Modified Pairs Trading System

2 years, 6 months agoComments closed

pairs-trading tutorial tips

We have modified our pairs trading recommendation system significantly. Here is what you can expect in future:

  • Now expect holding period to be about 15 on average and 25 at maximum. In last few days, many recommendations were sent with unacceptable max holding periods, we have rectified that.
  • Do not expect new pairs recommendations everyday. About 1 new recommendation in every 2 trading days can be expected.

Regards,

The Techapaisa Team

Top stocks in FMCG sector

4 years, 7 months agoComments closed

screener tutorial

Very often, we are asked by investors how to find top stocks in a particular sector/index/industry for a holding period of atleast 2-3 years. At techpaisa.com, we specializes in making money technically but techpaisa screener has the capaibility to filter fundamentally strong stocks in a particular sector as well. As an example, how you can find top stocks in FMCG sector using tools on techpaisa.com for free.

Basic difference between trading fundamentally strong stocks and technically strong stocks is that your holding period changes. When you trade fundamentally then you are expecting that the company will post strong financial results and overall markets will rally and you are prepared to hold stock for a period of at least 2-3 years. However, when you trade technically, your holding period is mostly less than 1 month and you don’t really worry about financial results posted by company.

Index/Sector Discovery

Figure out the index or the sector in which you want to find the best stocks in the long-term. This step is very easy if you know one stock from the sector/index you are looking for. For example, from FMCG sector, ITC is one of the well-know stocks. Search for ITC on techpaisa.com and go to ITC stock page. In the top corner, you can see ITC is part of FMCG-Food-and-Beverages (FMCG-FnB) which is a sub-sector of broader Conumer Goods sector. Also, scroll down to see that ITC is part of various indices. We suggest you to note the most specific index which is CNXFMCG. So we have figured that we want to find fundamentally strong stocks which are good for long-term in index CNXFMCG or sector Consumer Goods. Since consumer goods (contains 50 stocks) sector is broader than FMCG, we should use CNXFMCG (comprises 15 stocks) in the screener.

Finding Top Stocks

After identifying the sector or index, now we use techpaisa screener to find good stocks in long-term. We suggest you read screener tutorial before proceeding further. We will discuss two methods of finding 2 methods. One is completely fundamental and in the other we mix long-term moving average with fundamental indicators like PE ratio.

Method 1

We are going to use “PE Cheap” filter and index as CNXFMCG (Click here to access the filtered stocks). If you use this filter, stocks are sorted in increasing P/E ratio, which means that cheap stocks come first. Moreover, we also make sure that last 3 quarters of the stock have been positive Earning Per Share.

Method 2

In the second method, we will just add one more filter in the last screener which is that stock price is above 200 Day Moving Average. When stock price is above 200 DMA, its an indicator that stock is in a long-term uptrend (Click here to get filtered stocks).

Here, we explained how to find fundamentally strong stocks in FMCG sector which can give good returns in 2-3 years period. Similarly you can find best stocks in other sectors for the long-term.

Stay tuned for latest updates:

Happy Investing!

Techpaisa Team.

Deliverable Quantity

5 years ago87 Comments

deliverable-quantity analysis tutorial

Volume is an important aspect of technical analysis because it is used to confirm trends and chart patterns. Any price movement up or down with relatively high volume is seen as a stronger, more relevant move than a similar move with weak volume.

However, day trading volumes are just noise and are mostly made up of speculative trades. Any ratio derived from day trading volumes, cannot be a reliable indicator. That’s why, we look at deliverable volume which is all the trades which were not closed on the same day i.e. all trades which were not intraday trades.

If a stock’s price goes up sharply, with a substantial increase in delivery volume, it is a bullish indication. If a stock’s price falls sharply, with a substantial increase in delivery volume, it is a bearish indication.

I don’t think a stock can be traded just by looking the the delivery statistics. Along with the delivery data, one should also look at the entire technical setup of the stock i.e. the technical charts.

Another important idea in technical analysis is that price is mostly preceded by volume. Volume is closely monitored by technicians and chartists to form ideas on upcoming trend reversals. If volume is starting to decrease in an uptrend, it is usually a sign that the upward run is about to end.

