Market conditions - Market Trends

Market conditions

Before reading this lesson, you should have previously read through:

• Support and resistance

It is useful to be able to identify the different types of market conditions, as this can help you make trading decisions, such as in which direction you should trade or which particular strategy to use.

There are two types of market conditions: trending and ranging.

Trending market

A trending market is when the price is clearly moving in one particular direction. If the price is moving up, then it is said to be in an uptrend; if the price is moving down, then it is said to be in a downtrend.

A trending market is when the price is clearly moving in either an uptrend or a downtrend.

Many traders trade in the direction of the trend because there is a higher probability of the trade being profitable. There is a distinct advantage for traders who identify a trend early on — entering the market when a trend is beginning to develop means it is more likely to return a profitable result.

Uptrend

The chart below demonstrates an uptrend. You can clearly see the price is moving up and that the uptrend is made from a series of peaks and troughs — the price does not move straight up, it moves up in waves. The peaks make the swing highs and the troughs make the swing lows.

number_1 Higher lows
number_2 Higher highs

In an uptrend, the market direction can be identified by a series of higher highs and higher lows.

Downtrend

In a downtrend, the price behaves in the same way, moving down in waves, with a series of peaks and troughs that make the highs and lows respectively. A downtrend can be identified by a series of lower lows and lower highs.

number_1 Lower lows
number_2 Lower highs

It is important to note that in an uptrend, not every candle is bullish and in a downtrend, not every candle is bearish; in a trending market the price is moving in an overall direction.

You can practice determining the trend direction in the following exercises:

Can you determine the market direction on the following chart?
number_1

Solution

Market is in an uptrend
number_1 Price is making higher highs
number_2 Price is making higher lows

Can you determine the market direction on the following chart?
number_2

Solution

Market is in an downtrend
number_1 Price is making lower highs
number_2 Price is making lower lows

Can you determine the market direction on the following chart?
number_3

Solution

First market is in an downtrend
number_1 Price is making lower highs
number_2 Price is making lower lows
Then price changes direction and starts trending up
number_3 Price is making higher highs
number_4 Price is making higher lows

Ranging market

The other type of market condition is a ranging market, sometimes referred to as a sideways market. You can see from the chart below that the price is moving within a range; there is no clear sustained uptrend or downtrend.

In a ranging market, the price moves within an upper boundary or resistance level, and a lower boundary or support level. The upper and lower levels may not always be exact or clear to observe, however what you will see is the price rising and falling within a maximum and minimum price zone.

Determining a correction from a reversal

There is a distinct difference between a correction and a reversal and it is important to differentiate between the two.

A correction is when the market pulls back, but continues on in the trend direction. A reversal is when price completely reverses in the opposite direction of the trend.

Corrections

A correction — sometimes referred to as a retracement — is when the market moves in the direction of the trend, pulls back for a short time and then continues on in the original trend direction.

The charts below show a correction in an uptrend and in a downtrend, respectively.

number_1 Confirmed uptrend
number_2 Correction to the downside

number_1 Confirmed downtrend
number_2 Correction to the upside

You can practice finding price corrections in the following exercises:

Reversals

A reversal is when the market direction changes completely and reverses the other way. The charts below illustrate a reversal to the downside and a reversal to the upside.

number_1 Confirmed uptrend
number_2 Reversal to the downside

number_1 Confirmed downtrend
number_2 Reversal to the upside

You can practice finding reversals in the following exercises:

Can you identify the reversal on the following chart?
number_1

Solution

number_1 Confirmed downtrend
number_2 Reversal to the to the upside

Can you identify the reversal on the following chart?
number_2

Solution
number_1 Confirmed uptrend
number_2 Reversal to the downside

Summary

So far you have learned ...

• ... there are two types of market conditions: trending and ranging.
• ... an uptrend can be identified as a series of higher highs and higher lows.
• ... a downtrend can be identified as a series of lower highs and lower lows.
• ... ranging is when the price is trading between an upper and lower boundary.
• ... a correction – or retracement – is a temporary pull back when the price is trending.
• ... a reversal is where the price direction changes completely and reverses in the opposite direction.

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Open Intarest, What, How, When.

