The Fibonacci Retracements

The topic of Fibonacci retracements is quite intriguing. To fully understand and appreciate the concept
of Fibonacci retracements, one must understand the Fibonacci series. The origins of the Fibonacci
series can be traced back to the ancient Indian mathematic scripts, with some claims dating back to
200 BC. However, in the 12th century, Leonardo Pisano Bogollo, an Italian mathematician from Pisa,
known to his friends as Fibonacci discovered Fibonacci numbers.The Fibonacci series is a sequence of
numbers starting from zero arranged so that the value of any number in the series is the sum of the
previous two numbers.

The Fibonacci sequence is as follows:

0 , 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377, 610…

Notice the following:

233 = 144 + 89

144 = 89 + 55

89 = 55 +34

Needless to say, the series extends to infinity. There are few interesting properties of the Fibonacci
series.

Divide any number in the series by the previous number; the ratio is always approximately 1.618.

For example:

610/377 = 1.618

377/233 = 1.618

233/144 = 1.618

The ratio of 1.618 is considered as the Golden Ratio, also referred to as the Phi. Fibonacci numbers
have their connection to nature. The ratio can be found in the human face, flower petals, animal
bodies, fruits, vegetables, rock formation, galaxy formations etc. Of course, let us not get into this
discussion as we would be digressing from the main topic. For those interested, I would suggest you
search on the internet for golden ratio examples, and you will be pleasantly surprised. Further into
the ratio properties, one can find remarkable consistency when a number is in the Fibonacci series is
divided by its immediate succeeding number.

For example:

89/144 = 0.618

144/233 = 0.618

377/610 = 0.618

At this stage, do bear in mind that 0.618, when expressed in percentage is 61.8%.

Similar consistency can be found when any number in the Fibonacci series is divided by a number two
places higher.

For example:

13/34 = 0.382

21/55 = 0.382

34/89 = 0.382

0.382, when expressed in percentage terms, is 38.2%

Also, consistency is when a number in the Fibonacci series is divided by a number 3 place higher.

For example:

13/55 = 0.236

21/89 = 0.236

34/144 = 0.236

55/233 = 0.236

0.236, when expressed in percentage terms, is 23.6%.

Relevance to stocks markets

It is believed that the Fibonacci ratios, i.e. 61.8%, 38.2%, and 23.6%, finds its application in
stock charts. Fibonacci analysis can be applied when there is a noticeable up-move or down-
move in prices. Whenever the stock moves either upwards or downwards sharply, it usually
tends to retrace back before its next move. For example, if the stock has run up from Rs.50
to Rs.100, it is likely to retrace back to probably Rs.70 before moving Rs.120.
‘The retracement level forecast’ is a technique that can identify upto which level
retracement can happen. These retracement levels provide a good opportunity for the
traders to enter new positions in the trend direction. The Fibonacci ratios, i.e. 61.8%,
38.2%, and 23.6%, help the trader identify the retracement’s possible extent. The trader can
use these levels to position himself for trade.
Have a look at the chart below:

I’ve encircled two points on the chart, at Rs.380 where the stock started its rally and at
Rs.489, where the stock prices peaked.
I would now define the move of 109 (380 – 489) as the Fibonacci upmove. As per the
Fibonacci retracement theory, after the upmove one can anticipate a correction in the stock
to last up to the Fibonacci ratios. For example, the first level up to which the stock can
correct could be 23.6%. If this stock continues to correct further, the trader can watch out
for the 38.2% and 61.8% levels.
Notice in the example shown below, the stock had retraced up to 61.8%, which coincides
with 421.9, before it resumed the rally.
We can arrive at 421 by using simple math as well –
Total Fibonacci up move = 109
61.8% of Fibonacci up move = 61.8% * 109 = 67.36
Retracement @ 61.8% = 489- 67.36 = 421.6
Likewise, we can calculate for 38.2% and the other ratios. However, one need not manually
do this as the software will do this for us. Here is another example where the chart has rallied
from Rs.288 to Rs.338. Therefore 50 points move makes up for the Fibonacci upmove. The
stock retraced back 38.2% to Rs.319 before resuming its up move.

