Month: February 2022

Back in the day when trading had just started in India, the stocks used to be traded in a fashion known as the “Open Outcry system”. This was a system that took place on the trading floor where the person would shout or use hand signals to indicate price changes or buying and selling of shares during market hours. The person interested would approach these people and strike a deal and would take down notes on a slip or form and then after the session they would go back and register all the trades made for the day. The process was cumbersome and exhausting and only those who had access to the building where it happened could benefit from this. However, this has become an outdated process and with the advent of technology, everything has become online. No more shouting or screaming and fighting for getting shares on the market floor.

In the present, online trading has made it easy for the common man to trade stocks with minimal interference from the broker. From websites to mobile apps, trading has become convenient for all with just a few clicks. And this has seen a huge number of participation from all age groups from across the country. So what are the benefits of trading online? I’m sure you can name many yourself but we’ll cover some here as well just in case you may have missed out a point. So let’s go!

What is Online Trading?

Online Trading is the process of trading your stock directly from a website or an app instead of calling the broker or other traditional methods. These platforms are provided by internet based brokers like TradeSmart. It’s very easy to access these platforms as all you need is a good computer system or mobile phone that has an internet connection and you start trading. Basically, you can easily buy and sell stocks from your home or workplace.

The process of online trading

When you place an order online to buy or sell stocks, the process gets executed within seconds. But at the same time, there is a lot happening behind the scenes which help execute these trades in seconds. The process involves.

• You place and order and it gets registered
• The order then gets placed in a database
• It then waits for a seller or buyer depending on the order placed to match its order and when found, a confirmation message is sent to both parties.
• The order and price is reported to the regulatory bodies
• The records of the transactions are then stored by the regulatory bodies incase they want to study your past transactions
• A contract is sent to your broker who sold the shares and to the one who bought them
• Then the broker has a maximum of 3 days to settle where they exchange the cash and shares
• The money then gets debited and the shares are officially in your account.

What are the advantages of online Trading?

With technology incorporated in trading, this has brought several benefits. The benefits of Online Trading are as follows:

• More independence from stockbrokers
  Prior to the online trading era, stock traders would contact their stockbrokers on the phone. While calls were recorded, the chances of human error were huge. While trading something as critical as leveraged stocks, especially over Intraday trading, a single error could cause massive losses.

  In the case of Intraday trading, all you need is that the internet connection should be stable. Rest, everything is on a screen in front of you. Omitting the trader and phone call significantly reduces the time taken and chances of human error.

  Also, when the market is volatile, the dealers of stockbrokers remain busy. That is not the case with online trading. Everything can be managed by the trader instantly at the click of a button.

• Online Trading is quicker
  Earlier, to trade stocks, you would have to call the stockbroker’s dealers. Then at times, your call would be placed in a queue. After connecting to the broker, you would read the exact details of the stock and sale. With online trading, all this happens at the click of a button. In the case of Intraday trading of even minutes matter for volatile stocks. Thus, online trading is quicker.
• More exposure to stocks and finances
  In the case of online trading, all stocks and finances are visible on the webpage. You make independent decisions and eventually are exposed to detailed statistics of stocks.
• Location flexibility
  As of present, most of the reputed trading platforms have apps for phones. This means you can manage your stocks from literally anywhere. All you need is an internet connection. While dealing through an app on your phone, you can trade on the go.

• Trader gets alerts
  While dealing with stocks by phone, you have to constantly ask the broker for clarifications. In the case of online banking, you can change the settings to get email and SMS alerts. This can help you keep a track of your stock transactions from time to time.

• You can keep track of stock prices in real-time
  Online trading allows you to deal with stocks in real-time. This means you can check the exact price of the stock on the internet instead of confirming it from the broker every time. Also, since the trading is quick, you would get the stock at the exact price.

  In the case of highly leveraged Intraday trading, even a few minutes of delay could cause losses into thousands or more.

• Cheaper than phone trading
  Online trading is cheaper than phone trading for both the broker and the trader.  In the case of phone trading, the broker must invest in dealers. This also means the broker will charge a fee from the investor for maintaining the infrastructure.

  This is also the reason most major stockbrokers have created their own online trading platforms. It saves them the cost and saves money for the trader too.

