Module 2 Technical Analysis

Chapter 18

The Dow Theory (Part 2)

169

18.1 – Trading Range

The concept of range is a natural extension to the double and triple formation. In a range, the stock attempts to hit the same upper and lower price level multiple times for an extended period of time. This is also referred to as the sideways market. As the price oscillates in a narrow range without forming a particular trend, it is called a sideways market or sideways drift. So, when both the buyers and sellers are not confident about the market direction, the price would typically move in a range, and hence typical long term investors would find the markets a bit frustrating during this period.

However the range provides multiple opportunities to trade both ways (long and short) with reasonable accuracy for a short term trader. The upside is capped by resistance and the downside by the support. Thus it is known as a range bound market or a trading market as there are enough opportunities for both the buyers and the sellers.

In the chart below you can see the stock’s behaviour in a typical range:

M2-Ch18-Chart1

As you can see the stock hit the same upper (Rs.165) and the same lower (Rs.128) level multiple times, and continued to trade within the range. The area between the upper and lower level is called the width of the range. One of the easy trades to initiate in such a scenario would be to buy near the lower level, and sell near the higher level. In fact the trade can be both ways with the trader opting to short at the higher level and buying it back at the lower level.

In fact the chart above is a classic example of blending Dow Theory with candlestick patterns. Starting from left, notice the encircled candles:

  1. The bullish engulfing pattern is suggesting a long
  2. Morning doji star suggesting a long
  3. Bearish engulfing pattern is suggesting a short
  4. Bearish harami pattern is suggesting a short

The short term trader should not miss out such trades, as these are easy to identify trading opportunities with high probability of being profitable. The duration of the range can be anywhere between a few weeks to a couple of years. The longer the duration of the range the longer is the width of the range.

M2-Ch18-title

18.2 – The range breakout

Stocks do breakout of the range after being in the range for a long time. Before we explore this, it is interesting to understand why stocks trade in the range in the first place.

Stocks can trade in the range for two reasons:

  1. When there are no meaningful fundamental triggers that can move the stock – These triggers are usually quarterly/ annual result announcement, new products launches, new geographic expansions, change in management, joint ventures, mergers, acquisitions etc. When there is nothing exciting or nothing bad about the company the stock tends to trade in a trading range. The range under these circumstances could be quite long lasting until a meaningful trigger occurs
  2. In anticipation of a big announcement – When market anticipates a big corporate announcement the stock can swing in either directions based on the outcome of the announcement. Till the announcement is made both buyers and sellers would be hesitant to take action and hence the stock gets into the range. The range under such circumstances can be short-lived lasting until the announcement (event) is made.

The stock after being in the range can break out of the range. The range breakout more often than not indicates the start of a new trend. The direction in which the stock will breakout depends on the nature of the trigger or the outcome of the event. What is more important is the breakout itself, and the trading opportunity it provides.

A trader will take a long position when the stock price breaks the resistance levels and will go short after the stock price breaks the support level.

Think of the range as an enclosed compression chamber where the pressure builds up on each passing day. With a small vent, the pressure eases out with a great force. This is how the breakout happens. However, the trader needs to be aware of the concept of a ‘false breakout’.

A false breakout happens when the trigger is not strong enough to pull the stock in a particular direction. Loosely put, a false breakout happens when a ‘not so trigger friendly event’ occurs and impatient retail market participants react to it. Usually the volumes are low on false range breakouts indicating, there is no smart money involved in the move. After a false breakout, the stock usually falls back within the range.

A true breakout has two distinct characteristics:

  1. Volumes are high and
  2. After the breakout, the momentum (rate of change of price) is high

Have a look at the chart below:

M2-Ch18-Chart2

The stock attempted to breakout of the range three times, however the first two attempts were false breakouts. The first 1st breakout (starting from left) was characterized by low volumes, and low momentum. The 2nd breakout was characterized by impressive volumes but lacked momentum.

However the 3rd breakout had the classic breakout attributes i.e high volumes and high momentum.

18.3 – Trading the range breakout

Traders buy the stock as soon as the stock breaks out of the range on good volumes. Good volumes confirm just one of the prerequisite of the range breakout. However, there is no way for the trader to figure out if the momentum (second prerequisite) will continue to build. Hence, the trader should always have a stoploss for range breakout trades.

For example – Assume the stock is trading in a range between Rs.128 and Rs.165. The stock breaks out of the range and surges above Rs.165 and now trades at Rs.170. Then trader would be advised to go long 170 and place a stoploss at Rs.165.

Alternatively assume the stock breaks out at Rs.128 (also called the breakdown) and trades at Rs.123. The trader can initiate a short trade at Rs.123 and treat the level of Rs.128 as the stoploss level.

After initiating the trade, if the breakout is genuine then the trader can expect a move in the stock which is at least equivalent to the width of the range. For example with the breakout at Rs.168, the minimum target expectation would be 43 points since the width is 168 – 125 = 43. This translates to a price target of Rs.168+43 = 211.

18.4 – The Flag formation

The flag formation usually takes place when the stock posts a sustained rally with almost a vertical or a steep increase in stock prices. Flag patterns are marked by a big move which is followed by a short correction.  In the correction phase, the price would generally move within two parallel lines. Flag pattern takes the shape of a parallelogram or a rectangle and they have the appearance of a flag on the pole. The price decline can last anywhere between 5 and 15 trading session.

M2-Ch18-Chart3

With these two events (i.e price rally, and price decline) occurring consecutively a flag formation is formed. When a flag forms, the stock invariably spurts back all of a sudden and continues to rally upwards.