The Fibonacci retracements can also be applied to falling stocks to identify levels upto which
the stock can bounce back. In the chart below (DLF Limited), the stock started to decline from
Rs.187 to Rs. 120.6 thus making 67 points as the Fibonacci down move.
After the down move, the stock attempted to bounce back retracing back to Rs.162, which is
the 61.8% Fibonacci retracement level.

Fibonacci Retracement construction

As we now know, Fibonacci retracements are movements in the chart that go against the
trend. To use the Fibonacci retracements, we should first identify the 100% Fibonacci move.
The 100% move can be an upward rally or a downward rally. To mark the 100% move, we
need to pick the most recent peak and trough on the chart. Once this is identified, we connect
them using a Fibonacci retracement tool. This is available in most of the technical analysis
software packages including Zerodha’s Pi 🙂

Here is a step by step guide:

Step 1) Identify immediate peak and trough. In this case, the trough is at 150, and the peak is
at 240. The 90 point moves make it 100%.

Step 2) Select the Fibonacci retracement tool from the chart tools

Step 3) Use the Fibonacci retracement tool to connect the trough and the peak.
After selecting the Fibonacci retracement tool from the charts tool, the trader has to click on
trough first, and without un-clicking, he has to drag the line till the peak. While doing this,
simultaneously, the Fibonacci retracements levels start getting plotted on the chart.
However, the software completes the retracement identification process only after selecting
both the trough and the peak. This is how the chart looks after selecting both points.

You can now see the Fibonacci retracement levels are calculated and loaded on the chart. Use
this information to position yourself in the market.

How should you use the Fibonacci retracement levels?

Think of a situation where you wanted to buy a particular stock, but you have not been able
to do so because of a sharp run-up in the stock. The most prudent action to take would be to
wait for a retracement in the stock in such a situation. Fibonacci retracement levels such as
61.8%, 38.2%, and 23.6% act as a potential level upto which a stock can correct.
By plotting the Fibonacci retracement levels, the trader can identify these retracement levels,
and therefore position himself for an opportunity to enter the trade. However please note
like any indicator, use the Fibonacci retracement as a confirmation tool.
I would buy a stock only after it has passed the other checklist items. In other words, my
conviction to buy would be higher if the stock has:
Formed a recognizable candlestick pattern
The stoploss coincides with the S&R level.
Volumes are above average.
Along with the above points, if the stoploss also coincides with the Fibonacci level, I know the
trade setup is well aligned to all the variables, and hence I would go in for a strong buy. The
word ‘strong’ usage indicates the level of conviction in the trade set up. The more confirming
factors we use to study the trend and reversal, more robust is the signal. The same logic can
also be applied for the short trade.

Key takeaways from this chapter

The Fibonacci series forms the basis for Fibonacci retracement
A Fibonacci series has many mathematical properties. These mathematical properties are
prevalent in many aspects of nature.
Traders believe the Fibonacci series has its application in stock charts as it identified potential
retracement levels.
Fibonacci retracements are levels (61.8%, 38.2%, and 23.6% ) upto which a stock can retrace
before it resumes the original directional move.
At the Fibonacci retracement level, the trader can look at initiating a new trade. However,
before initiating the trade, other points in the checklist should also confirm.

17. The Dow Theory (Part 1)

The Dow Theory has always been a very integral part of technical analysis. The Dow Theory
was used extensively even before the western world discovered candlesticks. In fact, even
today, Dow Theory concepts are being used. In fact, traders blend the best practices from
Candlesticks and Dow Theory.
The Dow Theory was introduced to the world by Charles H. Dow, who also founded the Dow-
Jones financial news service (Wall Street Journal). During his time, he wrote a series of articles
starting from the 1900s which in the later years was referred to as ‘The Dow Theory’. Much
credit goes to William P Hamilton, who compiled these articles with relevant examples over
a period of 27 years. Much has changed since the time of Charles Dow, and hence there are
supporters and critics of the Dow Theory.