 OPEN INTEREST :-

A contract has both a buyer and a seller, so the two market players combine to make one contract. The open-interest position that is reported each day represents the increase or decrease in the number of contracts for that day, and it is shown as a positive or negative number. An increase in open interest along with an increase in price is said to confirm an upward trend. Similarly, an increase in open interest along with a decrease in price confirms a downward trend. An increase or decrease in prices while open interest remains flat or declining may indicate a possible trend reversal.

HOW TO READ OPEN INTEREST :-

•     If prices are rising and open interest is increasing at a rate faster than its average, this is a bullish sign. More participants are entering the market, involving additional buying, and any purchases are generally aggressive in nature

•     If the open-interest numbers flatten following a rising trend in both price and open interest, take this as a warning sign of an impending top

•     High open interest at market tops is a bearish signal if the price drop is sudden, since this will force many 'weak' longs to liquidate. Occasionally, such conditions set off a self-feeding, downward spiral

•     An unusually high or record open interest in a bull market is a danger signal. When a rising trend of open interest begins to reverse, expect a bear trend to get underway

•     A breakout from a trading range will be much stronger if open interest rises during the consolidation. This is because many traders will be caught on the wrong side of the market when the breakout finally takes place. When the price moves out of the trading range, these traders are forced to abandon their positions. It is possible to take this rule one step further and say the greater the rise in open interest during the consolidation, the greater the potential for the subsequent move

•     Rising prices and a decline in open interest at a rate greater than the seasonal norm is bearish. This market condition develops because short covering and not fundamental demand is fueling the rising price trend. In these circumstances money is flowing out of the market. Consequently, when the short covering has run its course, prices will decline

•     If prices are declining and the open interest rises more than the seasonal average, this indicates that new short positions are being opened. As long as this process continues it is a bearish factor, but once the shorts begin to cover it turns bullish

•     A decline in both price and open interest indicates liquidation by discouraged traders with long positions. As long as this trend continues, it is a bearish sign. Once open interest stabilizes at a low level, the liquidation is over and prices are then in a position to rally again.

• If prices are rising and the volume and open interest are both up, the market is decidedly strong. If the prices are rising and the volume and open interest are both down, the market is weakening. Now, if prices are declining and the volume and open interest are up, the market is weak, but when prices are declining and the volume and open interest are down, the market is gaining strength.

OPEN INTEREST AND VOLUME :-

Used in conjunction with open interest, volume represents the total number of shares or contracts that have changed hands in a one-day trading session in the commodities or options market. The greater the amount of trading during a market session, the higher the trading volume. A new student to technical analysis can easily see that the volume represents a measure of intensity or pressure behind a price trend. The greater the volume the more we can expect the existing trend to continue rather than reverse.

Volume precedes price, which means that the loss of either upside price pressure in an uptrend or downside pressure in a downtrend will show up in the volume figures before presenting itself as a reversal in trend on the bar chart. The rules that have been set in stone for both volume and open interest are combined because of their similarity; however, having said that, there are always exceptions to the rule, and we should look at them.

So, price action increasing in an uptrend and open interest on the rise are interpreted as new money coming into the market (reflecting new buyers) and is considered bullish. Now, if the price action is rising and the open interest is on the decline, short sellers covering their positions are causing the rally. Money is therefore leaving the marketplace and is considered bearish.

If prices are in a downtrend and open interest is on the rise, chartists know that new money is coming into the market, showing aggressive new short selling. This scenario will prove out a continuation of a downtrend and a bearish condition. Lastly, if the total open interest is falling off and prices are declining, the price decline is being caused by disgruntled long position holders being forced to liquidate their positions. Technicians view this scenario as a strong position technically because the downtrend will end as all the sellers have sold their positions. The following chart therefore emerges:

 

USE OF MONITORING OPEN INTEREST :-

While open interest shows the total number of outstanding contracts, the data is not much of use, if looked at on a standalone basis. In the futures segment, open interest data need to be read along with price changes in the futures contract.

* If volume is relatively high while the market is going up and remains relatively low during corrections, the inference is that the market is in a strong uptrend, which should continue.

* If volume is high while the market is going down and relatively light during upward retracements, then the market is weak with a continuing downward trend likely.

