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Beginners Guide to Identify Multibaggers Stocks - Learn and Earn!

Updated: Aug 29, 2021

Most people think that becoming rich is a reserved privilege for Warren Buffett or Rakesh Jhunjhunwala.


Normal people like us often struggle to identify a proper investment technique and spend all our earnings on unnecessary things.


I am willing to bet that you will have many multi-baggers in your portfolio if you follow the Dow Theory concept for a few years.


How to pick multibagger stocks for investment


When it comes to investing, there are two schools of thought:

  • Fundamental Analysis and

  • Technical Analysis

Fundamentalists are more concerned about the company's management, various products, Sales, Price to earnings ratio, Balance sheet, Cash flow, Debt to equity ratio, etc. Broadly they are concerned about qualitative as well as quantitative aspects of the Company analysis.


Technical Analysts consider the analysis of past behavior of prices to interpret their study. They believe that the price contains all the information, and it's enough to analyze the price chart.


I belong to the technical analysis category. I will give a simple technique so that anyone can start investing immediately after reading this post.

 

Charles Dow wrote a series of Wall Street Journal editorials from 1900 until the time of his death. As per Dow, all market-related information – past, present, and even future is discounted and reflects on the charts.


As per Dow, market movements can be divided into three types, and at any time, the price is the combination of any of these three types. These three types are:


  1. Uptrend,

  2. Downtrend, and

  3. Sideways




Popular Topics


 

Uptrend


Uptrend as per Dow theory
Image 1 – Uptrend as per Dow theory

An Uptrend consists of series of Higher Lows (HL) and Higher Highs (HH) as shown in the above image. We can say, the price is in an uptrend until it keeps making HL and HH.


#ICICIBank chart showing an uptrend
Image 2 – ICICI Bank chart showing an uptrend

#BajajFinance chart showing an uptrend
Image 3 – Bajaj Finance chart showing an uptrend

Image-2 and Image-3 are the two examples of uptrend stocks.


Also read: 6 Trading Mistakes Every Beginner Should Avoid
 

Downtrend


Downtrend as per Dow theory
Image 4 – Downtrend as per Dow theory

A Downtrend consists of series of Lower Lows (LL) and Lower Highs (LH) as shown in the above image. We can say, the price is in a downtrend until it keeps making LL and LH.


#RCOM chart showing a downtrend
Image 5 – RCOM chart showing a downtrend

#YESBANK chart showing a downtrend
Image 6 – YES BANK chart showing a downtrend

Image-5 and Image-6 are the two examples of downtrend scrips.


 

Sideways Trend


Sideways trend as per Dow theory
Image 7 – Sideways trend as per Dow theory

When the price starts making the same Lows and same Highs, it can be recognized as a sideways trend.


#VRL chart showing a sideways trend
Image 8 – VRL chart showing a sideways trend

#CANARABANK chart showing a sideways trend
Image 9 – CANARA BANK chart showing a sideways trend

Image-8 and Image-9 are the two examples of sideways trend scripts.



“I will tell you how to become rich. Close the doors. Be fearful when others are greedy. Be greedy when others are fearful.” – By Warren Buffett

 

How to Identify the Change in Trend?


To make more money in the market, you have to take Entry at the beginning of the Uptrend and you have to exit at the beginning of the Downtrend.


However, it is always a challenging task to identify the beginning of the uptrend and the beginning of the Downtrend.


Dow Theory helps us to identify these market turns with ease.


Buy the No.1 book on investment "The Intelligent Investor" here.

 

End of Down Trend


End of Downtrend (or the start of Uptrend)
Image 10 – End of Downtrend (or the start of Uptrend)

As shown in the above image, the first price stops forming Lower Lows (LL) and Lower Highs (LH) and next forms a Higher Low (HL). The break of the next high indicates the end of the Down Trend and the beginning of the new Uptrend.


End of Downtrend in BAJAJ FINANCE
Image 11 – End of Downtrend in BAJAJ FINANCE
End of Downtrend in AURO PHARMA
Image 12 – End of Downtrend in AURO PHARMA

Image-11 and Image-12 show the examples for the end of a downtrend (or a beginning of an uptrend).


One can look for such scripts to make an entry for fresh investments.

 

End of Up Trend


Only 'Entry' and 'Exit' decide the fate of your investment decisions irrespective of your experience, qualification, and reputation.


Hence, it is better to know the good 'Exit' point to take more profits. The end of the uptrend provides a good idea of the 'Exit' point.

End of Uptrend
Image 13 – End of Uptrend

As shown in the above image, the first price stops forming Higher Lows (HL) and Higher Highs (HH) and next forms a Lower High (LH). The break of the next low indicates the end of the Up Trend and the beginning of the new Downtrend.


End of Uptrend in JK TYRES
Image 14 – End of Uptrend in JK TYRES
End of Uptrend in LOEWS CORP
Image 15 – End of Uptrend in LOEWS CORP

Image-14 and Image-15 show the examples for the end of an uptrend (or a beginning of a downtrend).


Whenever your script displays this scenario, it’s better to sell the scripts.


Smart people know that Trading/Investing in one pattern is more valuable than using multiple patterns.


Two best quotes on "Investment" to end this article:


"The Stock Market is a Device for Transferring Money from the Impatient to the Patient" - Warren Buffett


“Know what you own, and know why you own it.” – By Peter Lynch


Below are the best books to learn more about investment.


Best Books to Learn Investment in Stock Market


Below are the best books to learn more about investment.


"One Up On Wall Street" by Peter Lynch


"The Intelligent Investor" by Benjamin Graham



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