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Varun AggarwalThe Magic of Japanese Candlestickobject(stdClass)#14597 (59) { ["id"]=> string(4) "6117" ["title"]=> string(33) "The Magic of Japanese Candlestick" ["alias"]=> string(33) "the-magic-of-japanese-candlestick" ["introtext"]=> string(141) "Candlesticks are formed using the open, high, low, and close of a particular time period.
" ["fulltext"]=> string(106488) "Open (O), high (H), low (L), and close (C) serves as the best way to summarise the trading action for the given period, we need a charting technique that displays this information in the most comprehensible way. If not for a good charting technique, charts can get quite complex. Each trading day has four data points i.e. the OHLC. If we are looking at a 10-day chart, we need to visualize 40 data points (1-day x 4 data points per day). So you can imagine how complex it would be to visualize 6 months or a year’s data.
History of the Japanese Candlestick
Before we jump in, it is worth spending time to understand in brief the history of the Japanese Candlesticks. As the name suggests, the candlesticks originated from Japan.
The fundamental theory and concepts behind Japanese Candlesticks were invented over three hundred years ago by a Japanese rice trader named Sokyu Honma (1716 -1803). Sokyu lived in Sakata, Japan and was also known as Sokyu Homma and Munehisa Homma.
He made extensive studies of the price movements of stocks and commodities, especially rice, which enabled him to identify traits and patterns from daily trading formations. He was then able to produce a very viable trading strategy that made him a very wealthy man. In fact, he eventually developed a very fearsome reputation for diligent and accurate trading which he gained from exploiting his enhanced knowledge of the rice markets and candlestick strategies. He compiled a book in 1755 called the ‘Fountain of Gold – the Three Monkey Record of Money’ in which he detailed his findings and observations on the psychology of trading.You can gain a deeper understanding about the power of three if you study the main components of the Sakata Five Methods. They were:
1. The ‘Three Mountains’ or ‘Sanzan’ depicted trading patterns similar to the modern day ‘Head and Shoulders’.
2. The ‘Three Rivers’ or ‘Sansen’ was indicative of the shift in power between the two market forces of selling and buying.
3. The ‘Three Gaps’ or ‘Sanku’ identified saturation or exhaustion points in the direction of the current trend and, as such, was consider as a forecaster of potential reversals.
4. The ‘Three Parallel Lines’ or ‘Sanpei’ represented a continuation pattern that strongly suggested that the current trend was most likely to continue in its present direction.
5. The ‘Three Methods’ or ‘Sanpo’ indicated again that the current prevailing market force was strong enough to maintain the direction of the present price trend.
Though the candlesticks have been in existence for a long time in Japan, and are probably the oldest form of price analysis, the western world traders were clueless about it. It is believed that sometime around 1980’s a trader named Steve Nison accidentally discovered candlesticks, and he introduced the methodology to the rest of the world. He authored the first-ever book on candlesticks titled “Japanese Candlestick Charting Techniques” which is still a favourite amongst many traders.
Most of the pattern in candlesticks still retains the Japanese names; thus giving an oriental feel to technical analysis.
Candlestick Anatomy
While in a bar chart the open and the close prices are shown by a tick on the left and the right sides of the bar respectively, however in a candlestick the open and close prices are displayed by a rectangular body.
In a candlestick chart, candles can be classified as a bullish or bearish candle usually represented by blue/green/white and red/black candles respectively. Needless to say, the colours can be customized to any color of your choice; the technical analysis software allows you to do this. In this article, we have opted for the blue and red combination to represent bullish and bearish candles respectively.
Let us look at the bullish candle. The candlestick, like a bar chart, is made of 3 components.
1. The Central real body – The real body, rectangular connects the opening and closing price
2. Upper shadow – Connects the high point to the close
3. Lower Shadow – Connects the low point to the open
Have a look at the image below to understand how a bullish candlestick is formed:
This is best understood with an example. Let us assume the prices as follows.
Open = 62
High = 70
Low = 58
Close = 67
Likewise, the bearish candle also has 3 components:
1. The Central real body – The real body, rectangular which connects the opening and closing price. However, the opening is at the top end and the closing is at the bottom end of the rectangle
2. Upper shadow – Connects the high point to the open
3. Lower Shadow – Connects the Low point to the close
This is how a bearish candle would look like:
This is best understood with an example. Let us assume the prices as follows.
Open = 456
High = 470
Low = 420
Close = 435
Time Frames
A time frame is defined as the time duration during which one chooses to study a particular chart. Some of the popular time frames that technical analysts use are:
o Monthly Charts
o Weekly charts
o Daily or End of day(EOD) charts
o Intraday charts – Hourly 1, 2, 3 and 4 hours, Minutes - 60 minutes, 30 minutes, 15 minutes, 5 minutes and 1 minute
One can customize the time frame as per their requirement. For example, a high-frequency trader may want to use a 1-minute chart as opposed to any other time frame.
As you can see from the table below as and when the time frame reduces, the number of candles (data points) increase. Based on the type of trader you are, you need to take a stand on the time frame you need.
The data can either be information or noise. As a trader, you need to filter information from noise. For instance, a long term investor is better off looking at weekly or monthly charts as this would provide information. While on the other hand an intraday trader executing 1 or 2 trades per day is better off looking at the end of the day (EOD) or at best 15 min charts. Likewise, for a high-frequency trader, 1-minute charts can convey a lot of information.
So based on your stance as a trader you need to choose a time frame. This is extremely crucial for your trading success because a successful trader looks for information and discards the noise.
1. Conventional chart type cannot be used for technical analysis as we need to plot 4 data points simultaneously.
2. A line chart can be used to interpret trends but besides that, no other information can be derived.
3. Bar charts lack visual appeal and one cannot identify patterns easily. For this reason, bar charts are not very popular.
4. There are two types of candlesticks – Bullish candle and Bearish candle. The structure of the candlestick, however, remains the same.
5. When close > open = It is a Bullish candle. When close < open = It is a Bearish candle.
6. Time frames play a very crucial role in defining trading success. One has to choose this carefully.
7. The number of candle increases as and when the frequency increases.
8. Traders should be in a position to discard noise from relevant information.
The big assumption - History tends to repeat itself (Deja Vu)
As mentioned earlier one of the key assumptions in technical analysis is that, we rely on the fact that the history tends to repeats itself. This probably is one of the most important assumptions in Technical Analysis. According to the assumption – History tends to repeat itself. However, we need to make an addendum to this assumption. When a set of factors that have panned out in the past tends to repeat itself in the future, we expect the same outcome to occur, as was observed in the past, provided the factors are the same.
Candlestick patterns and what to expect
The candlesticks are used to identify trading patterns. Patterns, in turn, help the technical analyst to set up a trade. The patterns are formed by grouping two or more candles in a certain sequence. However, sometimes powerful trading signals can be identified by just a single candlestick pattern. Hence, candlesticks can be broken down into single candlestick pattern and multiple candlestick patterns. Candlestick patterns help the trader develop a complete point of view. Each pattern comes with an in-built risk mechanism. Candlesticks give an insight into both entry and stop loss price.
Few assumptions specific to candlesticks
Before we jump in and start learning about the patterns, there are few more assumptions that we need to keep in mind. These assumptions are specific to candlesticks. Do pay a lot of attention to these assumptions as we will keep referring back to these assumptions quite often later. At this stage, these assumptions may not be very clear to you. We will explain them in greater detail as and when we proceed. However, do keep these assumptions in the back of your mind:
o Buy strength and sell weakness – Strength is represented by a bullish (blue) candle and weakness by a bearish (red) candle. Hence whenever you are buying ensure it is a blue candle day and whenever you are selling, ensure it’s a red candle day.
o Be flexible with patterns (quantify and verify) – While the textbook definition of a pattern could state certain criteria, there could be minor variations to the pattern owing to market conditions. So one needs to be a bit flexible. However, one needs to be flexible within limits, and hence it is required to always quantify the flexibility.
o Look for a prior trend – If you are looking at a bullish pattern, the prior trend should be bearish and likewise if you are looking for a bearish pattern, the prior trend should be bullish
The single candlestick pattern
As the name suggests, a single candlestick pattern is formed by just one candle. So as you can imagine, the trading signal is generated based on one trading candle. The trades based on a single candlestick pattern can be extremely profitable provided the pattern has been identified and executed correctly.
