Rachana Ranade. Blog

Introduction
Axis Bluechip fund is the flagship fund of the AMC with an Asset Under Management (AUM) of more than Rs. 33,000 Cr. as of January 2023, this is a huge AUM. The highest AUM was in August 2022 of Rs. 36,979.68 Cr. The AUM has grown multifold between 2017 to 2020 because of its fantastic returns during these years. To give you an idea about the growth of the fund, you must know that the AUM of the fund in Jan 2017 was Rs. 1,942 Cr only. Wow! If this is the growth in AUM, let us check how the returns were.

Returns
1) Calendar Returns

Source: Value Research
In the above image, you can see that the fund has given amazing returns in 2014 and from 2017 to 2020. In 2021, the fund fell short to perform with the benchmark and the category. 2022 was not good as the benchmark and category both gave positive returns while the fund gave negative returns. This is where it started hurting the investors.
2) Trailing Returns

Source: Value Research
In the short term, the fund is bleeding. But, by now we all are aware that you should invest in large-cap funds with an investment horizon of more than 5 years. So, if we look at long-term returns, it is 12.14%, 15.30%, and 14.64% for 5 years, 7 years, and 10 years respectively which is a fair enough performance.

Risk Return Parameters
Similarly, if we look at the risk-returns parameters –

Source: Value Research
Mean returns should be higher the better, you can see that the fund is lagging in the category where it is ranked second from below. A silver lining can be seen in the form of standard deviation and beta where the fund manager has managed to keep a check on volatility. But the problem lies in Sharpe ratio and Alpha. The Sharpe ratio is low, and Alpha is negative. Those who have taken the course on the Magic of Mutual funds know in detail what these ratios mean, and how important they are in analyzing a fund. If you have still not enrolled in the course, you can click on the image below –

Portfolio Concentration
Now, let us dig deeper and try to understand what caused the problem. For that, we will have to compare the portfolio concentration of Axis bluechip fund with one of its peers. I think this peer can be the SBI Bluechip fund considering that it is the best-performing fund in the peers having an AUM of more than Rs. 30,000 Cr.
1) Axis Bluechip Fund -

2) SBI Bluechip Fund –

Source: Value Research
If we look at the above data, we can see that Axis Bluechip fund has 87% in equity whereas SBI Bluechip has a 93% allocation to equity. So, SBI is in a better position to generate additional returns. The allocation to the top 5 stocks is more in Axis Bluechip funds, this creates pressure on the fund manager that these 5 stocks will decide the fate of the fund. So, now it becomes necessary to see which are these 5 stocks.

Top stocks in the Portfolio
1) Axis Mutual Fund –

2) SBI Bluechip Fund –

Source: AMC website
I think there is no need for any explanation here. In the portfolio of Axis Bluechip fund, 3 out of the top 5 stocks have generated a negative return, while the score for SBI Bluechip fund is only 1 out of the top 5. Another stock that attracts attention in SBI bluechip fund which is missing from the Axis Bluechip fund is ITC Ltd. I hope the reason for underperformance is slowly getting clear now.

Fund Manager History
Usually, when there is a change in fund management, we have seen that the new fund manager takes his time to implement the strategies, which causes the fund to underperform for a brief period of time. Let us see if it is the case with Axis Bluechip Fund –

Source: Morningstar
In this chart, you can see that Shreyas Devalkar has been with the fund house since 2017. It is he who had delivered the golden returns of this fund. So, we cannot say that the underperformance is because of the change in fund management.

Will I redeem my investments in this fund?
We all know that the stock market moves in cycles and there are ups and downs. Axis blue chip fund has witnessed a positive cycle from 2017 to 2020 now it is time for the negative cycle. You cannot expect a fund manager to keep generating amazing performances every single year. It is not like the fund manager is selecting stocks that are not good. His stock picks are simply going through a rough phase. Maybe now he will relate to our merchandise which says “I Buy… Asa Kasa Kay?” :D. Jokes apart I think it is only a matter of time until the fund reverses to its glory days. All we need to do is be patient.
This was all and only about the Axis Bluechip fund, but there is more to this analysis. The lead trader/dealer of Axis Mutual Fund who was also one of the fund managers was recently barred by SEBI in a front-running case linked to the fund house. To know more about the front-running scandal and if this scandal changes my view about investment in this fund don’t forget to watch the video on my YouTube channel. Until then!