* If both open interest and prices are increasing, then new buyers are being brought into the market with a strong technical picture unfolding. Expect the uptrend to continue.

* If on the other hand, open interest is increasing while prices decline, short sellers have the upper hand in a technically weak market. Asopen interest is growing while prices decline, buyers are obviously the more aggressive party.

* In the event of open interest declining while prices are also slipping, liquidation by long positions is the implication, therefore suggesting a technically strong market overall. In other words, the market is strong as open interest declining suggests no new aggressive shorts, as this would entail an increase in open interest.

* When open interest is declining and prices are increasing, short covering is the most likely cause suggesting that overall the market is weak .

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Overtrading ... The Kiss of Death.

When you love too much.

Overtrading ... The Kiss of Death.

The #1 problem most traders face? I haven't taken a formal survey (feel free to take the poll in this lens and maybe we'll get a more official answer), but I would guess it is:

Over trading.

We don't really trade for the money. Oh sure, the money is great, and we do want it, and it is thrilling.

But there are many ways to make money. We choose to do it through trading because we LOVE to trade.

That's good.

And bad.

It's wonderful to pursue your passion. But when it comes to trading, too much of a good thing leads to failure.

Learn from the Cheetah.

 The Cheetah waits and waits and waits in the tall grass. It doesn't pursue the prey, but rather it just sits silently and perfectly still waiting for its prey to come to it.

It can wait for looooong periods of time.

Perfectly still.

Perfectly quiet.

Boring.

And it doesn't attack the strongest prey. It's not interested in a fair fight. It wants the weakest one that's limping across the field.

Because the Cheetah isn't in it for sport. It's in it for survival.

It's the same with us as traders. If you want to truly make money at trading, it isn't going to be as action packed as you first imagined.

The best trades come by waiting for the weakest points in the market ... the times that don't happen very often, but when they do occur, the odds are clearly stacked in your favor. The rest of the time you just wait and wait and wait ... coiled like a cat ready to pounce.

Dr. Van Tharp once said: "Good trading is boring."

So how do you deal with the need for "action?"

You seriously and deliberately need to structure it into your life in another way, so you aren't even tempted to get that need filled at the trading screen.

When I first heard someone say you can't treat trading like a video game, I didn't believe them.

Tens of thousands of dollars (lost) later, I decided they were right!

Like most traders, I had a need for action, so I deliberately went out and bought an XBox!

That worked pretty well. So now I upgraded to a PS3!

I took it pretty literally. You may not like video games, but if you have a need for "action," then you'll do yourself the biggest favor by getting a hobby that gives you all the action you can handle so when it comes to trading, that need has already been satisfied and you patiently wait for the perfect time ... and let the amateurs have all the other trades. 

- Dr. Barry Burns

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Effective Techniques For Trading

Three Effective Techniques Preparing You For Trading In the Real World

If you have decided to give trading a try, then like they say, there’s no better time than the present. Go for it! Give it your best shot. And above all do it with utmost sincerity; and chances are that you will end up belonging to the category that is here to stay and find yourself in the trading room as happy and upbeat as you are now for many years to come.

The perfect way to go about trading seems like when you can take a few trial runs before putting your real money at risk. What if you could trade in the real market with imaginary or fake money to begin with? What if you were given an opportunity to trade in the real market environment, where real price action was taking place; what if you were given the freedom to refer to real time charts and make real decisions regarding choice of your trade, its entry and exit without having to risk any real money until you were more at ease?

Well, there is this kind of alternative available with brokers wherein beginners can take advantage of it. Why just beginners, anybody wishing to do it could. Let’s discuss different ways in which a trader can practice trading without putting real money at risk.

First is called Simulation Trading, also known as paper trading; where as the name suggests trades are merely on paper not inside the market. In this style of trading, the trader is in the real market checking out trades but as he places his trades, they are not forwarded to the exchange; instead they are simulated by the trading software. Trading software that your brokers provide mostly comes with simulation option, which means that the trader is using the same trading platform while doing paper trade that he will eventually use while trading live with his real money. Simulation trading besides offering practice in real market conditions also gives you time to get used to the new trading software and learn its various functions.