One needs to pay some attention to the length of the candle while trading based on candlestick patterns. The length signifies the range for the day. In general, the longer the candle, the more intense is the buying or selling activity. If the candles are short, it can be concluded that the trading action was subdued.
The Marubozu
the Marubozu candlestick pattern is a one-candle, easy-to-spot signal with a very clear meaning. It comes in both a bearish (red or black) and a bullish (green or white) form, and it commands attention with its long and sturdy shape. The word Marubozu means “Bald” in Japanese.
The text book defines Marubozu as a candlestick with no upper and lower shadow (therefore appearing bald). A Marubozu has just the real body as shown below. However, there are exceptions to this. We will look into these exceptions shortly.
Bullish Marubozu
The absence of the upper and lower shadow in a bullish Marubozu implies that the low is equal to the open and the high is equal to the close. Hence whenever the, Open = Low and High = close, a bullish Marubozu is formed.
A bullish Marubozu indicates that there is so much buying interest in the stock that the market participants were willing to buy the stock at every price point during the day, so much so that the stock closed near its high point for the day. It does not matter what the prior trend has been, the action on the Marubozu day suggests that the sentiment has changed and the stock in now bullish.
The expectation is that with this sudden change in sentiment there is a surge of bullishness and this bullish sentiment will continue over the next few trading sessions. Hence a trader should look at buying opportunities with the occurrence of a bullish Marubozu. The buy price should be around the closing price of the Marubozu.
Live Example :
Please Note : If a Bullish Marubozu has small upper shadow, it can be called as Bullish Belthold.
Bearish Marubozu
Bearish Marubozu indicates extreme bearishness. Here the open is equal to the high and close the is equal to low. Open = High, and Close = Low.
A bearish Marubozu indicates that there is so much selling pressure in the stock that the market participants actually sold at every price point during the day, so much so that the stock closed near its low point of the day. It does not matter what the prior trend has been, the action on the Marubozu day suggests that the sentiment has changed and the stock is now bearish.
The expectation is that this sudden change in sentiment will be carried forward over the next few trading sessions and hence one should look at shorting opportunities. The sell price should be around the closing price of the Marubozu.
Live Example :
Please Note : If a Bearish Marubozu has small lower shadow, it can be called as Bearish Belthold.
Marubozu Trap
Avoid trading during an extremely small (below 1% range) or long candle (above 10% range).
A small candle indicates subdued trading activity and hence it would be difficult to identify the direction of the trade. On the other hand, a long candle indicates extreme activity. The problem with lengthy candles would be the placement of stop-loss. The stop-loss would be deep and in case the trade goes wrong the penalty to pay would be painful. For this reason, one should avoid trading on candles that are either too short or too long.
Key takeaways:
1) Remember the rules based on which candlesticks work
2) A bullish Marubozu indicates bullishness
- Buy around the closing price of a bullish Marubozu
- Keep the low of the Marubozu as the stoploss
- A bearish Marubozu indicates bearishness
3) A bearish Marubozu indicates bearishness
- Sell around the closing price of a bearish Marubozu
- Keep the high of the Marubozu as the stoploss
4) An aggressive trader can place the trade on the same day as the pattern forms
5) An abnormal candle length should not be traded unless other parameters are also suggesting same.
a) Short candle indicates subdued activity
b) Long candle indicates extreme activity, however placing stoploss becomes an issue.
The Spinning Top
The spinning top is a very interesting candlestick. Unlike the Marubozu, it does not give the trader a trading signal with specific entry or an exit point. However, the spinning top gives out useful information with regard to the current situation in the market. The trader can use this information to position himself in the market.
Two things are quite prominent…
o The candles have a small real body
o The upper and lower shadow are almost equal
What do you think would have transpired during the day that leads to the creation of a spinning top? On the face of it, the spinning top looks like a humble candle with a small real body, but in reality there were a few dramatic events which took place during the day.
Now think about the spinning top as a whole along with all its components i.e. real body, upper shadow, and lower shadow. The bulls made a futile attempt to take the market higher. The bears tried to take the markets lower and it did not work either. Neither the bulls nor the bears were able to establish any influence on the market as this is evident with the small real body. Thus Spinning tops are indicative of a market where indecision and uncertainty prevails. Variations in formation of spinning top can also be possible.
If you look at a spinning top in isolation, it does not mean much. It just conveys indecision as both bulls and bears were not able to influence the markets. However, when you see the spinning top with respect to the trend in the chart it gives out a really powerful message based on which you can position your stance in the markets.
Live Example (Bearish) :
Live Example (Bullish) :
Remember, a spinning top has a small real body. The upper and lower shadows are almost equal in length. The colour of the spinning top does not matter. What matters is the fact that the open and close prices are very close to each other. Spinning tops conveys indecision in the market with both bulls and bears being in equal control.
The Dojis
The Dojis are very similar to the spinning tops, except that it does not have a real body at all. This means the open and close prices are equal. Doji provide crucial information about the market sentiments and is an important candlestick pattern. There are different variations of the pattern, namely the common doji, gravestone doji, dragonfly doji, long-legged doji and four price doji.
The classic definition of a doji suggests that the open price should be equal to the close price with virtually a non-existent real body. The upper and lower wicks can be of any length.
However, keeping in mind the rule i.e. ‘be flexible, verify and quantify’ even if there is a wafer thin body, the candle can be considered as a doji.
Obviously the color of the candle does not matter in case of a wafer thin real body. What matters is the fact that the open and close prices were very close to each other.
The Doji's have similar implications as the spinning top. Whatever we learnt for spinning tops applies to Doji's as well. In fact, more often than not, the Doji's and spinning tops appear in a cluster indicating indecision in the market.
Have a look at the chart below, where the Doji appear in a downtrend indicating indecision in the market before the next big move.
Here is another chart where the doji appears after a healthy up trend after which the market reverses its direction and corrects.
So the next time you see either a Spinning top or a Doji individually or in a cluster, remember there is indecision is the market. The market could swing either ways and you need to build a stance that adapts to the expected movement in the market.
Long Legged Doji : Consists of a Doji with very long upper and lower shadows. Indicates strong forces balanced in opposition. The stop loss would be placed at the top of the upper wick on the Long-Legged Doji.
Dragonfly Doji (Bullish Pattern) : Formed when the opening and the closing prices are at the highest of the day. If it has a longer lower shadow it signals a more bullish trend. When appearing at market bottoms it is considered to be a reversal signal. Auspicious sign, signal bullish trend.
Gravestone Doji (Bearish Pattern) : Formed when the opening and closing prices are at the lowest of the day. If it has a longer upper shadow it signals a bearish trend. When it appears at market top it is considered a reversal signal.
The Four Price Doji : is simply a horizontal line with no vertical line above or below the horizontal. This Doji pattern signifies the ultimate in indecision since the high, low, open and close (all four prices represented) by the candle are the same. If formed with gap of previous candle from bottom(Bullish) and vice-versa.
Paper Umbrella
The paper umbrella is a single candlestick pattern which helps traders in setting up directional trades. The interpretation of the paper umbrella changes based on where it appears on the chart.
A paper umbrella consists of two trend reversal patterns namely the hanging man and the hammer. The hanging man pattern is bearish and the hammer pattern is relatively bullish. A paper umbrella is characterized by a long lower shadow with a small upper body.
If the paper umbrella appears at the bottom end of a downward rally, it is called the ‘Hammer’.
If the paper umbrella appears at the top end of an uptrend rally, it is called the ‘Hanging man’.
To qualify a candle as a paper umbrella, the length of the lower shadow should be at least twice the length of the real body. This is called the ‘shadow to real body ratio’.
