These funds are called interval funds. 

These mutual funds derive the name due to a typical feature associated with their buying or selling. What makes the interval funds different is that these funds can only be bought or sold during a particular pre-determined window at periodic intervals. 

Let’s delve into the details if you are looking for a new category of mutual funds. 

What are Interval Funds?

As the name suggests, an interval fund is a type of mutual fund whose units can be bought or sold only during a particular period. The window for buyback of these mutual funds units based on net asset value (NAV) is predetermined by the mutual fund house. The investors can invest interval funds at any time, but the redemption is allowed only during the specified transaction period (STP). 

Interval funds are mostly debt oriented schemes but they can invest in both debt and equity instruments.   

One of the advantages of interval funds is that the fund manager gets the opportunity and time to put in place a good investment strategy without getting worried about redemption requests and liquidity. This helps the fund house to determine the interval for unit redemption.  

How an interval fund works

The investors are allowed to buy or sell their units at the prevailing NAV only during the specified transaction period (STP), which opens in periodic intervals. Asset management companies (AMCs) decide the interval when investors can redeem their units.

Key Features of Interval Mutual Funds

• Thanks to their special design, interval funds could be a suitable short-term investment option.
• Interval funds offer higher liquidity as buying and selling units are allowed only during a specific window of time periodically.
• Interval funds normally suit investors with lower risk appetites.
• Interval funds generally invest in debt securities, minimising risks for investors.
• Even during any emergency, investors cannot redeem the units of their funds even if they are willing to pay the exit load.
• Investors need to be careful about the expense ratio as interval funds normally charge higher fees than other mutual funds.
• History shows that interval funds have given investors low to moderate returns of up to 8% over a period of 5 years.
• Taxation depends on the amount of investment in debt or equity.

Benefits of Interval Mutual Funds

Interval funds allow retail investors to gain exposure to unconventional assets. Asset management companies running such funds tend to invest in unconventional assets like commercial property, forestry tracts and business loans. Investors can put their money in institutional-grade alternative investments with low minimum investments. AMCs make periodic offers to investors to repurchase shares at prevailing NAV.

Who may find interval funds suitable?

As each mutual fund is designed with a specific focus to meet the particular investment needs of the investor, interval funds also focus on this aspect. These funds invest in commercial property, forestry tracts, business loans and other illiquid assets, which are suitable for investors who want to invest in unconventional assets. These funds are also suitable for short-term investors with low to moderate risk profiles.

Conclusion

Many investors compare interval funds with closed-ended funds, but the latter does not allow the investor to withdraw capital for a long period of time. Interval funds, however, allow investors to buy and sell during predefined windows. Interval funds also share features with a fixed maturity plan, so investors should keep in mind this positive aspect while investing.

The post Interval Funds first appeared on Upstox.

This is a beautiful daily chart of Axisbank with a 21 period EMA (exponential moving average). Do you see that upward trajectory and the fact that price came down to the blue line (that’s the EMA)?  It then continued its movement upward?

This is BharatForge, it’s moving swiftly up and as we can see the 21 EMA proves to be crucial support when the market ‘dips’. It works pretty well right? Well, like almost everything in the market the moving averages have a good and a bad. Let us start with the SMA or the simple moving average.

The Simple Moving Average

You live in much easier times than the generation of traders before us. In the times before us traders used to plot a chart by hand, taking each day’s closing price and recording it in a diary. After they had enough data they would draw a line to ‘average’ the movement of the stock over a certain number of days.
Today with the advantage of technology, our customers at Upstox can use their NEST trading software and obtain a chart with their desired moving average within a few clicks (shown at the end of this article). Lucky you?

How To Calculate a Simple Moving Average

To calculate a 21 day simple moving average, simply add the closing prices of the last 21 days and divide by 21. This of course gives us a single average point. When a new day is added then we have 2 points, and the calculation is done every time a new data set arises, eventually making a blue line you see in the charts above. If you were wondering why we call this a “moving” average and not just mean of prices it is because as new days are added, previous data sets are dropped to include the new data and the average is constantly ‘moving’.