You can view deliverable volume of all stocks traded on NSE at the individual stock page. (e.g. Reliance)

Stock Screener

5 years, 3 months agoComments closed

screener nse tutorial

We are pleased to introduce our own stock screener. You can access it here and use it for free. A stock screener is a tool to filter stocks based on various technical and fundamental criteria.

At techpaisa, you can filter stocks based on following technical criteria:
  • Near 200 SMA: If current stock price is within 1% range of 200 Day Simple Moving Average. Same filter for 20 and 50 Day SMA.
  • Above/Below 200 SMA: If current stock price is above/below 200 DAY SMA. Same filter for 20 and 50 Day SMA.
  • RSI Oversold/Overbought: If RSI is indicating that stock is oversold/overbought.
  • MACD Bullish/Bearish Crossover: See here to know about MACD.
  • MACD Bullish/Bearish Centerline Crossover
  • Bollinger Bands squeezing/squeezed: See this tutorial to understand bollinger bands.
  • ADX Trending: See here to know about ADX. It’s a measure whether a stock is trending or not.
Following fundamental criteria are supported:
  • Sector: You can use this filter to compare stocks from a given sector.
  • P/E (Price-to-Earnings Ratio): If you use this filter, stocks are sorted in increasing P/E ratio, which means that cheap stocks come first. Moreover, we also make sure that last 3 quarters of the stock have been positive Earning Per Share.
  • Traded in Futures: Whether futures for that stock are traded are not.
  • Promoter Shareholding: More the promoter shareholding, better the stock.
  • Absolute beta: View this tuorial for a brief introduction of beta.
  • Market Capital: Filter high market capital stocks usign this filter.
Our stock screener can be used in many interesting ways. We list some of the screens which we find interesting:
  • Stocks near 200 SMA and above 200 SMA and above 50 SMA and above 20 SMA and traded in futures: This screen filters all stocks above 200 Day SMA, 50 SMA and 20 SMA and which are close to 200 SMA. Stocks above 200 SMA, 50 SMA and 20 SMA are considered to be in an uptrend. And when a stock in uptrend comes near 200 SMA, then 200 SMA acts as a strong support for that stock and it is a good time to go long in that stock. Similarly, you can use this screener to find stocks in a downtrend and near 200 SMA. You can even apply ADX trending filter to refine the results.
  • Stocks with Cheap P/E and in education: This screener will give you all stocks in Education sector with cheap price-to-earnings ratio. We suggest whenever you apply P/E filter, you should choose a sector because P/E ratio of two stocks from different sectors can’t be compared.

Please let us know if you have any more suggestions for filters.

Stay tuned for latest updates:

Techpaisa Team.

Average Directional Index

5 years, 5 months agoComments closed

average-directional-index technical-analysis tutorial

DISCLAIMER: If you trade stocks, you do so at your own risk. Trading/Investing in stocks carry high risk. Any trade or action you take in the market is your own responsibility. Techpaisa.com will not be liable for any loss arising out of the use of any information on the website by anybody.

Adding to our arsenal of technical analysis tools, we intoduce Average Directional Index (ADX) at techpaisa.

ADX tells us whether a stock or a commodity is in a trend or not. It also tells us the strength of the trend. However using ADX only, one can not determine whether a stock is in a downtrend or uptrend, that is, ADX only tells whether a stock is in a trend or a trading range.

Reading ADX values is pretty straight forward. If ADX is less than 25, then stock is in a trading range. If ADX is greater than 25 then the stock is in a trend. If ADX becomes very large (around 50) then it generally means, the trend is weak and expect ADX to fall from here.

As ADX does not tell us the direction of trend, it can not be used to generate buy or sell signals. However, you can combine ADX with other technical indicators to get an idea of stock’s movement in next few weeks.

Other Tutorials on internet:
Stay tuned for latest updates:

Happy Investing!

Techpaisa Team.

Average True Range

5 years, 5 months ago1015 Comments

average-true-range technical-analysis tutorial

DISCLAIMER: If you trade stocks, you do so at your own risk. Trading/Investing in stocks carry high risk. Any trade or action you take in the market is your own responsibility. Techpaisa.com will not be liable for any loss arising out of the use of any information on the website by anybody.

We have introduced several technical analysis tools and talked about them here and here.