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Should I sell Axis Bluechip Fund?

Starting a family is a wonderful time, everyone is happy, excited, and a little nervous but it can also be a stressful one. If you are a parent, parents-to-be, or planning a family in the future – one of the most important things to consider is how much it is going to cost. You cannot put a price tag on having a child; it is a priceless experience that adds immense joy and meaning to life. However, smart parents are those who are prepared for the journey emotionally, physically, and most importantly, financially.

One of the most important things you can do to reduce stress is to establish sound financial habits early on. Here are ten financial tips to keep in mind when starting a family:

1. Create a budget

A budget is the foundation of good financial management. It helps you understand your income, expenses, and how much money you can allocate toward different categories. Create a budget including your income sources, expenses, and savings goals.

a. Save for emergencies
Having an emergency fund can provide peace of mind and financial security. Aim to save at least six months of living expenses in an emergency fund.

b. Consider childcare expenses
Child care can be a significant expense for families. A study by Aditya Birla Capital suggested that the cost of nine months of parental care and delivery might go up to Rs. 2,00,000/- and the two-year cost of raising an infant (0 to 2 years) can go up to Rs. 5,00,000/-. Consider the cost of child care when creating your budget, and start planning for it as early as possible to enjoy the best time of your life.

c. Don't overspend on baby items
Babies need a lot of stuff, but you don't have to spend a fortune on it. Consider buying gently used items or borrowing from friends and family to save money.

d. Plan for education expenses
Planning for your child's education expenses early can help you avoid financial stress later on. There is no need to explain how expensive the education system is. According to a survey by NDTV, in most schools in Tier-I and Tier-II cities, the annual tuition fee might range from ₹ 60,000 to ₹ 1.5 lakhs.

2. Get a life insurance
Life insurance is important if you have dependents who rely on your income. It can provide financial support for your family in case something unexpected happens. If you already have insurance then review your insurance coverage regularly to ensure that it meets your family's needs. Consider getting a term life insurance policy if you don't already have one.

3. Plan for retirement

It's never too early to start saving for retirement. There are numerous government schemes as well as private plans to help you accumulate your retirement fund. Consider setting up a retirement investment as early as possible and contribute regularly to it.

4. Make a will

Creating a will is an important step in protecting your family's financial future. It ensures that your assets are distributed according to your wishes and can help avoid legal complications.

5. Communicate with your partner

Effective communication with your partner is essential for good financial management. Set financial goals together, create a budget, and regularly review your finances to ensure you're on track.

Starting a family is an exciting and challenging time, but by following these financial tips, you can establish good habits that will help you achieve your financial goals and provide security for your family's future. This will help you enjoy the happy moments in your life stress-free. So, stay aware and start investing, until next time!

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5 Financial Tips when you start a family

Establishing financial goals is a crucial first step toward obtaining success and stability in your finances. But a lot of people have trouble figuring out what their financial goals should be and how to achieve them. We'll go through several actions you can take to make sure your financial goals are practical, achievable, and significant in this blog.

1. Determine how you are currently doing financially - Examining your present financial condition is the first step in defining financial goals. This entails figuring out your net worth, figuring out how much money you make, and figuring out how much money you spend. You can use this information to assess your financial situation and make goals since it will assist you to do so.

2. Define your short-term and long-term goals - It's time to define your financial goals after you've evaluated your existing financial status. Start by establishing both short- and long-term objectives. Paying off debt, setting up an emergency fund, or saving for a down payment on a home are some examples of short-term objectives. Long-term objectives can include supporting your children's education, retiring comfortably, or purchasing a home.

3. Be specific and measurable in your goals - It's important to make your financial goals specific and measurable. For example, rather than setting a vague goal of "saving more money," set a specific goal of saving a certain amount each month or increasing your savings rate by a certain percentage. This will make it easier to track your progress and stay motivated.

4. Establish a schedule for accomplishing your goals - Choosing a schedule for reaching your financial goals is a crucial component of goal-setting. Think about your short- and long-term objectives, and decide when you want to accomplish each one. You can use this to prioritize your goals and build a strategy for accomplishing them.

5. Make a plan of action - It's time to make an action plan when you've established your financial goals and the timeframe for reaching them. This should include concrete actions you can take, like raising your income, cutting your costs, or making stock market investments, to reach each goal. Make a timeline for finishing each goal and break it down into smaller, manageable tasks.

