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| Random Walk Theory |
| Price changes are serially
independent and that price history is not a reliable indicator
of future price direction. |
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Rectangle formation |
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A pause in the trend during which prices move sideway between two parallel
horizontal lines. The rectangle is sometimes referred to as a trading range or a
congestion area. It usually represents just a consolidation period in the
existing trend, and is usually resolved in the direction of the market trend
that preceded its occurrence.
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Relative Strength Index (RSI) |
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A ratio line comparing two
different entities. It is often used to correct the
erratic movement seen in constructing a momentum line
because of sharp changes in the values being dropped
off.
The actual formula is calculated as follows :
RSI = 100 (100/(1+RS))
RS = Average of x days up closes/ Average of x days
down closes
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Resistance
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A price level or area over the market where selling
pressure overcomes buying pressure and a price advance
is turned back. Usually a previous peak identifies a
resistance level. It is a place where sellers are more
dominant than buyers and if the selling is absorbed
there, the stock can go up.
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Retracement
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Price action that is not in the trends direction
but that does not affect the direction of the trend
itself. Generally if the action retraces more than
two-thirds of the trend in progress, the movement is
not temporary but rather signals a reversal. Also
known as a correction.
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Return Move
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A move that develops as a
bounce-back to the bottom of the neckline or to the
previous reaction low, both of which have now become
overhead resistance. Volume may help to determine the
size of the bounce.
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Reversal day
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A trading day on which prices set a new extreme in the
trends direction during trading, but close in the
opposite direction.
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Right angle triangle
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This pattern is formed when one of the lines of
symmetrical triangle is horizontal and the other one
is slanting up or down towards it. It may be of two
types namely
i) Ascending when the top line is horizontal and
bottom line slants towards it. It indicates a
forthcoming rally in the stock prices. This is bullish
in nature.
ii) Descending when the bottom line is horizontal and
top line slants towards it. It indicates a breakout of
prices after completion of triangle formation. This is
bearish in nature.
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Runaway (measuring) Gap
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After the move has been underway for a while,
somewhere around the middle of the move, prices will
leap forward to form a second type of gap (or a series
of gaps) called the runway gap. This type of gap
reveals a situation where the market is moving
effortlessly on moderate volume.
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Risk/reward Ratio
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In stock markets any position we take, we should
always see the risk/reward ratio.
It means that if our risk is 1 unit, then a
profit should be atleast 2 unit for a risk/reward
ratio if 1:2 i.e., risk should be half than the
reward. Example:-
If we buy Nifty at Rs. 2000 and our stop loss is 20
points, then our reward should be atleast 40 points.
Here we expect Nifty to go up to Rs. 2040.
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