracement level is one of the very popular tools used for technical analysis in stock market.This method is used to determine the support and resistance levels. It is based on the key numbers which was first identified in thirteenth century by the mathematician Leonardo of Pisa, who is also called Fibonacci.
 Fibonacci retracement theory is based on the idea that markets will retrace a predictable portion of a move, after which they will continue to move in the original direction.
The start of the retracement level is '0%' and when it reaches 100% there will be a reversal to the original path.
Fibonacci series
The fibonacci numbers or fibonacci sequence is called as fibonacci series.
Look at this,
 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377, 610........
 Here 'o' and '1' are the first two numbers in the fibonacci series. There after all numbers are the sum of previous two numbers.
 For example the third number '1' is the sum of first number '0' and second number '1'.The fourth number '2' is the sum of second number '1' and third number '1' and so on...
 This sequence can also be extend to negative like this
−21, 13, −8, 5, −3 , 2 , −1, 1, 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377, 610...

Fibonacci ratio
The fibonacci ratios are derived from fibonacci series. The key Fibonacci ratios are 0%,  23.6%, 38.2%, 50%, 61.8% and 100%.

The key Fibonacci ratio is 0.618, which is also called 'the golden ratio',  is derived by dividing one number in the series by the number which immediately follows it. For example: 55/89 is approximately 0.6180 and 144/233 is approximately 0.6180.

The 0.382 ratio is found by dividing any number in the sequence by the number that is found two places to the right. For example: 89/233 is approximately 0.3820.

The 0.236 ratio is found by dividing a number in the sequence by the number that is three places to the right. For example: 21/89 is approximately 0.2360.

The 0 ratio is derived from :

  In addition to these ratios stock market traders use 50%, 76.4% and 78.6% levels.

The 76.4% (0.764) ratio is the result of subtracting 0.236 from the number 1.

The 78.6% (0.786) ratio is :

The 50% (0.50) ratio is not really a fibonacci ratio. It is derived from dividing the number 1 (second number in the series) by the number 2 (third number in the series).

Fibonacci retracement levels
  As I said earlier fibonacci retracement levels are used to trade on stock market, currency and commodity markets. It is also said that the key fibonacci ratios are 0%, 23.6%, 38.2%, 50%, 61.8% and 100%. 76.4% and 78.6% are also used by several traders. We also know that o% is the start and 100% is the reverse path. In the price movements of a security the 0.236, 0.382, 0.5, 0.618, 0.764 and 0.786 retracement levels act as the potential resistance and support point.
 I have earlier mentioned that markets will retrace a predictable portion of a move, after which they will continue to move in the original direction.
  Now let us come to the point.The Fibonacci retracement is the potential retracement of a financial asset's (stocks, commodities or currencies) original movement in price. Here the ongoing trend stops and new trend starts against its previous trend. In supports the price starts going lower and in resistance the price stops going higher. And then going against the trend.If it happens this is a correction and one can enter the counter here.
Trade using fibonacci retracement levels
  The fibonacci retracement levels are here divided in to three areas.
 Range bound area-Now suppose the security is trading between 38.2% and 23.6% levels.That is security gets support at 38.2% level and gets resistance at 23.6 per cent level or gets support at 23.6 per cent and resistance at 38.2 per cent level.If a breakout not happens there is a chance of range bound trading.
 Medium area -The security is trading between 50% and 38.6% levels.That is gets support at 50% level and resistance at 38.2% level or gets support at 38.6% level and resistance at 50% level.There is a possibility that market may go to the previous trend.
 Danger Area- The security is trading between 78.6% and 50% levels.That is the security gets support at 76.4% to 78.6% levels and resistance at 61.8% level (golden level) or resistance at 50% level and support at 76.4% to 78.6% level.Then the security may not go to the previous trend.
 Entry point for a trader
 If you are long on a security which is trading at danger area from the swing high, go for short with 50% level as the first stop loss and 38.2 per cent level as second stop loss.You may fix targets at 100%, 127% and 161.8% levels from the swing high.
 If the security is trading at danger area from the swing low you can go long on that scrip with 50% level as the first stop loss and 38.2% as the second stop loss.Targets are 100% level, 127% level and 161.8% level from the swing low.