Let us look at this example: Open = 100, High = 103, Low = 93, Close = 103 (bullish candle). Here, the length of the real body is Close – Open i.e. 103-100 = 3 and the length of the lower shadow is Open – Low i.e. 100 – 93 = 7. As the length of the lower shadow is more than twice of the length of the real body; hence we can conclude that a paper umbrella has formed.
The Hammer formation
The bullish hammer is a significant candlestick pattern that occurs at the bottom of the trend. A hammer consists of a small real body at the upper end of the trading range with a long lower shadow. The longer the lower shadow the more bullish the pattern.
The chart below shows the presence of hammer formed at the bottom of a down trend.
Notice the hammer has a very tiny upper shadow, which is acceptable considering the “Be flexible – quantify and verify” rule.
A hammer can be of any color as it does not really matter as long as it qualifies ‘the shadow to real body’ ratio. However, it is slightly more comforting to see a blue colored real body.
The Hanging Man
If a paper umbrella appears at the top end of a trend, it is called a Hanging man. The bearish hanging man is a single candlestick, and a top reversal pattern. A hanging man signals a market high. The hanging man is classified as a hanging man only if is preceded by an uptrend. Since the hanging man is seen after a high, the bearish hanging man pattern signals selling pressure.
A hanging man can be of any color and it does not really matter as long as it qualifies ‘the shadow to real body’ ratio. The prior trend for the hanging man should be an uptrend, as highlighted by the curved line in the chart above.
The thought process behind a hanging man is as follows:
1. The market is in an uptrend, hence the bulls are in absolute control.
2. The market is characterized by new highs and higher lows.
3. The day the hanging man pattern appears, the bears have managed to make an entry.
4. This is emphasized by a long lower shadow of the hanging man.
The Shooting Star
The price action on the shooting star is quite powerful, thus making the shooting star a very popular candlestick pattern to trade.
The shooting star looks just like an inverted paper umbrella.
Unlike a paper umbrella, the shooting star does not have a long lower shadow. Instead it has a long upper shadow where the length of the shadow is at least twice the length of the real body. The colour of the body does not matter, but the pattern is slightly more reliable if the real body is red. The longer the upper wick, the more bearish is the pattern. The small real body is a common feature between the shooting star and the paper umbrella. Going by the text book definition, the shooting star should not have a lower shadow, however a small lower shadow, as seen in the chart above is considered alright. The shooting star is a bearish pattern; hence the prior trend should be bullish.
The expectation is that the bears will continue selling over the next few trading sessions, hence the traders should look for shorting opportunities.
Inverted Gammer
The inverted hammer is a type of candlestick pattern found after a downtrend and is usually taken to be a trend-reversal signal. The inverted hammer looks like an upside down version of the hammer candlestick pattern, and when it appears in an uptrend is called a shooting star.
The pattern is made up of a candle with a small lower body and a long upper wick which is at least two times as large as the short lower body. The body of the candle should be at the low end of the trading range and there should be little or no lower wick in the candle.
The long upper wick of the candlestick pattern indicates that the buyers drove prices up at some point during the period in which the candle was formed, but encountered selling pressure which drove prices back down to close near to where they opened. When encountering an inverted hammer, traders often check for a higher open and close on the next period to validate it as a bullish signal.
Important Points :
1. A paper umbrella has a long lower shadow and a small real body. The lower shadow and the real body should maintain the ‘shadow to real body’ ratio. In case of the paper umbrella the lower shadow should be at least twice the length of the real body.
2. Since the open and close prices are close to each other, the color of the paper umbrella should not matter.
3. If a paper umbrella appears at the bottom of a down trend, it is called the ‘hammer’.
4. If the paper umbrella appears at the top end of an uptrend, it is called the hanging man.
5. The shooting star is a bearish pattern which appears at the top end of the trend. One should look at shorting opportunities when a shooting star appears.
6. If the inverted paper umbrella appears at the bottom end of downtrend-trend, it is called the Inverted Hammer.
Double Candlestick Patterns
Bullish Engulfing
A reversal pattern that produces a bullish signal when a bearish candlestick is followed by a larger bullish candlestick. It should be ignored if the combination of the two candlesticks does not occur after a downtrend. The shorter the body of the bearish candlestick, the longer the body of the bullish candlestick, and the stronger the signal. This pattern is usually an important reversal signal.
Bearish Engulfing
It is the exact opposite of the bullish engulfing pattern. After a defined uptrend, an engulfing bearish pattern is formed when a bullish candlestick is followed by a larger bearish candlestick. The shorter the body of the bullish candlestick, the longer the body of the bearish candlestick, and the more powerful the signal is.
Bullish Counterattack
The Counterattack Bullish is a bullish reversal pattern represented by two candles. During a downward trend, a first decreasing candle with a long body and short wick, is followed by a second candle heading upwards and closing near the first candle’s close.
As the name suggests, the pattern represents a bullish counterattack. During a downtrend, a green candle with medium-long body forms and closes at the same level as the previous candle.
The long green candle means that the bulls have strongly rejected the downtrend, probably due to the price has reached a support and the price can go up. This pattern is likely to lead to a new uptrend or a pull-back. Therefore, if selected in your strategy, it would open a position.
Bearish Counterattack
The Bearish Counter-Attack candlestick pattern is a bearish reversal candlestick pattern. A Bearish Counter-Attack candlestick pattern can lead to a swift price reversal to the downside.
An uptrend has been in place for some time and bullish investors feel good about the momentum of the share price. A Bearish Counter-Attack candlestick pattern starts off with much more of the same, maybe even a little too much jubilee as the price opens with a gap-up compared to the previous candlestick pattern's closing price. Bullish investors are feeling great about the morning gap-up.
But somewhere in the middle of the trading period, things change. Investors are selling shares and by the end of the trading period the closing price for the candlestick is the same, or even slightly below the previous candlestick's closing price. Hence the "counter-attack" naming convention.
Requirements
These are the requirements for a Bearish Counter-Attack candlestick pattern.
- A Bearish Counter-Attack candlestick pattern is made up of 2 candlesticks
- The 1st candlestick in the pattern has a green colored real body
- The 2nd candlestick in the pattern gaps higher at the open than the 1st candlestick's closing share price
- The closing share price, even after the initial gap-up, closes at the same or almost the same share price as the 1st candlestick in the pattern
- The Bearish Counter-Attack is confirmed on the 3rd candlestick if the share price continues the reversal of momentum that started to take place with the 2nd candlestick
Dark Cloud Cover
A bearish candlestick appears after a long bullish candlestick. The bearish period gaps above the high of the bullish and closes below the midpoint of the bullish candle’s body. This may indicate the end of a bullish trend and signals a selling opportunity. This pattern is a reversal signal but it should be ignored if it does not occur after an uptrend.
Piercing Line
This is a reversal bullish signal. You should ignore this if it does not occur after a downtrend. The bullish candlestick opens below the low of the previous bearish candlestick. However, prices move higher and the candlestick closes above the midpoint of the previous bearish candlestick body.
Characteristics of a piercing pattern:
- Occurs at the bottom of a downtrend
- Includes a bearish and bullish candle
- The bullish candle opens lower than the close of the bearish candle
- Bullish candle then closes above the 50% level of the bearish candle body
What does this tell traders?
- Potential trend reversal to the upside (bullish reversal)
- Bears (sellers) are losing impetus at this key price level
Bullish Harami Line
As a potential market reversal, the harami line is a sign of consolidation in the market. It implies that the market can reverse upward and traders may need to wait for a confirmation before deciding to buy or sell. Its formation results from a bullish candlestick following a longer bearish candlestick. The bullish candle is completely engulfed by the body of the bearish candlestick. It must be ignored if it does not occur after a downtrend.
Bearish Harami Line
A bearish candlestick follows a larger bullish candlestick. The bearish candlestick is fully nested by the previous bullish candlestick. As a reversal signal it needs to be ignored if it does not occur after an uptrend.
Kicker Pattern
This is a reversal signal that occurs in the beginning of a trend, during a trend and at the end of a trend. It is bullish kicker when a bearish Marubozu (open equals to high and the close equals to low of the period) is followed by a bullish Marubozu (open is the low and the close is the high of the period).
