Relative strength index in Stock market; Importance and calculation of RSI

 Like MACD, Relative strength index (RSI) is also a technical indicator used in financial markets. It was introduced in 1970's by Welles Wilder. It is a momentum oscillator which measures the speed and change of price movements. RSI also determines the strength or weakness of a security. It compares the magnitude of gains to losses in a specific period of time. By using this we can identify or confirm over bought and oversold conditions in securities.
 According to Wilder's theory when the price increases very rapidly, at some point it is considered as over bought and when the price decreases, at some point it is considered over sold. At this point a reversal is possible. Wilder suggested a smoothing period of 14.
 In stock market graph RSI moves between 'zero' and 'hundred'. RSI indicator has an upline at 70, a down line at 30 and a midline at 50.Above 70 line the security or financial instrument is over bought and below thirty line it is over sold. The midline 50 shows that there is no trend.
 Wilder also described the divergence in RSI. According to him a bullish divergence happens when price makes a newer low and RSI makes higher low. A bearish divergence happens when price makes a higher high and RSI makes lower high.
 Andrew Cardwell added some new interpretations of RSI which helps us to determine the up and down trends. According to him in up trends RSI usually moving between 40 and 80 and in down trend it moves between 20 and 60. He also observed that when the trend changes in financial instruments, that is from up trend to down trend or from down trend to up trend RSI will pass through a 'range shift'.
 Cardwell also described the positive and negative reversals in the RSI. According to him Reversals are the opposite of divergence. A positive reversal happens when price correction results in a higher low and RSI results in a lower low compared to the prior correction in an uptrend . A negative reversal happens when price correction results in a lower high and RSI makes a higher high compared to the prior rally in down trend.

                          100
    RSI = 100 -  --------
                         1 + RS
    RS = Average of up closes of 'n' days / Average of down closes of 'n' days.

 An example for RSI calculation is given below

Date	Close	Change	Gain	Loss	Average Gain	Average Loss	RS	RSI (14)
01-Jul-13	120.2
02-Jul-13	125.4	5.2	5.2
03-Jul-13	124.8	-0.58		0.58
04-Jul-13	128.4	3.53	3.53
05-Jul-13	129.3	0.92	0.92
08-Jul-13	128.5	-0.82		0.82
09-Jul-13	132.5	4.05	4.05
10-Jul-13	134.2	1.7	1.7
11-Jul-13	133.3	-0.9		0.9
12-Jul-13	135	1.7	1.7
15-Jul-13	136.5	1.5	1.5
16-Jul-13	135.5	-1		1
17-Jul-13	137	1.5	1.5
18-Jul-13	135	-2		2
19-Jul-13	132.5	-2.5		2.5	1.44	0.56	2.58	72.04
22-Jul-13	131	-1.5		1.5	1.33	0.62	2.13	68.10
23-Jul-13	132	1	1		1.31	0.58	2.26	69.31
24-Jul-13	132.7	0.7	0.7		1.27	0.54	2.35	70.16
25-Jul-13	133.4	0.7	0.7		1.23	0.50	2.45	71.02
26-Jul-13	134.2	0.8	0.8		1.20	0.46	2.57	72.02
29-Jul-13	133.7	-0.5		-0.5	1.11	0.40	2.81	73.73
30-Jul-13	135	1.3	1.3		1.12	0.37	3.06	75.37
31-Jul-13	136.1	1.1	1.1		1.12	0.34	3.29	76.69
01-Aug-13	137	0.9	0.9		1.11	0.32	3.49	77.74
02-Aug-13	137.7	0.7	0.7		1.08	0.29	3.66	78.55
05-Aug-13	138.6	0.9	0.9		1.06	0.27	3.90	79.59
06-Aug-13	137	-1.6		1.6	0.99	0.37	2.69	72.88
07-Aug-13	137.5	0.5	0.5		0.95	0.34	2.79	73.63
08-Aug-13	136.3	-1.2		1.2	0.89	0.40	2.20	68.73
09-Aug-13	134.7	-1.6		1.6	0.82	0.49	1.68	62.73
12-Aug-13	135	0.3	0.3		0.78	0.45	1.73	63.38
13-Aug-13	135.9	0.9	0.9		0.79	0.42	1.88	65.32
14-Aug-13	136.5	0.6	0.6		0.78	0.39	1.99	66.59
15-Aug-13	137.8	1.3	1.3		0.82	0.36	2.25	69.22
16-Aug-13	138.5	0.7	0.7		0.81	0.34	2.40	70.56
19-Aug-13	139	0.5	0.5		0.79	0.31	2.51	71.52
20-Aug-13	138	-1		1	0.73	0.36	2.02	66.84
21-Aug-13	138.5	0.5	0.5		0.71	0.34	2.12	67.97
22-Aug-13	139.7	1.15	1.15		0.74	0.31	2.38	70.46