Second way to prepare for trading is by indulging yourself in small trades. For traders who have learnt it all and done enough paper trading should start with small trades. Here they start with very small money and invest in small stocks. They earn very small profits but the objective here is learning and not profit so small trading should be part of routine of a beginner irrespective of the type of trader he is or his capacity to invest. Investing in penny stocks in real market conditions, placing smallest of orders and analyzing market and making predictions… is by far the safest way to succeed as a trader. Exposure and thrill of the real market, winning or losing is also real albeit in very small amount are all there. In small trades, the trader is trading and investing in live market, learning the trade on the job.

The third way to prepare for trading is with the help of what is called Shadow Trading. Shadow trading is about replicating trades of other fellow traders. Here the trader learns to read and understand charts such as the bar charts and based on highs and lows, opening and closing price of the stock, volume of trade etc, the trader decides to place a trade. While doing this he however has to remember that he can’t do thing haphazardly without having any understanding of his move. Because if he does it, he will end up losing both – money as well as interest in trading; this is not a good sign, especially for a trader who joined with a goal of making a career out of it. Here also trader is advised to start with a small investment. So that even in worst situation he has not lost much. However Shadow trading is a great way to study, understand and thereafter base one’s trade on various stock charts and indicators.

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Candlestick Basic -Chart Patterns

Candlestick Basic

Introduction

In the 1700s, a legendary Japanese rice trader named Homma used trading techniques that eventually evolved into the candlestick techniques that technical analysts on the Japanese stock market used in the 1870s. Steve Nison introduced these techniques to the Western world in his first book, Japanese Candlestick Charting Techniques.

The advantage of using candles on charts is that single or multiple candle patterns give earlier and more reliable reversal signals. Every candle shows the activity for the referenced period in hourly, daily, or weekly charts, for example.

 Figure 6.1: Horizontal reference points of the candlestick.

In figure 6.1, the horizontal reference points of the candle represent the opening price, the highest price, the lowest price, and the closing price of the considered period. The rectangular portion of the candle, or the body, represents the range between the opening and the closing prices. If the closing price is higher than the opening price, the body is white (not filled). If the closing price is lower than the opening price, the body is black (filled).

Figure 6.2: Candlestick naming.

A candle consists of either just a body or a body with an upper and/or a lower shadow. A candle with an opening and closing price at almost the same price level is called a doji (figure 6.2). The candlewicks are called shadows, and they extend up to the highest price and down to the lowest price of the related period. Candlestick charts can be used in any time frame, including minutes, hours, days, weeks, or months.

Candlestick chart patterns are formed by one or more candles; they indicate a short-term trend reversal or a trend continuation. You must always take into account the previous trend when interpreting candlestick patterns. Candlestick patterns do NOT give price targets!

Format, Naming, and Meaning Candlesticks Format Overview

Format description:

Sr.	Name	Interpretation
1	Big white body (White Marubozu)	Very positive
2	Big black body (Black Marubozu)	Very negative
3	White opening Marubozu	Quite positive
4	White closing Marubozu	Positive
5	Black closing Marubozu	Negative
6	Black opening Marubozu	Quite negative
7	White candle	No direction
8	Black candle	No direction
9	Dragonfly doji	Reversal?
10	Doji star	Reversal?
11	Gravestone doji	Stable/Reversal
12	Long-legged doji	Reversal?
13	Four price doji	Reversal?
14	Hammer (white) Hanging man	Bottom reversal Top reversal
15	Hammer (black) Hanging man	Bottom reversal Top reversal

Psychological Background 

Candlesticks psychological background 1.

 










The candlesticks demonstrate the psychological trading that takes place during the period represented by a single candle.

Candlesticks psychological background 2.

 Rising power candles ------------------

Some candles with falling power ---------------

Candles with reversal power -------------------

 Important  Main  Factor 

• A big white body means buyers are in power, and the trend is up.
• A big black body means sellers are in power, and the trend is down.
• A small body means that buyers and sellers are trying to take power.
• A big shadow below is a positive sign and indicates strength.
• A big shadow above is a negative sign and indicates weakness.
• A doji is a candle with opening and closing prices that are close together.
• A doji means that price acceleration is slowing down and that bulls and bears are in balance.
• A doji at a top or bottom often is the first signal of a price reversal.