Kicker can also produce a reversal signal in an uptrend.
It can be bearish when a bullish Marubozu is followed by a bearish Marubozu.
Key takeaways:
1. Explosive and powerful, the Bullish Kicker should not be overlooked. Most traders place it amongst the strongest and most influential candlestick patterns in existence, so when you spot it, be prepared for action
2. However, the Bullish Kicker candlestick pattern is also unfortunately rare. Traders don't often change their opinion of a stock so dramatically and quickly. They tend to be more moderate, slowly shifting one way or the other.
3. The Bearish Kicker should never be overlooked. In fact, some describe Kicker patterns as the most powerful Japanese candlestick signals of all! As always, however, be sure to confirm your suspicions before you make your next move. A red candle or a gap down can give you greater confidence in the Bearish Kicker's forecast and increase your peace of mind.
Tweezer Bottoms and Tops
Tweezer patterns are two candlestick reversal patterns.
This type of candlestick pattern is usually be spotted after an extended uptrend or downtrend, indicating that a reversal will soon occur.
There are two types of Tweezer patterns: the Tweezer Bottom and the Tweezer Top.
Notice how the candlestick formation looks just like a pair of tweezers!
Amazing!
The most effective Tweezers have the following characteristics:
The first candlestick is the same as the overall trend. If price is moving up, then the first candle should be bullish.The second candlestick is opposite the overall trend. If the price is moving up, then the second candle should be bearish.
The shadows of the candlesticks should be of equal length.
Tweezer Tops should have the same highs
Tweezer Bottoms should have the same lows
Two Crows Pattern
This pattern is a made up of three candlesticks. The black candlesticks of the second and third day represent the two crows that perched on the first white candlestick.
Recognition Criteria
1. The market is characterized by a prevailing uptrend.
2. A strong white candlestick appears on the first day.
3. The second day is a black candlestick that gaps up.
4. On the last day another black candlestick appears that opens inside the body of the second day and then closes inside/outside the body of the first day.
Pattern Requirements and Flexibility
The Bearish Two Crows should start with a strong white body. A black body that forms an upside body gap with the first candlestick follows. The third day is another black body that opens at or above the close of the second day. The third day should close near the lows.
Trader’s Behaviour
An uptrend has been in place, and the strong white candlestick adds to the bullishness that is already present. The following day opens higher with a gap up. Prices fall a little bit, and a short black candlestick is formed. The bulls are not alarmed by this day, because even though a black body appears, prices fail to close below the close of the previous day. The third day opens at or above the close of the second day, but it declines throughout the day and closes well within the body of the first day. The third day’s action fills the gap of the second day, and shows that the bullishness is eroding.
Sell/Stop Loss Levels
The confirmation level is defined as the last close. Prices should cross below this level for confirmation.
The stop loss level is defined as the last high. Following the bearish signal, if prices go up instead of going down, and close or make two consecutive daily highs above the stop loss level, while no bullish pattern is detected, then the stop loss is triggered.
Rising Window
A window (gap) is created when the low of the second candlestick is above the high of the preceding candlestick.
It is considered that the window should provide support to the selling pressure.
Falling Window
A Falling Window candlestick pattern is a bearish continuation candlestick pattern. A Falling Window candlestick pattern is more commonly known as a gap-down.
This sharp decrease in the stock price usually happens outside of the market's normal trading hours, like after the release of bad press or a bad earnings announcement or stock market crash. Most gap-downs are news-driven events. Maybe it was earnings related or some other new. Maybe the share price was in a downtrend and then more bad news comes out for the company, like a top executive leaving. Either way, a gap-down is almost always the result of a news-driven event.
For those investors that employ shorting stocks in their toolbox, a Falling Window candlestick pattern can provide short-sellers the most confidence when entering into a short trade.
Bullish Homing Pigeon
The pattern may indicate that there is a weakening of the current downward trend, which increases the likelihood of an upward reversal. The pattern is composed of a large real body followed by a smaller real body, and both candles are black (filled) or red indicating the close is below the open.
Bullish homing pigeon patterns don't provide profit targets, and a stop loss is typically placed below the bottom of the pattern after an upside move is confirmed.
Bullish homing pigeons are bullish reversal patterns, but some research has suggested that it's a more accurate bearish continuation pattern. This is because prices don't move in straight lines. During a downtrend the price drops, then pauses or pulls back, and then proceeds lower again. The bullish homing pigeon could just be a pause before the price continues lower.
Descending hawk
Descending hawk is a bearish reversal pattern, which forms in an uptrend. On the first day a long white candle evolves in the direction of the trend. On the second day, again a white body appears. The body of the first day candle completely engulfs the second candle. Shadows are not important in regard to both candles.
The descending hawk resembles the harami pattern, except for the colors of the body. Here both candles are white. It is the bearish version of the homing pigeon.
The first figure of the descending hawk may be any candle with a white body, appearing as a long line, however doji or spinning top are not permitted. The second candle of the pattern must appear as a short line and again doji or spinning top is not permitted.
Bullish Tasuki
The Bullish Tasuki Line belongs to the tasuki patterns group, predicting a downtrend reversal. Both candles appear on as a long line. The first line has a black body, whereas the second line has a white body. The length of the shadows does not matter; however, the volume (if available on the given market) of the second line is significant. Relation of the bodies is insignificant.
The pattern requires confirmation, that is, breaking out of the nearest resistance zone or trendline.
Bearish Tasuki
The Bearish Tasuki Line is a two-line bearish reversal pattern, belonging to the tasuki patterns family.
The first line of the pattern is a white candle appearing as a long line. The second line also appears as a long line, but the candle is of black color. The length of the shadows does not matter; however, the volume (if available on the given market) of the second line is significant. Relation of the bodies is unimportant.
The pattern requires confirmation, that is, breaking out of the nearest resistance zone or trendline.
Triple Candlestick Patterns
Planet Mercury or Morning Star
The pattern got the name because just like the planet mercury, which is the star of early morning i.e. it appears just before the sun rise, this pattern appears just before a potential rise in the price.
A morning star is a visual pattern consisting of three candlesticks that is interpreted as a bullish sign. A morning star forms following a downward trend and it indicates the start of an upward climb. It is a sign of a reversal in the previous price trend.
A morning star is a visual pattern made up of a tall black candlestick, a smaller black or white candlestick with a short body and long wicks, and a third tall white candlestick.
Doji Morning Star
The Doji Morning Star is a bullish reversal pattern, being very similar to the Morning Star.
The only difference is that the Morning Doji Star needs to have a doji(Dragonfly, long legged, etc) candle on the second line. The doji candle (second line) should not be preceded by or followed by a price gap. Some variation with small difference is allowed with Doji.
Bullish Abandoned Baby
The bullish abandoned baby is a three-bar pattern following a downtrend. It consists of a strong down candle, a gapped down doji, and then a strong bullish candle that goes up. It is exactly similar to Doji Morning star except the gap between the candles.
The pattern signals the potential end of a downtrend and the start of a price move higher.
Some traders allow for slight variation. There may be more than one doji, or gaps may not be present after the first or second candle. But the overall psychology of the pattern should still be present.
Venus or Evening Star
Evening Star patterns are associated with the top of a price uptrend, signifying that the uptrend is nearing its end.
The Evening Star pattern is considered a very strong indicator of future price declines. Its pattern forms over a period of three days, in which the first day consists of a large white candle signifying a continued rise in prices; the second day consists of a smaller candle that shows a more modest increase or slight decrease in price not below starting point of first, while the third day shows a large red candle that opens at a price below the previous day and then closes near the middle or below of the first day. Close below the first candle is strong sell signal.
Close below the first candle is strong sell signal.
Bearish Abandoned Baby
A bearish abandoned baby is a specialized candlestick pattern consisting of three candles, one with rising prices, a second with holding prices, and a third with falling prices. Technical analysts expect that this pattern signals at least a short-term reversal in a currently upward trending price.