• Single platform for access to all stock exchanges
  Online Trading platforms allow you to trade across multiple stock exchanges at the same time, mostly through the same website. This means you are managing not only multiple stocks but your assets across multiple stock exchanges from a single computer.

  In the case of trading through the phone, even if your broker allows you this facility, trading across multiple stock exchanges will be cumbersome.

Conclusion

Online Trading is no doubt a way better option than trading on the phone. It saves your time, reduces risk, is more convenient, and saves your money. There is no question on whether one should shift to Online Trading, but one needs to decide which broker to work with. With this technology, opening a demat account also has become faster, simpler and can be done at the comfort of your home.

In recent years, there has been a significant surge in the number of retail traders. While some traders still depend on fundamental analysis for evaluating investment opportunities, there has been a discernible shift towards the adoption of technical analysis. This methodology entails examining historical price and volume data to predict future price movements, gaining traction, especially among traders concentrating on shorter time frames. Long wick candles have emerged as a key focal point for traders seeking to identify potential price reversals and market sentiment shifts.

What Is a Candlestick?

One of the most prominent techniques in technical analysis is candlestick pattern analysis. While candlestick analysis has always been a vital aspect of technical analysis, it traditionally focused on the body of the candle. However, the wicks or shadows play a crucial role in candlestick patterns, as they indicate significant changes in price levels, representing the high and low of a specific trading session. Wick trading thus revolves around price levels formed outside of the day’s open and close prices, with the length of the wick being essential for determining trading strategies.

A short wick indicates that trading mostly occurred between the open and close prices of the period, whereas a long wick suggests that price movements surpassed or breached the open and close price limits. It’s important to distinguish between a long upper wick and a long lower wick. A long upper wick candlestick occurs when the candle’s high is strong but the closing price is weak, indicating that although buyers attempted to dominate most of the session, sellers ultimately drove the price down. Conversely, a longer lower wick suggests that the trading session ended strongly, with sellers dominating initially but buyers managing to push prices up.

What are Long Wick Candles and How to Identify them?

Trading with long wick candlesticks occurs when prices undergo testing but are ultimately rejected. These wicks signify levels of rejection. Prior to observing a long lower wick, there’s typically a long bearish candle where bears dominate, followed by bulls exerting pressure to reverse the trend upward. As prices start to rise, a pronounced lower shadow or tail emerges, transforming the prior bearish candle into one with a long tail. Conversely, a long upper wick candlestick begins with a bullish candle, but as bears take control, prices decline, revealing a prominent upper wick or shadow.

Typically, the upper and lower wicks of candlesticks aren’t of equal length. However, there are occasions when neither wick surpasses the other. In such instances, the candlestick exhibits a long upper wick and an extended tail, yet the body is small. This formation is referred to as a spinning top, indicating a potential stalemate between bulls and bears, both of whom have been actively trading.

At times, candlesticks may lack any wick or tail altogether. Such candlesticks are known as Marubozu Candlesticks. A red Marubozu occurs when the opening price equals the high, and the closing price equals the day’s low, indicating a bearish sentiment. Conversely, a green Marubozu represents a bullish sentiment, where the opening price equals the low and the closing price equals the day’s high.

These conditions highlight the versatility of wick trading, encompassing not only long or short wicks and tails but also instances with no wicks or equal long wicks and tails. Wick trading holds significant importance as wicks provide insights into supply-demand dynamics, market sentiment, and factors influencing price changes.

Identifying long wick candles involves several key steps:

• Long wick candles are easily recognizable by their extended candle wicks.
• Look for candles with long wicks that are notably longer than others on the same day.
• Identify price levels likely to align with the long wicks, indicating potential support and resistance levels.

Utilize these identified levels in conjunction with the long wicks to assess trade opportunities effectively.

Types of Long Wick Candles

There are two types of long wick candlesticks:

1. Bullish Long Wick Candlestick

This candlestick pattern features a long tail below the body of the candle, typically observed after a prolonged downward trend. Its appearance often signals a potential bullish reversal, indicating a shift towards an upward price movement. This suggests that the security may be reaching a bottom after experiencing a significant decline, with a potential for price appreciation ahead. The extended tail below the body symbolizes efforts by sellers to drive the price down substantially, only to be countered by buyers who demonstrate notable buying strength, resulting in a price rebound.