For a trader who has missed the opportunity to buy the stock, the flag formation offers a second chance to buy. However the trader has to be quick in taking the position as the stock tends to move up all of a sudden. In the chart above the sudden upward moved is quite evident.

The logic behind the flag formation is fairly simple. The steep rally in the stock offers an opportunity for market participants to book profits. Invariably, the retail participants who are happy with the recent gains in the stock start booking profits by selling the stock. This leads to a decline in the stock price.  As only the retail participants are selling, the volumes are on the lower side. The smart money is still invested in the stock, and hence the sentiment is positive for the stock. Many traders see this as an opportunity to buy the stock and hence the price rallies all of a sudden.

18.5 – The Reward to Risk Ratio (RRR)

The concept of reward to risk ratio (RRR) is generic and not really specific to Dow Theory. It would have been apt to discuss this under ‘trading systems and Risk management’. However RRR finds its application across every type of trading, be it trades based on technical analysis or investments through fundamentals. For this reason we will discuss the concept of RRR here.

The calculation of the reward to risk ratio is very simple. Look at the details of this short term long trade:
Entry: 55.75
Stop loss: 53.55
Expected target: 57.20

On the face of it, considering it is a short term trade, the trade looks alright. However, let us inspect this further:

What is the risk the trader is taking? –  [Entry – Stoploss] i.e 55.75 – 53.55 = 2.2

What is the reward the trader is expecting? – [Exit – Entry] i.e 57.2 – 55.75 = 1.45

This means for a reward of 1.45 points the  trader is risking 2.2 points or in other words the Reward to Risk ratio is 1.45/2.2 = 0.65. Clearly this is not a great trade.

A good trade should be characterised by a rich RRR. In other words, for every Rs.1/- you risk on a trade your expected return should be at least Rs.1.3/- or higher, otherwise it is simply not a worth the risk.

For example consider this long trade:
Entry: 107
Stop loss: 102
Expected target: 114

In this trade the trader is risking Rs.5/- (107 – 102) for an expected reward of Rs.7/- (114 – 107). RRR in this case is 7/5 = 1.4. This means for every Rs.1/- of risk the trader is assuming, he is expecting Rs.1.4 as reward. Not a bad deal.

The minimum RRR threshold should be set by each trader based on his/her risk appetite. For instance, I personally don’t like to take up trades with a RRR of less than 1.5. Some aggressive traders don’t mind a RRR of 1, meaning for every Rs.1 they risk they expect a reward of Rs.1. Some would prefer the RRR to be at least 1.25. Ultra cautious traders would prefer their RRR to be upwards of 2, meaning for every Rs.1/- of risk they would expect at least Rs.2 as reward.

A trade must qualify the trader’s RRR requirement. Remember a low RRR is just not worth the trade. Ultimately if RRR is not satisfied then even a trade that looks attractive must be dropped as it is just not worth the risk.

To give you a perspective think about this hypothetical situation:

A bearish engulfing pattern has been formed, right at the top end of a trade. The point at which the bearish engulfing pattern has formed also marks a double top formation. The volumes are very attractive as they are at least 30% more than the 10 day average volumes. Near the bearish engulfing patterns high the chart is showing a medium term support.

In the above situation, everything seems perfectly aligned to short trade. Assume the trade details are as below:
Entry: 765.67
Stop loss: 772.85
Target: 758.5
Risk: 7.18 (772.85 – 765.67) i.e [Stoploss – Entry]
Reward: 7.17 (765.67 – 758.5) i.e [Entry – Exit]
RRR: 7.17/7.18 = ~ 1.0

As I mentioned earlier, I do have a stringent RRR requirement of at least 1.5. For this reason even though the trade above looks great, I would be happy to drop it and move on to scout the next opportunity.

As you may have guessed by now, RRR finds a spot in the checklist.

18.6 – The Grand Checklist

Having covered all the important aspects of  Technical Analysis,  we now need to look at the checklist again and finalize it. As you may have guessed Dow Theory obviously finds a place in the checklist as it provides another round of confirmation to initiate the trade.

  1. The stock should form a recognisable candlestick pattern
  2. S&R should confirm to the trade. The stoploss price should be around S&R
    1. For a long trade, the low of the pattern should be around the support
    2. For a short trade, the high of the pattern should be around the resistance
  3. Volumes should confirm
    1. Ensure above average volumes on both buy and sell day
    2. Low volumes are not encouraging, and hence do feel free to hesitate while taking trade where the volumes are low
  4. Look at the trade from the Dow Theory perspective.
    1. Primary, secondary trends
    2. Double, triple, range formations
    3. Recognisable Dow formation
  5. Indicators should confirm
    1. Scale the trade size higher if indicators confirm to your plan of action
    2. If the indicators do not confirm go ahead with the original plan
  6. RRR should be satisfactory
    1. Think about your risk appetite and identify your RRR threshold
    2. For a complete beginner, I would suggest the RRR to be as high as possible as this provides a margin of safety
    3. For an active trader, I would suggest a RRR of at least 1.5

When you identify a trading opportunity, always look how the trade is positioned from the Dow Theory perspective. For example if you are considering a long trade based on candlesticks, then look at what the primary and secondary trend is suggesting. If the primary trend is bullish, then it would be a good sign, however if we are in the secondary trend (which is counter to the primary) then you may want to think twice as the immediate trend is counter to the long trade.

If you follow the checklist mentioned above and completely understand its importance, I can assure you that your trading will improve multiple folds. So the next time you take a trade, ensure you comply with above checklist. If not for anything, at least you will have no reason to initiate a trade based on loose and unscientific logic.

18.7 – What next?