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Moving averages and moving average convergence divergence

  Moving averages is one of the most popular and reliable tool used in stock market technical analysis. In statistics it is also known as rolling average or running average. Some people call this as moving mean or rolling mean. Moving average is the average price of a stock over time. It is calculated by averaging the initial fixed subset of number series or data points.
 In stock market moving average (MA) is used to determine the trend of the market or a security. Upward trend is confirmed when short term moving average crosses above a longer term moving average and downward trend is recognized when short term moving average breaches below longer term moving average. For example if 50 MA crosses above 100 MA it is considered as up trend. If 50 MA falls below 100 MA trend is bearish.
 Simple moving average (SMA), Cumulative moving average (CMA), Weighted moving average (WMA) and Exponential moving average (EMA) are important  types of Moving averages.Modified moving average (MMA) or Running moving average (RMA), or Smoothed moving average is also considered as a moving average.
 As I said above Moving averages allow traders to recognize and confirm the trend. Thus by identifying the trend he can achieve success in his trade.

Moving Average Convergence Divergence (MACD)
MACD or moving average convergence divergence was developed by Gerald Appel in late 1970's. It is also a simplest and useful technical indicator used in stock market. It is based on exponential moving average. In a chart it is a collection of three signals namely MACD line, Signal line and the divergence (difference) line. These signals are calculated from historical prices of a financial instrument (indice or stock).Most people use closing prices to calculate MACD.
 The first signal 'MACD line' is the difference between a short term (fast) exponential moving average , and a longer term (slow) exponential moving average. In a chart MACD line is changing over time along with 'signal line'. MACD histogram time series is an oscillator which shows the divergence between MACD line and Signal line.
 The standard setting for MACD used in stock market is 12,26 and 9. MACD 3,10,16 is also used by some traders.

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Exponential moving average and how to calculate EMA

Exponential Moving Average (EMA)
 Exponential moving average or EMA is also known as exponentially weighted moving average (EWMA). It gives more weight to recent prices in other words the weight of old prices decreases exponentially.
 A seven day EMA applies 25 per cent weighting Calculation of EMA is a complicated one. Stock market traders can get EMA from almost all technical charts.
In order to calculate EMA, first calculate SMA.
SMA = Mean or average of previous n days= Sum of n days / n
For eg, 7 SMA= Sum of Seven days closing price / 7
Then you have to find smoothing factor.
Smoothing factor = (2 / (Time periods + 1) ) = (2 / (7 + 1) ) = 0.25 (25 per cent weighting; ie 0.25*100)
Then calculate EMA by applying the following formula.

EMA= [Close - EMA(Yesterday)] x Smoothing Factor + EMA(Yesterday).

Note that Some people use current price instead of close.

If you know the per cent and want to get time period you can use the following formula.

Time period= (2/Smoothing Factor)-1
Here smoothing factor is per cent divided by 100.
For eg;- If the per cent is 25, smoothing factor is 25/100= 0.25
Then time period= (2/0.25)-1= 7; so seven is the time period.