6. Consistently assess and modify your goals - Finally, when your circumstances change, it's critical to periodically assess and modify your financial goals. If your income or expenses change, you might need to revise your schedule, modify your goals, or set new ones after you've reached your previous ones.

In summary, establishing financial goals is a crucial first step toward financial success. You can develop a road map to financial stability and success by analyzing your present financial condition, identifying clear and measurable goals, establishing a schedule, making an action plan, and routinely reviewing and updating your goals. Always keep in mind that setting financial goals requires time and work, but they are ultimately worthwhile.

In addition to this, I have also made a detailed video on “How to set SMART Goals?”

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How to set financial goals?

A few years ago, we would visit nearby stores to purchase items like clothing, books, gadgets, and other necessities. However, shopping has become more convenient since the rise of online marketplaces like Flipkart and Amazon as we can now access thousands of products at the touch of a button—and at great prices, too! The Buy Now Pay Later (BNPL) programs, which let us order items online and pay for them later in flexible payments, improve our online shopping experience. But is this facility a blessing or a curse? Let's find out in this blog.

With a short-term credit product called "Buy Now Pay Later," we can make upfront purchases that can be paid for over the course of four or six payments. In essence, we are taking out a short-term loan and we will need to pay it back in a lump sum or through EMIs. The majority of the time, we use these loans for online shopping.

Paytm Post-paid, Amazon Post-paid, Flipkart Post-paid, Zest Money, Simpl, PayPal, Lazy Pay, and Mobi Kwik Post-paid are the entities providing this facility in India.

We can purchase items with the help of BNPL plans without having to pay for them right away. But we should proceed with caution and only purchase items that we can genuinely afford to pay for; otherwise, we run the risk of purchasing something we didn't really want but ended up doing so because it wouldn't immediately strain our budget. In addition, interest will be added to the amount that was defaulted if we delay or neglect to pay an instalment.

Although BNPL schemes offer flexibility in selecting payback terms and instalment amounts at no additional cost, our credit scores are negatively impacted by late payments. But in all the fuss about BNPL hurting credit scores, the opportunity it affords new borrowers to establish strong credit histories is being disregarded. We can build solid traditional credit ratings by making on-time repayments and using credit responsibly. To do this, we must improve our knowledge of personal finance. With this goal in mind, I am developing "Mastering Money Management," a brand-new course on personal finance. Details will shortly be released on my website www.rachanaranade.com.

Moving on BNPL schemes have their own advantages and disadvantages. Advantages include quick and simple approval of interest-free loans, minimal documentation, low processing fees, customized repayment schedules, and safe and transparent online transactions. Disadvantages include impulsive spending, interest and fees for late payments, and the possibility of a lower credit score.

There is no such thing as a free lunch when it comes to money. The price of our purchases must be paid in any case. Therefore, the choice to buy now and pay now or buy now and pay later is entirely up to us, i.e., the consumer.

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Is BNPL a boon or bane?

The FIFA World Cup is starting tomorrow. Similar to Cricket, football is a ride of emotions for millions of fans across the country. Remember the 2011 Cricket World Cup? It was Sachin’s last World Cup and everyone wanted him to retire with one in his bag of achievements. Similar is the case with Lionel Messi this year. He has already confirmed that it will be his last try to get the Golden Cup, and we all want to see him hold one. Football has given us some very emotional moments. Remember how Russian Prez’s umbrella attracted more lenses than the trophy in the 2018 Finals, for once no one was annoyed that a non-deserving team won when Germany lifted the cup in 2014, and of course, you either need to be dead or not born to not know Shakira’s Waka Waka that took over the universe in 2010, it still does.

Today, we will understand three investment lessons that this phenomenal game can teach us. Let us begin

1) Choosing a team:

You may have observed that the team the manager chooses prior to every game attracts a lot of interest. Before revealing his starting lineup, the manager assesses the strengths and weaknesses of both his own squad and the opposition. Similar circumstances apply to stock picking. Research is necessary before selecting the best stocks.

The type of players chosen by a football manager is another analogy. If the manager decides to pitch a squad made up entirely of defenders or strikers, he would get himself into trouble. What would a game look like with eleven strikers? The team's composition would be incredibly unbalanced. They may score a hat trick, but they will also give up a lot of goals. Likewise with choosing stocks, choosing only stocks in the same industry or that are similar is not a good strategy. To reduce risk, you must diversify your holdings.