Timeframes

The moving average is not restricted to only daily charts, they can be used on any timeframe and are useful for intraday traders as well as investors simply by changing the timeframe. For instance intraday traders may look to buy the cross over of the 10 period and 20 period average on the 10 20min timeframe while the investor may look for some buying pressure to arise at the touch of the 200 MA on the daily charts.

The Birth of The EMA

Now, If you think about it the simple moving averages gives the same ‘weight’ or importance to each new data point equally. Many traders asked themselves why older price points were given the same weightage as new price points in the simple moving average. Traders started to argue that the most recent development has the right to influence our averages more than the older data points.
Thus, the EMA was born, it gave more importance to recent data and the most popular variant is called the Exponential Moving Average (EMA).

How the EMA is calculated

Current EMA= ((Price(current) – previous EMA)) X multiplier) + previous EMA.
The most important factor is the smoothing constant that = 2/(1+N) where N = the number of days.

For example the smoothening for a 10-day EMA = 2/( 10+1) = 18.8

That means a 10 day EMA gives 18.8% weightage to the most recent data. The same way a 20 day EMA will give about 9.5% weightage to the most recent data.

Some points to remember

The EMAs and SMAs are not efficient indicators, they provide a way to check what the masses are looking at and may give us an indication for trend changes. The key points to remember when using the moving averages are:

Couple it with price action

It is vital to use averages with strong price action methodologies which have shown results independently. The averages work well as a confirmatory indicator rather than a leading indicator.

Use Money Management

Unfortunately, a lot of traders concentrate too much time on price discovery methods and not as much time on their risk management. Please make sure you are not leveraging too much by risking no more than 0.5% or 1% per trade for beginners and slightly more for the more experienced.

Averages + Trading Methodology = Win

At the end of the day you are basically looking at the average movement of price, use a tested methodology to trade the averages. Discipline and methodology are your main ingredients to successful trading.

How To Setup MA on Upstox Nest Platform

1. 1. Login to Nest and select the scrip you want, we are looking at BankNifty here
   2. Right click and click on intraday chart
   3. Right click on the chart that has appeared and hover over ‘Indicators’ and then to ‘simple moving average’. Select the timeperiod calculations and hit ‘apply’!
   4. You will now have the chart with the SMA, shown in blue

Now that we have talked about the pitfalls, we will be exploring some ideas of using the averages for our trading!

The post Simple Moving Averages Vs Exponential Moving Averages – Difference & Which is Better first appeared on Upstox.

A Bollinger band is a tool for technical analysis developed by American author and financial analyst John Bollinger. The tool is constituted by a set of trend lines and its purpose is to give investors an idea about when a particular stock is being oversold or overbought.

Bollinger Bands show two important indicators, like positive standard deviation and the negative standard deviation, from the simple moving average, which is typically a 20-day simple moving average (SMA), of the price of a particular security. The indicator can be adjusted as per individual preferences.

In short, Bollinger Band is composed of three lines namely, the SMA line or the middle band, the upper band and the lower band.

What does the Bollinger Band indicate?

Bollinger Band helps investors ascertain whether a particular stock is being oversold or overbought in the market. It is believed that the closer the price is to the upper band, the more overbought the stock is. Similarly, when the price is closer to the lower band, it could be an indication that the stock is being oversold.

Patterns in the Bollinger Bands

Breakout

Majority of the stock price movement occurs between the upper band and the lower band. When the price breaks the upper or the lower band to move beyond them, the Bollinger Band is said to be on a breakout. There is a common misconception among market participants that a breakout in a particular direction signals a buy or sell of the stock. In reality, the breakout is not a trading signal and it provides no clue to the extent and the direction of future movement.

Squeeze

When the upper band and the lower band come closer together compressing the middle band, the Bollinger Band is said to witness a squeeze. 

What does this squeeze indicate for the market participants? 

It shows a period of decreased stock volatility. More often than not, it is considered to be an indication of trading potential as it may signal increased volatility in future. As opposed to this, when the bands move far apart from the middle band, it is considered to be an indication of an exit potential and it may signal decreased volatility in future.