2. Bearish Long Wick Candlestick

In this candlestick pattern, a long wick appears above the body of the candle, typically occurring after a period of uptrend characterized by a significant price increase. The presence of this long wick can indicate a bearish reversal signal, suggesting that the security may be reaching a peak and could potentially experience a sudden decline in price. The extended wick above the candle’s body signifies that buyers’ attempts to dominate over sellers have been unsuccessful. As a result, sellers are likely to gain momentum and successfully drive the price downwards, leading to a decrease in price.

Significance of Long Wick Candles

Long wick candles are significant because they often signal important price rejection or reversal points in the market. When a long wick forms, it signifies significant price movement in one direction during the trading period, followed by a reversal back in the opposite direction, often erasing most or all of the gains or losses incurred.

For instance, let’s consider a long upper wick candle in an uptrend. This candle indicates that buyers initially drove the price higher, but by the period’s end, strong selling pressure pushed it back down, closing near or below the opening price. This suggests a potential loss of momentum in the uptrend, potentially signalling a reversal to a downtrend.

Similarly, a long lower wick candle in a downtrend suggests that sellers initially pushed the price lower, but by the period’s end, strong buying activity pushed it back up, closing near or above the opening price. This implies a potential loss of momentum in the downtrend, potentially signalling a reversal to an uptrend.

In both scenarios, long wick candles reflect significant indecision or a battle between buyers and sellers at that price level. This serves as a signal for traders to take notice, as it could indicate a potential change in trend direction or the continuation of the current trend, depending on various factors and market context.

Trading Strategies using a Long Wick Candle

1. Reversal Trading Strategy

Traders often use long wick candles as a signal for potential reversals in price direction. For example, after a prolonged downtrend, a long lower wick candle can indicate that sellers tried to push the price lower but were unsuccessful, and buyers stepped in, potentially signalling a reversal to an uptrend. This is because the long lower wick shows that there was significant buying interest at lower price levels, which could lead to a reversal in the direction of the trend.

Traders using this strategy may enter a trade in the direction opposite to the previous trend once they see a long wick candle forming, with a stop-loss order placed below the low of the candle for risk management.

2. Confirmation Trading Strategy

While long wick candles can be useful for identifying potential reversals, traders often look for confirmation from other indicators or candlestick patterns before making a trading decision based solely on the long wick candle. This is because long wick candles, while indicative of price rejection, can sometimes be false signals.

For example, traders may look for confirmation from other technical indicators such as moving averages, RSI (Relative Strength Index), or MACD (Moving Average Convergence Divergence). They may also look for additional candlestick patterns, such as bullish or bearish engulfing patterns, to confirm the potential reversal indicated by the long wick candle.

By waiting for confirmation, traders can reduce the risk of entering trades based on false signals and increase the likelihood of entering trades with favourable risk-reward ratios.

Caution in Using Long Wick Candles for Trading

While long wick candles can provide valuable insights into potential price reversals or rejection levels, it’s important for traders to exercise caution and not rely solely on them for making trading decisions. Here are some key considerations:

1. Market Conditions

Long wick candles should be interpreted in the context of the overall market conditions. For example, during periods of high volatility, long wick candles may be more common and may not necessarily indicate a significant reversal in price direction. Traders should consider the broader market environment before making trading decisions based on long wick candles.

2. Trend Analysis

It’s important to consider the prevailing trend when interpreting long wick candles. A long wick candle may have different implications depending on whether it occurs in an uptrend, downtrend, or in a ranging market. Traders should use trend analysis tools, such as trend lines or moving averages, to confirm the direction of the trend before acting on signals from long wick candles.

3. Volume

Volume is an important factor to consider when analyzing long wick candles. A long wick candle accompanied by high trading volume is typically more significant than one with low volume. High volume indicates strong participation from traders and can confirm the validity of the signal provided by the long wick candle.

4. Confirmation from Other Indicators

As mentioned earlier, traders should seek confirmation from other technical indicators or candlestick patterns before making trading decisions based solely on long wick candles. This helps reduce the risk of entering trades based on false signals and increases the likelihood of entering trades with favourable risk-reward ratios.