The Dow Theory Principles

The Dow Theory is built on a few beliefs. These are called the Dow Theory tenets. Charles H
Dow developed these tenets over the years of his observation on the markets. 9 tenets are
considered as the guiding force behind the Dow Theory. They are as follows:
Sl
Tenet What does it mean?
No

Indices The stock market indices discount everything which is known & unknown in the public
01 discounts domain. If a sudden and unexpected event occurs, the stock market indices quickly
everything recalibrate itself to reflect the accurate value

Overall
there are 3
02 broad Primary Trend, Secondary Trend, and Minor Trends
market
trends.

This is the major trend of the market that lasts from a year to several years. It indicates the
The Primary broader multiyear direction of the market. While the long term investor is interested in the
03
Trend primary trend, an active trader is interested in all trends. The primary trend could be a
primary uptrend or a primary downtrend

These are corrections to the primary trend. Think of this as a minor counter-reaction to the
The
larger movement in the market. Example – corrections in the bull market, rallies & recoveries
04 Secondary
in the bear market. The counter-trend can last anywhere between a few weeks to several
Trend
months

Minor
05 Trends/Daily These are daily fluctuations in the market; some traders prefer to call them market noise
fluctuations

All Indices
must We cannot confirm a trend based on just one index. For example, the market is bullish only if
06 confirm CNX Nifty, CNX Nifty Midcap, CNX Nifty Smallcap etc. all move in the same upward direction.
with each It would not be possible to classify markets as bullish, just by the action of CNX Nifty alone
other.

The volumes must confirm along with the price. The trend should be supported by volume.
Volumes
The volume must increase as the price rises and should reduce as the price falls in an
07 must
uptrend. In a downtrend, the volume must increase when the price falls and decrease when
confirm
the price rises. You could refer chapter 12 for more details on volume

Sideway
markets can Markets may remain sideways (trading between a range) for an extended period. Example:-
08 substitute Reliance Industries between 2010 and 2013 was trading between 860 and 990. The sideways
secondary markets can be a substitute for a secondary trend
markets.

The closing
price is the Between the open, high, low and close prices, the close is the most important price level as it
09
most represents the final evaluation of the stock during the day.
sacred.
The different phases of Market

Dow Theory suggests the markets are made up of three distinct phases, which are self-
repeating. These are called the Accumulation phase, the Markup phase, and the Distribution
phase.
The Accumulation phase usually occurs right after a steep sell-off in the market. The steep
sell-off in the markets would have frustrated many market participants, losing hope of any
uptrend in prices. The stock prices would have plummeted to rock bottom valuations, but the
buyers would still be hesitant to buy fearing another sell-off. Hence the stock price languishes
at low levels. This is when the ‘Smart Money’ enters the market.
Smart money is usually the institutional investors who invest in a long term perspective. They
invariably seek value investments which are available after a steep sell-off. Institutional
investors start to acquire shares regularly, in large quantities over an extended period of time.
This is what makes up an accumulation phase. This also means that the sellers trying to sell
during the accumulation phase will easily find buyers, and therefore the prices do not decline
further. Hence invariably, the accumulation phase marks the bottom of the markets. More
often than not, this is how the support levels are created. Accumulation phase can last up to
several months.
Once the institutional investors (smart money) absorb all the available stocks, short term
traders since the support. This usually coincides with the improved business sentiment. These
factors tend to take the stock price higher. This is called the markup phase. During the Markup
phase, the stock price rallies quickly and sharply. The most important feature of the markup
phase is speed. Because the rally is quick, the public at large is left out of the rally. New
investors are mesmerized by the return, and everyone from the analysts to the public sees
higher levels ahead.
Finally, when the stock price reaches new highs (52 weeks high, all-time high), everyone
around would be talking about the stock market. The news reports turn optimistic, business
environment suddenly appears vibrant, and everyone (public) wants to invest in the markets.
By and large, the public wants to get involved in the markets as there is a positive sentiment.
This is when the distribution phase occurs.
The judicious investors (smart investors) who got in early (during the accumulation phase)
will start offloading their shares slowly. The public will absorb all the volumes offloaded by
the institutional investors (smart money) there by giving them the well-needed price support.
The distribution phase has similar price properties as that of the accumulation phase.
Whenever the prices attempt to go higher in the distribution phase, the smart money offloads
their holdings. Over a period of time, this action repeats several times, and thus the resistance
level is created.
Finally, when the institutional investors (smart money) completely sell off their holdings,
there would no further support for prices. Hence, what follows after the distribution phase is
a complete sell-off in the markets, also known as the mark down of prices. The selloff in the
market leaves the public in an utter state of frustration.
Completing the circle, what follows the selloff phase is a fresh round of accumulation phase,
and the whole cycle repeats. It is believed that that entire cycle from the accumulation phase
to the selloff spans over a few years.
It is important to note that no two market cycles are the same. For example, in the Indian
context, the bull market of 2006 – 07 is way different from the bull market of 2013-14.
Sometimes the market moves from the accumulation to the distribution phase over a
prolonged multi-year period. On the other hand, the same move from the accumulation to
the distribution can happen over a few months. The market participant needs to tune himself
to evaluating markets in the context of different phases, as this sets a stage for developing a
view on the market.