Doji Evening Star
The Evening Doji Star is a bearish reversal pattern, being very similar to the Evening Star. The only difference is that the Evening Doji Star needs to have a doji candle on the second line. The doji candle (second line) should not be preceded by or followed by a price gap.
Three White Soldiers
The Three White Soldiers pattern is formed when three long bullish candles follow a DOWNTREND, signalling a reversal has occurred.
This type of triple candlestick pattern is considered as one of the most potent bullish signals, especially when it occurs after an extended downtrend and a short period of consolidation.
The first of the “three soldiers” is called the reversal candle. It either ends the downtrend or implies that the period of consolidation that followed the downtrend is over.
For the Three White Soldiers pattern to be completed, the last candlestick should be at least the same size as the second candle and have a small or no shadow.
Three Black Crows
It is formed when three bearish candles follow a strong UPTREND, indicating that a reversal is in the works.
The second candle’s body should be bigger than the first candle and should close at or very near its low. Finally, the third candle should be the same size or larger than the second candle’s body with a very short or no lower shadow.
Three Line Strike Bullish
When you hear the term "three strikes," you probably think of baseball. Three strikes and you're out! Depending on which team you're rooting for and who is at bat, that third strike could be frustrating or gratifying. When it comes to Japanese candlesticks, there are two forms of Three Line Strikes, one bullish and one bearish. Bullish Three Line Strike, a rare candlestick pattern that forms during an uptrend. Composed of four candles – three white and one black.
Despite its name, the Bullish Three Line Strike actually contains four candles, three of which are considered "strikes." After the initial trio of progressive candles, a fourth candle strikes down to lower the price. For help spotting this elusive signal, look for the following characteristics:
First, an uptrend must be in progress. Second, a white (or green) candle must appear on the first day. Third, another white candle must appear on the second day, closing higher than the previous day. Fourth, a third white candle must appear on the third day, again closing higher than the previous day's close. These candles continue the established uptrend. Fifth, those three escalating white candles should be followed by a black (or red) candle, which opens higher than the previous candles but then dips down, closing below the first candle's opening price. In the end, this fourth candle should contain the real bodies of the three previous candles within its length.
Three Line Strike Bearish
The bullish three line strike reversal pattern carves out three black candles within a downtrend.
Each bar posts a lower low and closes near the intrabar low. The fourth bar opens even lower but reverses in a wide-range outside bar that closes above the high of the first candle in the series. The opening print also marks the low of the fourth bar.
According to Bulkowski (Famous Investor and Chartist), this reversal predicts higher prices with an 84% accuracy rate.
Two Black Gapping
Two black gapping candle pattern acts as a continuation of the downward price trend. Look for two black candles that gap below the prior one and the second of the two candles has a lower high. That combination is simple enough and it appears often, so you will have no trouble finding it in real time trading or in a historical price series.
The exciting thing about this candlestick is that is performs so well, but a check of the numbers shows that all is not rosy. The two black gapping candles does best after an upward breakout, but performance after downward breakouts really suffers.
Upside Tasuki Gap
The Upside Tasuki Gap is a three-bar candlestick formation that signals the continuation of the current uptrend. The Upside Tasuki Gap’s third candle may partially close the gap between the first two bars or last two candles might look like dark cloud cover or bearish harami.
The Upside Tasuki Gap demonstrates an uptrend’s strength through the gap open of the pattern’s second candle, as well as its escalating price. The pattern’s third candle indicates a pause in the trend as the bears attempt to move the price lower but cannot close the gap between the first and second candle. The bear’s inability to close the gap suggests the uptrend will likely continue.
KEY TAKEAWAYS
- The first bar is a large white/green candlestick within a defined uptrend.
- The second bar is another white/green candlestick with an opening price that has gapped above the close of the previous bar.
- The third bar is a black/red candlestick that may partially closes the gap between the first two bars.
Downside Tasuki Gap
The Downside Tasuki Gap is a three-line bearish continuation pattern belonging to the tasuki patterns family.
Its first line appears as a long line in a downtrend, having a black body.
The second line may appear as any black candle, either as a long or short line. A price gap exists between first two lines.
The third line may be any white candle (except doji candles) which opens between prior opening and closing prices. It closes above the prior closing price, however, is not closing the price gap between first and second line.
To conclude, remember history tends to repeat itself. Candlestick patterns can be broken down into single and multiple candlestick patterns. Buy strength and sell weakness, be flexible – quantify and verify and look for a prior trend. Each pattern comes with an in-built risk mechanism. Candlesticks give an insight into both entry and stop loss price.
Special thanks to Manisha Khurana in compiling this article. Hope you all liked reading it. Feedback will be appreciated. Thank You!
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Anuj PuriRBI’s 2nd Booster Shot to Economy Amidst COVID-19object(stdClass)#14596 (59) { ["id"]=> string(4) "6104" ["title"]=> string(51) "RBI’s 2nd Booster Shot to Economy Amidst COVID-19" ["alias"]=> string(49) "rbi-s-2nd-booster-shot-to-economy-amidst-covid-19" ["introtext"]=> string(146) "The hard facts of declining consumption and a deepening economic slowdown in India are inescapable.
" ["fulltext"]=> string(2056) "All sectors including real estate have been severely impacted. To this gloomy backdrop, the RBI’s repo rate cut of 40 bps – from 4.40% to 4% now - is a welcome move.
Simultaneously, for the second time in a month, the reverse repo rate has also been slashed by another 40 bps and now stands at 3.35%.
This is another big step which will ease liquidity for developers - the rate cut will not only send out positive signals but will enable banks to lend even more.
Thus, the rate cuts combined with the further extension of loan moratoriums by 3 months up to August 31, 2020 augurs well for the real estate sector in the times to come.
This move is a major booster shot aiming to cushion the impact of COVID-19 on the Indian economy. Beyond doubt, repo rate cuts do uplift the sentiments of home buyers even further.
Home loan interest rates have already gone down substantially over the last year, and are presently at an all-time low averaging between 7.15% to 7.8%.
Interestingly, ANAROCK’s recent survey conducted during the lockdown also highlighted that of the respondents who were previously in no mood to purchase properties and have now become buyers in the lockdown period, a massive 92% cited lower home loan interest rates and a sense of security that physical assets provide during such exigencies.
Today’s repo rate cut will further help banks to lower home loan interest rates, which may get several more fence-sitters onto the market.
Moreover, the repo rate cut may compel banks to reduce the interest rates for FDs even further - this could result in even more people leaning towards housing as a better investment option.
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Bryce WelkerTop 11 Audit CPA Exam Tipsobject(stdClass)#14599 (59) { ["id"]=> string(4) "6095" ["title"]=> string(26) "Top 11 Audit CPA Exam Tips" ["alias"]=> string(26) "top-11-audit-cpa-exam-tips" ["introtext"]=> string(1109) "Auditing concepts can be difficult to understand, because an audit requires a different set of skills than posting accounting transactions or generating financial statements.
" ["fulltext"]=> string(26507) "To succeed on the Audit CPA exam (AUD) you need to put yourself in the shoes of an auditor, and understand the tests performed to issue an audit opinion.
Use these CPA Audit exam tips to better understand how to navigate the most difficult questions and topics and pass your upcoming exam!
1. Adjusting Entry
The accrual method of accounting requires companies to use the matching principle, which matches revenue earned with the expenses incurred to produce the revenue. This rule applies, regardless of the timing of cash inflow and outflows.
Now:
When you see questions on adjusting entries, remember that the entry requires one balance sheet and one income statement account. Assume, for example, that you owe $3,000 in payroll for the last week of December, and that payroll will not be paid until January 5th of the following year. Here is the adjusting entry:
December 31st
Debit wage expense $3,000
Credit accrued wages payable $3,000
(To post wage expense on 12/31)Wage expense is an income statement account, and accrued wages payable is a balance sheet account.
Here is the entry when the wages are paid on January 5th:
January 5th
Debit accrued wages payable $3,000
Credit cash $3,000
(To pay wages on 1/5)2. Asset Valuation
An audit opinion states whether or not the financial statements are free of material misstatement. Because an audit opinion does not state that the financial statements are free of all errors, the auditor can perform test work on a sample basis. CPAs use statistics to determine the required sample size, and the results of the sample can be applied to the entire population tested.