5. Risk Management

Regardless of the signals provided by long wick candles or other technical indicators, traders should always prioritize risk management. This includes setting stop-loss orders to limit potential losses and managing position sizes to avoid overexposure to any single trade.

Conclusion

Long wick candles serve as potent tools in technical analysis, signalling robust price rejection or potential market reversals. They offer valuable glimpses into price action, revealing instances where attempted price movements were staunchly rejected, leading to a reversal in the opposite direction. Although these candles can aid in pinpointing potential entry or exit points in trading strategies, it’s imperative for traders to supplement their analysis with other technical indicators and factor in prevailing market conditions for confirmation. Relying solely on long wick candles for trading decisions is ill-advised; instead, traders should adhere to sound risk management practices to mitigate potential losses.

 

Since the onset of the pandemic, the number of retail investors has seen a huge rise. Thus possibilities of conflicts are also increasing day by day.  The Securities Exchange Board of India (SEBI) has taken a lot of measures to safeguard the interests of retail investors. One of these is done by issuing contract notes, showing the price, brokerage, GST, and securities transaction tax (STT) in the prescribed format. 

Contract notes are easily one of the most relevant legal documents available to investors and traders in the stock market. It shows in detail all transactions which took place in a day in one place, along with profit and loss information. It is a legal record of any of the trades made by a trader on a stock exchange. It records and confirms the trades taken place on a particular day, performed on a stock exchange (BSE or NSE). This document is sent to the trader by the broker, listing out the details of the shares bought and sold through them. This document is generally available in an electronic form.

Contents

A contract note gives traders and investors a basic description of the trades they have taken, along with the date, period, lot size, or quantity traded. It also gives the trader a reference number with which they can cross-reference their transactions with the stock exchange.

Contract Notes usually consist of the following:

• Order Number & Trade Number: This column accounts for the distinctive numbers given by Exchanges to specific Orders and Trades.
• Order Time: the precise time at which an investors Order was placed on the Exchange is highlighted here.
• Trade Time: The time at which an investor’s trade was successfully executed on the Exchange comes under this column.
• Securities/Contract Description: Refers to the name of the stock/contract that was traded.
• Buy/Sell: basically refers to the sort of order placed by the trader or investor.
• Exchange: This column lets you know on which exchange your trades took place. That is NSE or BSE.
• Quantity: This accounts for the quantity of stock an investor trades in. Positive numbers apply to buy orders while negative (-) numbers apply to Sell Orders.
• Gross Rate per Unit: This rate highlights the price at which an investor’s order got executed on the Exchange.
• Brokerage per Unit: Brokerage charged for each trade is mentioned in the next table.
• Net Rate per Unit: As brokerage charges are mentioned separately, net rate per value adds up to the same value as gross rate per unit.
• Closing Rate per Unit: These are applicable only to derivative trades, this rate accounts for the price that the specific contract closed for the day.
• Net Total before Levies: This refers to the whole amount before any of the other charges can be added. A positive (+) amount denotes that an amount is owed to you. Whereas a negative (–) amount denotes an amount you owe.

While the first table provides you with comprehensive details, the following table gives you a breakup of the summary of the charges.

• Pay In/Pay out Obligation: This is the summation of the amounts owed to you (positive), or the amounts you owe (negative), before the deduction of levies and taxes.
• Taxable Value of Supply: This tells you the total of brokerage that is chargeable as per your brokerage plan, plus the Exchange Transaction Charges, which is a fee by exchanges like NSE, BSE, MCX, and NCDEX, in order to enable the trader to trade. 
• Securities Transaction Tax (STT): This is the direct tax chargeable on each trade taken on the exchange,, which gets collected by the broker and paid to the respective exchange. STT is levied on every trade taken be it buying or selling and on equity delivery, and on selling on intraday and F&O.
• SEBI Turnover Fees: The Securities and Exchange Board of India (SEBI) charges a fee on securities transactions made by traders in order to regulate the market.
• Stamp Duty: this is a Government levy applicable on transfer of securities like shares, debentures, futures and options, currency, commodities, and various other capital assets.
• Net Amount Receivable by Client / (Payable by Client): This column denotes the total amount to be paid or received by the client after all levies and charges. A positive (+) amount denotes that an amount is owed to you, while a negative (–) amount denotes an amount you owe.

