What is Market Capitalization and its importance

In this article, you’re going to learn what is an index and what role does market capitalization play in buying or selling of stocks or in mutual funds. I’ve also added an example for you to understand what role does Market Capitalization play to decide whether a company is valuable or not.

So the Index is something using which the performance of the stock market is measured.

You might have heard people often say – 

“Mann! Did you check the market today? It is underperforming today.”

or something like “Hey! Today the market was up!”

The market has been down by 10% the previous week

The question is what do they mean by that, are they talking about a particular stock? If yes then how can they say that the market is underperforming? Shouldn’t it be “this stock is underperforming”?

Well this is where the concept of index kicks in.

The index tells you about the performance of the market. How? 

So instead of mapping the performance of a single stock, a group of stocks are selected using particular criteria. You can find more details on the eligibility criteria of these companies to get listed in a particular index by doing a simple search on the internet.

The index is updated with these stocks after a specific time period. So for example, the NIFTY index gets updated every 6 months.

If all of the stocks in that criteria are performing well, then obviously the index would be in green, and you may hear the people say, that the market is up.

In India, we have two indexes. NIFTY and SENSEX. So Nifty is an index which contains stocks listed in NSE whereas SENSEX maps the performance of stocks listed in BSE.

Similarly, in the US we have NASDAQ, Dow jones, s&P 500 and so on.

So this was all about indexes. Let’s now talk about market capitalization.

You may have heard of these terms –

Large cap, mid cap and small cap.

What do they mean, and what is their importance?

Let’s first start by understanding what market capitalization is.

The market cap of a company is simply the number of outstanding shares multiplied by the share price.

An example can be – 

You might have seen that company X’s share price is greater than company Y’s share price. Does this mean the X is more valuable than Y. Not necessarily.

Why, the market capitalisation of Y might be more than X. 

Hence let’s say if x has 10 outstanding shares and the price of 1 share is rs 10.

The market cap is 10 * 10 = 100

Whereas company B has 100 outstanding shares, and the share price of 1 share is Rs 5.

Total market cap is 100 * 5 = 500

So you can clearly tell now, which company is more valuable. In the above case, company B is more valuable than A.

I hope this article brings you some clarity on what is an Index and what is Market Capitalization.

If you haven’t already, checkout our previous article on a mind hack that can help you make millions!

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One mind hack to achieve success in the stock market

In this article, we’re going to discuss a mind hack that can not only be useful for you in the stock market but can act as a financial lesson for you. The article is based on a lesson which was taught to me when I was learning about the financial markets back in the day. At that point of time, I didn’t realise the actual meaning of it, but 3 years down the line, when I recall that class and that lesson particularly, it all makes sense now.

Alright, so in the lesson, my professor was telling us students about what is a stock market and why do people fear it. He then went on explaining why did people often bombed their account. How trading and investing in the market become gambling and so on. To give you a gist of the whole context, let me explain to you the whole physcology of a retail investor.

The retail investor wants to gain quick profits with minimal losses. Before that the question we must ask ourselves is that how does the retail investor know that there is money to be made in the market. Why? Even though maximum number of people are making losses. Why is this soon-to-be retail trader so convinced about his success when all others are failing?

The reason is simple. The incoming retail trader thinks of trading as gambling. The person wants to try their luck as well, and thinks that even if they lose their investment, it wouldn’t matter! Mainly because their investment is not that much (we are talking about 50 to 500$). What happens is that after they’ve made their investment and could see their positions going up, greed takes over. This emotion makes them appreciate their decision and they invest more and more.

The investment amount multiplies as their positions keep on surging.

However, this fantasy dream soon breaks and dawn hits upon them when the next day they see their position in Red. In just one move all of their profits went poof! Hope is what comes next. Hoping that when the stock would again go up so that you can square off your positions immediately once the loss% turns to zero. This is the Fear talking now.

What happens is that the next day the stock tanks further. The trader is now in some serious loss. The fear overcomes their thought process and they immediately close their positions thinking that the stock would go down more.

This story actually stands true for every 1 trader out of 5. The learning from this is pretty simple. However, to implement that learning can be a difficult task.

And finally the learning:

Participating in the stock market is not about making money or finding the right time to make an investment.

You can only make huge profits off the market if you’re good at managing your money. Hence think of this as a money management skill.

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How to Trade The Inside Bar Pattern

One of the most occurring patterns in stock markets is the Inside Bar Pattern. This is prominent as it is hard to decide what will the next move be as this pattern can be a continuation or a reversal pattern (as well). In this article, we’re going to discuss how you can trade this pattern using the Inside Bar Strategy and what other factors contribute in deciding whether a reversal is coming or the trend would continue.

What is an Inside Bar (Image credits – elitetrading.org)

Before moving forward, it is important for you to keep in mind that this pattern occurs very frequently. However, it is very tricky to predict whether a reversal is coming or if the price action is just haunting for a bit before moving further downwards.

Trading an Inside Bar Pattern Based on News Sentiment

Sometimes the news sentiment plays an important role in determing the movement of the price action. The strategy here would be – If the stock is in a downtrend and if a bad news about the stock comes, then chances are the support is going to get broken and a fall can be continued.

Inside Bar Strategy (Downtrend)

Similarly, if the stock has already formed an Inside bar pattern and is hovering around some specific levels, chances are that when a good news like a good result (or any appreciated action taken by the management) is declared, the price action may reverse and reverse.