Calculation of the Bollinger Bands

The upper and lower bands in the Bollinger Bands are typically 2 standard deviations apart from the 20-day Simple Moving Average of the stock price (denoted by the middle band) in the respective direction.

• Hence, the first step in calculating the Bollinger Bands is to calculate the Simple Moving Average (SMA) of the security under consideration. Generally, a 20-day SMA is taken into account. The closing price for the first 20 days is taken as the first data point. This is to calculate the middle band.

• The next step is to calculate the standard deviation of the security price for the upper band. It typically measures as to how far numbers are from an average value. For this the moving average of the closing price of a security is taken into consideration and standard deviation is added. 

Formula= 20-day SMA + (2*20 Standard Deviation of closing price)

• To calculate the lower band, first compute the moving average of the close and subtract standard deviations from it. 

Formula= SMA 20-(2*20 Standard Deviation of closing price).

Complementary Indicators

A lot of technical indicators work best when paired with other indicators. As far as Bollinger Bands are concerned, they work the best with Relative Strength Indicator (RSI) and the BandWidth Indicator which measures the width of the bands with respect to the middle band.

Shortcomings of Bollinger Bands

The Bollinger Bands are computed using a simple moving average. Since a simple average gives equal weightage to older and recent data points, fresh and more relevant information may get mixed with outdated data points and become less relevant and less indicative.

The calculation elements (i.e., the 20-day SMA and the 2 standard deviations) are random and not based on some solid reasoning. It might not work accurately for every person in every situation.

It is hence recommended that market participants use the Bollinger Bands according to their own unique situations and should also pair them up with other relevant indicators to get a better picture.

In a Nutshell

Bollinger Bands can be a useful tool in the hands of a market participant who are looking to draw insight from the oversold or overbought position of a stock. The squeeze and breakout elements of the concept also help in indicating expected volatility in the market. However, to get more reliable inputs, it is recommended to use it with other relevant indicators.

The post Bollinger Band first appeared on Upstox.

A Stochastic Oscillator is a momentum-based tool used by traders to compare the current closing price of a financial instrument over a period. 

The trading tool was developed by Dr. George Lane in the 1950s to be used in the technical analysis of securities. The reading in Stochastic Oscillator ranges between 0 to 100 where 0 is the lowest point and 100 indicates the highest point in the designated time.

The oscillator’s sensitivity to the market movements can be reduced by adjusting the time or taking a moving average of the result.

Used as a tool to generate overbought and oversold trading signals, the Stochastic Oscillator typically tracks the speed and momentum of the market. It does not consider price and volume. Further, it may also be used to predict market reversal points.

Trading ranges of over 80 are considered in the overbought range and anything under 20 is considered oversold. The charting of the Stochastic Oscillator consists of two lines – one representing the actual value of the oscillator in every session (%k) and the second reflecting its moving average over three days (%d). 

When the %k line remains above the %d line, it is seen as a bullish signal. Similarly, when the %k line crosses below the %d line, it is an indicator of a bearish trend. 

The intersection of these two lines is seen as a signal that a reversal may be coming up as it indicates a large shift in momentum from day to day.

However, it must be noted that the trading ranges in a Stochastic Oscillator may not always be indicative of a reversal. Strong trends in the overbought and oversold range can continue for an extended period. Hence, traders should be alert to changes in the stochastic oscillator for hints of a possible shift in the future trend.  The divergence between the stochastic oscillator and tending price action can be key indicators for a possible reversal.

Stochastic Oscillator Formula

The Stochastic Oscillator can be calculated using the following formula:

• %K for each day: 

%k = (Closing Price – Lowest Low) / (Highest High – Lowest Low) x 100

• 3-day Simple Moving Average of %k (%d):

%d = (Sum of %k of last 3 days)/3

Like every other trading tool, Stochastic Oscillator has its own set of limitations. It tends to generate false signals, especially during volatile trading conditions. Hence, traders need to confirm the trading signals generated by Stochastic Oscillators with indications from other technical indicators.