 Sample of a contract note issued by TradeSmart

Importance of Contract Notes

As there has recently been a huge increase in the number of participants in the stock market, the odds of disputes are also rising at a similarly increasing rate as days go by. SEBI has taken a few steps to shield the retail investors. One of the first actual steps on this course is the digital contract note in the prescribed format showing Price, Brokerage, GST, STT etc. By perusing this report thoroughly, an investor can be confident that the order he has placed with his broker has been executed correctly. This report is a prerequisite for submitting a grievance against your broker, you must always insist on regular delivery of contract notes from your broker.

Just by glancing at this report, an investor can be assured that the order he executed through his brokerage was carried out efficiently. Contract Notes can act as a ready reference in case of doubt with reference to any transactions as you can guarantee the genuineness of the same on the BSE/NSE website. The most common use of a contract note is:

• Computation of Capital Gains,
• Calculation of overall brokerage charged,
• Calculation of details for submitting Income Tax Return,
• Cross verifying genuineness of the transactions
• Legal Proof in case of dispute with broker.

In summation, contract notes offer investors a summary of their trades taken on a specific day. Additionally to those trades, they’re given an overview of their profits or losses. Contract notes are provided in an electronic format with a digital signature of the authorized signatory of the brokerage firm.

A majority of people find intraday trading intimidating. They often can’t figure out their style of trading that best benefits them. It is important to figure out the technique you need to adopt that best suits your financial goals, risk appetite and time you spend in the stock market. For some it serves as a good source of additional income while there are those who use it as their main source of income. The latter are those people who are very experienced with trading and are well learned in various advanced trading strategies. Scalping is one such style of trading that many adopt. It gives a good feel of trading and you can also earn quick profits using this method.

And in order to master this technique of trading there are several indicators to help out. But first it is imperative that you understand the meaning of a scalper and its details before jumping to the indicators.

Who is a Scalper?

Scalping  is a method of trading in which traders book profits in small changes in price. A scalper is a person who enters and exits the trades in financial markets extremely quickly, usually within seconds, using a higher margin to place a large volume of trade so that they can achieve great profits from tiny changes in the markets. Their exit from the market is pre-planned since they trade in such a way that a single loss can eliminate all their small gains.

Scalpers buy and sell several times in a day with their main objective being to make consistent profits from minor changes in the price of the security they are trading.

Scalpers usually view charts in a shorter time frame, such as one, three, and five minute time frames, to make their trading decisions. With the help of several different technical indicators to predict minor movements in price. 

Traits of a Scalper

Scalpers are of the belief that it is easier to make small profits off the market since there is a lot of volatility and can’t afford to take too much risk. They grab small moments when there is a profitable trade before it vanishes. Unlike many who buy shares for the long term, these guys rely on trading within minutes. And this has led to certain characteristics about scalpers which can be listed below.

• Disciplined

  Scalpers need to be extremely disciplined. They must follow their trading plan to the T, if they are to succeed. Scalpers generally set a daily loss limit, and refrain from trading if that point is breached. This prevents revenge trading.

• Combative

  Scalpers are generally warriors by nature. They view the stock market as a warzone and consider other traders as the enemy.

• Decision Making

  As scalping is a very quick process, the scalper should be extremely quick and have to make important decisions within a matter of seconds, or they might miss opportunities. They also need to make quick decisions to recover from wrong decisions. Being a good decision maker is an essential skill that every scalper should have, it helps them remain calm and composed in dire situations.

Advantages of Scalping

Since scalping yields a short burst of profits, it has a few benefits which are mentioned below.

• Lower Risk Exposure

  The short holding periods of scalping ensure that your risk is limited.

• Potential for Higher Profits

  There is good potential to earn more profits from scalping as it does not depend on big market movements.

• Allows Multiple Trades

  Scalping allows you to take multiple entries into the same trade during the day, as the opportunity presents itself.

• No Requirement of Fundamentals

  As the trades will be held for a short period of time, there is no need to have a fundamental knowledge of the asset being traded. Only a deep knowledge of technical analysis is required.