2) Profile of the players:

Players vary from one another, just like stocks do. The energy of the fresh blood, the serenity of the seasoned, and the undisclosed magic of the great players must all be in perfect proportions in order for the team to succeed. Different needs are served by each player. Take Lionel Messi or Cristiano Ronaldo as an example, whichever team they play for they are the ones chosen first by the manager. That's a result of the legends' extraordinary consistency throughout the years. For an investor, they resemble the stocks of reputable businesses that have historically produced significant returns.

Managers love the next-generation players. We are talking about the Mbappes, Kluiverts, and Scholes of the world. The rookies have something to prove, are simple to manage, and have skill reserves that can only be discovered if they are selected for the squad. However, not all young people make a splash. Playing a young gun definitely has its drawbacks. Here, managers take a calculated risk, something like investing in stocks of an unproven small-cap firm. Either these stocks turn out to be multi-baggers or they disappear without a trace. Therefore, a wise bet can be made by researching the company's business plan.

If you gave it any thought, you'd see that stable large-caps have a lot in common with defenders, unstable mid-caps have a lot in common with midfielders, and promising small-caps have a lot in common with forwards.

3) Game plan:

The strategies used on a football pitch also apply to the stock market. The manager chooses a starting lineup for his team based on the team's capabilities and the opposition's strengths. The most common football lineups have been 4-4-2, 4-3-3, and 3-5-2.

Balanced Strategy: 4-4-2 lineup is used when a manager wants to ensure that his side plays creatively while still avoiding taking any unnecessary risks. This is accomplished by keeping the ratio of defenders, midfielders, and strikers in check. The following strategy can be used by an investor to balance his portfolio for the best outcomes: He can invest 20% in small-cap stocks, 40% in mid-cap stocks, and 40% in large-cap stocks.

Aggressive strategy: When the manager decides it is time to put all of his efforts into scoring goals, he deploys a 4-3-3 aggressive lineup that consists of three strikers, three midfielders, and four defenders. The manager needs to choose players with excellent offensive talent in order for this method to succeed.

Defensive strategy: The manager occasionally wants to be conservative and avoid giving up goals. This is where he uses the 3-5-2 formation. To support the three midfielders and two tenacious strikers up front, he deploys three central defenders and two fullbacks. This is comparable to a person who prefers to take small risks and is content with steady profits. Such investors choose portfolios that are heavily weighted in defensive large-cap stocks, with the balance held in mid-cap stocks that are performing well.

Hah! I somehow see finance in everything that I see around me. But, enough learning for today, now let us drench ourselves in the wild energy and emotions that this World Cup has in its purse for us. Until then Tsamina mina, eh, eh Waka waka, eh, eh…

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Investment lessons from the football field

It is human tendency to imitate success stories. We frequently follow eminent Indian stock market investors who have achieved phenomenal success and attempt to participate in the same kinds of ventures that they have had. While it might not be a fine decision to duplicate their portfolios because we have our own restrictions and distinct investment philosophies, we can learn a few things from their investing and life experiences that will help us plan our own successful investing journey.

Let us have a look at the top investments of the top 3 individual investors.

1. Mr. Radhakishan Damani

Radha Kishan Damani, a low-profile trader, investor, entrepreneur, and veteran known as "Mr. White and White," is one of the top investors in the Indian market. He liked to speculate and watch the stock market tactics rather than getting personally involved in trading because he was a beginner in the broking industry in his 20s.

At the age of 32, he made his first investment and got registered with SEBI. He gained wealth through trading and soon understood that he could make money by investing in MNCs. He wasn't always successful; rather, he had some losses as well and picked himself up after them.

Mr. Damani had an interest in the consumer goods industry. He also acquired the franchise of the co-operative retail chain "Apna bazaar" prior to founding D-Mart.

Mr. Damani's top investments as of the June 2022 quarter include a 67.5% ownership in Avenue Supermarts Limited, valued at roughly 1.88 lakh crores. In addition to Avenue Supermarts Limited, he possesses around 32.3% of VST industries through his various entities.