To counter the Stochastic Oscillator’s tendency to generate false signals, some traders use more extreme points in the range to indicate overbought or oversold conditions in a market.

Instead of using readings above 80 as a signal for an overbought trend, they consider readings above 85. Similarly, only readings of 15 or below are seen as signals of oversold conditions during a bearish run.

While the technique does reduce the chances of false signals, in some cases, it can also result in the trader missing trading opportunities.

Traders should use the Stochastic Oscillator along with other technical indicators to avoid false signals.

The post Stochastic Oscillator and how it works first appeared on Upstox.

As the name suggests, an Accumulation Distribution Line (ADL) indicates whether a particular stock is being accumulated or distributed. It is basically a cumulative indicator that uses both the price as well as the volume of the security to assess its accumulation or distribution. To do so, it identifies the disparity between a security’s price and its flow of volume.

By doing so, ADL suggests how strong a particular price movement is. For instance, if the price is on a rising trend but the accumulation distribution line is falling, then it is an indication that the purchase volume is not strong enough to provide a further support to price rise. Hence, a fall in price may be witnessed in the near future.

In other words, it can be said that the accumulation distribution line measures the supply and demand of a particular security or asset by looking at its price and volume variables.

The accumulation distribution line was developed by famous American analyst March Chaikin. Initially, ADL was named as the Cumulative Money Flow Line by Chaikin. 

What does the Accumulation Distribution Line indicate?

The accumulation distribution line indicates the impact of demand and supply factors on the price of a security. It helps market participants to first assess the trends in price and then foresee how the trend will persist in future i.e., whether it will continue or reverse. To put it simply, the volume-based indicator shows the cumulative inflow or outflow of money for a security. 

Let’s take an example to understand this.

If the price of a particular security is on a decreasing trend but the accumulation distribution line of that security is on an upward trend, then it indicates that there is a strong buying pressure for the security which may result in the reversal in the price trend in the near future, i.e. the price might rise going forward.

On the other hand, if the price of the security is on an increasing trend but the accumulation distribution line of that security is on a downward trend, it is indicative of a potential selling spree warning of a probable decline in price in the near future.

As opposed to an inverse trend, if the price and the accumulation distribution line move in the same direction, for instance both are in a downward trend, it indicates that there is still strong supply, and the prices are to continue to decline further.

Calculation of the Accumulation Distribution Line

To calculate the accumulation distribution line, the money flow volume is used. The volume is computed using the money flow multiplier and the period volume. 

Here is the step-by-step process to compute the accumulation distribution line and the formula:  

• The first step in calculating the accumulation distribution line is computing the money flow multiplier using the most recent period’s close, low and high price levels. Here’s the formula:

MFM = (Close-Low) – (High-Close)/High-Low

Where MFM = Money Flow Multiplier, Close = Closing Price, Low = Low price for the period and High = High price for the period

• The second step is to calculate the money flow volume using the money flow multiplier and the volume of the current period. The following formula is used to calculate this: 

Money Flow Volume = Money Flow Multiplier*Period Volume

• The Money Flow Volume calculated above is added to the last value of the accumulation distribution line in the following formula:

A/D = Previous A/D + CMFV

Where A/D is the value of the accumulation/distribution line and CMFV is the current period’s money flow volume

It’s important to note that for the first value of the line, the money flow volume is used itself as the value of the accumulation/distribution line.  

The above process is repeated as and when each period ends by adding/subtracting the new money flow volume to/from the previous accumulation distribution value to get the ADL indicator. 