Reversal due to a positive news.

Trading based on Support and Resistance Levels

Identifying Support and Resistance Levels can also be of great value if you’re looking to trade in this pattern. Generally, if the pattern occurs at a major support level, then there are high chances that a short-term reversal is due. Similar is the case with the Resistance levels. Do checkout out our article on getting started with Technical Analysis if you’d like to know more about Support and Resistance areas.


Next, we have breakouts and breakdowns that can help you in confirming the direction of the price action. For example, if the pattern has already been formed and the next candle breaks the low of the ‘mother candle’ (forming a new lower low) then there is a high chance of the price moving downwards. Similar is the case with a breakout.

Things to know before trading this pattern

Though the risk to reward ratios in trading Inside Bar patterns is pretty high, yet novice traders should not trade this.

Why? Since this pattern can be identified pretty easily, many traders get excited and opt-in to take up a position without waiting for other signals to confirm their strategy. And since this pattern is highly unreliable (reversal or continuation can happen), there is a 50% chance that the traders might book a loss.

Also, if the price action goes into your favour, then remember to set up a strict target and stop loss. Why? This is because historical data suggests that a reversal after this pattern has occurred is very much possible. One way to set up the targets can be identifying the next immediate strong support/resistance level and wait for price action to achieve it.

Lastly, although there are website or articles that have blatantly put in links to books and long articles for you to read, we think that by simply understanding the basics (mentioned above) can set up your fundamentals pretty straight.

You can move to reading books when you thoroghly know the basics and can identify which piece of information is useful and which is not..

We hope you like this article. Do follow us on Twitter for more updates.

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RSI Indicator Strategies And How To Use It Effectively

Indicators are very well known within the trading community. Indicators though lagging act as great confirmation signals. In this article, we’re going to understand what does RSI mean, what are possible RSI Indicator Strategies and how you can use these strategies to enter a profitable trade.

In this article, we’re not going to dive deep into the definition of RSI, how it is calculated and other formulas. We’re going to jump right into a quick introduction and then discuss how you can implement RSI Indicator in your intraday trading.

What does RSI mean?

In order to understand what role RSI plays and how you can effectively use RSI in your strategy, remember that RSI (Relative Strength Index) is a direction (momentum) indicator. Also, it is important to know that it oscillates from 0 to 100. We’ll understand what these levels mean later in the article.

Through direction, you could easily identify the current trend of the instrument you’re trading.

For example, let’s say you are all set up to trade AAPL (Apple Inc.) on a 15-minute timeframe. You analyse the support and resistance area levels and figure that the price action has given a positive bullish breakout (via price action). However, what if this is a false breakout or if the market is going to go sideways? You could be easily trapped if you try to go long.

Well, RSI can help you figure that out. With the RSI Indicator Strategies, you could not only identify if the stock can possibly go in a range or not but figuring out if the stock is already in the overbought/ oversold zone and if any further upward movement of the stock is possible or not.

Setting up the indicator

To implement RSI, you can go to the indictors section of the platform you’re using to view the chart and type RSI to active the indicator.

Default RSI settings

We’re going to change the RSI settings in our case. Click on the settings wheel icon and set the length to 5. We’re changing the length as we want the indicator to react faster to the changes in the price action.

RSI Indicator settings

Know when the market in Range Bound

By default a rectangular area (between 70 and 30 RSI levels) is highlighted for you. If it isn’t, just understand that whenever the signal line hovers in between these two RSI levels then it means that the market has gone sideways.

RSI signal line bounces between the 70 and 30 levels indicating a range bound market

Above chart is of Tesla – 30 minute timeframe. You can see that there isn’t much of a change in the price of the stock for a considerable period of time. The only noticable difference is when the RSI signal line breaks down near the end, and when the signal crosses the 70 mark at the end.

Thus, as long as the Relative Strength Index of the stock doesn’t break the 30 and 70 levels we can say that the market is choppy or range bound.

Breakout or Breakdown confirmation

You may have partially got the idea of how to confirm a good breakdown/breakout. Notice that in the chart above, we can see a breakdown (in the RSI section) near the end. However, the price didn’t go down instantly. Why? That is because the price action was at a strong support level and hence it quickly bounced back.

However, at the end, you can see the indicator gave an early breakout, indicating that the momentum of the stock is strong and in upward direction (bullish).

Needless to say, support and resistance play a very important role in deciding the movement of the price action. Hence you should consider trying out an indicator if you want to confirm your analysis.

Overbought and Oversold Zones

Knowing about the overbought and oversold zones can be a great trading opportunity for you. However, in order to accurately identify these zones, you should set up another RSI indicator with default settings.

Let’s see how.

Click here to enlarge

In the above image (AAPL – 1 hour), we can see that whenever the RSI signal line crosses the 80 mark, then the stock price either goes downwards or sideways. This is known as the overbought zone and it is assumed that when the signal line enters the overbought zone, the price action halts for a moment or breaks down.

Similarly, if the signal line crosses below the 20 mark, it is assumed that the stock price is now in the oversold zone and correction of the price is due.

It is important to note that this situation will not arise frequently. However, it is important to not miss this opportunity when it arises as this strategy works almost always.

We hope you like these RSI indicator strategies and have learnt something valuable through this article. Do follow us on Twitter to stay updated.