We have covered many aspects of technical analysis in this module. I can assure you the topics covered here are good enough to put you on a strong platform. You may believe there is a need to explore other patterns and indicators that we have not discussed here. If we have not discussed a pattern or an indicator here on Varsity, do remember it is for a specific purpose. So be assured that you have all that you need to begin your journey with Technical analysis.

If you can devote time to understanding each one of these topics thoroughly, then you can be certain about developing a strong TA based thinking framework. The next logical progression from here would be to explore ideas behind back testing trading strategies, risk management, and trading psychology. All of which we will cover in the subsequent modules.

In the next concluding chapter, we will discuss few practical aspects that will help you get started with Technical Analysis.


Key takeaways from this chapter

  1. A range is formed when the stock oscillates between the two price points
  2. A trader can buy at the lower price point, and sell at the higher price point
  3. The stock gets into a range for a specific reason such as the lack of fundamental triggers, or event expectation
  4. The stock can break out of the range. A good breakout is characterized by above average volumes and sharp surge in prices
  5. If the trader has missed an opportunity to buy a stock, the flag formation offers another window to buy
  6. RRR is a critical parameter for trade evaluation. Develop a minimum RRR threshold based on your risk appetite
  7. Before initiating a trade the trader should look at the opportunity from the Dow Theory perspective

 

169 comments

  1. jagadeesh says:

    Hello Sir,
    Regarding the chart patterns in 15min intraday chart, how much should be the minimum time spacing to recognize it as a dow patterns??

    • Karthik Rangappa says:

      I my personal trading experience, Dow theory works best on EOD basis. However, on 15 mins intraday basis I would advice you to use it with at least 60 mins separation..that would be four 15 mins candle.

    • Rodolfo Jose Camarena says:

      At first you say the formula of risk (RRR) is {Entry – Stoploss} and at the last example you put it as {Stoploss – Entry}???

      • Karthik Rangappa says:

        Need to correct that. Here is what I mean –

        Long trades –
        Reward: Target – Entry
        Risk: Entry – Stoploss

        Short trades –
        Reward: Entry – target
        Risk: Stoploss – Entry

  2. Anishcharith says:

    sir how can we set support and resistances for intraday trades ? can we do it with the data of few previous trading sessions ?

    • Karthik Rangappa says:

      When it comes to intra day S&R can be plotted by taking a look back period of at least 3 – 5 trading days.

      • Aj says:

        But sir, you had told in the chapter on S&R that for intraday you need to check short term S&R, where you had defined short term as 3-6 months or so.. ? Would you clarify? Thanks!

        • Karthik Rangappa says:

          Aj, yes, having a 3-6 months perspective certainly helps. That plus the recent few trading sessions is what you need to look for.

  3. Kishore says:

    In the first chart, in the third encircled zone before the formation of the bearish engulfing, the chart shows a clear cut gap up opening breaking away the traditional resistance, suggesting going long. However, on day 2 the stock has formed a bearish engulfing hitting my stops. On day three after the bearish engulfing it is clear to short from the top. How do you handle such cases, do you take up the loses fast and align with the trend and go short?

    • Karthik Rangappa says:

      Few points that come to my mind with respect to the chart you have pointed out, this is probably how I would handle the situation…

      1) The gap up opening is good but it should not be the sole point based on which the trade should be initiated

      2) Considering the stock was in a range – I would apply my thoughts on range breakout (which I have explained in the chapter)

      3) On the formation of a bearish engulfing pattern, I would initiate the short position (considering other checklist items are in place)

      4) After initiating, I would stay put till the target is hit or SL is breached.

  4. Keerthan says:

    Can I ask you certain questions on certain chart patterns on certain stocks? I need a confirmation before I ask you the questions. Thanks in advance.

    • Karthik Rangappa says:

      Of course, as long as it is educational and helpful to other 🙂

      • Keerthan says:

        Have a look at the following chart. Could you tell me what kind of pattern is this?
        1) Is it a pendant or a flag pattern. Is it ready for a breakout?
        2) The downtrend pattern, is it the Elliot wave 2 nearing its end and EW3 is ready to take off?

        • Keerthan says:

          Correction, It should have been Pennant and not Pendant

          • Karthik Rangappa says:

            I have seen all the charts that you have posted –

            1) I’m not too familiar with EW, so cant comment
            2) I guess there are too many elements in your charts, from my experience charts should be very basic with just few basic elements. Having too many distracts you from the price action to all the noise in the chart.

  5. Keerthan says:

    Have a look at the attached image. Is it following a similar pattern like that formed in Waterbase (the earlier image)?
    Could you tell us what is the current Elliot wave as in (EW1 or EW2 or others)?

    • Niranjan Krishna says:

      EW, you need to use in combination with fibanocci retracement. Based on S/ R lines you can judge if current EW is a continuation of the previous one or new EW altogether. Also you can take help of trendlines.
      Above one, looks like continuation of existing EW

  6. Keerthan says:

    This image suggests the EW2 pattern ending and the beginning of EW3. Could you confirm this?

  7. totally i am unable understand how to fix up the target pl help me in detail if possible with eg.. i have gone thru many books and stock chart .com and now i found for people lke me the infn what u have provided is very much useful. i have alredy lost some money. i am very new to zerodha, i am already 66 now i am entering this field.

    • Karthik Rangappa says:

      Sir I would request you to go through the chapter on support and resistance – http://zerodha.com/varsity/chapter/support-resistance/. I have explained the concept of target and stoploss in detail. Also, I would sincerely request you to go through the Technical Analysis chapter from the beginning and follow the contents closely. If you have any queries please post the same and we will be more than happy to help you through. Also, request you to trade with small amounts till you get comfortable with trading.