Shortcomings of Accumulation/Distribution Line:

Like many other technical indicators and tools used by stock traders, the ADL also has its own limitations. The indicator is fraught with two main limitations:

Firstly, it focuses only on the closing price in the current period range and hence does not factor in the price changes from one period to another thereby creating some anomalies. For instance, let’s say a security gaps down 20% on a large volume. The price keeps oscillating throughout the day and finally closes towards the upper end. But, let’s say it is still down from the previous close by say 18%. This would result in the accumulation/distribution line to rise because even though the stock lost value, it closed in the upper end of the price spectrum. The indicator might in fact rise significantly due to high volume. Thus, traders need to stay wary of such anomalies as they can be somewhat misleading

Secondly, another limitation arises from the fact that the accumulation distribution line monitors divergences. Divergences are poor signals of timing. Whenever any disparity occurs between the accumulation distribution line and the price, it does not necessarily mean an imminent price reversal. The price reversal may happen after a long time or may not happen at all

In a Nutshell

Accumulation Distribution Line can be a useful tool in the hands of a market participant who is looking to draw insight from the accumulation or distribution level of a stock. However, to get more reliable inputs, it is advisable to use the indicator in conjunction with other market analysis tools like chart patterns, fundamental analysis, etc. to get a better picture.  

The post Accumulation Distribution Line first appeared on Upstox.

Market participants resort to various tools or indicators that help them make informed decisions when it comes to investing in an asset class. Average True Range (ATR) is one such popular indicator that helps traders assess risks and know about good stop-loss levels.

Let’s discuss the various intricacies of ATR and know its definition, calculation and practical applications.

What is Average True Range (ATR)

ATR is a kind of technical analysis indicator that gauges market volatility. ATR theory was first developed by J. Welles Wilder, the American real estate developer known for introducing the Relative Strength Index (RSI) and the Average Directional Index (ADX). 

With the help of ATR, traders tend to get a better understanding of the price movement’s intensity over a given period.

ATR Calculation
As far as ATR calculation is concerned, it involves a multi-level process. The main goal is to get to a True Range (TR) for each period and then find the average of these True Ranges. The True Range is determined by choosing the highest of the following three values:

• Current High minus Current Low
• Absolute Value of the Current High minus Previous Close
• Absolute Value of the Current Low minus Previous Close

Average True Range (ATR) Formula

ATR = (Previous ATR * (n – 1) + TR)/n

Where, n = number of periods or bars and TR = True Range.

ATR is derived from a 14-day simple moving average of a series of TR indicators. 

Talking about the trading view, one can see the ATR indicator showing as a line underneath the chart. Even though it can be calculated on any timeframe, ATR is generally discussed and interpreted in terms of the daily timeframe – which means that ATR can tell a trader how much a stock will go up or come down in a particular trading day.

ATR Value Interpretation

As a trader, understanding ATR values is important for you. Because, a higher ATR score suggests heightened volatility, which means larger price movements. Similarly, a lower ATR score means less volatility and comparatively smaller price fluctuations. By analysing ATR values, you can tailor strategies to suit the prevailing market conditions.
Practical applications of ATR

Fixing stop-loss levels

One of the key ATR applications is in marking stop-loss levels. Traders use a multiple of the ATR value to set a buffer that accommodates normal price fluctuations. With this dynamic approach, you can adjust the stop-loss levels while keeping in mind the market’s volatility.

Position sizing

ATR also helps in determining the exact position size for a trade. By including the volatility measure, traders can easily know their position sizes and also be aware of the risks, thus avoiding overexposure during periods of high volatility.

ATR’s limitations

Even though the ATR is beneficial and a key tool for traders, it has some limitations. Traders do not get directional information from ATR, and it only focuses on volatility. Furthermore, ATR might not be as useful in highly trending markets, especially when volatility is constant.

To sum up

Overall, the Average True Range (ATR) as an indicator is a boon for traders, helping them gauge market volatility and make key investment decisions accordingly. ATR’s versatility as far as its applications are concerned, spanning from fixing stop-loss levels to gauging trend strength, sets it apart from many other tools. It is particularly helpful for those who look for a complete understanding of price movements. Traders who completely understand and interpret ATR values find themselves ahead in the game as they can easily navigate the volatility with more confidence.

The post Average True Range (ATR) first appeared on Upstox.

The stock exchanges around the world have devised several rules and mechanisms to ensure fair trading practices while maintaining market stability. It is to achieve this objective that bourses use tools like price-bands and circuit-breakers.

Price-bands and circuit-breakers broadly refer to a range within which the price of a financial security can fluctuate.