Quoting from stockcharts:

Developed by J. Welles Wilder, the Average True Range (ATR) is an indicator that measures volatility. It is important to remember that ATR does not provide an indication of price direction, just volatility.

At techpaisa,we use a 14-day period (most common period) to calculate ATR. You can find ATR in technical analysis section on each stock page at techpaisa. ATR is calculated using stock prices and is not normalized, which means, a stock with price Rs. 100 will have a lower ATR than a stock with price Rs. 1000. ATR can be used to identify breakouts. When a breakout occurs, ATR suddenly goes up.

For more details, check out following links.

Other Tutorials on internet:
Stay tuned for latest updates:

Happy Investing!

Techpaisa Team.

Market Capital, Earnings Per Share (EPS), Price-to-Earnings (P/E)

5 years, 5 months ago0 Comments

market-capital eps pe tutorial

DISCLAIMER: If you trade stocks, you do so at your own risk. Trading/Investing in stocks carry high risk. Any trade or action you take in the market is your own responsibility. Techpaisa.com will not be liable for any loss arising out of the use of any information on the website by anybody.

We are pleased to announce that now you can view following fundamental information regarding stocks:

  • Market capital
  • Earnings Per Share (EPS)
  • Price-to-Earnings (P/E or PE)

Market Capital

Market capital of a company is equal to the total number of shares times the share price of the company. Stock market indices such as NIFTY use free float market capitalization to get the weightage of company in index. Free float market capital of a company is equal to the number of publicly traded shares times the share price of the company.

Earnings Per Share (EPS) and Price-to-Earnings (PE)

EPS is the profit made by company per share. Total net profit is not a good figure to compare two companies as their market capital will be different. EPS is the normalized profit per share. To compare two companies, EPS only is not enough as a company’s share might be worth Rs. 100 and other might be worth Rs. 1000. Company with share price Rs. 100 and EPS Rs. 20 is doing better than the company with share price Rs. 1000 and EPS Rs. 20. So to get a comparable metric share price is divided by EPS to get Price-to-Earnings Ratio (PE).

Companies release their financial results quarterly. There are two types of financial results: consolidated and non-consolidated. Consolidated results are better than non-consolidated results as they include results of all subsidiary companies too. We take consolidated results whenever available.

To calculate current PE, current share price is divided by sum of EPS of last 4 quarters. This PE is known as trailing twelve months (TTMPE.

For each sector (on sector page at techpaisa), you can sort using PE or market capital to compare stocks from the sector on the basis of PE and market capital. You should not compare two companies from different sectors on the basis of PE as average PE of different sectors tend to be different. This is because some sectors have higher profit margins and thus higher average PE than some other sectors.

Stay tuned for latest updates:

Happy Investing!

Techpaisa Team.

Option Greeks (Delta, Theta, Gamma, Vega, Rho)

5 years, 6 months agoComments closed

options greeks tutorial

DISCLAIMER: If you trade stocks, you do so at your own risk. Trading/Investing in stocks carry high risk. Any trade or action you take in the market is your own responsibility. Techpaisa.com will not be liable for any loss arising out of the use of any information on the website by anybody.

We are pleased to announce that now you can view greeks of options traded at NSE. If you trade options, then its important to understand what is the risk in your positions. Each greek letter measures a different dimension of risk in an option position. For an introduction to options, we suggest reading investopedia. Greek letters are calculated using black scholes model.

You can find greek letters of options in “Futures & Options” section on every stock page. We will talk about greeks with the help of an example. RELIANCE call option with strike price Rs.860 closed at Rs.6.75, while underlying RELIANCE stock closed at Rs.843. Reliance Call (Rs860 Strike Price) greeks are:

  • Delta: 0.35
  • Theta: -1.85
  • Gamma: 0.0092
  • Vega: 40.1
  • Rho: 4.71

Now we discuss each greek letter in detail:

Delta

The delta of an option is defined as the rate of change of option price with respect to the price of underlying equity/asset. As example, delta of reliance call option (Rs.860 Strike) is 0.35 which means if the stock price goes up by Rs.10 then option price will tend to go up by Rs.3.5. If you have one lot (250 options) of thse reliance options, then delta of your position is 250x0.35 = 87.5.