The Dow Patterns

Like in candlesticks, there are few important patterns in Dow Theory as well. The trader can
use these patterns to identify trading opportunities. Some of the patterns that we will study
are:
The Double bottom & Double top formation
The Triple Bottom & Triple Top
Range formation, and
Flag formation
The support and resistance is also a core concept for the Dow Theory, but we have discussed
it much earlier a chapter dedicated to it because of its importance (in terms of placing targets
and stop-loss).

The Double bottom and top formation

A double top & double bottom is considered a reversal pattern. A double bottom occurs when
a stock’s price hits a shallow price level and rebounds back with a quick recovery. Following
the price recovery, the stock trades at a higher level (relative to the low price) for at least 2
weeks (well-spaced in time). After which the stock attempts to hit back to the low price
previously made. If the stock holds up once again and rebounds, then a double bottom is
formed.
A double bottom formation is considered bullish, and hence one should look at buying
opportunities. Here is a chart that shows a double bottom formation in Cipla Limited:

Notice the time interval between the two bottom formations. The price level was well spaced
in time.
Likewise, in a double top formation, the stock attempts to hit the same high price twice but
eventually sells off. Of course, the time gap between the two attempts of crossing the high
should at least be 2 weeks. In the chart below (Cairn India Ltd), we can notice the double top
at 336 levels. On close observation, you will notice the first top was around Rs.336, and the
second top was around Rs.332. With some amount of flexibility, a small difference such as
this should be considered alright.

From my own trading experience, I find both double tops and double bottoms handy while
trading. I always look for opportunities where the double formation coincides with a
recognizable candlesticks formation.
For instance, imagine a situation wherein the double top formation, the 2nd top forms a
bearish pattern such as a shooting star. This means, both from the Dow Theory and
candlestick perspective there is consensus to sell; hence the conviction to take the trade is
higher.
The triple top and bottom
As you may have guessed, a triple formation is similar to a double formation, except that the
price level is tested thrice as opposed twice in a double bottom. The interpretation of the
triple formation is similar to the double formation.
As a rule of thumb, the more number of times the price tests, and reacts to a certain price
level, the more sacred the price level is considered. Therefore by this, the triple formation is
considered more powerful than the double formation.
The following chart shows a triple top formation for DLF Limited. Notice the sharp sell-off
after testing the price level for the 3rd time, thus completing the triple top.

Key takeaways from this chapter

1. Dow Theory was used in the western world even before candlesticks were formally
introduced.
2. Dow Theory works on 9 basic tenets.
3. The market can be viewed in 3 basic phases – accumulation, mark up, and distribution
phase.
4. The accumulation phase is when the institutional investor (smart money) enters the
market, mark up phase is when traders make an entry. The final distribution phase is
when the larger public enter the market.
5. What follows the distribution phase is the markdown phase, following which the
accumulation phase will complete the circle.
6. The Dow theory has a few basic patterns, which are best used in conjunction with
candlesticks.
7. The double and triple formations are reversal patterns, which are quite effective.
8. The interpretation of double and triple formations are the same
The Dow Theory (Part 2)
Trading Range
The concept of the range is a natural extension to the double and triple formation. The stock
attempts to hit the same upper and lower price level multiple times for an extended period
of time in a range. This is also referred to as the sideways market. As the price oscillates in a
narrow range without forming a particular trend, it is called a sideways market or sideways
drift. So, when both the buyers and sellers are not confident about the market direction, the
price would typically move in a range. Hence, typically long term investors would find the
markets a bit frustrating during this period.
However, the range provides multiple opportunities to trade both ways (long and short) with
reasonable accuracy for a short term trader. The upside is capped by resistance and the
downside by the support. Thus it is known as a range-bound market or a trading market as
there are enough opportunities for both the buyers and the sellers.
In the chart below, you can see the stock’s behaviour in a typical range:

As you can see, the stock hit the same upper (Rs.165) and the same lower (Rs.128) level
multiple times and continued to trade within the range. The area between the upper and
lower level is called the width of the range. One of the easy trades to initiate in such a scenario
would be to buy near the lower level and sell near the higher level. In fact, the trade can be
both ways with the trader opting to short at a higher level and repurchasing it at the lower
level.
In fact, the chart above is a classic example of blending Dow Theory with candlestick patterns.
Starting from left, notice the encircled candles:
1. The bullish engulfing pattern is suggesting along.
2. Morning doji star suggesting along
3. Bearish engulfing pattern is suggesting a short
4. Bearish harami pattern is suggesting a short
The short term trader should not miss out such trades, as these are easy to identify trading
opportunities with a high probability of being profitable. The duration of the range can be
anywhere between a few weeks to a couple of years. The longer the duration of the range,
the longer is the width of the range.
The range breakout
Stocks do break out of the range after being in the range for a long time. Before we explore
this, it is interesting to understand why stocks trade in the range in the first place.
Stocks can trade in the range for two reasons:
When there are no meaningful fundamental triggers that can move the stock, these triggers
are quarterly/ annual result announcements, new product launches, new geographic
expansions, change in management, joint ventures, mergers, acquisitions, etc. When nothing
is exciting or nothing bad about the company, the stock tends to trade in a trading range. The
range under these circumstances could be quite long-lasting until a meaningful trigger occurs.
In anticipation of a big announcement – When the market anticipates a big corporate
announcement, the stock can swing in either direction based on the announcement’s
outcome. Till the announcement is made both buyers and sellers would be hesitant to take
action, and hence the stock gets into the range. The range under such circumstances can be
short-lived lasting until the announcement (event) is made.
The stock after being in the range can break out of the range. The range breakout more often
than not indicates the start of a new trend. The direction in which the stock will breakout
depends on the nature of the trigger or the event’s outcome. What is more important is the
breakout itself, and the trading opportunity it provides.
A trader will take a long position when the stock price breaks the resistance levels and will go
short after the support level breaks.
Think of the range as an enclosed compression chamber where the pressure builds up on each
passing day. With a small vent, the pressure eases out with a great force. This is how the
breakout happens. However, the trader needs to be aware of the concept of a ‘false
breakout’.
A false breakout happens when the trigger is not strong enough to pull the stock in a particular
direction. Loosely put, a false breakout happens when a ‘not so trigger friendly event’ occurs,
and impatient retail market participants react to it. Usually, the volumes are low on false
range breakouts indicating; there is no smart money involved in the move. After a false
breakout, the stock usually falls back within the range.
A true breakout has two distinct characteristics:
Volumes are high and
After the breakout, the momentum (rate of change of price) is high.
Have a look at the chart below:
The stock attempted to break out of the range three times. However, the first two attempts
were false breakouts. Low volumes and low momentum characterized the first 1st breakout
(starting from left). The 2nd breakout was characterized by impressive volumes but lacked
momentum.
However, the 3rd breakout had the classic breakout attributes, i.e. high volumes and high
momentum.