While price-bands are set for stock prices, circuit breakers are used for indices. Setting such limits prevent extreme price fluctuations, or panic selling and buying on any given day.

The upper and lower limits of these bands are set by exchanges based on the guidelines laid out by the capital market regulator and can be adjusted based on market conditions.

As an investor, you should be well-informed about these concepts in order to safeguard your position in times of extreme market volatility. Let us help you understand in detail how price-bands and circuit breakers work in the Indian stock markets.

Price bands

Price band refers to the range within which a stock can move in a trading session. For instance, a 10% price band for a stock that closed at ₹100 in the previous session implies that it can move anywhere between ₹90 and ₹110 in the ongoing session. 

Trades executed outside this price band would not be allowed and considered invalid. The buying and selling activities would be suspended as soon as the stock hits the upper or lower end of this price range.

Taking the above example, if the stock hits its lower limit of ₹90 during the trading session, it would be “locked” in a lower circuit. This means that no more sell orders can be placed on the counter and the share price can’t go lower than this level. However, the price may increase again to move within the range in case traders start buying the stock.

Stocks can have different daily price bands as listed below:

• Daily price bands of 2% (either way)
• Daily price bands of 5% (either way)
• Daily price bands of 10% (either way)
• No price bands are applicable on scrips on which derivative products are available
• Price bands of 20% (either way) on all remaining scrips (including debentures, preference shares etc.)
• Stocks on which no derivatives products are available but which are part of index derivatives are also subjected to price bands

The price bands can be changed for a stock from time to time. The downward revision is a daily process, whereas upward revision is a bi-monthly process, subject to satisfaction of certain objective criteria.

Circuit breakers

Circuit breakers are basically price bands for indices. When breached, these circuit breakers bring about a coordinated trading halt in all equity and equity derivative markets nationwide.

The index-based circuit breaker system applies at three stages of the index movement either way — at 10%, 15% and 20% compared with its previous close.

These circuit breakers can be triggered by movement of either the BSE Sensex or the Nifty 50, whichever is breached earlier.

The purpose of the halt is to give traders time to evaluate market movement and determine the future course of action. This lends stability to the system and protects investor interest. After every halt, the market reopens with a pre-opening session.

The duration of the market halt varies depending on the quantum and timing of the movement of the index (check the table below). 

To conclude

It can be said that price-bands and circuit breakers act as protection gear for investors in special circumstances when sentiments overrule logic and markets spiral towards one direction. 

The post Price-bands and circuit-breakers in trading first appeared on Upstox.

On-balance volume (OBV) is one of the popular momentum indicators used by traders to predict the price of an asset using volume numbers.

The indicator uses daily volume changes to make predictions of a bullish or bearish trend.

OBV is essentially based on the principle that if volumes are increasing sharply without a significant change in an asset’s price, then the price will eventually move upwards or downwards. Hence, this indicator mainly tries to measure buying and selling pressure in an asset.

The on-balance volume as an indicator represents an asset’s cumulative trading volume. It keeps adding volume on days when the price rises and subtracts it on the days when the price declines.

Remember that one individual quantitative value of OBV does not hold any meaning. Instead, it is the movement of OBV over time that is analysed and used for interpretation. Comparing the movement of OBV with the actual asset price over a period can also help traders forecast future price shifts. Let’s explain this in detail.

How is OBV calculated?

As mentioned earlier, OBV is a cumulative indicator. This means it is the running total of positive volume and negative volume.

Positive volume is the volume on up-days and negative volume is the volume on down days. In other words, all of the day’s volume is added when the stock price closes higher than its previous close, whereas all of the day’s volume is subtracted when the stock closes lower than its previous close.

OBV calculation begins with volume at any previous point in time – say close of the previous trading day. 

Now three situations arise:

Case 1: If the closing price of the asset is higher than the previous day’s closing price. In that scenario:

OBV = Previous OBV + Current Day’s Volume

Case 2: If the closing price of the asset is lower than the previous day’s closing price, then:

OBV = Previous OBV – Current Day’s Volume

Case 3: If the closing price of the asset is the same as the previous day’s closing price:

OBV = Previous OBV + 0

Therefore, OBV will rise over a time when trading volumes on up-days will outweigh the trading volumes on down-days. The trend of rising OBV highlights positive volume pressure that can lead to higher prices.