 

Candlestick Patterns

The power of Candlestick Charts is with multiple candlesticks forming reversal and continuation patterns. These candlestick patterns given below:

 

Candlestick Design Tutorial Video

 

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How to analyze the company before investing - Fundamental Analysis

How to analyze the company before investing

= What is Fundamental Analysis
= Invest in Good Company
= Earnings
= Current Valuations of the Shares
= Future Earnings Growth
= Debit status of the Company
 

= What is Fundamental analysis?

Fundamental analysis is basically done for long term and mid term investment which is also called as delivery based investment or trading.
The main important aim behind is to study and understand the company in which you are planning to invest your hard earned money and get excellent returns.

How to analyze the fundamentals of the company?
Basically one should be able to judge at least how the company has done in past years, its debit status, its current valuation, its future growth prospects, its earning capacity etc 
So that based on these terms he can at least decide whether to invest in this company or not.

= What you should look for in a company to invest?

1. About Company - 
What the company is doing and what are its businesses?
How is the current demand for their products and how the demand will be in future like in next 3 to 5 years and so? (It is difficult to analyze the future demand yourself so you can visit financial websites or contact us)

2. Earnings - 
This is very important parameter. Broadly look into its last 5 or 10 years earnings whether the company has posted profits or losses.
It’s all about earnings. The bottom line is investors want to know how much money the company is making and how much it is going to make in the future. 
To find the earning status ratios used are EPS - Earning per share

3. Current valuation - 
This is another very important factor which most of the investor forgets while doing their investments. 
Generally most of the investors invest at higher valuations of shares and when share prices start coming down then they keep worrying, so this should not happen.
Before investing one should check the current valuation of the share price and invest only when the share price is at right price and not at over priced share.
This is what happened in January 2008. Most of the people invested at very high valuations and later on the share prices started to correct (falling down).
To find the current valuation of the stock the ratios used are 
PE ratio - Price to earning ratio
Book value 
PB ratio - Price to book value ratio

4. Future earnings growth -
It is very important to analyze how the company is going to do in future. How will be its returns or its profits etc?
Basically most of the investors invest in shares taking into consideration Company’s future growth prospects.
To find the future growth of the stock the ratios used are 
PEG ratio - Price to earning growth ratio
Current EPS and Forward EPS
Price to sales ratio

5. Debit status - 
For any company to perform well in the future it is very important to be debt free or less debit because if company is having large debits like borrowings, loans then it becomes difficult for it to plan for any acquisitions, expansion plans take over plans, dividend   payout and very important its most of the net profit goes in paying the interest and loans and other debits.
So in other words if the company is having fewer debits or no debit then they are having lots of cash in hand and they are free to take any decision in coming future.
To find the debit status of the company the ratios used are 
Debit ratio

So to accomplish above parameters fundamental analyst follow certain ratios which are mentioned below.
 

= Earnings

Earning Per Share - EPS
EPS plays major role in investment decision. 
EPS is calculated by taking the net earnings of the company and dividing it by the outstanding shares. 

EPS = Net Earnings / Outstanding Shares 
(Nowadays you will get this ready made, no need for you to do calculation.)

For example - 
If Company A had earnings of RS 1000 crores and 100 shares outstanding, then its EPS becomes 10 (RS 1000 / 100 = 10). 
Second example - 
If Company B had earnings of RS 1000 crores and 500 shares outstanding, then its EPS becomes 2 (RS 1000 / 500 = 50). 

So what is that you have to look in EPS of the company?
Answer - You should look for high EPS stocks and the higher the better is the stock.

Note - You should compare the EPS from one company to another, which are in the same industry/sector and not from one company from Auto sector and another company from IT sector. 

Before we move on, you should note that there are three types of EPS numbers: 

Trailing EPS - Trailing EPS means last year’s EPS which is considered as actual and for ongoing current year.

Current EPS - Current EPS means which is still under projections and going to come on financial year end.