You can use delta to do hedging which is also called as delta-hedging. Suppose you have sold one lot of above mentioned reliance options. Then delta of your position is -87.5. Now you lose money if stock goes up. Delta of a stock is 1. So if you buy 87.5 (~88) stocks of reliance. Then delta of your overall position becomes zero and position is delta neutral. Now your option position is hedged.

It is important to relaize that as delta changes, your position remains delta hedged for only a relatively short period of time. The hedge has to be adjusted periodically. This is known as rebalancing. This is also known as dynamic hedging. If you don’t rebalance then its called as static hedging or hedge-and-forget.

Delta decreases as strike price of option increases and it increases with increasing time to expiry. Delta of a long call option is positive and delta of a long put option is negative.

Theta

The theta of an option is the rate of change of value of option with respect to passage of time with all else remaining same. It is also referred as the time decay of an option. In the example above, theta is -1.85 which means that with each trading day, value of the option decreases by Rs1.85 if all else remained same.

Theta is usually negative for an option. This is because, as time passes with all else remaining the same, the option tends to become less valuable.

Gamma

The gamma of an option is the rate of change of option delta with respect to the price of the underlying asset. It is the second partial derivative of option price with respect to asset price.

When you are doing dynamic hedging then rebalancing to keep the portfolio delta neutral need to be made infrequently.

In the example above, gamma is 0.0092 which means when stock price changes by Rs.1 then delta of option changes by 0.0092.

Vega

The vega of an option is defined as the rate of change of value of option with respect to volatility of underlying asset.

In the example above, vega is 40.1 which means a 1% increase in volatility of reliance stock price will result in 0.01x40.1= Rs.0.4 increase in option price and vice-versa.

If you wish to make your porfolio to be not dependent on volatility then you make it vega neutral by taking appropriate option positions.

Rho

The rho of an option is defined as the rate of change of value of option with respect to the interest rate.

In the example above, vega is 4.71 which means a 1% increase in interest rate will result in 0.01x4.71= Rs.0.04 increase in option price and vice-versa.

Rho of a long call option is positive and rho of long put option is negative.

Caveats

In practice, if you are doing delta hedging, rebalancing should be done depending on gamma of your portfolio. While rebalancing, transaction costs should be considered beforehand.

Stay tuned for latest updates:

Happy Investing!

Techpaisa Team.

Fibonacci Retracement

5 years, 6 months agoComments closed

fibonacci-retracement technical-analysis tutorial

DISCLAIMER: If you trade stocks, you do so at your own risk. Trading/Investing in stocks carry high risk. Any trade or action you take in the market is your own responsibility. Techpaisa.com will not be liable for any loss arising out of the use of any information on the website by anybody.

We have introduced several technical analysis tools and talked about them here.

Adding to existing set of tools, we are pleased to introduce one more technical analysis tool - Fibonacci Retracement.

Fibonacci Retracement technical analysis tool is based on the assumption that there are a certain ratios that naturally occur in nature. In a fibonacci sequence, ratio of two consecutive numbers is 1:1.618 or 0.618:1. Based on that, using fibonacci retracement, we can find support and resistance levels.

Fibonacci Retracement is most effective when a stock is tredning. Main idea is that when a stock is trending, it will pull back a percentage of the trend before continuing the trend. These retracement percentages are 38.2%, 50% and 61.8%.

We use a proprietery algorithm to find swings/trends to get fibonacci levels.

At techpaisa, you can find fibonacci retracement analysis on each stock page, my watchlist page, sector page and index page.

For more details, check out following links.

Other Tutorials on internet:
Stay tuned for latest updates:

Happy Investing!

Techpaisa Team.

Pairs Trading Strategy for Indian Stock Market

5 years, 7 months agoComments closed

pairs-trading tutorial

We are pleased to announce that now you can analyse any pair of stocks using well-known pairs trading strategy at techpaisa. To the best of our knowledge, we are the first website in India to provide this utility online, and free of cost as of now.

What is pairs trading?

As the name suggests, pairs trading strategy works with a pair of stocks. First step is to find a pair of stocks or indices whose prices “move together”. Moving together of price is technically known as cointegration. Idea is to find the pair of stocks which move together but occasionally, this pair will diverge from the average. Whenever a pair diverges from their mean, take positions in both the stocks (one long position and one short position). Gradually, when the prices of these stocks revert to the mean, exit the trades and book profit.