Similarly, OBV would fall when volume on down-days is much higher than volume on up-days, hinting at a bearish trend.

Also, if the OBV indicator makes a significant move without an accompanying move in the price of the asset, a possible trend reversal can be anticipated.

For example, if volume begins to sharply increase or decrease even as the stock price remains relatively flat, then OBV will show significant movement even as stock price is stable. This indicates that the greater amount of buying or selling is likely to result in a sharp price movement to the upside or downside in the near term.

Limitations of OBV

As is the case with other momentum indicators, the biggest drawback of OBV is that it is limited to volume data and does not consider other important factors that can affect the price movement of an asset. So, it should not be used in isolation. Rather, traders should use other indicators in combination with OBV while keeping a track of the news flow around an asset to make a more informed trading decision.

Also, OBV may give false signals in a low-volume market. It should not be relied on if trading activity is thin in the asset.

Conclusion

OBV indicator uses trading volumes and price of an asset to measure buying and selling pressure. Traders can use OBV to foresee a trend reversal in the price of an asset. However, it should be used in conjunction with other momentum indicators to get a complete and more accurate picture of the markets.

The post On-balance volume indicator first appeared on Upstox.

Stock markets can be daunting, especially for day traders. It can be overwhelming to take quick decisions in a complex financial world where the dynamics change in a brink of a second. In such a fast-paced environment, risk-management tools like bracket orders can be a blessing for day traders.

Bracket order is a trading technique where in your main order is placed along with two more orders – a stop-loss order and a target order. This means that you are taking a single trading position with three interconnected orders.

So, with just one click, you are building a complete trading strategy by deciding the levels where you would want to book profits, as well as by placing a risk limit through a stop-loss order in case the stock movement turns unfavourable. As this creates a bracket around your main trade, it is called a bracket order.

For instance, suppose you want to trade in the shares of a company ABC through a bracket order. As soon as you choose the option of ‘bracket order’ on your trading portal, the first order created would be the main order. It can be both a ‘buy’ or a ‘sell’ order (in case of short-selling).

Let’s understand this through an example. 

For instance, you placed a ‘buy’ order for 500 shares of ABC at ₹100 apiece. Now, as soon as you placed this order, two more orders would get created simultaneously, for which you would have to set price details. So, say you set the stop-loss order at ₹95 per share and a target order at ₹110 per share.

Now, in case the stock breaches the ₹95 levels during the day, your stop-loss order would get triggered and your shares would be automatically sold, thereby limiting your losses to a predetermined level. But, in case the share price rises to hit ₹110 levels, the target order would get executed and profit would be booked.

In case, the stock neither hits the stop-loss level nor the target, the position would get squared off automatically at the end of the trading session. Hence, in such a scenario, all 500 ABC shares would be sold at the market price at the end of the session that day.

Hence, a bracket order is essentially automating the entire trading process for an intra-day trader. Just choose a stock, take a trading position and feed the prices in the system, and you are done.

Things to know about bracket order

It is important to know that the target order and stop-loss order become active in a bracket order only after the main order is executed. So, in case you had placed a main order which was a ‘limit’ order and not placed at the market price. If that order was not executed during the trading session, the other two orders would automatically get cancelled. Only the execution of the main order triggers the other two orders.

Also, a bracket order is valid only for a single trading session and the positions can’t be rolled over to subsequent days.

Advantages of bracket order

The biggest advantage of a bracket order is that it helps traders in managing time by combining multiple orders in one transaction. Using this tool, day traders can easily take positions in multiple stocks without having to monitor the minute-by-minute movement of individual stocks.

Also, bracket orders help traders stay disciplined about their trading strategy and not get impulsive during unpredictable and volatile market movements.

Bracket orders put traders in control of their risk-reward ratio. Securing timely gains and limiting losses protect traders’ capital, thereby ensuring a successful trading journey for a longer duration of time.