Read More

PAN Card; its importance and how to get a PAN card

Permanent Account Number (PAN) is an unique alphanumeric combination consists of ten characters (6 letters and four numbers) issued to all juristic entities identifiable under the Indian Income Tax Act 1961.It is almost equivalent to a national identification number. One can not open demat account with out PAN card.So it is necessary for trading in Stock Market.
 PAN is issued in the form of a laminated card, by the Income-tax department under the auspices of the Central Board for Direct Taxes (CBDT). One person can apply and obtain only for one PAN. Obtaining or possessing more than one Permanent Account Number is against the law.

 How to get a PAN card?
  You can get PAN card by applying at UTI website or NSDL website.
In order to apply for a PAN one must fill in one of the following forms.
If you are an Indian citizen, you have to submit your ‘Application for allotment of new PAN’ in Form 49A and if you are a foreign citizen you will have to submit your ‘Application for allotment of new PAN’ in Form 49AA.

Uses of PAN
It is used as an important Identity proof.PAN is Mandatory for financial transactions such as opening bank account, to file income tax returns and to purchase assets above specified limits.The primary aim of PAN is to bring a universal identification key factor for all financial transactions.It indirectly prevent tax evasion by keeping a track of monetary transactions of high net worth individuals.

Features
PAN is unique and permanent.Address change inside the country will not affect PAN.

The other areas where PANCARD is useful
 Earlier I have mentioned in this post PANCARD is must for trading in Stock markets.There are many other areas where Pan Card is mandatory or useful.
1. Pan card is necessary for filing Income tax return online (E-Filing).
2.Pan Card is useful for bank transactions.If you have a fixed deposit on a Bank that exceeds RS 50,000, a copy of PAN card needs to be given. If you are not submitting a copy of PAN card, the bank will deduct TDS of 20% or at the prevailing rate (whichever is higher).
3. It is useful in the purchase of real estate and vehicles.
4. In hotels, restaurants and travel agencies if your bill exceeds RS 25,000 you may have to produce a copy of PAN Card.
5. Jewellery Purchase- For Higher value jewellery purchasing Pan Card is essential.
For tele phone installation, Visa and other credit cards, and in some purchasing Pan card is necessary.
 To invest and file tax returns in India NRI's also need PAN Cards.

Read More

Demat account, its importance and how to open

 Demat is the short form of dematerialization.It is defined as the movement from the use of physical certificate into an electronic form.In demat the securities are held electronically instead of physical possession of certificates.
 If you want to save money on a bank a savings account is must.You need to open a demat account to buy or sell stocks.Unlike savings account no minimum shares are required to maintain a DP account.But there is an annual account maintenance fee, which may vary on different DP's.
 Demat account is used to keep all kind of financial assets and instruments like stocks, debentures, bonds, debt and NSC in a dematerialized form.The demat number is quoted When a trade or transaction take place in electronic mode.
 If you have 1000 shares of JP Associates, 100 shares of Reliance Industries and 10 shares of MRF, all your shares are listed on your demat account.If you buy or sell shares they will be adjusted in your account.
The features of Demat system
 Demat system was started in India on 1996 with the introduction of Depository Act.After that the purchasing and transfer of shares become easier because electronic sharing eliminates problems like signature mismatch, postal delays, risk of forgery and certificate damage.
Benefits of demat account
1. It is the easiest way to hold securities
2.One can immediately transfer securities using demat account (Fast)
3.Unlike Physical format it does not require stamp duty for transactions
4.No need to keep papers shares.So it is safe.
5.Paper works are very rare.
6.Transaction cost is very low compared to physical shares.
7.One can sell even if he has only one share.
8.Address change is very easy.Needed only once for all shares in case of change in residence.
9.No need to report the transaction to company.It is done by DP.
10.Only a single demat account is needed to hold all investments.
11.Account holder can do transactions from anywhere.
The difference between the broker and DP
A broker is a member of Stock exchange. They can buy or sell shares either on their own behalf or on behalf of their clients.
DP just provides a safe place to hold the shares bought by the clients.
How to open a demat account-
You have to approach a DP (Depository Participant) to open demat account.Most banks, brokers and other financial institutions are depository participants.You can choose the DP you like.
Complete list of depository participants are available on NSDL and CDSL Websites.

