ADX - Simple tool to make money!

The average directional movement index (ADX) was developed in 1978 by J. Welles Wilder as an indicator of trend strength in a series of prices of a financial instrument.
 ADX has become a widely used indicator for technical analysts, and is provided as a standard in collections of indicators offered by various trading platforms.

The ADX is a combination of two other indicators developed by Wilder, the positive directional indicator (abbreviated +DI) and negative directional indicator (-DI).
The ADX combines them and smooths the result with an exponential moving average.

ADX is a lagging indicator that measures the trend strength without regard to trend direction.

ADX is formed by combining two other indicators which are positive directional indicator (abbreviated +DI) and negative directional indicator (abbreviated -DI).

Positive Directional Indicator is calculated based on differences between current high and previous high over recent trading periods. Similarly Negative Directional 

Indicator is calculated based on differences between current low and previous low over certain recent trading periods.

ADX will range between 0 and 100 and is usually calculated based on 14 time-periods. Usually 20 is used as the key level for analysing ADX.

Since ADX enables one to quantify trend strength, it helps to identify the strongest trends as well as range conditions. So, appropriate trading strategy can be used. In trending conditions, one can enter on pullbacks and trade in direction of the trend where as in range conditions, one can trade on reversal either at support (bullish) or at resistance (bearish). In range conditions, another strategy can be to combine ADX with RSI (overbought and oversold) signal.

Different researchers have come out with various ways to interpret ADX. Some of the popular ones are as below:

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ADX below 20 indicates absence of trend and similarly ADX above 25 indicated strong trend. So, avoid trending strategies when ADX is below 20 as the market will be range bound and price action happens sideways.

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 Increasing ADX values above 20, indicates increasing trend strength, thereby uptrending ADX confirms either bullish or bearish trends supporting decision to either buy or sell.

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ADX crossing over 25 from below especially after being below for 30 bars or so, indicates that price has broken out of range with sufficient strength and that now trend trading strategies can be profitably deployed.

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ADX above 50 indicates extremely strong trend.

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ADX value pulling back below 40 indicates trend getting exhausted and likely to reverse.

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ADX crossing below 20 from above especially after being above for 30 bars or so, indicates that market is likely to be rangebound and accordingly risk management strategies can be put in place to handle change in trend momentum.

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Trend is deemed to be uptrend when (+DI) line is above (-DI) line and ADX is above 20.

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Trend is deemed to be downtrend when (+DI) line is below (-DI) line and ADX is above 20.

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When ADX is above 20 and +DI line crosses over -DI line, buy signal is indicated.

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When ADX is above 20 and -DI line crosses over +DI line, sell signal is indicated.

ADX indicator scale

If ADX is between 0 and 25 then the stock is in a trading range. It is likely just chopping around sideways. Avoid these weak, pathetic stocks!

Once ADX gets above 25 then you will begin to see the beginning of a trend. Big moves (up or down) tend to happen when ADX is right around this number.

When the ADX indicator gets above 30 then you are staring at a stock that is in a strong trend! These are the stocks that you want to be trading!

You won't see very many stocks with the ADX above 50. Once it gets that high, you start to see trends coming to an end and trading ranges developing again.

​Applied ADX on live charts with 100% Success Rate :- 

1) Nifty :- ​

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​2) Infy :-​

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3) Reliance :-

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​4) Maruti :-​

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5) ITC :- 

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Whether to follow it or not, it is completely your choice. To me this looks simple and easy to interpret and make money. Happy Trading :) 

Intrinsic Value & Book Value - Concept Checker

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Intrinsic or fundamental value is the perceived value of an investment's future cash flows, expected growth, and risk. The goal of the value investor is to purchase assets at prices lower than the intrinsic or fundamental value.

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Intrinsic value is an all-important concept that offers the only logical approach to evaluating the relative attractiveness of investments and businesses. Intrinsic value can be defined simply: It is the discounted value of the cash that can be taken out of a business during its remaining life.

The calculation of intrinsic value, though, is not so simple.  Intrinsic value is an estimate rather than a precise figure, and it is additionally an estimate that must be changed if interest rates move or forecasts of future cash flows are revised. Book value, an easily calculable number, though one of limited use.

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The book value of an entity is an accountant's view of the value of the company. The book value could be the intrinsic or fundamental value if you believe the accountants' estimate of assets and liabilities are the true value and there are not intangible values to be considered. But accounting methodology makes it rare that the book value would be a good indication of the real or fundamental value.

You can gain some insight into the differences between book value and intrinsic value by looking at one form of investment, a college education. Think of the education's cost as its "book value." If this cost is to be accurate, it should include the earnings that were foregone by the student because he chose college rather than a job.

For this exercise, we will ignore the important non-economic benefits of an education and focus strictly on its economic value. First, we must estimate the earnings that the graduate will receive over his lifetime and subtract from that figure an estimate of what he would have earned had he lacked his education. That gives us an excess earnings figure, which must then be discounted, at an appropriate interest rate, back to graduation day. The

rupee​

 result equals the intrinsic economic value of the education.

Some graduates will find that the book value of their education exceeds its intrinsic value, which means that whoever paid for the education didn't get his money's worth. In other cases, the intrinsic value of an education will far exceed its book value, a result that proves capital was wisely deployed. In all cases, what is clear is that book value is meaningless as an indicator of intrinsic value.

Compounding is the 8th Wonder of the World, Power of Equity Compounding is the 9th wonder of the world - Unlock the real truth behind stock market!!!

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This is what 10,000 in Stock Market can do for you & still people say money is not made in stock market. Wipro Stock has multiplied by 7,04,265 times or an annualised return of 48.22% over 34 years.