2. Mr. Rakesh Jhunjhunwala

Undoubtedly, Rakesh Jhunjhunwala ruled the Indian stock market. His success has encouraged millions of Indians to trade stocks, and his tale is now used as a case study in nearly all business schools.

Mr. Jhunjhunwala’s lack of capital to trade or invest in was his biggest obstacle. After all, making money also costs money! Additionally, he didn't have the option of borrowing money from friends or relatives and only had 5000 rupees in his account.

His portfolio, which he started with just 5000 rupees, is now worth more than 40,000 crores. He holds almost 5.1% of Titan company limited valuing roughly 12000 crores making it one of the top investments in his portfolio.

3. Mr. Vijay Kedia

Born into a Marwari stockbroker family he joined the family business of stockbroking at the age of 19, after his father's death. While in Kolkata, Vijay Kedia discovered the "Punjab Tractor" for Rs 50, which increased tenfold over the following three years. However, he had relatively little investment in that stock.

Vijay believes that an investor must have three qualities: Knowledge, Courage, and Patience. He has been keeping himself updated since the beginning of his profession in investing by reading business publications, newspapers, and annual reports of companies. He continues to engage in these activities and has developed an interest in watching interviews with managers or CEOs of various companies

One of his top investments in his portfolio as of June 2022 is Tejas networks limited in which he has a 2.6% stake which is roughly valued at 278 crores.

I hope you enjoyed reading the blog and by now you likely have a better understanding of these top investors' best investments, and I hope you find it motivating and inspiring.

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Top investments of top 3 investors

The Best and Worst investments of Mr. Rakesh Jhunjhunwala

Rakesh Jhunjhunwala the veteran Indian investor also known as the Big Bull of India recently lost his life on the 14^th of August 2022.

Rakesh Jhunjhunwala was the crown jewel of the Indian Stock market who believed in the Indian growth story and was so optimistic about the Indian Capital markets and was always bullish on the Indian stock markets.

As we all know Rakesh Jhunjhunwala started his investing career way back in 1985 with a mere amount of Rs.5,000 with his own investment philosophy which backed every investment he made in the markets but what separated him from the crowd was the size of his bets whenever his conviction was high which led him to invest a large chunk of money in his best stocks which are Titan, Lupin and Crisil back in 2002-03. In an interview, Ramesh Damani pointed out that Jhunjhunwala’s investments logged a whooping CAGR of 54% over the last 35 years.

In an interview, Rakesh Jhunjhunwala said “If a girl is pretty then the suitor will come” which means if the company is good the investors are going to come and invest. He further mentioned that he likes to invest in stocks that are not popular because you get a good company at a cheaper price.

Let us understand what are the top 5 lessons which we can learn from his investing career

1. Be ready to grab an opportunity - He firmly believed that the volatile nature of markets is what creates opportunities

2. Invest in a business that is Hard to replace – Investing in such businesses will give you a competitive advantage.

3. Success requires obsession – He used to say that people become shy of investing in stocks after booking losses. His advice for investors was to prepare themselves for the market and continue investing with a thumb rule of 'buy, hold and forget.' He used to advise investors to hold a stock as long as they can.

4. Never time the market - Stock markets are always right and no one can time the market. He was of the opinion that one should enter or exit on the basis of market timing instead of timing the market on its own.

5. Be Bold - He believed that “whatever you can do or dream you can, begin it. Boldness has genius, power, and magic in it." So, one should take stock market shopping like any other shopping. As you try to buy goods at the cheapest possible rates, you should do the same while buying stocks as well.

When he was asked in an interview about his worst investment, Mr. Jhunjhunwala said that his worst investment was in his own health. Shankar Sharma one of his close friends said that “with Rakesh, you need to have a strong liver to match up to his capabilities both in terms of thinking and drinking as well” So irrespective of the net worth that Mr.Jhunjhunwala had health is something where he got a pullback in life because of his habits.

Finally, India will remember him as the biggest bull, and his investment rules or philosophies cannot be written down in a book as the man himself along with his ideas were unique.

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The Best and Worst Investments of Mr. Rakesh Jhunjhunwala

It’s a bright sunny day. You are traveling from Bangalore to Pune by road. You have reached midway somewhere near Hubli when you stop for some rest and refreshment. What is the first thing that comes to your mind? Chai… That cup of tea freshens you up and you are ready to move north. Similar is the case in technical analysis. A cup and handle pattern is a chart pattern that takes the shape of a cup with a handle. It is a trend continuation chart pattern. The stock price is moving north. In between it takes a break, it forms a pattern that resembles a cup with a handle. After that break, the stock again starts heading towards north. The Cup with Handle formation was popularized by William J. O’Neil in his book “How to make money in stocks?”.