Here’s the deal:
Performing an audit may not uncover fraud, which is defined as willful intent to deceive. Fraud is particularly difficult to uncover if two or more employees collude and work together to avoid internal controls.
If a business suspects that a fraud has occurred, the firm may engage a CPA to test every transaction in a particular account, in order to uncover fraud.
3. Confirmations
Every AUD exam includes questions regarding confirmations, and confirming information with a third party is considered more reliable the documentation provided by the client. An auditor may send confirmations to a bank to confirm an account balance, or send confirms to customers who have a large balance in accounts receivable.
4. Engagement Letter
The engagement letter is a written agreement between the client and the CPA firm performing the audit, and some components of the engagement letter may be confusing to exam candidates.
An auditor uses judgment when selecting the audit procedures to be performed, and there is not one set of procedures performed for every audit. The client is responsible for implementing a system of internal controls, but the auditor must comment on any internal control weaknesses noted during the audit. Finally, the financial statements are the responsibility of management, and not the auditor.
5. Inventory Count
The best way to confirm the existence of inventory is to perform a physical count, and most auditors require that a count take place before issuing an unqualified audit opinion.
If you haven’t participated in a physical inventory count, some aspects of the count may not be familiar to you. Here are some important components of an inventory count.
- Access during the count: No inventory can move in or out of the area where inventory is stored during the count. Inventory counts typically take place in a warehouse or retail shop, and the access to the location should be restricted during the count. This ensures that the count is performed using the most recent inventory listing from the accounting system.
- Obsolete inventory: Keep an eye out for obsolete inventory, or items that have been in inventory for a long time and are not selling. Obsolete inventory should be expensed by writing off the value of the inventory to cost of goods sold. Every inventory audit program requires the auditor to ask company managers about obsolete inventory.
- All tags collected: Every physical inventory item is tagged, and the tag lists the number of items, a product description, and the cost of the items tagged. If you’re a sporting goods retailer, for example, you might carry a box of 50 baseball gloves in inventory. All inventory tags generated from the accounting system must be placed on inventory and checked during an inventory count.
The AUD test includes several questions on inventory counts, so make sure that you study enough to understand these concepts well.
6. Materiality
Materiality is defined as a dollar amount that is large enough to be relevant to a financial statement reader, and there is not a set dollar amount that is considered material for every audit. The most important aspect of materiality is a misstatement of net income, because net income is a key metric used to value a company.
But here’s the kicker:
During audit planning, the audit staff will decide on a level of tolerable misstatement for each account balance. If, for example, the balance of accounts receivable is $2 million, the auditor may decide that any misstatement greater than $500 is material, which means an adjusted entry should be posted.
7. Sales and Receivables
When an auditor performs an analytical review, the accountant compares balances in the financial statement to see if the relationships are reasonable. This analysis includes a review of trends from one year to the next. It’s very likely that you’ll see questions on the relationship between credit sales and receivables.
Credit sales are transactions that are not immediately paid in cash, and credit sales increase the accounts receivable balance. If your firm increases credit sales to new customers, you may find that new customers don’t pay as quickly as your existing client base.
What’s the bottom line?
If the accounts receivable balance grows at a faster percentage rate than credit sales, you may not be able to generate enough cash to operate each month. Growing credit sales by 10% will increase profits, but if the accounts receivable balance grows by 30%, if may create a cash shortage.
8. Sampling
Sampling is defined as applying an audit procedure to less than 100% of the items in a population. Keep in mind, however, that if exceptions are found as samples are tested, the auditor will expand the audit work by testing more items.
Assume, for example, that an auditor pulls a sample of client checks with a dollar amount of $1,000 or more. The client’s internal controls require two signatures on every check of $1,000 or more, and the auditor selects 50 checks for test work. If the auditor reviews checks that do not have two signatures, the sample size will be expanded. An auditor cannot rely on a sample that contains errors, because the same error rate may apply to the entire population.
9. Search for Unrecorded Liabilities
Auditors plan the engagement so that each account in the balance sheet is audited, and auditors are concerned about overstatement of asset accounts and liability accounts that are understated. This auditing concept is based on the balance sheet formula:
Assets – liabilities = equity
If an asset account, such as accounts receivable, increases, the firm’s equity balance also increases. On the other hand, a decrease in accounts payable (a liability account) also increases equity. The auditor’s goal is to audit each balance sheet account, to ensure that each account is materially correct.
The search of unrecorded liabilities is a procedure that confirms accounts payable. The auditor scans large checks written shortly after the fiscal year end and reviews the accounts payable detail. An auditor wants to see if the check is paying a liability that was posted to accounts payable.
Assume, for example, that a company has a December 31st fiscal year end. A $5,000 check paid to a vendor on January 10th was not listed on the December 31st accounts payable detail. If the client was incurred the expense before year-end, the $5,000 should be added to accounts payable by posted an adjusting entry.
10. Segregation of Duties
Segregation of duties is a concept that applies to many audit procedures, and every accountant must understand this topic. This concept is the only way to reduce the risk of fraud, particularly fraud committed by workers within a business.
You might be wondering:
How can I protect my firm from fraud? To protect yourself, make sure that you understand the three types of duties that must be segregated among different employees:
- Physical custody of assets: One worker should have physical custody of assets, such as the checkbook, or the keys to the warehouse.
- Authorization: A second person, usually the owner, should have authority to move assets. An authorized check signer, for example, has the ability to move cash by signing a check.
- Recordkeeping: If possible, a third worker should be responsible for posting accounting activity. That would include the task of reconciling the bank accounts, for example.
Ideally, three separate people should handle these duties. The Audit CPA exam asks many questions on this topic, so make sure that you’re clear about segregation of duties.
11. Invest In Your Audit CPA Exam Preparation
The AUD exam can be difficult, particularly if you haven’t worked as an auditor for a CPA firm. While this test does not have as many calculations as other sections of the CPA exam, you still need to invest a great deal of time to study for it.
- Access during the count: No inventory can move in or out of the area where inventory is stored during the count. Inventory counts typically take place in a warehouse or retail shop, and the access to the location should be restricted during the count. This ensures that the count is performed using the most recent inventory listing from the accounting system.
4
Anuj PuriUpdating India's Land Laws to Spur Economic Growthobject(stdClass)#14604 (59) { ["id"]=> string(4) "6083" ["title"]=> string(50) "Updating India's Land Laws to Spur Economic Growth" ["alias"]=> string(50) "updating-india-s-land-laws-to-spur-economic-growth" ["introtext"]=> string(191) "As India continues to confront the COVID-19 crisis, there are also opportunities to not just weather the crisis but also revive economic growth.
" ["fulltext"]=> string(1321) "One of the ways to do this is by urgently resolving the impediments in the country’s land regulations, as this is a primary means to attract global manufacturers and businesses.
India's stringent land regulations have impeded the faster proliferation of commercial activity in the manufacturing sector and dampened foreign investor sentiments for years.
Land is the basis of all economic activity in any country, and a sound land policy - updated to current requirements - is imperative for developing nations like India.
Here, reforms are needed across the board - in regulation, ownership, operation, sale, leasing and inheritance of land.
For example, land ownership is still carried out via registered sale deeds.
This is not only presumptive in nature but is also subject to challenge since this mechanism does not define the title of the property and the extent of rights of all owners.
This has historically resulted in countless disputes, litigations and generally hijacked economic progress.
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Varun AggarwalJio's Dopamine Kick To Make RIL Debt Freeobject(stdClass)#14603 (59) { ["id"]=> string(4) "6077" ["title"]=> string(41) "Jio's Dopamine Kick To Make RIL Debt Free" ["alias"]=> string(41) "jio-s-dopamine-kick-to-make-ril-debt-free" ["introtext"]=> string(78) "Jio is the subsidiary of Reliance Industries headquartered in Mumbai.