An example of EMA calculation on a sheet is given below

Day	Close	7 SMA	Smoothing Factor	EMA 7
1	87.50
2	86.00
3	85.00
4	86.20
5	87.00
6	85.00
7	85.70	86.06		86.06
8	86.70	85.94	0.2500	86.22
9	87.20	86.11	0.2500	86.47
10	87.50	86.47	0.2500	86.72
11	87.70	86.69	0.2500	86.97
12	88.00	86.83	0.2500	87.23
13	88.80	87.37	0.2500	87.62
14	89.20	87.87	0.2500	88.01
15	90.20	88.37	0.2500	88.56
16	91.20	88.94	0.2500	89.22
17	91.70	89.54	0.2500	89.84
18	91.90	90.14	0.2500	90.36
19	92.50	90.79	0.2500	90.89
20	93.00	91.39	0.2500	91.42
21	93.50	92.00	0.2500	91.94
22	93.20	92.43	0.2500	92.25
23	92.70	92.64	0.2500	92.37
24	90.50	92.47	0.2500	91.90
25	91.70	92.44	0.2500	91.85
26	92.30	92.41	0.2500	91.96
27	93.80	92.53	0.2500	92.42
28	94.50	92.67	0.2500	92.94
29	94.80	92.90	0.2500	93.41
30	95.50	93.30	0.2500	93.93

EMA 5, 10, 20, 50, 100, and 200 are very common in stock market trading

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What is Simple moving average: How to calculate SMA

As the name indicates Simple moving average (SMA) is the simplest form of all the moving averages. It is the unweighted mean of the previous 'n' data points.
 In stock market SMA is simply calculated by taking the mean (average) of a security over a specified number of days. One can calculate moving averages from open, high, low or close prices. But in most cases, close prices are used to calculate SMA.
 If you want to calculate a seven day simple moving average of a security, add the previous seven day closing prices and divide it by seven (mean or average of last seven days). You can't calculate simple moving average if you don't have last seven days closing price.
 An example of a seven day moving average is given below
 

Day	Close	7 Day SMA
1	58
2	64
3	62
4	60
5	63
6	65
7	65	62.43
8	67	63.71
9	68	64.29
10	67	65.00
11	66	65.86
12	64	66.00
13	65	66.00
14	67	66.29
15	69	66.57
16	70	66.86
17	67	66.86
18	65	66.71
19	62	66.43
20	63	66.14
21	66	66.00
22	68	65.86
23	71	66.00
24	69	66.29
25	70	67.00

 You can also calculate simple moving average of 'n' days using the following formula.

 Suppose  previous 'n' day closing prices are 

 Then Simple moving average



In order to calculate simple moving average in a row (for successive values) use the following formula

  

For short term trading most people use 5, 10, 20 and 50 SMA. For long term 100, 200 SMA's are considered as important.

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Book value per equity and book value per share; its importance

 In accountancy 'book value' is the value of an asset as per balance sheet. It is also called carrying value or net asset value, which is equal to the original cost of the asset less any accumulated depreciation, amortization or impairment costs made against the asset.
 In share market traders use book value to determine the safety level of shares after the payment of all debts.
 Total Book value of an equity is the value that the equity worth after the repayment of all debts and liquidation of all assets.
 Total Book value of equity is calculated by the following formula,
 Total Book value of an equity= Book value of assets- Book value of liabilities

 Book value of all Common shares is calculated as
 Book Value of Equity- Book Value of Preferred Stocks

Book value per share is defined as the value, that share worth after repaying all debts and liquidating all its assets.
  Book value per Common share is calculated by using the following formula
 Book Value per Common Share = (Total stock holder's equity- Preferred Equity)/(Total Number of outstanding Shares)

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Stock market trading; How to be a successful trader

If you are a stock market trader, it is advisable that you must follow some basic principles. By doing these you can achieve success in day and delivery trading.

1. Virtual stock market trading

It is important that before entering and investing money to stock market, spend some time  on virtual stock market trading or paper trading or on stock market trading games. By doing this you will get some trading experience before entering in market. Many brokerages offer virtual stock trading.    