What is a Cup with Handle chart pattern?
As the name suggests a cup with a handle chart pattern is a pattern of price movement on the trading chart that looks similar to a cup with a handle. A “U” shaped price movement forms the cup section and a short price pullback from the edge of the cup forms the handle. The pattern shows the movement of the stock in the past and helps us predict the stock's movement in the future. However, this pattern takes time to form. The formation may be as short as seven weeks or as long as 65 weeks or more. A cup and handle pattern provides a logical entry point, a stop-loss level, and a profit target.

How to identify a cup and handle pattern?
The pattern can be formed in any timeframe. However, it is advisable to focus on the daily timeframe. Being a continuation pattern, there has to be a prior trend and the same needs to be understood first.
Identifying the bullish cup and handle pattern: - There must be an established uptrend for the bullish cup and handle pattern to form. However, the trend should not be a mature one as it would reduce its chances to continue. The cup is formed by a normal fall in prices that gradually reverses forming a “U” shape. It should have a bowl or rounding bottom and not a sharp “V” shaped bottom. A rounding bottom ensures that there is a consolidation with valid support at the bottom of the “U”. The pattern could have equal highs on both sides of the cup, but this is not a necessity. The depth of the cup is another lookout point. The cup should not be too deep.
The fall in security price that forms on the right side after the formation of the cup is the “handle”. It is a short pullback that slopes downward. This can be taken as a small consolidation before the big breakout. While the cup can extend from 7 to 65 weeks, the handle may take about 1 to 4 weeks to form. Let us try to understand this with the help of the following example -

A visible cup and handle pattern followed by a breakout can be seen in the above example of Kolte Patil Developers stock. The black line shows a small uptrend in the stock. The stock has reached Rs.277 from Rs.206. A normal fall in prices to Rs.132 and gradual reversal to Rs.277.3 breaking the previous high leads to the formation of the cup. There is a steady decline till the bottom and steady incline back to the previous high leading to a “U” shape cup and not a “V” shape cup. The security has created two highs near Rs.277 at the start and end of the cup, which is a typical characteristic of the cup. We can see that at the end of the cup, the security has faced a minor correction before giving a breakout at Rs.280. This minor correction is called “The Handle”. The breakout at Rs.280 is also giving a buy signal.
An important point needs to be noted. Volume data can be very helpful in both patterns. Volume should decrease during the formation of the pattern and there should be an increase when breakout/breakdown happens after the formation of the handle.

What can be an ideal entry, price target, and stop-loss?
The price which breaks out of the upper trend line is an ideal entry price (Rs.466 in our example). Security can be purchased at the close of the breakout candlestick. There are two target prices for this pattern. The first target is an estimated distance equivalent to the depth of the handle. The second target is equivalent to the depth of the cup, starting from the point of breakout. If after buying at the breakout, the price drops, instead of rising, a stop-loss order is needed. The stop-loss should be at a level that is below the lowest point of the handle.

Limitations of the Cup and Handle Pattern.
Every coin has two sides. Similarly, the cup with handle pattern also has certain limitations. The main disadvantage is the time taken to form a clear pattern. A fully developed pattern may take one to six months to form or even more. This might delay the investment decisions. The depth of the cup is another issue. In some cases, a shallower cup can give a strong bull run and, in some cases, a deep cup can be a false signal. In certain exceptional circumstances, Cups forming without handles also limit the utility of this theory. Like other technical patterns, the cup and handle pattern can be unreliable in illiquid markets.

Bottomline
The cup and handle pattern when formed in a nicely rising bull market, tests an old high and encounters selling pressure because of profit booking. The price gradually declines and consolidates over time because the selling pressure is not high. New buyers and old buyers see the reduction as an opportunity to take a long position in the market, leading to a gradual increase and retesting the high from where the pullback initially started. The more the consolidation, the bigger the breakout. It is advisable to use the cup and handle chart pattern with other technical indicators for the best decisions.
If you would love to understand the calculations that go behind Cup and Handle and how to use other significant indicators, make sure to check out my course on Technical Analysis. Until next time!