Forward EPS - Forward EPS which is again under projections and going to come on next financial year end

But the EPS alone doesn’t tell you the whole story of the company so for this information, we need to look at some more ratios as following.
It’s not advisable to make your investment decisions based on only single ratio analysis.
EPS is the base for calculating PE ratio.

Importance of Earnings -
Earnings are profits. Quarterly or yearly company’s increasing earnings generally makes its stock price move up and in some cases some companies pay out a regular dividend. This is Bullish sign and indicates that the company’s is in growth.

When the company declares low earnings then the market may see bearishness in the stock price and hence its share price starts deceasing and corrects further if the company doesn’t provide any sufficient justification for low earnings.
  
Every quarter, companies report its earnings. There are 4 quarters. 

Quarter 1 - (April to June and earnings will be declared in July)
Quarter 2 - (July to Sept and earnings will be declared in Oct)
Quarter 3 - (Oct to Dec and earnings will be declared in Jan)
Quarter 4/final - Also called as financial year end - (Jan to Mar and earnings will be declared in April)

Now by this time you would have understood how earnings are important for a stock price to move up or down. But depending only on earnings one should not make investment or trading decision. To make decision more risk free you should look into more tools as mentioned below so that your investment decision becomes more solid and you should get excellent returns in future. 

Conclusion - Keep a close watch on quarterly earnings and trade or invest accordingly or manipulate your investing.

Following are the most popular and important tools/ratios to find excellent growth stocks which focuses on earning, growth, and value of the company’s. 
To make you understand more easily we have explained in very simple steps.

= Current Valuations of the shares

Price to Earnings Ratio - PE ratio
PE ratio is again one of the most important ratio on which most of the traders and investors keep watch. 
Important - The PE ratio tells you whether the stock’s price is high or low compared to its forward earnings. 
The high P/E suggests that investors are expecting higher earnings growth in the future compared to companies with a lower P/E. This generally happen in bull market and share price keeps on increasing. Basically in bull market share prices keep increasing without giving more importance to its current valuation and once market realizes that it is over priced then they start selling.
In bear market the low PE stocks having high growth prospects are selected as best investment options.

But, the P/E ratio doesn't tell us the whole story of the company.
Generally the P/E ratios are compared of one company to other companies in the same sector/industry and not in other industry before selecting any particular share.

The PE ratio is calculated by taking the share price and dividing it by the companies EPS.
That is 
PE = Stock Price / EPS 

For example
A company with a share price of RS 40 and an EPS of 8 would have a PE ratio of 5 
(RS 40 / 8 = 5). 

Importance - The PE ratio gives you an idea of what the market is willing to pay for the companies earning. 
The higher the P/E the more the market is willing to pay for the companies earning. 
Some investors say that a high P/E ratio means the stock is over priced on the other side it also indicates the market has high hopes for such company’s future growth and due to which market is ready to pay high price. 
On the other side, a low P/E of high growth stocks may indicate that the market has ignored these stocks which are also known as value stocks. Many investors try finding low P/E ratios stocks of high value growth companies and make investments in such stocks which may prove real diamonds in future.

Which P/E ratio to choose?  
If you believe that the companies has good long term prospects and good growth then one should not hesitate to invest in high P/E ratio stocks and if you are looking for value stocks which prove real diamonds in future then you can go with low PE stocks provided that companies has good growth and expansions plans.
At all if you would like to do PE ratio comparison then it has to be done in same sectors/industry stocks and not like one stock from banking sector and other stock from pharmacy sector.
So now you would have come to know how to choose stocks based on PE ratio.

What is book value?
Book value is the total value of the company's assets that shareholders would theoretically receive if a company were liquidated (closed).
By being compared to the company's market value, the book value can indicate whether a stock is under priced or overpriced.
So in other words if the share price is trading below its book value then it is considered as under priced and good for value investing.

Price to Book Ratio - PB ratio
Basically PB ratio is mostly utilized by smart investors to find real wealth in shares, so investing in stocks having low PB ratio is to identify potential shares for future growth.

A lower P/B ratio could mean that the stock is undervalued.

Like the PE, the lower the PB, the better the value of the stock for future growth. 

Some of the investors become quite wealthy by holding stocks for the long term of such companies whose growth is based on their businesses instead of market and one day when every one notices this stock the value investor’s pockets are full of profit. 