2. Put small amount of money first time

If you are trading for the first time or you are not an experienced trader put small amount of money in to market. Then increase the amount very slowly.

3. Make a trading plan
If you want to become a successful trader you must keep a trading plan. You have to do some home work before trading. This include study of chart patterns.

4. Identify the trend of market
It is very important that you identify the right trend of  the market before trading or investing. Also try to understand strong and weak sectors.

5. Pick right trading or investing stock for you
Before trading a security, try to pick the right stock for you. It depends upon your trade (intraday or short term)

6. Research about the stock before investing

Now a days it is found that investors are going behind brokerage research and calls. Before following brokerage calls it is strictly advised to do your own research.

7. Keep an eye on important trading levels
Before trading it is important to keep an eye on technical levels like pivot points, camarilla levels, fibonacci retracement levels, wave and Gann levels.

8. Book profits or loss in right time
Keep targets and stop loss for every trade. Book partial profit on all targets. If your trade hits stop loss avoid repeated trade in that direction.

9. Never try to buy a security on a new low
If a security make a new low don't try to buy that security. There may be reasons behind the new decline. Try to buy the stock only on a clear indication of reversal (Rising in  price to a specific level).

10. Never try to sell a security on a new high
If a security make a new high don't try to sell that security. There may be reasons behind the new price increase. Try to sell the stock only on a clear indication of reversal(Falling in  price to a specific level).

11. Avoid over trading

If you want to be a successful trader you must avoid over trading. It is the best solution to avoid huge losses.

12. Avoid impulsive trading

Traders must avoid impulsive trading. It will result in the loss of large amount of money. If you believe that you made a bad trade you must exit from the trade or keep a strict stop loss to keep the losses small.

13. Alertness is required for day trading
Day trading requires alertness. So  is advisable to watch movement of market and scrip from terminal or visual media.

14. Keep a positive attitude

A trader must look on getting profits. But if a particular plan not works for you you must reduce or close positions and watch what is happening. If a trade fails on a day, there is no need to become mood out. Participate in other activities to keep your right mood.

 By applying these principles one can easily trade on stock market.

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Market order and Limit order in stock markets

In stock markets, trades occurs when orders are placed. When one trader places buy order and another trader places sell order at the same price trade occurs.
 One can place buy order or sell order in order to enter or exit the trade in stock markets. If some body enters to trade by placing a buy order he can exit from that trade by placing a sell order. If some one enters to a trade by placing a sell order he can exit from that trade by placing a buy order.

Market order

Market order is an order placed with a brokerage to buy or sell shares in the current market place. In market order trader tells the number of shares he or she want to buy or sell. Market order will be executed immediately. If you place a market order to get some shares of a company you will get the shares at a price somewhere between the ask and bid price. In high volume markets, market orders are comparatively safe. Market order guarantee the execution subjected to the liquidity of that scrip, but does not guarantee the price.
 For example a security is trading at 500 RS and you place an order for 100 shares, 100 shares of that security would be bought for you at the price of 500 RS per share.

Limit Order

Limit order is a conditional order, which can be defined as the order placed to buy when the market price of the stock comes to the limit price you set. Limit orders are some times classified as buy limit orders and sell limit orders. Limit order guarantee the price, but does not guarantee the execution.

For example if you place an order for 100 shares of a security at 500 RS, which is trading at 550 RS, your order would be executed when the price come down to 500 RS.

Buy Limit Order

If you think that the price of a security will decrease in short term and then rebound to a higher price you can place an order to buy the security at lower levels.
For example A security is trading at 100 RS. If you think the price of that security will decline to 80 RS, you can place a buy order at RS 80. Only if the price come down to 80 RS, your trade will be executed.

Sell Limit Order

If you own a security, and think the price will go higher in short term. Then you can place a sell order at a higher price. If the price reaches that higher level your limit order will be executed.
For example A security is trading at 100 RS. If you think the price of that security will increase to 120 RS, you can place a sell order at RS 120. Only if the price go higher to 120 RS, your trade will be executed.

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