" ["fulltext"]=> string(32519) "The beta testing of the company was done on 27th December 2015 on the 83rd birth Anniversary of Dhirubai Ambani and became publicly available on 5th September 2016. Currently, they are the largest mobile network operator in India and third largest network operator all over the world after Bharti Airtel Limited and China Mobile Communications operation.
Jio's plans shook the telecom sector in India. They brought free internet providing 4G service through Voice over LTE Technology and created a customer base which shook all the major network operators in India as people started leaving their services. Once Jio started charging prices for the services it provided very cheap plans to gain more and more customers and have affected the sector completely and broken down the market control of Airtel, Vodafone and Idea by their efficient and effective services.
Facebook — Jio Deal
Facebook’s investment and corresponding valuation is higher than the average Rs 4.2 trillion enterprise value given to the company by top brokers like Citi Investment Research, Kotak Institutional Equities, JP Morgan India and Goldman Sachs India. Valuation by Jefferies suggests that Facebook expects Jio's EBITDA to double from current level.
The stake which effectively cost the company about Rs 18,000 crores (a 10% stake) is now being sold for over two times that amount (Rs 43,574 crores). For Facebook, it means access to over 370 million JIO subscribers, a partnership with one of India’s largest tech companies with a play in telecom services and infrastructure, cloud storage (JioCloud), digital entertainment (JioTV and Jio Cinema), payments (MyJio), communication (JioChat), cybersecurity (JioSecurity), E-commerce (JioMart), health tech (JioHealth-Hub) and IoT (JioMotive for smart car connectivity), and the opportunity to launch new products (e.g., Lasso) through Jio’s vast customer network.
This deal makes Facebook, the social media giant, the largest minority shareholder in the Indian telecom network. It also marks the largest investment for a minority stake by a tech company in the world, and the biggest foreign direct investment (FDI) in India’s tech space. However, WhatsApp and Jio will remain independent entities with their own business models and compete where necessary, in line with the respective business models, and collaborate in other areas where they see synergies. Implications for rivals like Amazon and Flipkart and should spark healthy concerns from a regulatory perspective for India’s consumers.
Reasons for Facebook’s Investment in Jio for 9.99% Stake
1. Jio Mart
Mukesh Ambani in the announcement about the Facebook investment in Jio mentioned their plans to come up with Jio Mart and the use of 400 million users for the same. Jio Mart is basically a venture by Jio to connect various Kirana shops through Whatsapp with their customers which makes people order their daily items through Whatsapp itself and do not need to make any extra efforts to travel to the shops as the shops will be delivering the products which helps the Kirana shopkeepers to grow their business, generate employment for the delivery persons, save time and money for the customers by ordering through digital media. Given the competition and winning the trust of the customers isn’t that easy this product will take time to grow and can be a little risky. This can be a great opportunity for both Jio and Facebook to grow in the E-Commerce sector and give competition to Amazon and Flipkart.
2. Regulatory Problems in India
Facebook has tried to partner with Jio to reduce the regulatory problems it could have faced in India especially given Reliance and Ambani's influence and very strong relations with huge personalities in the country which can help them get their work done easily given the fact that as the world is facing an economic slowdown due to COVID - 19 countries would prefer to have an economy which promotes local products and companies more, that their economy can grow. Facebook has invested in 2 other companies in India and tried entering the Indian market completely with the concept of net neutrality but due to regulatory problems and a lot of customers voiced their opinions against it, hence they had to cancel this plan completely and this time they needed a strong support and working with Jio along with the support of Mukesh Ambani in India already solved half of their problems in India.
3. Debt Free Company
Mukesh Ambani declared his aim for making RIL Net Debt Free by the end of 2021 March and it might be accomplished in some time. Due to the crude oil crisis the chances of RIL receiving an investment from Saudi Aramco have fallen down drastically which was supposed to be equal to be a 20 % stake in the company but now that the company has received an investment of 43,574 crores it will be a huge boost for the company to become net debt free as Jio would only be keeping 15,000 crores for their operations and investments and the rest of the amount will be used for RIL to become net debt free but this situation is possible when we consider a little optimistic scenario as in the current situation the product and selling of a lot of products is stopped due to the nationwide lockdown which might create huge losses for the company, and they might need the money to cover up for it or might have to borrow more funds. Reliance Infocomm Limited also plans to go Public to raise more funds to finish the debt of the company.
4. Access to Data
Facebook and Jio both benefit as they get access and a customer base with many people. If Jio is successful with its venture of 'Jio Mart' it will be a huge benefit for Facebook as well as they would be able to understand the Indian consumers, their consumption patterns, their preferences and get a great feedback which can help them improve themselves and in advertising to attract more customers by understanding their needs significantly with their analysis. But this would not just help Facebook with data but also benefit Jio with data as well as Jio could gain global prominence using Facebook tool and their data and investments. Jio can get access to data related to the number of likes a particular product might get on Facebook/Instagram and come up with it to attract many consumers. After WhatsApp was bought by Facebook they showed WhatsApp as an affiliate to Facebook which helped them share data between WhatsApp, Facebook and Instagram since they are affiliated to Facebook. Facebook might adopt this technique with Jio Mart or any of the Jio suite apps to provide them more data and get a proper share of returns and profit because of their favor and investments.
5. Digitalization Movement
India has been going through a digitalization movement over the last few years. It initially got a boom with the Prime Minister promoting online payments at the time of demonetization and continued with large number of consumers ordering products through E-commerce websites in India. India has 400 million WhatsApp users and Facebook has 300 million users and such collaboration in a country going through a digitalization movement is a win - win situation for everyone. This will also help to grow businesses and entrepreneurs to develop along with the digital and analytic tools which might come up with this collaboration.
6. Competition from TikTok
Facebook is facing a strong competition from the Chinese app TikTok, which is facing a sharp rise in number of customers which has now reached 250 million users which is a very strong competition to 300 million users of Facebook because some Facebook accounts have been made fake and a lot of people have made 2/3 accounts and giving the sharp rise of users for TikTok, there might be a chance that they take over Facebook in India.
In a study TikTok was declared the 2nd most popular free app downloaded in 2019 and given the current pandemic a lot of people are actively using TikTok to stay at home and pass time which is a huge problem for Facebook. Facebook has also come up with a similar app Lasso. Given all these uncertainties and the strict competition it faces from TikTok, the support of Jio and Mukesh Ambani in India is a huge thing for facebook to capture the Indian market again and defeat their competitor TikTok.
7. Affiliate Marketing
Jio's privacy policy states that they can share personal data of the customers with its affiliates if necessary for activities like advertising or any other promotional activity. Also, when WhatsApp was acquired by Facebook it was clearly mentioned by them that they will be sharing their data with Facebook since they are an affiliate to Facebook and given such strategies and policies of both Jio and Facebook, it is very evident that they both are going to use this loophole. Through affiliate marketing Jio and Facebook will be sharing customer’s data with each other that both the businesses can expand significantly.
8. Virtual Reality, Internet of Things and 5G Technology by Jio
Facebook also wants to develop a partnership with Jio to be the key to future technological plays in Virtual Reality and Internet of things through the 5G Technology. Jio has developed its own 5G Technology recent to boost up itself but only need the approval from TRAI and once it gets done they can work on it with full force along with a huge experienced partner like Facebook who has already made investments in Japan for Virtual Reality and Internet of things using the 5G Technology tools. Telecom has been heavily regulated in India but companies like Jio and owners like Mukesh Ambani do not face many problems due to the relations and trust in the company which gives Facebook easy access to 5G Technology and tools in India to grow.
9. Super App Ecosystem
Given the current scenario Jio being a partner with Facebook can launch a super app ecosystem properly, enhancing its suite of apps which failed earlier and the new apps like Lasso brought up by Facebook. The app’s ecosystem can include WhatsApp along with Jio Pay as WhatsApp Pay had been facing difficulties earlier with compliance and approval for the same but now collaborating with Jio about the same they can benefit and come up with an idea related to the payment system. It will also include Jio Cinema, Jio TV, JioCloud, Jio Chat, JioMart, JioHealth-Hub and JioMotive for smart car connectivity. There is a possibility that there’s one single app which has all these features from E-Commerce to Payment system, everything covered which can be a huge boost for Facebook and Jio to increase their customer base and profits.