  8. Deep says:

    Dear Mr. Karthik,
    I would appreciate if you can elaborate the Dow Theory Primary, Secondary trend confirmation which you have briefly referred to after the final checklist. From the initial chapters, majority of the suggested trades have been on anticipation of the end of a current up or down leg. What exactly should be checked from Dow Theory perspective? Do we have to ensure that the prior leg which is expected to reverse should be secondary (i.e. counter) to the prevailing primary (major overall) trend so that after the reversal our trade should ideally fall in line with the prevailing bigger trend?

    Also kindly suggest if my trading horizon is from a few days to a couple of weeks (or to a month at most), which time frame(s) should I refer to for determining the primary/secondary trends? Should it be from a single time frame or multiple ones?

    Thanking you for the great work and anticipating an early response.

    • Karthik Rangappa says:

      I personally like to use Dow Theory to get a perspective on –

      1) Long term primary trend
      2) Secondary trend
      3) Double or triple tops/bottoms
      4) Flag formation

      Besides these, I never use the Dow Theory for anything else. Calling the top or bottom of a rally is not really easy (because its not quantifiable) hence you take cues from formations like double top/bottoms etc. Also I would suggest you rely more on candlesticks as opposed to Dow Theory.

      Suggest you stick to EOD data for the kind of trades you prefer to do.

      • Deep says:

        Dear Mr. Karthik,

        Thanks for the quick revert. Just wanted to know whether the long term primary trend and the secondary trend are determined in the daily charts or weekly/monthly.

        Also from what you have elaborated, it appears to me that a secondary trend by definition must be counter to the primary trend. Please let me know if I have correctly understood it.

        Thanks again for the wonderful work!

        Deep

        • Karthik Rangappa says:

          I would suggest you look at the EOD chart to determine the primary and secondary trend although you can use a weekly chart to determine the same. Yes, the secondary trend has to be counter to the primary trend. So if the primary trend is bullish secondary should be bearish, vice versa. Also, do remember the secondary reactions could be short lived. Meaning if the primary trend is a strong bullish one, then obviously the secondary trend is bearish…but in the backdrop of a good bullish trend the secondary trend could last for a relatively short time…which means to say you should be quick to buy on corrections 🙂

  9. girish says:

    Flag formation bulish indicator.
    dear karthik sir..
    I’m so happy person in this world….ha ha ha karthik ji, thank you, thank you.
    I enjoyed all each ta indicators happily, in my office each indicator I found perfect i loudly cheerup my self…..everytime i feel like nasa researching like that……again I keep practice regulry & now i’m going to live fun with my friend ‘trend’…
    Ta module helps me a lot, now i’m planning to buy metastock software because free website arrow up & down some are the indicators giving me false. thank you, i’ll keep regulry add my workshop with you karthik ji, I believe one day i’ll search own technique in stock trending..

    • Karthik Rangappa says:

      Glad to know this Girish. Hope you get all the success u deserve. Good luck.

      • girish says:

        heartly thank you sir….yes i’m rocking in market sir….your ta article helps me lot, I sincerely studied and worked practice…now see the magic sir…all stocks are rocking…..My Goal is 5,00,00,000.00 cr..
        thank you sir.

  10. T RAMA DEVI says:

    Dear Sir
    In the above chapter 18.1, What is Morning Doji. Pl. explain. I have benefited with your Technical Analysis chapters by avoiding trades without proper candle stick patterns. This helped me not only selecting good trades but also cutting the losses at the right time. Thanks alot.

    Regards

    • Karthik Rangappa says:

      Most welcome, and I’m happy to know it has helped you. Morning doji start is a regular morning star pattern, except instead of a spinning top on the 2nd day it will be a doji. This is the only difference.

  11. TSS KISHORE says:

    Sir,
    With reference to Capital First chart stock has already rallied much, it is advisable to wait for a correction and to long only when a recognizable pattern occurs during the down trend. Pl. clarify. Regards T.S.S.Kishore

  12. madhu nair says:

    Hi Kartik, In the chart attached how would one have traded today’s break out? i post this under dow theory as i thought there seems to be a symmetrical triangle formation. is that valid? or is there any other signals i should have picked to trade the break out.

    • Karthik Rangappa says:

      Totally valid, by the way this is a good stuff. The only other thing I would add is that the breakout is also near the support region. Hence there is more conviction on the long side.

  13. madhu nair says:

    Karthik, wanted to hear your views on the ascending triangle pattern. the chart of ambuja shows a failed ascending triangle in a downtrend. is it more reliable in an uptrend? is it prudent to trade it as a continuation pattern and not look out for a reversal?

    • Karthik Rangappa says:

      Tricky one here – especially considering the presence of support around the same region. I’d be happy to take a wait and watch approach.

      • madhu nair says:

        Thanks for that. how should one be trading this pattern? is it more reliable in an uptrend or downtrend?

        • Karthik Rangappa says:

          Ascending triangle is more of a continuation pattern in an up trend. Best to spot this when the market has rallied and the stock is having some sort of correction. So yes, look for it in an uptrend.

  14. madhu nair says:

    Karthik, how could have one traded today’s break out? was this a range break out? or was it a bounce near support? please share your views.

    • Karthik Rangappa says:

      I would treat the most recent up move as a bounce from the support. The earlier part of the chart is a range breakout. So basically when you look for range breakout, ensure the range is well spread in time (at least for 1 or 2 months in case of EOD charts).