Essential documents required to open a demat account

Identity proof 
PAN CARD
Voters ID Card
Passport
Driver's license
ID card with photo of the applicant, issued by Central or State government and departments, statutory or regulatory authorities, public sector undertakings scheduled commercial banks, public financial institutions
Photo ID card issued by colleges affiliated to universities to their students, professional bodies such as ICAI, ICWAI, ICSI or Bar council to their members
Credit card or Debit cards
IT Returns/Electricity Bill/Land Phone Bill
Bank Pass Book

Address Proof
Ration Card
Passport
Voter ID Card
Driving licence
Bank Passbook
Electricity Bills (Verified copy only; not more than two months old)
Telephone Bills (Verified copy only; not more than two months old)
Verified copy of leave and license agreement
Verified copy of agreement for sale.
Identity card/ document with address (Issued by Central or State government, statutory or  regulatory bodies, public sector undertakings or scheduled banks
Identity card issued by public financial institutions or professional bodies like ICAI, ICWAI, Bar council etc to their members
Identity card issued by Colleges (affiliated to Universities) to students (Valid till the period of study)

Passport size photograph
Copy of PAN Card
You must have to produce original documents for verification at DP.

Read More

Important terms used in stock market trading

Ask price (Offer price/ Offer)- Ask price is the price a seller is willing to accept for a security

Ask Size-The total number of shares in board lots of the most recent ask to sell a particular security.

Bid price-The highest price a buyer is willing to pay for a security is called bid

Bid Size-The total number of shares in board lots of the most recent bid to buy a particular security

Business Day- Any Week day from Monday to Friday, excluding statutory holidays is called business day

Clearing Day- Any week day from Monday to Friday on which the clearing corporation is open to effect trade clearing and settlement.

Clearing Number- It is the trading number of the clearing Participating Organization or Member.

Client Order- It is the order placed by a retail customer of a Participating Organization.

Close- Price of a scrip when market closes for the day

Day Order- It is the order placed for intraday, which is valid only for the day it is entered.

Daily Price Limit- It is the maximum price change (advance or decline) permitted for a futures contract in one trading session compared to the previous day's closing price.

Delist- It is the removal of a particular security's listing on a stock exchange.

Face Value- Face value is the nominal value value of a security stated by the issuer. In case of stocks, it is the original cost of the stock shown on the certificate.

Futures- Futures is a financial contract to buy or sell securities at a future date

Hedge- Hedge is a strategy used to reduce the risk of adverse price movements in a security, by making a transaction that offsets an existing position in a related security.

High- When the price of a scrip/ Indice reaches day's highest level while trading it is called high

Initial Public Offering (IPO)-The first issue of shares of a company to the general public through primary market.

Long- In stock market the term long refers to ownership of securities.If you are long on 1000 shares of a company, it means that you own 1000 shares of that company.

Low-When the price of a scrip/Indice reaches day's lowest level while trading it is called low

Market Order- Market order is the order that a trader makes through a broker to buy or sell securities immediately at the best current price.

Net Change- The difference between the previous day's closing price and the last traded price of a security or Index.

Open-Open is the first price of a scrip/indice when the market opens

Open Interest- The term open interest refers to the net open positions of a futures and/or option contract.

Open Order- An order to buy or sell securities that remains in the system for more than one day.It remains in effect until it is canceled by the customer or until it is executed or until it expires.

Par Value- The normal face value of a security is called par value.

Position Limit- It is the maximum number of futures and/or options contracts of one underlying security, any individual or corporate is allowed to hold at one time.

Previous Close- Close price of a scrip on previous day

Price-Earnings (P/E) Ratio- It is the valuation ratio of a company's current share price compared to its per-share earnings.It is calculated as
a particular security's last closing market price per share divided by the latest reported 12-month earnings per share (EPS).

Spread- The difference between the bid and the ask price of a security is called spread.