PB ratio is calculated as 
PB ratio = Share Price / Book Value per Share.

Generally, if the ratio comes below 1 then it is considered as value investing. But this doesn’t mean that the ratio coming to 1.2 or 1.5 is not value investing. It also depends on its future growth prospects.

= Future earnings growth

Projected Earning Growth ratio - PEG ratio
Because the market is usually more concerned about the future than the present, it is always looking for companies projected plans, financial ratios, and other future announcements. 

The use of PEG ratio will help you look at future earnings growth of the company.

PEG is a widely used indicator of a stock's potential value.
Similar to the P/E ratio, a lower PEG means that the stock is more undervalued.

To calculate the PEG the P/E is divided by the projected growth in earnings. 

That is PEG = P/E / (projected growth in earnings) 

For example - 
A stock with a P/E of 30 and projected earning growth for next year is 15% then that stock would have a PEG of 2 (30 / 15 = 2). 
In above example what does the “2” mean? 

Lower the PEG ratio the less you pay for each unit in future earning growth. So the conclusion is you can invest in high P/E stocks but the projected earning growth should be high so that companies can provide good returns. 

Looking at the opposite situation; a low P/E stock with low or no projected earnings growth is not going to give you good returns in future because its PE is low means investors are not ready to pay high and its PEG is also low because companies do not have any good future growth or expansion plans so investment in such stocks could prove less or no returns.

A few important things to remember about PEG:
It is about year-to-year earnings growth. 
It relies on projections, which may not always be accurate.
It’s forward earning estimation which market analyst or company calculates. 

Following two ratios are again the projection or estimation done by either market analyst or by company resources.

Current EPS - Current EPS means which is still under projections and going to come on financial year end.

Forward EPS - Forward EPS which is again under projections and going to come on next financial year end.

Price to Sales Ratio
The question is, is it that companies having no current earnings are bad investments? 
Answer is Not necessarily, because such companies may be new and trying to grow and expand but you should approach such companies with precaution.

The Price to Sales (P/S) ratio looks at the current stock price relative to the total sales per share. 

You can calculate the P/S by dividing the market cap of the company by the total revenues of the company. 

You can also calculate the P/S by dividing the current stock price by the sales per share. 

That is 
P/S = Market Cap / Revenues 
or 
P/S = Stock Price / Sales Price per Share 

Conclusion - To find under valued stocks you can look for low P/S ratios.

The lower the P/S ratio the better is the value of the company. 

= Debit status of the Company

Debit Ratio
This is one the very important ratio as this tells you how much company relies on debit to finance its assets.
The higher the ratio the more risk for company to manage going forward. So look for company’s having low debit ratio. 
Generally it is considered that debit ratio less then 1is good investment option. But even some investor considers higher debit ratio provided the company is having good growth prospects.

If company has fewer debits then company can make more profit instead paying for its debits like interests rates, loans etc.

Dividend Yield
If you are a value investor or looking for dividend income then you should look for Dividend Yield figure of the stock.
This measurement tells you what percentage return a companies pays out to shareholders in the form of dividends. Older, well-established companies tend to payout a higher percentage then do younger companies and their dividend history can be more consistent. 

You calculate the Dividend Yield by taking the annual dividend per share and divide by the stock’s price. 
That is 
Dividend Yield = annual dividend per share / stock's price per share 
For example
If a company’s annual dividend is RS 1.50 and the stock trades at RS 25, the Dividend Yield is 6%. (RS 1.50 / RS 25 = 0.06). 

Important Note - Any single tool or ratio should not be used to make your investment or trading decision nor will they provide you any buy or sell recommendation. All tools should be used to find growth and value stocks. 
After making use of above all tools you will get excellent stocks which will give you excellent returns in mid term to long term. 
You will find all these ratios in any financial website or you can contact us.

Final and last - very important
Check out company’s PAT (profit after tax) of every quarterly if you are short term to mid term trader and if you are long term investor then check out its yearly PAT. The company should have posted consistent growth.

•          FUNDAMENTAL  ANALYSIS  TUTORIAL - By- Paresh Ratan Kundu, Click here for Download Power Point Document

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