Trading the range breakout

Traders buy the stock as soon as the stock breaks out of the range on good volumes. Good
volumes confirm just one of the prerequisite of the range breakout. However, there is no way
for the trader to figure out if the momentum (second prerequisite) will continue to build.
Hence, the trader should always have a stoploss for range breakout trades.
For example – Assume the stock is trading in a range between Rs.128 and Rs.165. The stock
breaks out of the range and surges above Rs.165 and now trades at Rs.170. Then trader would
be advised to go long 170 and place a stoploss at Rs.165.
Alternatively, assume the stock breaks out at Rs.128 (also called the breakdown) and trades
at Rs.123. The trader can initiate a short trade at Rs.123 and treat Rs.128 as the stoploss level.
After initiating the trade, if the breakout is genuine, then the trader can expect a move in the
stock that is at least equivalent to the range’s width. For example, with the breakout at
Rs.168, the minimum target expectation would be 43 points since the width is 168 – 125 = 43.
This translates to a price target of Rs.168+43 = 211.
The Flag formation
The flag formation usually occurs when the stock posts a sustained rally with almost a vertical
or a steep increase in stock prices. Flag patterns are marked by a big move which is followed
by a short correction. In the correction phase, the price would generally move within two
parallel lines. Flag pattern takes the shape of a parallelogram or a rectangle, and they have
the appearance of a flag on the pole. The price decline can last anywhere between 5 and 15
trading sessions.

With these two events (i.e. price rally, and price decline) occurring consecutively a flag
formation is formed. When a flag forms, the stock invariably spurts back suddenly and
continues to rally upwards.
For a trader who has missed the opportunity to buy the stock, the flag formation offers a
second chance to buy. However, the trader has to be quick in taking the position as the stock
tends to move up suddenly. In the chart above, the sudden upward moved is quite evident.
The logic behind the flag formation is fairly simple. The steep rally in the stock offers an
opportunity for market participants to book profits. Invariably, the retail participants who are
happy with the recent stock gains start booking profits by selling the stock. This leads to a
decline in the stock price. As only the retail participants are selling, the volumes are on the
lower side. The smart money is still invested in the stock, and hence the sentiment is positive
for the stock. Many traders see this as an opportunity to buy the stock, and hence the price
rallies all of a sudden.

The Reward to Risk Ratio (RRR)

The concept of reward to risk ratio (RRR) is generic and not really specific to Dow Theory. It
would have been apt to discuss this under ‘trading systems and Risk management’. However,
RRR finds its application across every trading type, be it trades based on technical analysis or
investments through fundamentals. For this reason, we will discuss the concept of RRR here.
The calculation of the reward to risk ratio is straightforward. Look at the details of this short
term long trade:
Entry: 55.75
Stop loss: 53.55
Expected target: 57.20
On the face of it, considering it is a short term trade, the trade looks alright. However, let us
inspect this further:
What is the risk the trader is taking? – [Entry – Stoploss] i.e 55.75 – 53.55 = 2.2
What is the reward the trader is expecting? – [Exit – Entry] i.e 57.2 – 55.75 = 1.45
This means for a reward of 1.45 points the trader is risking 2.2 points or in other words, the
Reward to Risk ratio is 1.45/2.2 = 0.65. Clearly, this is not a great trade.
A good trade should be characterised by a rich RRR. In other words, for every Rs.1/- you risk
on trade your expected return should be at least Rs.1.3/- or higher. Otherwise, it is simply not
worth the risk.
For example, consider this long trade:
Entry: 107
Stop loss: 102
Expected target: 114
In this trade, the trader is risking Rs.5/- (107 – 102) for an expected reward of Rs.7/- (114 –
107). RRR, in this case, is 7/5 = 1.4. This means for every Rs.1/- of risk, the trader is assuming,
he is expecting Rs.1.4 as a reward. Not a bad deal.
The minimum RRR threshold should be set by each trader based on his/her risk appetite. For
instance, personally, I wouldn’t say I like to take up trades with a RRR of less than 1.5. Some
aggressive traders don’t mind a RRR of 1, meaning for every Rs.1 they risk they expect a
reward of Rs.1. Some would prefer the RRR to be at least 1.25. Ultra cautious traders would
prefer their RRR to be upwards of 2, meaning for every Rs.1/- of risk they would expect at
least Rs.2 as a reward.
A trade must qualify the trader’s RRR requirement. Remember, a low RRR is just not worth
the trade. Ultimately if RRR is not satisfied, then even a trade that looks attractive must be
dropped as it is just not worth the risk.
To give you a perspective think about this hypothetical situation:
A bearish engulfing pattern has been formed, right at the top end of a trade. The point at
which the bearish engulfing pattern has formed also marks a double top formation. The
volumes are beautiful as they are at least 30% more than the 10-day average volumes. Near
the bearish engulfing patterns high, the chart is showing medium-term support.
In the above situation, everything seems perfectly aligned with a short trade. Assume the
trade details are as below:
Entry: 765.67
Stop loss: 772.85
Target: 758.5
Risk: 7.18 (772.85 – 765.67) i.e [Stoploss – Entry]
Reward: 7.17 (765.67 – 758.5) i.e [Entry – Exit]
RRR: 7.17/7.18 = ~ 1.0
As I mentioned earlier, I do have a stringent RRR requirement of at least 1.5. For this reason,
even though the trade above looks great, I would be happy to drop it and move on to scout
the next opportunity.
As you may have guessed by now, RRR finds a spot in the checklist.

