How to invest in a volatile market?

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Stock market have again opted for upmove and been cruising along. Sensex has travelled from 19000 to above 20000 in less than 2 months time. FIIs have flooded india stock market. But there are many retail investors who have missed the rally and are now confused about the current levels. stock market is all about entry and exit. Timing is the most crucial factor in playing stock market. An average investor is looking for clues and tips to know about the right stocks and right time. We often turn to stock analyst for tips, but at the same time we hardly understand what they say, we just follow their recommendations and sometime we make profit and sometime, loss. If we can understand their analysis, it will further boost our confidence and then we will be able to reap the real benefits of market. A trader can make profit from falling as well as gaining market.

There are two kind of analysis, namely;

1. Fundamental Analysis

2. Technical Analysis

1. Fundamental Analysis- Fundamental Analysis deals with financial health of the company and factor affecting it. It involves looking into company’s earning, liabilities, assets, expenses and overall financial statements. It require careful study of cash flow statement, balance sheet. PE ratio and EBITDA margin. Fundamental Analysis plays a huge role in long term market movements but in short term movement, market may differ fundamental analysis.

2. Technical Analysis- Technical Analysis deals with the predicting the stock or index prices by looking into the historical data, charts and the volume. It is more accurate in short term and widely used by traders. We will further look into the technical analysis as it is more important for profit generation in a volatile market.

Technical Analyst use charts to study price movements, patterns and then predict future prices. Patterns such as head and shoulders or double top reversal patterns, study indicators, moving averages, and forms such as lines of support, resistance, channels, and more obscure formations such as flags, pennants, balance days and cup and handle patterns.

They also look at other data like volumes and Advance/decline data. Commonly used charting terms and indicators in technical analysis are;

Resistance — a price level which acts as a ceiling above prices

Support — a price level which acts as a floor below prices

Breakout — the concept whereby prices forcefully penetrate an area of prior support or resistance, usually, but not always, accompanied by an increase in volume.

Trending — the phenomenon by which price movement tends to persist in one direction for an extended period of time

Average true range — averaged daily trading range, adjusted for price gaps

Chart pattern — distinctive pattern created by the movement of security prices on a chart

Dead cat bounce — the phenomenon whereby a spectacular decline in the price of a stock is immediately followed by a moderate and temporary rise before resuming its downward movement

Elliott wave principle and the golden ratio to calculate successive price movements and retracements

Fibonacci ratios — used as a guide to determine support and resistance

Momentum — the rate of price change

Point and figure analysis — A priced-based analytical approach employing numerical filters which may incorporate time references, though ignores time entirely in its construction.

Types of charts

OHLC “Bar Charts” — Open-High-Low-Close charts, also known as bar charts, plot the span between the high and low prices of a trading period as a vertical line segment at the trading time, and the open and close prices with horizontal tick marks on the range line, usually a tick to the left for the open price and a tick to the right for the closing price.

Candlestick chart — Of Japanese origin and similar to OHLC, candlesticks widen and fill the interval between the open and close prices to emphasize the open/close relationship. In the West, often black or red candle bodies represent a close lower than the open, while white, green or blue candles represent a close higher than the open price.

Line chart — Connects the closing price values with line segments.

Point and figure chart — a chart type employing numerical filters with only passing references to time, and which ignores time entirely in its .

Here is an example of a technical chart (candlestick chart), it is just for representation purpose;