Strike Price- It is the price at which a specific derivative contract can be exercised.It is commonly used in option trading.The purchases and sales are known as calls and puts.In calls the strike price is the price that a security can be bought with in expiration date. In puts the strike price is the price that a security can be sold with in expiration date.

Trading Session- Trading session is the period during which the Exchange is open for trading.That is the time between the opening bell and closing bell on a trading day.

Volume- Number (quandity) of Scrips traded

52 week high (Year high)- When the price of a scrip/Indice reaches 52 week's highest level

52 week low (Year low)-When the price of a scrip/Indice reaches 52 week's lowest level

Read More

Bank rate, Repo, CRR ,SLR and other key rates

Bank Rate
Bank rate is the interest rate charged by the central bank [in India Central bank is the Reserve Bank of India (RBI)] to commercial banks for the loans and advances.In other words, this is the rate at which Reserve Bank of India lends money to financial institutions and banks.If the bank rate is hiked, long term interest rates also tend to move in upward direction.It is because the banks use the fund they borrowed at a lower rate, for lending to individuals and corporates at a higher rate of interest to make profit.
When unemployment of a country is high, lower bank rate is helpful to expand the economy.It will lower the burden of borrowers.When inflation of a country is high, higher bank rates help to control the inflation by controlling the flow of money.
 In India the bank rate acts as the penal rate charged on domestic banks for shortfalls in meeting their reserve requirements (That is, cash reserve ratio and statutory liquidity ratio). The bank rate is used as a reference rate for indexation purposes by several organizations.
 In United States of America, the bank rate is the federal funds rate.It is controlled by the Federal Open Market Committee (FOMC). FOMC buys and sells securities to regulate money supply.The process of regulation of the economy by the Federal Open Market Committee (FOMC) is called  monetary policy.
 Increase in bank rates will affect the growth of Industries as the money circulation becomes very low.Hence only in case of higher or hyper inflation the central bank hike bank rates that too only for a short period.
Repo Rate
Repo (Repurchase) rate is the rate at which banks borrow funds for short term use from the central bank.Decrease in Repo rate helps banks to get money at a cheaper rate. On the other hand the increase in repo rate makes borrowing expensive.When liquidity crunch occurs in the market central bank increases repo rate.
 In case of an inflation, central bank will try to reduce the money supply by increasing the repo Rate. When repo rates are hiked, banks will borrow less amount of money from central bank and thus the amount of money they are lending to the public will decrease.If deflation occurs, central bank will want to inject more money supply and they will reduce the repo rate.
Reverse Repo Rate
Reverse Repo Rate is the exactly opposite to repo rate.It refer to the rate at which the Cental bank [In India Reserve Bank of India (RBI)] borrows excess money from domestic banks (private and public sector banks), when there is too much money flowing in the banking system.
Reverse repo rate helps to control the economic stability of the country.
 The defferance between repo and reverse repo is that in repo, the central bank injects liquidity and in reverse repo it absorbs liquidity.
Call Rate
The interest rate paid by the domestic banks for borrowing for their daily fund requirement is called 'Call Rate'. Banks some times need funds on daily basis, for that they borrow from other banks according to their requirements on a regular basis.
Cash reserve Ratio (CRR)
The meaning of CRR is Cash reserve Ratio.The domestic or national banks have to maintain or keep a portion of their deposit with Central Bank.This minimum ratio is known as Cash reserve ratio.It enables Central bank to control the liquidity in the system.It also ensures that a portion of bank deposit is risk free.In case of Inflation, the central bank increases the CRR rate and thus the available amount to banks becomes down.If the central bank decreases the CRR rate the availability of money increases.That is, more money will come on hands of banks.
Statutory Liquidity Ratio (SLR)
 SLR means Statutory Liquidity Ratio.The ratio of liquid assets to demand and time liabilities is known as Statutory Liquidity Ratio.Before providing credit to its customers the banks have to maintain or keep a part of its deposits in the form of gold, cash or other government approved securities as a part of SLR requirements.In India SLR is determined and maintained by Reserve Bank of India.With the SLR tuning, RBI can control the inflation through controlling credit growth and money supply.

Read More