▎Part 1: Advanced Patterns in Indian Stocks
▎1. Head and Shoulders Pattern
• Definition: A reversal pattern that signals a change in trend direction. It consists of
three peaks: a higher peak (head) between two lower peaks (shoulders).
• Structure:
• Left Shoulder: Price rises to a peak and then declines.
• Head: Price rises to a higher peak and then declines again.
• Right Shoulder: Price rises again but not as high as the head, then declines.
• Example:
• Imagine a stock price goes from ₹1,500 to ₹2,100 (left shoulder), then up to ₹2,500
(head), and finally up to ₹2,300 (right shoulder) before dropping back down to ₹1,800.
This pattern indicates a potential reversal from bullish to bearish.
▎2. Double Tops and Bottoms
• Double Top:
• Definition: A bearish reversal pattern formed after an uptrend, consisting of two
peaks at roughly the same price level.
• Example: A stock rises from ₹800 to ₹1,200, then drops to ₹1,000, rises again to
₹1,200, and finally drops below ₹1,000. This indicates a potential reversal from bullish
to bearish.
• Double Bottom:
• Definition: A bullish reversal pattern formed after a downtrend, consisting of two
troughs at roughly the same price level.
• Example: A stock falls from ₹1,200 to ₹800, bounces back to ₹1,000, falls again to
₹800, and then rises above ₹1,000. This suggests a potential reversal from bearish to
bullish.
▎Part 2: Indicators for Indian Stocks
▎1. Relative Strength Index (RSI)
• Definition: A momentum oscillator that measures the speed and change of price
movements, typically used to identify overbought or oversold conditions.
• Calculation:
• RSI = 100 - (100 / (1 + RS))
• Where RS (Relative Strength) = Average Gain / Average Loss over a specified period
(usually 14 days).
• Example:
• If a stock has an average gain of ₹20 and an average loss of ₹10 over 14 days, RS =
20/10 = 2. Plugging this into the RSI formula gives RSI = 100 - (100 / (1 + 2)) = 66.67.
An RSI above 70 indicates overbought conditions, while below 30 indicates oversold
conditions.
▎2. Moving Average Convergence Divergence (MACD)
• Definition: A trend-following momentum indicator that shows the relationship
between two moving averages of a security's price.
• Components:
• MACD Line = 12-day EMA - 26-day EMA
• Signal Line = 9-day EMA of the MACD Line
• Histogram = MACD Line - Signal Line
• Example:
• If the 12-day EMA is ₹1,000 and the 26-day EMA is ₹950, the MACD line is ₹50. If the
signal line (9-day EMA of the MACD) is ₹30, the histogram is ₹50 - ₹30 = ₹20. When the
MACD crosses above the signal line, it could indicate a buy signal; crossing below could
indicate a sell signal.
▎Paper Trading Plan for Indian Stocks
Now that you have an understanding of advanced patterns and indicators in the context
of Indian stocks, here’s how you can structure your paper trading sessions for effective
learning:
▎Paper Trading Structure (3 Hours)
1. Hour 1: Study and Identify Patterns
• Spend the first hour reviewing charts of Indian stocks to identify Head and
Shoulders, Double Tops, and Double Bottoms.
• Use historical data or a demo trading platform to look for these patterns.
• Example Task: Identify two Head and Shoulders patterns on Indian stock charts like
Reliance Industries or Tata Motors.
2. Hour 2: Apply RSI and MACD
• Use the RSI and MACD indicators on the charts you studied in Hour 1.
• Calculate RSI values for stocks showing patterns and analyze them.
• Example Task: For one identified pattern, calculate RSI and MACD values and
interpret their signals using stocks like Infosys or HDFC Bank.
3. Hour 3: Execute Trades Based on Findings
• Choose one or two stocks where you see clear patterns combined with RSI/MACD
signals.
• Simulate entering trades based on your analysis.
• Example Task: If you identify a Double Bottom with an RSI below 30 in a stock like
SBI (State Bank of India), simulate buying the stock.
▎Summary
By breaking down advanced patterns and indicators into clear definitions, structures,
calculations, and examples relevant to Indian stocks, you can more easily grasp these
concepts. Regular practice through paper trading will reinforce your understanding and
help you remember what you've learned. Keep reviewing and applying these concepts
consistently!