10. Larger Scope
Reliance has already left its local competitors behind. The Jio - Facebook deal came after Microsoft agreed to work with Jio to offer cloud computing to businesses. Facebook has the most customers in India, also given the fact that now India is the world's second largest smart phone market. Due to the effect of COVID-19, a lot of people have started to become tech-savvy and tech companies are to grow at a very rapid rate, given their demand in the current situation.
Why did Facebook not explore a similar investment earlier?
The last time Facebook tried to enter the market it did not work out as Facebook brought the program Free Basic which got banned in India as regulators didn't allow free internet that favors one company over another.
Even many people were unsatisfied with this program due to which the public also started requesting to shut the program as it weren’t a great idea.
Silver Lake Investment into Jio Platforms
Reliance Industries Ltd. owned Jio received an investment of 5,656 crores for its digital operations. The 5,656 crores deal values Jio platforms like Jio TV, Jio Cinema, Jio Cloud and Jio Mart around 4.9 lakh crores. The Silver Lake deal represents a 12.5% premium to the equity valuation of the Facebook investment into Jio Platforms, a wholly-owned subsidiary of Reliance Industries Ltd (RIL).
It is headquartered in Menlo Park in California and has $40 billion in combined AUM and committed capital. Silver Lake has usually invested in famous growing tech businesses which add a huge value to Jio's market and brand value. The companies in Silver Lake's AUM are AMC, NASDAQ, EMC, Dell, Avaya, Airbnb and many more.
Including the recent rights issue for $7 billion and Investments from huge companies like Silver Lake can help RIL achieve its aim of becoming a zero debt company, which even in this very tough situation, might become possible. RIL has announced initiatives that could reduce net debt by about $13.6 billion from the reported net debt of $21.4 billion as on March 31, 2020.
The company is also facing huge losses due to the fall in oil prices and the oil sector being hit very badly which has even caused the price of RIL to fall even after such news of incoming strong investments. Such large amount of Investments will help in paying off for the losses faced in the oil sector.
The Investors and the stakeholders of the company also expect RIL to become financially flexible due to the large amount of Investments the company is receiving and their plans to go public for certain projects which will easily pay off debts and increase the funds with the company.
The reports mention that the PE giant's investment in Jio highlights the importance of India in the nations that make up the BRIC (Brazil, Russia, India, and China) nations. The deal also indicates that Silver Lake is looking beyond telecommunications business.
Vista Equity Partners invests into Reliance Jio
It is an American based private equity and venture capital firm which comes under the Vista group founded in 2000 by Robert. F. Smith and is headquartered in Austin, Texas, United States. The company focuses on financing and forwarding software and technology enabled startup business as well as passive equity investments.
Reliance Jio Platforms, part of Mukesh Ambani-controlled Reliance Industries group, has sold a 2.32 per cent stake to US-based private equity firm Vista Equity on a fully diluted basis for Rs 11,637 crores. The Vista Equity investment has valued Jio Platforms at an equity value of Rs 4.91 trillion and an enterprise value of Rs 5.16 trillion. Vista’s investment will make Vista it “the largest investor in Jio Platforms behind Reliance Industries and Facebook”.
Facts about the deal
· Vista's investment values Jio Platforms at an equity value of 4.91 lakh crores and an enterprise value of 5.16 lakh crores. This value is roughly the same as that of Silver Lake.
· Vista's investment will translate into a 2.32% equity stake in Jio Platforms on a fully diluted basis.
· Vista's investment in Jio Platform makes it the third largest investor behind Reliance Industries and Facebook.
· Morgan Stanley acted as financial advisor to Reliance Industries and AZB & Partners and Davis Polk & Wardwell acted as legal counsels.
Vista's vision of believing in transformative technology to create a future for everyone and continuing the process of Digitalization can be a huge boost for Jio. The aim of Jio to help small merchants, micro and small businesses and farmers can be helped through this venture between Vista and Jio given the Investment and Technology provided.
Vista has more than $57 Billion in cumulative capital commitments and its worldwide spread network represents fifth largest enterprise software company in the world.
This investment focuses on enterprise software, data and Tech Company, entire suite of Jio Apps like Jio TV, Jio Cinema, Jio Mart, Jio Chat etc along with digital platform that Jio has made which consists of Broadband connectivity, Smart Devices, Cloud and Edge Computing, Big Data Analytics, Artificial Intelligence, Internet of Things, Augmented and Mixed Reality and Blockchain.
General Atlantic invests into Reliance Jio
The company is an American based private equity firm which provides financial and strategic support for growth companies. It combines a collaborative global approach, sector specific expertise, a long-term investment horizon and a deep understanding of growth drivers to partner with great entrepreneurs and management teams to build exceptional businesses worldwide. The company believes in growth investing and only chooses a company after a strict analysis to find out whether the company has scope to grow or not in future. It is headquartered in New York and was founded in 1980 and aims to help its portfolio companies to grow globally and achieve massive success.
The company emphasizes on the following themes:
· Transition to a digital economy
· Globalization of Entrepreneurship
· Shift of Economic Growth to Emerging Markets Led by Asia.
The firm has approximately $34 billion in assets under management and has a lot of growing companies in their portfolio which are expected to generate huge returns in future. Some of them include the following:
This investment by General Atlantic is their largest investment in Asia. General Atlantic has invested 6,598.38 crores for a 1.34% equity stake in Jio Platforms on a fully diluted basis. Jio Platforms which includes a suite of apps like Jio TV, Jio Cloud. Jio Mart, Jio Cinema, Jio Chat, Jio Pay, Jio Saavn and many more to come.
Facts about the deal:
· The investment values Jio Platforms at an equity value of 4.91 lakh crores and an enterprise value of 5.16 lakh crores.
· The company has bought a 1.34% stake in the Jio Platforms.
· Morgan Stanley acted as financial advisor to Reliance Industries and AZB & Partners, and Davis Polk & Wardwell acted as legal counsel.
· Paul, Weiss, Rifkind, Wharton & Garrison and Shardul Amarchand Mangaldas & Co. acted as legal counsel to General Atlantic.
· General Atlantic’s investment in Jio Platform makes it the fourth largest investor behind Reliance Industries, Vista and Facebook.
The main objective of this Investment in Jio for General Atlantic is to help Jio scale wireless connectivity and accelerate digital growth all over India. To build a consumer tech company in India, they need to be in contact with the lower level consumers of the Indian Market as they can't build a huge company by just focusing on the higher class and definitely need to reach out the lower and middle class consumers of the country which in case of Jio has been achieved by them by having 388 million subscribers. The company had discussions for a couple of years about this investment as they knew that to build a large consumer tech they need a platform like Reliance Jio.
General Atlantic in the past has invested in leading technology platforms such as Airbnb, Alibaba, Ant Financial, Box, ByteDance, Facebook, Slack, Snapchat and Uber.
This deal benefits Reliance to enhance and expand its digital platform and also for the main purpose of becoming debt free and currently the company is focusing on it a lot. The company is also seeking to raise about US$7 billion selling shares to existing holders as part of a drive to build confidence in his oil, telecommunications and retail conglomerate. The offering, set to open May 20 and close June 3, includes a promise from the billionaire and the largest investors to acquire their full allotment, plus any shares left by minority shareholders.
Summary of the Investments Received by Reliance Jio
These Investments have been a major transformation for the company to achieve its aims like bringing Jio Mart, enhancing the Jio suite apps and many others.
The pie chart clearly shows the distribution of amount received as investments by Jio for the past 1 month. There are still chances that the company receives investment from Saudi Aramco for a 20% stake in the company which will be a major boost for the company.
In total, Jio Platforms have raised 67,194.75 crores so far. The company through all these investments is trying to become debt free and has also opted for right issue of shares so as to reduce their debt and become debt free. Outlook looks promising as company is expected to become debt free.
Special thanks to Rishabh Gandhi in compiling this article. Hope you all liked reading it. Feedback will be appreciated. Thank You!
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