  15. madhu nair says:

    hi karthik, i heard one of the technical analyst on T.V saying he was expecting the HDFC stock to rally based on the charts…i couldn’t make out any signal for such an upsurge. can you identify any patterns or signal? there was though, a lot of fundamental news attached to the stock today. would like to hear from you on the same. regards.

    • Karthik Rangappa says:

      The only bullish signal is the surge in volumes along with a bullish candle….good enough for a follow on bullish trend.

  16. madhu nair says:

    karthik, i was referring to the chart before yesterdays upsurge in volume with a bullish candle….the chart looked bearish then to me. the analyst mentioned his views yesterday saying that based on day before’s chart he expects an uptick in the stock price.

    • Karthik Rangappa says:

      I should have realized, my bad 🙂

      I would have been bearish too…unless there was some fundamentals brewing.

  17. pavan says:

    Pls. refer to section 18.5 – “… RRR in this case is 114/107 = 1.4” .
    This needs to be changed to “RRR in this case is 7/5 = 1.4”

  18. romi says:

    Hi Karthik,
    can I assume a flag formation for the GM Breweries scrip here? the volumes are not so impressive, seems smart money is still invested. also, at this moment there are no buyers. Can I assume that stock will rally again? what should be the target?

  19. Prathvi says:

    Sir,
    We can adjust the stop loss according to our will therefore adjusting the RRR.
    For eg Entry: 765.67
    Stop loss: 772.85
    Target: 758.5
    Risk: 7.18 (772.85 – 765.67) i.e [Stoploss – Entry]
    Reward: 7.17 (765.67 – 758.5) i.e [Entry – Exit]
    RRR: 7.17/7.18 = ~ 1.0
    Here the stop loss can be modified to a different number say 767 . thereby increasing the RRR

  20. Suresh.ks says:

    Hi,
    Many traders say that if we trade in Future and option even if we are in profit by end of the month we lose the money, every month can not make profit whatever strategy or check list follow, in this case what is your opinion?

  21. Shanky Agrawal says:

    Hello Sir
    I have been reading TA on web for short period of time, but this material is way ahead from others. Thanks for your contribution sir to world of TA. Concepts are so clear and easy to understand. Thanks a lot sir.

    One question is there:-
    As you say for shorting a trade, we can short only on intraday and future trade.We can’t short on delievery based trade and say CNC, am i right?? If not how to short a trade in downtrend also how to short for next 3-4 months, is it possible??

    • Karthik Rangappa says:

      Thanks for the kind words 🙂

      Shorting is only futures or intraday…unfortunately you cannot short in spot market and carry overnight.

  22. Anmol Chandwani says:

    Hello Sir! I just want to ask if the range is same as S&R or its altogether different concept?

    • Karthik Rangappa says:

      Closely related, but they are two different concepts. In a sense the trading range over time defines the S&R level.

  23. Anmol Chandwani says:

    Sorry to disturb you Sir once again. I just have one last doubt. I am unable to understand this para related to Dow perspective.
    “When you identify a trading opportunity, always look how the trade is positioned from the Dow Theory perspective. For example if you are considering a long trade based on candlesticks, then look at what the primary and secondary trend is suggesting. If the primary trend is bullish, then it would be a good sign, however if we are in the secondary trend (which is counter to the primary) then you may want to think twice as the immediate trend is counter to the long trade.”
    Could you please simplify this in layman terms. Thankyou.

    • Karthik Rangappa says:

      It just means, that you need to validate the trade that you plan to execute with what Dow Theory suggests. For example if you wish to short a stock, but the secondary trend is bullish then it may not be a great idea to go against the trend. Similarly if you plan a long trade but the trend according to Dow theory is bearish then its good to stay cautious.

      • Vishal Saini says:

        Sir, I am bit confused here.
        Say if primary trend is bullish and we are in secondary trend(bearish) and we find bearish marubuzo in secondary.Then what I understood is that we should be cautious in such situation since secondary is counter to primary. Am i right?????

        • Karthik Rangappa says:

          Yes, but there is no harm if you go ahead and short. End of the day trades depend on conviction, as long as you are convinced, you should execute.

  24. MANISH SINGH INSAN says:

    RRR is not 114/107.
    it is 7/5=1.4

  25. Sameer says:

    What is the time frame to decide the primary and secondary trend for intraday trading.

    • Karthik Rangappa says:

      No standard rules here – primary is usually the longer term trend, runs for at least a year plus. Secondary can be anywhere between 3 to 6 months.

  26. Sameer says:

    What is the time frame to select the support and resistance for intraday trading?

  27. Ankur Agrawal says:

    Hi karthik!

    Could you please share how much money can I make by taking trades on the basis of above 6 points checklist. Also could you share how much money you make by trading on an average in a day?

  28. Vasantharam says:

    Now a days attachment option is not available to upload any images. Pls check & fix up the issue.

  29. ashish chauhan says:

    Hello Sir

    while trading futures, should i look at the charts of the futures or the underlying entity.

  30. Shankar Chettiar says:

    Hi Karthik ,
    i was novice in Stock market,but after reading your different module till now. i have gained quite good amount of knowledge . Thank you for such a excellent study material published on the Zerodha.
    i have just one query, will it be possible to share your checklist which i can refer to build my own checklist.

  31. Ayush says:

    How to calculate Expected target price(expected change in price) of any security.?

  32. Chandrashekhar says:

    If I find a bullish engulfing pattern in prior downtrend.
    As I am considering a long trade based on candlesticks,Is the above candlestick pattern comes under primary trend ?
    as the pattern formed in prior downtrend.

    • Karthik Rangappa says:

      You only need to look at the primary and secondary trend to get a broad overview, it is not advisable to mix it up with candlestick patterns.

