5⃣ When the RSI crosses the centerline (i.e., RSI value of 50) from below, it is an occurrence more important than the crossing of the values 80 and 20; the crossing implies that a *change of trend has happened and you can consider going long.*
Book profit when price falls below EMA (8). Let the stop loss be the low of the previous candle.
6⃣ When the RSI crosses the centerline from above, that is, when RSI value falls below 50, it is an indication that average losses are exceeding average gains over the period indicating that one can go in for *fresh shorting or selling to cover long,* provided price is trading below EMA (5). Book profit when price candle closes above EMA (8). Let the stop loss be the high of the previous candle.
✅ However any buy or sell decision may be taken only with the crossover support of
(i) 4-day SMA and 13-day SMA or
(ii) EMA( 8) and EMA (21) or
(iii) MACD (12. 26, 9) because RSI may remain in overbought condition for a long period while price continues to rise higher and higher and similarly RSI may be in oversold zone for a long period but price may continue to fall for a long period.
📕 WHAT EXACTLY IS P/E RATIO
🔸 Let’s try to avoid textbook definitions and formulae and instead understand the core concept of P/E ratio in simple words.
🔸 Assume that you and your best friend decide to start a new business venture.
🔸 Each one of you contributes ₹50,000 towards the business as starting capital.
🔸 In return each of you get 5,000 shares of ₹10 each.
🔸 Now here’s the capital structure:
- Total capital: ₹1,00,000
- No. of shares: ₹10,000
- No. of shareholders: 2 (50% each)
🔸 After a successful year in business, you generate a profit (earnings) of ₹25,000.
🔸 That means as 50% owner of the business, you get to keep ₹12,500.
🔸 Let’s calculate Earnings Per Share (EPS)
EPS = Earnings / No. of shares
= 25,000 / 10,000
= ₹2.5
🔸 So now that you have calculated the EPS you now exactly know how much each one of the 5000 shares you own is earning for you.
🔸 You get excited and tell this to another friend of yours and you also tell him how your business is going to grow in the coming years.
🔸 After listening to you, your friend goes home and thinks, wow even I want a share of the profits his business is going to make.
🔸 But he knows that now that your business is successful, he just cannot buy the shares of your company at base rate of ₹10 each share.
🔸 So he comes to you the next day and offers you to buy 1000 shares of your company at ₹15 per share.
🔸 He has added a premium of ₹5 per share over your base rate of ₹10 per share.
🔸 Here come’s the Price to Earnings (P/E) ratio.
P/E = Price / EPS
= 15 / 2.5
= 6
🔸 That means your friend is now willing to pay 6 times extra to buy your shares and earn from them in equal proportion as you.
🔸 P/E is also called as a value multiplier. In our story, it’s 6x.
🔸 It denotes how much extra new shareholders are willing to pay.