When you are investing in Stock Market with a little knowledge of Technical Analysis, you will only be on losing side. Below mentioned Key Technical Indicator will surely help you in generating profit and ensure your safety from severe losses that can happen to anyone in the Stock Market.
- Never Purchase on a Red Candle Day
- Support & Resistance
- Relative Strength Index
- Fibonacci Retracement
1. Never Purchase on a Red Day
I assume that you are aware with the Candlestick Chart Patterns. So, first rule of thumb is that, you should never purchase any of your stock on Red Candlestick day or in other words, you should not purchase stock on the day when its price is declining. Always try to purchase your stocks on Green Candlestick Day after a few sessions of decline in the prices. Because for shorter terms perspective, generally a Bearish or Bullish trend lasts for 3-4 days.
As you can see in the image above, price is declining from last 3 sessions and 4th Day, Stock made a Green Candlestick either completely bigger or completely smaller than the previous day’s Red Candlestick. From a Trader’s point of view, Bears were in full swing in the market and they were able to push the price lower for 3 consecutive days. However, on 4th day Bulls made their entry and raised the prices high and signalling a Bullish trend for upcoming few sessions. So, always try to understand the Indicator and logic behind them in order to create your own view in the market. You can read the same in brief here.
2. Support & Resistance
Second most important factor in Indicator is, Support & Resistance for Analysis. Always purchase your stocks near Support level in order to get the best Risk-to-Reward Ratio. Risk-to-Reward ratio represent the Risk that you will be having after your investment for the Reward that you deserve. For an example, if you are investing INR 100 on a Stock to gain of INR 20, which is your Reward. But what if, the stock price declines and it goes to INR 90. This is your Risk of INR 10 and as a result, your Risk-to-Reward ratio becomes 1:2 which is way more excellent ratio to trade. Generally, a trader uses to trade with a Risk-to-Reward above 1:1.5
What is Support & Resistance?
As the name suggests, Support is something which stop the price from decreasing further in normal market condition. At this point a stock trend is likely to reverse or bounce back. A strong Support Level is formed when stock has tested a price point several times in the past in declining condition but didn’t fell below this point.
Having said that, understanding of Resistance seems simple and intuitive. Resistance is a point which stops the price to rise further. At this point, stock price is likely to reverse, and downtrend may start now. However, it doesn’t mean that it is always true. Indicators are meant to guide you, not to direct you. Sometime, heavy buy, positive news or favourable market conditions may take the stock price above then resistance level. So, you must keep a close eye on the stock news you are trading along with the Indicator.
How do you recognise Support or Resistance Level?
On your Stock Trading Platform, with a single day chart, load at-least 12 Month’s data of the Stock. You will see that the stock didn’t rise many times after a certain price point.
As you can see in the below image that the stock declined @ Rs. 253 for 4 times and twice @ Rs 277. I have highlighted Resistance Points in the circles and there are two Resistance points have been formed by the stock. On the contrary side, there are two support level have been shown in the image @ Rs. 227 & Rs. 203 where stock got support and Bulls took their entry in the market.
So, while choosing your Support or Resistance Level, try to find maximum points at one price point. The higher data points, the stronger Support or Resistance will be. Like at Price INR 253 where stock declined 4 times.
So now you can find your entry and exit point in the market. Please take a note that you can’t time the market with any Indicator but you can save yourself from a loss. Nobody is so perfect to buy at the bottom and sell at the top. So, don’t be sad or greedy if your stock moves high after you sell your stake. You can understand the Support and Resistance in more detail here.
3. Relative Strength Index
Relative Strength Index or RSI is a very strong, popular & one of a widely used Technical Indicator used in Technical Analysis, developed by J. Welles Wilder. You can Google on how to add this indicator in your Trading platform since every platform have their own settings for these.
RSI is an Indicator which tells the internal strength of the security with the moving days. It moves between 0 to 100 and represents the Oversold or Overbought zone of the stock. Generally, a stock considered Oversold when RSI is hovering around 30 or below. On the contrary stock is considered Overbought when RSI is moving at 70 or above.
This is identical to the Great Investor and Writer of ‘Stock Market Analysis’ Mr. Benjamin Graham’s philosophy “Buy Fear and Sell Dear”. Which means, buy quality stocks when everyone is in fear of price drop and sell your stock when it becomes dear to you because it is making hefty profit. And at the same time, when everyone is trying to buy the stock even after the high price. You should sell those stocks which are high in evaluation.
4. Fibonacci Retracement
Stock Market or any specific stock do not go up or down directly like an arrow. It always moves in a Zig-Zag pattern. Stock always retrace its price while moving upwards or downwards. For Example, if a Stock has run up from Rs. 100 to Rs. 200 then is usually tends to retrace back to 170 before it could ladder to Rs. 230.
The retracement level forecast is a technique to identify the next level either upside or downside to ride on the stock for a correct entry and exit point. This retracement level provides a very good opportunity in the Stock Market to be profitable or to be safe from declining market.
This is the last Key Indicator in my list that I use to follow for my Stock Trading ‘Fibonacci Retracement’ which tells the next level of retracement. The Fibonacci ratios i.e. 61.8%, 50%, 38.2%, and 23.6%. If you see a stock rally sharply you can trace a Fibonacci Chart and see the level of retracement. If you want to see how Fibonacci Series is impacting our lives other than stock market, you can visit This.
Let’s understand this with an example. A Stock in the image below moved from price Rs. 1478 to 1741. A sharp and noticeable rally has been shown by the stock. You should not jump into stock just because it is moving upwards every next day. You should analyse the retracement level. As you can see, that the stock moved back to price Rs. 1678 with 23.6% Fibonacci Retracement from its recent top, which should be the right level to enter.
Now if you were not able to find this opportunity or you may have missed this, you can have to keep patience and see another opportunity level from where you can ride on the stock. But make sure, RSI of the stock should be in the right level. Let’s see the next level of the same stock.
As you can see in the image below, Stock again raised it price from Rs. 1663 to Rs 1856 and retraced with 38.2% Fibonacci Retracement from its recent top i.e. 1856 and came down to Rs. 1771 which should be the right level of entry.
Now when you have made your entry in the Stock, make sure you exit at the RIGHT time because stock market is always volatile and can take a U-Turn any time. Like in the above example, stock raised the price till 1868 and now it’s in down trend and nobody knows where it will go. But you can see the RSI indicated the overbought zone when stock was hovering around Rs. 168, RSI was 73 which is an alarm to get out from the stock and book your profit.
The same technique can be applied to the stock when it is in downtrend and you can see the level of correction which can happen in the stock. You can read in brief here.
So, above mentioned these 4 powerful and most important Technical Indicator that will ensure your safety in the Stock Market if you follow the defined rules and don’t get penic in tricky situations.