A Trader's Best Chart to Make Fast Profits

Jan 31, 2020

Apurva Sheth, Editor,Profit Hunter Pro

Hi, I'm Apurva Sheth and this is the Fast Profits Daily.

In last week's video, I told you why smallcaps are the place to be in 2020. You can watch it here.

Today, I'll tell you why I'm so bullish on smallcaps. My reason has nothing to do with small-cap stocks in particular.

I'm a chartist and my smallcap bullishness is grounded in a very special chart.

I encourage you to use it too...

Hi, I'm Apurva Sheth and I welcome you to this edition of Fast Profits Daily.

Now, last week I told you that smallcaps is the place to be in 2020. I showed you a Sensex to smallcap ratio chart to prove this: smallcaps are likely to do phenomenally well in the year 2020.

Now ratio charts are an excellent tool in your trading as well as investing toolkit. So today, I will show you how one could use ratio charts and what ratio charts are actually. So you should not miss this video.

But before I talk about ratio charts, I'd like to share a small story about myself.

Before I joined Equitymaster, I used to work with a broking firm in the institutional research department. Now here, we would be recommending trading and investing ideas to institutions.

One day, my boss called me up and said that today we are going for a meeting with the large PSU insurance company. Now I was surprised.

Why is an insurance company interested in talking to me? I recommend trading ideas. Why this company? In Insurance companies, normally the time frame for investment is of a longer duration. They're mostly into fundamentals.

Now this surprised me but nevertheless I went to the meeting and it went quite good. Now the fund manager spoke about the indicators that I used and the timeframes that are used to pick trading as well as slightly longer-term stocks.

Now this opened a window to me. I realised that even fund managers are closet technicians. Even people who claimed that they used fundamentals to pick long-term ideas, are also getting into technicals.

So how do they use technicals?

Well, they use technicals for entries and exits.

And how does that help them?

Well, fund managers are pressured to generate alpha. They have to beat the markets as well as their peers. Now how they do it when all of them are looking at the same group of stocks?

So that's when technicals come into play. They use technicals for entries and exits and it makes a lot of difference if you could generate 2% to 3% more on your entries as well as exits.

So now I knew their secret.

But the really smarter ones used ratio charts to make investing decisions. Now how do they use ratio charts?

Well, ratio charts help you to identify a relationship between two securities. So how do you make a decision when you have to choose between let's say, HDFC and HDFC Bank? TCS or Infosys? Bajaj Auto or Hero Motors? Indian Oil Corporation or BPCL?

Now ratio charts come in very handy to make this decision. So, as I told you that ratio charts help you to measure relationship between two securities.

It is calculated by dividing the price of a high-price security with the low-price security. Now you get a ratio and you plot this on a chart.

Now, ratio charts are just like your normal price charts. Even they trend.

But ratio charts are far more cyclical. You would find that they would revert to the mean more often than your regular price chart.

So as you can see in this chart, this is a ratio chart of HDFC and HDFC Bank between 2017 to 2019. So, as you can see on your screen, the ratio moves in a range. Now this particular information helps a lot.

Now, when the ratio chart falls, which is in this case, as you can see right now, HDFC ltd is underperforming HDFC Bank. Whereas when the ration chart moves up, that means HDFC is outperforming HDFC Bank.

The ratio is also moving in a range. Now this information helps fund managers take investing and trading decisions.

So when the ratio chart is at its bottom, they know that HDFC ltd has underperformed and it could be a good time to add HDFC in your portfolio instead of HDFC Bank and when the ratio chart has moved up and it is at the top end of the range, it suggests that HDFC has outperformed HDFC Bank, and it's probably time that HDFC Bank could be a outperformer.

So fund managers use these ratio charts to make such investing decisions. Now, next week I will show you, how one could use these same ratio charts to identify massive profit-making opportunities.

So until then, stay tuned. Thanks a lot and have a nice day.

I hope you found the video useful.

I'll be back again next Friday, with more trading ideas for fast profits.

And watch out for Vijay's video on Monday morning.

Have a profitable trading day and a great weekend ahead!

Warm regards,

Apurva Sheth
Apurva Sheth
Analyst, Fast Profits Report
Equitymaster Agora Research Private Limited (Research Analyst)

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2 Responses to "A Trader's Best Chart to Make Fast Profits"

c k palsuledesai

Feb 17, 2020

it was very revealing, useful



Feb 3, 2020

The concept of using ratio of prices of HDFC and HDFC Bank is interesting. But in my opinion, using the price directly is incorrect. The face value of shares of these companies is different. If one has to judge correctly, one should use the price per Rupee of the face value. Otherwise, one is not comparing analogous things.

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