The Grand Checklist

Having covered all the important technical analysis aspects, we now need to look at the
checklist again and finalize it. As you may have guessed, Dow Theory obviously finds a place
in the checklist as it provides another round of confirmation to initiate the trade.
The stock should form a recognisable candlestick pattern.
S&R should confirm to the trade. The stoploss price should be around S&R.
For a long trade, the low of the pattern should be around the support.
For a short trade, the high of the pattern should be around the resistance.
Volumes should confirm
Ensure above average volumes on both buy and sell day
Low volumes are not encouraging, and hence do feel free to hesitate while taking trade where
the volumes are low.
Look at the trade from the Dow Theory perspective.
Primary, secondary trends
Double, triple, range formations
Recognisable Dow formation
Indicators should confirm
Scale the trade size higher if indicators confirm to your plan of action
If the indicators do not confirm go ahead with the original plan
RRR should be satisfactory
Think about your risk appetite and identify your RRR threshold
For a complete beginner, I would suggest the RRR be as high as possible as this provides a
margin of safety.
For an active trader, I would suggest a RRR of at least 1.5
When you identify a trading opportunity, always look at how the trade is positioned from the
Dow Theory perspective. For example, if you consider a long trade based on candlesticks, then
look at what the primary and secondary trend is suggesting. If the primary trend is bullish,
then it would be a good sign, however, if we are in the secondary trend (which is counter to
the primary), you may want to think twice as the immediate trend is counter to the long trade.
If you follow the checklist mentioned above and completely understand its importance, I can
assure you that your trading will improve multiple folds. So the next time you take a trade,
ensure you comply with an above checklist. If not for anything, at least you will have no reason
to initiate a trade based on loose and unscientific logic.

Other indicators
Average Directional Index (ADX)
About:
The Average Directional Index (ADX), Minus Directional Indicator (-DI) and Directional
Indicator (+DI) represent a group of directional movement indicators that form a trading
system developed by Welles Wilder. The Average Directional Index (ADX) measures trend
strength without regard to trend direction. The other two indicators, Plus Directional
Indicator (+DI) and Minus Directional Indicator (-DI), complement ADX by defining trend
direction. Used together, chartists can determine both the direction and strength of the
trend. Source: stockcharts.com
What should you know?
ADX system has three components – ADX, +DI, and -DI
ADX is used to measure the strength/weakness of the trend and not the actual direction
ADX above 25 indicates that the present trend is strong, ADX below 20 suggest that the trend
lacks strength. ADX between 20 and 25 is a grey area
A buy signal is generated when ADX is 25, and the +DI crosses over –DI
A sell signal is generated when ADX is 25 and the –DI crosses over +DI
Once the buy or sell signal is generated, take the trade by defining the stop loss.
The stop loss is usually the low of the signal candle (for buy signals) and the high of the signal
candles ( for short signals)
The trade stays valid till the stoploss is breached (even if the +DI and –DI reverses the
crossover)
The default lookback period for ADX is 14 days.
On Kite:
Load the ADX indicator from studies. Kite gives you an option to change the lookback period;
by default, the lookback period is set.