To sum up

Smart traders can easily automate the trading process for themselves with the help of bracket orders. This one single trading technique holds the vast potential of not just securing gains for them, but also protecting them from the risk of capital erosion.

The post Bracket order in stock market first appeared on Upstox.

The biggest struggle for any trader is not to get caught in a market trend at the wrong time, just when the reversal is around the corner.

Often it is seen that buyers rush towards an asset when it is rallying, or sellers start dumping a stock as soon as a sell-off is triggered. In this rush, it gets difficult for traders to assess whether a security is ‘overbought’ or ‘oversold’?

This is when the Relative Strength Index, popularly known as RSI, comes into the picture. In technical trading, RSI helps the traders to assess the strength of a stock and the momentum.

RSI is essentially a popular momentum oscillator used by traders. Now what exactly is momentum oscillator? A momentum oscillator is basically a technical analysis tool that is used to identify the strength or weakness of a particular trend in the market.

As a momentum oscillator, RSI analyses the speed and change of price movements in a stock to indicate whether it looks ‘overbought’ or ‘oversold’.

What do ‘overbought’ and ‘oversold’ mean?

In simple words, being overbought means a stock is overpriced. An asset can be called overbought if it starts trading much above its calculated value. Similarly, when the asset trades lower than its perceived fair value, it is said to be oversold.

When a security is considered overbought, a price correction is likely to follow. In that situation, traders should start selling the security before the market becomes unfavourable for them.

If the security is being seen as oversold, it is time for traders to take fresh long positions in the asset.

RSI, therefore, helps traders determine the correct levels to exit or enter a security when it is caught in an upward or downward spiral.

How is RSI calculated?

The value of RSI fluctuates between 0 and 100. Any value below 30 indicates ‘oversold’ conditions, while value above 70 hints at ‘overbought’ situations. A value of 50 indicates a balance between bullish and bearish positions and is considered a ‘neutral’ condition.

Simply put, an RSI reading below 30 can be interpreted as a ‘Buy’ indication for a stock, while that above 70 can be seen as a ‘Sell’ signal.

Formula to calculate RSI

The average time period used to calculate RSI for a security is 14 trading days. Let’s say a stock was up in 10 of those days and down on the other 4. Then, as the first step to calculate RSI, the average daily gain for those 10 days should be divided by 14. This would give the ‘initial average gain’. Similarly, the average loss of 4 days should be divided by 14, which would give the ‘initial average loss’.

In the second step, you should calculate the relative strength (RS) which is the ratio of initial average gain and initial average loss.

RS = Initial Average Gain/Initial Average Loss

Once you have got the RS, you can calculate RSI using the following formula:

RSI = 100 – (100/1 + RS)

This calculation will give you the first RSI for your stock. You can also build the RSI chart further using subsequent closing prices of the stock after 14 days.

To calculate the second RSI for the stock to build a graph, you will need an extra closing price for the stock, which would give you a new average.

New average gain = [(previous initial average gain) x 13 + current daily gain]/14

New average loss = [(previous initial average loss) x 13 + current daily loss]/14

Once you have got new averages, recalculate the Relative Strength and get a second RSI value using the same formula. This way, you can keep building the RSI chart.

What are the limitations of RSI?

Momentum oscillators like RSI do not take into account any change in the fundamental conditions of the stock. All estimates of being overbought or oversold just depend on the price action.

Let us suppose that the share price of a company is falling day after day due to an adverse policy change by the government that will drastically affect profitability, Now, RSI might indicate that the stock is ‘oversold’, when actually the share price is just adjusting to the new estimated earnings.

Hence, traders should ideally depend on RSI only when fundamental factors are not at play.

Also, it is not advisable to rely on RSI indications during a bull or bear market, when there is broad-based selling or buying across all sectors and stocks, as the values may become erroneous.

To sum up

The Relative Strength Index, or RSI, can prove to be an extremely useful momentum indicator for day traders to get reliable ‘buy’ or ‘sell’ calls if used wisely in combination with other momentum oscillators. Along with the RSI, the traders also take into account the fundamental analysis of the asset.

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