  33. shabaz says:

    sir,
    how to predict a false breakout? Can you please explain little more. As i have seen many traders caught and suffered a huge lose due to false breakout.

    • Karthik Rangappa says:

      The only good indicator for this is volumes. Here is a general perception – If volume is surging/ then there could be a possibility of a genuine breakout…in the absence of which, the breakout is questionable.

  34. KUMAR MAYANK says:

    Hello sir
    In intraday trading, candle pattern doesn’t play a very crucial role. Many times after bullish engulfing or marubuzo pattern there remains downtrend. The indicators we learnt here are lagging. Then please let me know how to predict the trend in intraday trading. Is there some special skill we are missing for such trading ? I have been watching all day one minute basis candle pattern of nifty futures.

    • Karthik Rangappa says:

      I personally find 1 minute candles too noisy for intraday trading. Please increase the frequency to at least 5 minutes.

  35. sreeram says:

    Opening Range breakout start : 9.15 am
    Opening Range breakout end : 9.45 am

    Scripts to be selected from the following :
    ——————————————

    These to be done by 9.40 am

    1. Top performing index

    ( select top gainer, top loser, top volume
    stocks each 1 )

    2. Worst performing index

    ( select top gainer, top loser, top volume
    stocks each 1 )

    3. use scanner2.afl to find stocks

    4. use wmascanner.afl to find stocks

    5. use bigpaisa.com for eod stock selection

    6. OPEN = HIGH best few stocks (consider volume )

    7. OPEN = LOW best few stocks (consider volume )

    now, we have 10 to 20 stocks in list

    Strict Rules :
    ————–

    First entry gives profit,there wont be
    no re entry on that particular stock
    for the entire day

    take double qty, if first entry failed

    ———————————————–

    buy entry :
    ———–

    when ORB high breaks on candle closing bias, take a buy
    in next candle open price with stoploss
    1 percent below entry price.

    target 1 % or keep till 3.15 pm

    ————————————————

    sell entry :
    ————-

    when ORB low breaks on candle closing bias, take a sell
    in next candle open price with stoploss
    1 percent above entry price

    target 1 % or keep till 3.15 pm

    ———————————————–

  36. KUMAR MAYANK says:

    Hello sir
    Have you noticed the flag formation in nifty 50 for 1 hr chart in June?

  37. KUMAR MAYANK says:

    Yes sir! Exactly looking, i think 🙂 🙂
    I finished reading Varsity modules in May and for the last three weeks i am looking nifty 50 fut June contract chart from 09:15 to 15:30 hr unceasingly. I also looked EOD charts of major constituents of Nifty 50.Well i am about to finish Toni Turner’s book on day trading.
    Now i am zeroed on to day trade Future contracts of Nifty 50 using tight SL via CO provided by Zerodha.
    I am quite aware of the fact that buying shares in spot for trading is a bit different from trading in Fut. Along with volume OI comes into the arena.

    Whatever little i know today is because of Varsity. I therefore request you to suggest me as a mentor if it is right time for me to trade in Fut Contract. I want to add one more thing i did paper trading & performed well.
    Thank you
    Varsity student.

    • Karthik Rangappa says:

      Happy to know that, Kumar. I’d suggest you take a look at the checklist. If you think the trade falls within this checklist, then take it…else you may want to hold back for the right opportunity.

      Good luck.

      • KUMAR MAYANK says:

        Hello sir
        I thank you for prompt reply all the time.
        A polite request: It would be better for beginners like me if you spend a few minutes of your tight schedule on twitter. Please take it as a request not an advice.
        Thank you 🙂
        Varsity student

  38. Ash says:

    Hey Karthik,

    When you used to trade, would you at least spot 1 trade a day satisfying the 6 point checklist or you could go more than a week without spotting any? Just want to own your frequency of spotting form Nifty 50 Index stocks.

    Thanks,
    Ash

    • Karthik Rangappa says:

      I still trade, but the frequency has reduced 🙂

      I would run a mixed bag strategies (including the candlestick based patterns), so I’d have some signal of the other. Hard for me to isolate just this one strategy and quantify the number of signals.

      • Ash says:

        Ah great, then in that case would you be okay to list down the other mixed bag strategies that you employ? I can do a side reading on the same, would be of great help.

        • Karthik Rangappa says:

          Yes, I’d suggest you look up more on Dow Theory.

          • Ash says:

            I thought strategies mentioned in Dow Theory should be used along with the Candle stick pattern. Are you suggesting those are independent strategies?

          • Karthik Rangappa says:

            Not really, you can combine Dow theory with CS and calibrate your trades. Example – you spot a double bottom and you are looking at a long trade…simultaneously spotting a bullish engulfing will help you strengthen your bullish view.

  39. mrky says:

    Hi Karthik,

    Firstly would like to thank you for the interesting and valuable notes/insights you have in this website to get me started. Have always wanted to try trading but always ended up giving up after reading few pages, until I stumbled unto your website!

    I do have few questions in mind though:
    1) How many indicators should I be using altogether?
    2) Is there a chance that indicators have conflicting views and if so, how should I go about it?
    3) Usually how many points of the checklist is sufficient to get conviction in trading as i was wondering if finally finding a trade which ticks all the checklist may take a long time?

    Eager to start trading soon,
    thank you!

    • Karthik Rangappa says:

      Glad you liked the content 🙂

      1) Good to know few, but end of the day stick to few simple ones
      2) There is more than a chance, happens quite frequently 🙂
      3) Higher the number of points, higher is the conviction in the trade. Given this, you should look at ticking as many checklist items as possible.

      Good luck!