Pairs trading is a market-neutral strategy. A market-neutral strategy means that profit doesn’t depend on the direction of market. As long as the prices of pair of stocks revert to mean, you make money.

How to choose pairs?

First step in pairs trading strategy involves choosing pairs. We suggest you choose stocks from the same sector or subsector. Other pair could be to take one index and choose one of the constituent stocks. Example pairs: SBIN-AXISBANK, AMBUJACEM-ACC. You can also consider two indices as a pair.

At techpaisa, you can do pairs trading here. When you have chosen a pair, use first stock as stock whose market capitalization is more than the second stock. We also give a confidence in statistics of finding pairs, always use pairs with atleast 60% confidence.

How to do pairs trading?

After you have chosen that a pair of stock prices move together, you have to wait for the prices to diverge from their mean. When the prices diverge from their mean, one stock become overvalued and the other undervalued. The bet is that undervalued stock will outperform the overvalued stock and prices will revert to mean. You take long positions in undervalued stock and short positions in overvalued stock. By doing this, your positions become market-neutral (at-least theoretically).

Question is at what divergence, you will take positions, we suggest waiting for a divergence of at least 2 standard deviations from the mean. You can devise your own strategy. We strongly recommend you keep a target and a stop loss for your positions. Keep your target to the point where divergence reverts to 0.5 of standard deviation from mean. Keep your stop loss if divergence becomes 2.5 or 3 times standard deviation from mean.

We backtest pairs trading strategy on historical data to find out optimal entry divergence and stop loss divergence. So for some pairs, you will find that entry divergence is different from +2 or -2.

Example

We will take nifty and banknifty as an example. With 90% confidence, nifty and banknifty prices move together. NIFTY is STOCK1 and BANKNIFTY is STOCK2. Sequence of stocks in a pair matters because based on divergence and sequence of stocks we will determine which stock to long and which stock to short.

In the chart below, prices of nifty and banknifty diverges at 2.01 (standardized error) times the standard deviation from mean. We take positions when standardized error is approaching 2 from above or -2 from below i.e. divergence is decreasing. In the figure below, divergence is approaching -2 from below which means STOCK2 (banknifty in this case) is undervalued (long banknifty) and STOCK1 (nifty) is overvalued.

Standardized Error - Deviation from mean as a multiple of standard deviation

In the chart below, we have the prices of nifty and banknifty.

Nifty and Banknifty price

We take positions on 7th January 2011. Since banknifty is undervalued and nifty is overvalued. We go Long BANKNIFTY and Short NIFTY. Quantities are also decided based on Cointegration Coefficient which we call slope on analysis page. Slope is 3, which means for every 100 stocks in banknifty, trade 300 stocks in nifty. In futures lots, that translates to 3 lots of nifty (150 stocks) and 2 lots of banknifty (50 stocks).

Lets say we buy at the closing price of 7th January 2011 which is Rs. 5904 for NIFTY and Rs. 11053 for BANKNIFTY. We see that prices revert to mean after 7th January 2011 and if we close at our target of 0.5 standard deviation from mean, then that is reached on 24th January 2011. Price on that day is Rs 5743 for NIFTY and Rs. 11151 for BANKNIFTY. Our profit is (5904-5743)150 + (11151-11053)50 which is Rs 29050.

As a general rule, if pair is STOCK1-STOCK2, and entry divergence is negative then LONG STOCK2 - SHORT STOCK1. If entry divergence is positive, LONG STOCK1 - SHORT STOCK2.

You can employ your own strategy for closing trades like you close positions when the standardized error becomes zero i.e. prices revert to the mean exactly.

 Caveats

It may happen that pair of stocks you chose whose prices have diverged might not revert to mean because of a news flow or any other fundamental change in one of the stocks and the statistical relationship doesn’t hold for this pair of stocks anymore.

More links

Techpaisa Team.

DISCLAIMER: If you trade stocks, you do so at your own risk. Trading/Investing in stocks carry high risk. Any trade or action you take in the market is your own responsibility. Techpaisa.com will not be liable for any loss arising out of the use of any information on the website by anybody.