Film actor Rajesh Khanna bought a bungalow in iconic Carter Road in Mumbai for Rs.3.5 lakhs in 1970. His heirs sold it recently for Rs.85 crores. The property has multiplied by 2428 times or an annualized return of 19.38% over 44 years.

Samudhra Mahal in Mumbai is another expensive property. A flat purchased in 1970 at Rs.700 per sq.ft was sold at Rs.1,18,000 per sq.ft in 2013. Money multiplied by 168 times in 43 years. This works out to an annualized return of 12.66%

In 1963, Godrej paid Rs.1 lakh to buy his first house, a 2916 sq.feet apartment at Usha Kiran, Carmicheal road, in tony South Mumbai. In 2011 he sold it for Rs.25 crore. Money multiplied by 2500 times over 48 years or an annualized return of 17.70%

The first three properties can be bought and owned by cream or elite of the society who are worth at least tens of crores, mostly hundreds of crores.

Power of equity is least understood in this country.

If you can withstand notional loss (if you don't book) in portfolio during bear markets, not worry about daily price movements, it is possible to make much better money than what can be made out of best of real estate.

Give at least the same importance to equity as you give to real estate.

You don't mind holding real estate for 20 or 30 years. Please do the same for equity ignoring bull and bear markets, notional profits and losses.

Many of you have been investing for last couple of years. Stay the course for at least another 15 to 20 years completely ignoring market fluctuations. You would be amazed at the fortune created for your retirement or to pass on to your children.

Their are many examples of wealth creation in stock market, it is important that you realise the Power of Equity. Another such example is CIPLA, see what it did. Cipla Stock has multiplied by 2,32,886 times or an annualised return of 43.83% over 34 years.

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Remember : Compounding is the 8th Wonder of the World, Power of Equity Compounding is the 9th wonder of the world - Unlock the real truth behind stock market :) 

Diagonal Put Time Spread Strategy: Live Call

Buy Nifty 8500 Dec 2015 Strike Put @491.50

Sell Nifty 8100 Oct 2014 Strike Put @116

Net Debit = 491.50-116 = 375.50

After Oct expiry, keep selling next month or far months calls. Cost would reduce significantly & profits would maximise tremendously. 

Live Execution done today:

Relative Strength Index

Relative Strength Index

The relative strength index (RSI) is a technical indicator used in the analysis of financial markets. A technical momentum indicator that compares the magnitude of recent gains to recent losses in an attempt to determine overbought and oversold conditions of an asset.

It is intended to chart the current and historical strength or weakness of a stock or market based on the closing prices of a recent trading period. The indicator should not be confused with relative strength.

The RSI is classified as a momentum oscillator, measuring the velocity and magnitude of directional price movements. Momentum is the rate of the rise or fall in price. The RSI computes momentum as the ratio of higher closes to lower closes: stocks which have had more or stronger positive changes have a higher RSI than stocks which have had more or stronger negative changes.

The RSI is most typically used on a 14 day timeframe, measured on a scale from 0 to 100, with high and low levels marked at 70 and 30, respectively. Shorter or longer timeframes are used for alternately shorter or longer outlooks. More extreme high and low levels—80 and 20, or 90 and 10—occur less frequently but indicate stronger momentum.

When price moves up very rapidly, at some point it is considered overbought. Likewise, when price falls very rapidly, at some point it is considered oversold. In either case, Wilder deemed a reaction or reversal imminent.

RSI Formula:-

Interpreting Failure Swings: -

Wilder thought that "failure swings" above 70 and below 30 on the RSI are strong indications of market reversals. For example, assume the RSI hits 80, pulls back to 71, then rises to 81. If it falls below 71, Wilder would consider this a "failure swing" above 70.

Andrew Cardwell has developed several new interpretations of RSI to help determine and confirm trend. First, Cardwell noticed that uptrends generally traded between RSI 40 and 80, while downtrends usually traded between RSI 60 and 20. Cardwell observed when securities change from uptrend to downtrend and vice versa, the RSI will undergo a "range shift."

Next, Cardwell noted that bearish divergence: 1) only occurs in uptrends, and 2) mostly only leads to a brief correction instead of a reversal in trend. Therefore bearish divergence is a sign confirming an uptrend. Similarly, bullish divergence is a sign confirming a downtrend.

Reversals

Cardwell discovered the existence of positive and negative reversals in the RSI. Reversals are the opposite of divergence.

For example, a positive reversal occurs when an uptrend price correction results in a higher low compared to the last price correction, while RSI results in a lower low compared to the prior correction.

A negative reversal happens when a downtrend rally results in a lower high compared to the last downtrend rally, but RSI makes a higher high compared to the prior rally.

In other words, despite stronger momentum as seen by the higher high or lower low in the RSI, price could not make a higher high or lower low. This is evidence the main trend is about to resume. Cardwell noted that positive reversals only happen in uptrends while negative reversals only occur in downtrends, and therefore their existence confirms the trend.

Practical understanding through trading over the years & effective trading ranges: -

1) It is always better to work on RSI of 27 days rather than 14 days for 73:28

2) Positive ranges results in buy on dips near 40 RSI but not sell at 80. When I say buy on dips, it would be more fruitful to sell a far OTM Put or bullish derivative strategy near RSI of 40 rather than buying future.

3) Negative ranges results in Sell on Rise near 60-65 but not buy at 20. When I say sell on rise, it is far better to sell far OTM call or bearish derivative strategy than selling future.

4) It is always safe to work on 14 days RSI of 85:15 on stocks with good liquidity

5) Conventional ​14 days RSI of 80:20 works well on indexes

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Thank you​. ​Comments and feedback would be appreciated.