  40. DIVYA SANGHVI says:

    Hello Karthik,
    Referring to the below text –
    ‘A trader will take a long position when the stock price breaks the resistance levels and will go short after the stock price breaks the support level.’
    When you say that ‘stock price breaks the support level’ , does it mean that the stock price goes below the support?
    If yes, does it mean that because the stock has already crossed below support (which was intended to trigger max buying activity), there is no possibility now for the stock to be bought highly? Meaning by that when any stock when goes below support shall be short sold.

  41. chidambaram says:

    Hi Sir,
    During Flag pattern also should we need to look for a Candlestick pattern to buy the stock?If so along with candlestick pattern in flag should we also need to buy only on the green day(buy on strong )? Or without candlestick pattern merely just buy on strong is enough? or is nothing needed ,just needed to buy during flag formation?

    • Karthik Rangappa says:

      The flag is dow theory pattern, you can trade that independently without the candlesticks. However, general candlestick philosophy like buying strength and selling weakness helps.

  42. chidambaram says:

    Hi Sir,
    Suppose if we are a risk averse trader and if the P2 day is not confirming with the rule “buy strong ,sell weak” and if P3 or P4 is confirming with the rule and also till that if the price hasn’t reached the SL price, then can we enter the trade on P3 or P4 , though P2 was not in favor?

    • Karthik Rangappa says:

      Yes, once a pattern occurs, you can keep this on your radar for upto 4-5 trading sessions, post which the effect of the pattern starts to wane. This is purely from my experience and I cannot really justify this with any data.

  43. chidambaram says:

    Hi Sir,
    Can flag formation exist for more than a month (say 1.5 months or more) ?

  44. Himanshu Bansal says:

    Hi Karthik,
    I place a short trade on TechM Fut(P: 497 SL 513 T: 463) few days ago and below points were matching with the checklist suggested:
    1. Bearish Engulfing (prior trend- UP)
    2. High was a couple of ticks above the resistance
    3. Primary trend of the scrip- Downwards
    4. RRR of 2:1
    CMP is 502, should I continue holding or exit. Kindly advise..

  45. Karthik S says:

    Today, I have noticed a company’s volume 1.9M which is very huge compared to last 1 week average ( 9K ).
    Price of the stock has also been increased in a noticable amount.
    The price formed in triple low as on Dow theory.
    I infer this as an Smart money entry. Is my inference correct?

  46. invest_novice says:

    You mentioned RRR is kind of a hard limit right(it clearly tells you to go with the trade or to skip it)? Then it should have been at the top of the checklist(maybe number 3 or 4) right signifying its importance?

    • Karthik Rangappa says:

      Hmm, it is very important. But then so are other parameters, not easy to prioritize. In fact, I’d like to put the first 3-4 items under 1 itself!

  47. trader says:

    Hello,

    If my current account value is Rs. 2000, then can I place Bracket orders/cover orders for two different stocks for a total traded value of Rs.40000. For eg. Rs. 20000 in INFY and Rs. 20000 in RIL.. is this allowed? or am i supposed to close one trade and only after that I can place the new one with full leverage?

  48. Rajesh says:

    Your modules are excellent … But please clarify my doubt
    In the picture (Trading range) Several times hits bottom and top… There is almost 3 times price hit bottom.. why can’t we consider it as a triple bottom? How can distinguish between triple bottom/top from a trading range?
    I think trading range gives false signals…
    kindly reply me
    Thank you

    • Karthik Rangappa says:

      Rajesh, if the same price points are hit 3 or more times, then it is referred to as a trading range. Else it is double/triple tops or bottoms. I think the trading range is a great area to trade.

  49. priyanshu sharma says:

    Hi karthik Sir,
    **Bit Off Topic Query **
    Do traders use mean reversal , arbitrage opportunities, F-score calculations,Mathematical model based (delta neutral),index fund re-balancing etc strategies for executing manual trades. ?

  50. Dhananjay Chaudhari says:

    Can we trade options, by analysing stocks technically?

  51. vikas says:

    sir how to spot price volume breakout.pls advice and if we initiate a trade after breakout what is the minimum time frame we have to wait for better realisation

  52. vikas says:

    sir in intraday trading in 1min charts the rsi will be in overbought position for the same stock if we see rsi in 15min timeframe it will be in 55 (trending up ) position suppose if i initiate a short position in 1min chart the price again goes up and i end in loss.pls advise best time frame to choose to avoid volatility for profitable trading.

    • Karthik Rangappa says:

      Vikas, for this exact same reason you need to stick to one-time frame. I’d suggest you look at 15 minutes time frame.

  53. Santhosh says:

    in the range breakout para, u mentioned that a trader will take a long position when the stock price breaks the resistance levels and will go short after the stock price breaks the support level. But Resistance acts a trigger to sell and one should go with short position, right? Then how will it possible to take a long position when the stock price breaks the resistance level?

    • Karthik Rangappa says:

      The general perception is that if the price moves higher than the resistance, then the stock is expected to rally up further. Likewise, if the current price falls lower than the support, then the stock is expected to go lower.

      • SANTHOSH KUMAR N says:

        So, if the current market price is more than the resistance , one should go for the long position and if the CMP falls below the Support ,one should go for the short position. Am I right ,sir?

        • Karthik Rangappa says:

          Yes, that’s right. Also, once the CMP crosses the resistance, that particular resistance now becomes a support. Like with support.

          • SANTHOSH KUMAR says:

            Thanks for the help sir.. 🙂

          • Karthik Rangappa says:

            Good luck, Santhosh.