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Cup and Handle Chart Pattern

Before investing in any asset, one question that pops up in your mind is what is the markets’ view on this stock/asset. Will the bulls remain strong or will the bears take over soon? This is an important point to analyze before entering into a stock. Indicators like moving averages can tell us about the trend in an asset but it does not tell us how strongly the trend will continue or not. For that, we have an indicator called RSI. To put it simply, RSI tells us about the strength in the price movement of an asset. Sounds interesting right? Want to know more about this indicator? Pull up your socks and let’s get started!

What is RSI (Relative Strength Index)?
Before we jump on to understanding RSI, we must learn about oscillators. I know oscillators sound complex but don’t worry, that’s what I am here for. An oscillator is a tool that moves in a range. It has a trend indicator that fluctuates within that range (imagine something like a pendulum). This trend indicator moves in response to the recent price movement of an asset. RSI is the most popular oscillator used by technical analysts.

It was introduced by J. Welles Wilder Jr. in 1978. RSI is a leading indicator that measures the intensity/strength in the price movement during a particular look-back period. Generally, 14 days look-back period is used for calculating RSI. The value of RSI moves between 0 to 100.

RSI = 100 – [100 / (1 + RS)],
Where Relative strength (RS) = Average Gain / Average loss over the look-back period.

As RSI is readily calculated for us on charting platforms, we won’t be focusing on the calculation part. Rather, we would be learning about its application in today’s blog.

What does it tell you?

RSI tends to pick up when the average gain is greater than the average loss for a look-back period i.e. an asset has relatively moved up more number of times in the last 14 days than it has fallen. The opposite holds when the average loss is greater than the average gain i.e. an asset has relatively moved down more number of times in the last 14 days than it has moved up.

How to use it?
In a strong uptrend, the RSI value tends to stay above 30 and frequently crosses 70. In a strong downtrend, the RSI value tends to stay below 70 and frequently crosses 30. Through this, investors can interpret the strength in the trend for an asset. Ideally, buying opportunities can be explored when RSI is in the oversold zone and a reversal of the prior downtrend/down move is observed. Similarly, shorting opportunities can be explored, when RSI is in the overbought zone and a reversal of the prior uptrend/up move is observed. Using RSI along with other indicators like moving averages, MACD, pivot points, etc. can help you gain a more confident view.

How to analyse RSI along with price movement?
For that, we need to understand another term called Divergence. A divergence is when the price of an asset moves in the opposite direction of a technical indicator. Even divergences can be used to take positions. We already know that the price can either move up or down. Hence, we have 2 kinds of divergences- Bullish and Bearish divergence. Confused? No worries! Let’s understand divergences one by one with an example.

a. Bullish Divergence
A bullish divergence is observed when the price of an asset makes a lower low and RSI makes a higher low. This means that bullishness is strengthening and the prior downtrend/down move might reverse. If this divergence is observed when the RSI is in the oversold zone then a strong up move is possible. Hence, buying opportunities can be explored in such cases with confirmations from other patterns and indicators. You can observe this on the PVR chart below. A bullish divergence was observed on 18th May 2020, when the stock price made lower lows but RSI made higher lows, after which the stock moved upward.

b.Bearish Divergence
A bearish divergence is observed when the price of an asset makes a higher high and RSI makes a lower high. This means that bearishness is strengthening and the prior uptrend/up move might reverse. If it is observed when the RSI is in the overbought zone then a strong down move is possible. Hence, shorting opportunities can be explored in such cases with confirmations from other patterns and indicators. You may observe this on the chart of PVR. A bearish divergence was observed on 21st Jan 2021, when the stock made a higher high but RSI made a lower high after which the stock moved downward.

RSI is an oscillator that indicates whether a stock is overbought or oversold based on the magnitude of price movement. It can work best in a trending asset when combined with other indicators like MACD, Pivot, BB, etc. Technical analysts around the world use different RSI levels as per their strategy. You can also increase or decrease the look-back period for the same. If you decrease it then RSI will react faster and reach the overbought/oversold zone frequently. If it is increased then the opposite holds. After reading this blog if you felt like “Ye Dil mange more” then I have one more RSI strategy for you which I have discussed in my extensive yet simplified course on Technical Analysis. I am sure you would love it so don’t forget to check out the link. Until next time!

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