Disadvantages of Scalping:

• Requires a lot of Effort

  Scalping is a tough task which requires you to have a good knowledge of technical analysis, and also requires you to have great concentration and patience. 

• Expensive

  Scalping requires you to take multiple trades, whose cost can eventually add up to a big amount. And the stakes are such that one big loss can wipe out all the small profits earned over time.

• Time Consuming

  Scalping is a time consuming process, and requires the trader to spend long hours in front of the screen. It demands your constant attention as you cannot afford to miss out even a single opportunity to make a profit.

Most Commonly used Scalping Indicators

Now that you’ve understood what scalping is and who a scalper is, and if you are still keen to master the art of scalping and learn the in depth functioning of the market then following indicators will help you

• The SMA Indicator

  SImple Moving Average, or SMA is one of the basic scalping indicators that most traders use. It uses basic arithmetic, and shows traders the average price of the security they are trading in. It helps in identifying the market trend, whether upward or downward. It is calculated by adding the closing prices in the desired time frame, and then dividing the number by the number of periods.

Source: Fidelity

 

• The EMA Indicator

  The Exponential Moving Average, or EMA, is yet another useful moving average indicator. This indicator gives preference to the recent price. When compared to SMA, the EMA provides detailed information on price a lot faster. And while the SMA gives preference to overall weights, the EMA gives preference to recent price.Hence EMA reacts more quickly to recent price than to overall price.

Source: Fidelity

 

• The MACD Indicator

  Another common indicator used by scalpers is the Moving Average Convergence Divergence Indicator or MACD. It not only helps the trader understand momentum, but also assists in following and capturing market trends.One of the key features of this indicator is that it shows the relationship between two moving averages of a securities price.It can be calculated by minusing the 26 day EMA from the 12 day EMA, while the 9 day EMA is the default setting for buying and selling orders.

Source: Fidelity

 

• The Parabolic SAR Indicator

  The Parabolic Stop And Reverse or SAR indicator helps traders to get detailed information on price action trends.The concept behind this indicator is that when the position of the SAR is above the price, it is a down trend, and if the position of the SAR is below the price, it is an uptrend. The Parabolic SAR allows you to find out the short  term momentum and trend of any security. Hence it is a great tool for scalpers. A possible disadvantage of the PArabolic SAR indicator is that it can sometimes show false breakouts,which can mislead traders.

Source: Commodity.com

 

• Bollinger Bands Indicator

  Bollinger bands are a trading tool used to determine entry and exit points in a trade. They can also show overbought and oversold conditions. They also show the volatility of an instrument. They consist of three lines, the middle band is the 20 day simple moving average, the top band is calculated by adding twice the daily standard deviation to the middle band, and the lower band is calculated by the twice the daily standard deviation subtracted from the middle band. A trader would generally take an entry when the price is near the bottom or the middle band, and exit once it reaches the middle or the top.     

Source: Fidelity

 

• The Stochastic Oscillator Indicator

  This indicator can be used to trade across forex, indices, equity, and other securities as well. In spite of having such a wide range of applications, it can be used as a good scalping strategy. It follows the concept that the price of the asset is decided by the momentum So it basically allows traders to know what is about to happen right before it actually does. This is one of the most reliable scalping tools.

Source: Fidelity

 

How is Scalping different from Day Trading?

The difference between the two can be summarised in the table below:

Day Trading	Scalping
Trader uses a time frame of 1 – 2 hours	Trader uses a shorter time frame than day trading which ranges from 5 seconds – 1 minute
The account size is average	The account size is larger since scalp trader takes higher risks
The returns are expected by the end of the day	The returns are expected immediately after the trade has been executed
Traders usually follow trends and take decisions based in technical analysis	Traders don’t look for ant trends and rely on their own experience in determining where the trend is heading

In conclusion – should you scalp?

One thing that must be remembered is that there are several scalping tools available to traders. The ones listed above are some of the more popular ones, as well as user friendly ones. Some of these indicators can be used together, as well as with other indicators, however as the saying goes, too many cooks spoil the broth, so we must not over use the indicators as this could lead to confusion.

While these indicators might seem easy to use at first, it can take a while to fully find the right combination of indicators, and master them completely. It is suggested that you adopt this style of trading only if you’re a veteran in the field of stock trading and can afford to take really high risks.