          • SANTHOSH KUMAR N says:

            Sir, Am new to trading. I read and understood first two modules and am planning to read it again well and like to clarify some other doubts. I will read other modules too. But, Is that enough to enter trading with my knowledge on basics and technical analysis or should I need to read further modules before trading ?

          • Karthik Rangappa says:

            Yes, you should be in a position to identify patterns and place trades in Equity cash segment, Santhosh. Good luck!

          • SANTHOSH KUMAR N says:

            Thank you so much sir 🙂

          • Karthik Rangappa says:

            Welcome!

  54. Apurva Anil Kunkulol says:

    Hi Karthik Sir,

    1. I have tried to identify triple top and flag in the chart attached, could you please take a look at them? Also, I am dubious about the second flag formation(the one just before the triple top, and the highest one.) Would it qualify to be one?

    Link: https://drive.google.com/file/d/1h_dtUvoOKMh0EMy66l2YSUqTYSj-DXEb/view?usp=sharing

    Thanks.

  55. Srinathjayanna says:

    This is my examle for the above check-list.
    If last 5trading sessions will be in down trend with above average volumes with recognisable cs patterns. If 6th day will be the big short covering day means with counter trend rally for the primary trend with above average volumes and bullish cs
    Pattern wat should be our trade should it be on the long side or should be on the short side since the primary trend is bearish.

    • Karthik Rangappa says:

      Reactions and reversals to the primary trend are always sharp and quick. Given this, I’d always suggest you look for trades in line with the primary trend.

  56. Srinathjayanna says:

    What do you say about open low,open high strategy on daily time frame charts becoz this is also widely used by traders.Sometimes it get reversed immediately sometimes it get rallies how to identify whether open low open high sustains only on volumes average or is there any other method for it and how much time we should wait to check whether it gets sustains are not.

    • Karthik Rangappa says:

      I too personally prefer to look at EOD charts. This according to me has lower levels of noise. Btw, there is no technique to figure out if the OHLC value sustains through the day.

  57. Shashank says:

    What exactly makes ‘smart money (institutional investors)’ so smart? Is it some kind of special software or something else?

  58. Ayush says:

    Hi Karthik,

    In the example for RRR mentioned in the very last part of the chapter where a bearish engulfing pattern along with a double top is being formed, the high of the pattern should coincide with the medium term resistance of the stock to validate shorting the same. However, as mentioned in the example, it is coinciding with the medium term support, which seems a little confusing. Can you put some light on this?

  59. Mohammed Thameem says:

    Honestly I have learned a lot about trading just from zerodha varisity, thank you guys so much.

    I opened a broker account in zerodha before few months still haven’t started trading though hoping to start once I finish every modules *fingers crossed, hoping for the best*

  60. Rohit Garg says:

    Thanks for the amazing work Karthik, really very helpful! My question is how should one set the targets in case the range breaks out of previously formed support/resistance levels?

    • Karthik Rangappa says:

      Rohit, one theory is that if the breakout is strong enough, then the price can move at least to the extent of the range itself. For example, if the stock is trading between 220 – 240 (20 point range), breaks above 240, then the stock is expected to move to at least 260 (240 + 20).

  61. Rohit Garg says:

    WHile looking at candlesticks, does it make a difference whether the high was formed before the low or afterwards to track the psyche of bulls and bears on that particular day? i.e. Would you treat these two differently, based upon the order, when looking for a pattern – OHLC vs OLHC? If possible, could you explain with some examples? Thanks in advance.

    • Karthik Rangappa says:

      In some way, yes. If the high formed first, unable to sustain and trades near the low (therefore creates an intraday low), the outlook is biased towards bearishness. Of course, you should consider at the prior trend as well for this.

  62. Srinathjayanna says:

    Sir if all these conditions are satisfied means in which instrument should we trade is it in cash,futures or options.

  63. Hiten says:

    Where Can I learn Elliot Wave? please help!(Suggest)

  64. Apurva Anil Kunkulol says:

    Hi Karthik Sir,
    This is purely a wild guess, but I have a doubt.
    Does this look like a possible Head & Shoulders pattern in the forming?

    https://drive.google.com/file/d/1MHkDj1nP9dStryCrpUTZ_PiVsno39A0Z/view?usp=sharing

    • Karthik Rangappa says:

      Yup, it does. But personally I;’ve never really been a fan of these patterns 🙂

      • Apurva Anil Kunkulol says:

        Okay.
        So, in your experience, how reliable are these patterns?

        Thanks.

        • Karthik Rangappa says:

          It depends on how you use them. Not all patterns can be applied to all stocks. For example, a bearish engulfing pattern may work extremely well on ICIC but may fail on HDFC. So the trick really is to know which pattern works on what stock.

  65. Yogesh Verma says:

    So, the dow theory pattern won’t work in smaller sessions used in intraday trading?

  66. PANKAJ says:

    Please explain in short about Head & shoulders pattern

    what is it indicate
    How it generates buy or sell signal

    • Karthik Rangappa says:

      It is yet another dow patter, I’m not really a big fan of that. Have mentioned so in the chapter 🙂

  67. PANKAJ says:

    I read Nitin Zero to zerodha 60 days challenge
    Nitin sir says trading required inborn skill if you not found in you stay away from trading
    I am just starting trading one month before
    My question is that I am profit in last month trading but in this month I face loss of 1 lac Now I What to do
    I want to know how to know that that Inborn skill required for trading is present me or not
    What to do continuing trading or stay away
    Please Guide I am new

    • Karthik Rangappa says:

      Pankaj, I have a slightly different view on this. I think anyone can be trained to do anything in life as long as you are motivated enough.
      That said, I’d suggest you cut down on trading and spend more time in developing a strategy and improvising on it.

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