E-Book Technical Analysis

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Technical Analysis

A Basic Introduction

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Technical Analysis

–

Why?

z

z Technical analysis is the study of Price _{Technical analysis is the study of Price}

Movement, Volume and Price Relationships over

time periods.

time periods. z

z _{We analyse charts because the market repeats}_{We analyse charts because the market repeats}

itself and if we can see these re

itself and if we can see these re--occurring even occurring even though they may not be an exact repeat it will

though they may not be an exact repeat it will

help us to anticipate the future price movement.

help us to anticipate the future price movement. z

z Many traders use technical analysis and _{Many traders use technical analysis and}

everyone sees the same patterns and this is a

huge psychological factor in the movement of

prices.

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Technical Analysis Limitations

z

z Technical analsis is subjective _{Technical analsis is subjective}–– it it

depends on the person who is doing the

analyses.

z

z They give current and past information _{They give current and past information}

and can not predict the future

and can not predict the future –– they can they can

however, indicate a high probability market

movement.

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Charts & Chart Types

z

z Charts show us the movement of price against a _{Charts show us the movement of price against a}

time frame with the historical data.

time frame with the historical data. z

z Charts allow us to anticipate before hand where _{Charts allow us to anticipate before hand where}

prices may be going and help us to plan a high

probability transaction.

probability transaction. z

z Often appearing chart patterns do not always _{Often appearing chart patterns do not always}

work, but they are indication of a high probability

outcome. If we position our selves accordingly

we can use extra tools to confirm whether the

price is going to move as foreseen or not.

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Charts & Chart Types

z

z Technical analysts use different charts for _{Technical analysts use different charts for}

different time periods. There are traders

who will trade for an hour or two a day, or

day traders that will check the market for

10 minutes place and order and leave it

alone.

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Most Common Chart Types

--

Candle Bar Charts

Bear candle Bull candle

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Most Common Chart Types

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Most Common Chart Types

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Using Charts

z

z The chart a trader uses depends on the _{The chart a trader uses depends on the}

trader. Some will use a combination of

charts in different time periods and for

different currencies or commodities.

z

z There are traders who sometimes design _{There are traders who sometimes design}

their own charts from charting tools such

as bull and bar charts.

z

z In any case we need to know how to use _{In any case we need to know how to use}

them and what to do with them.

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Support & Resistance

Support

Support -- The levels where prices resist falling any further.The levels where prices resist falling any further. Resistance

Resistance –– The price levels where prices resist an increase in price.The price levels where prices resist an increase in price.

Support Resistance

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Trend Lines

Trend line

Determine the direction of the price. Trendlines can be classified as strong & weak. The proper drawing, use and application of trendlines help traders to keep on the right side of the trade.

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Chart patterns

-- The major continuation and reversal patternsThe major continuation and reversal patterns z

z Identification of chart patterns may reveal _{Identification of chart patterns may reveal}

the future market behavior basing on the

assumption that the way the market forces

interact does not change significantly with

time and may be analyzed on the historical

charts.

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Chart patterns

-- The major continuation patternsThe major continuation patterns

z

z A Rectangular pattern signals a A Rectangular pattern signals a continuation in the market trend and continuation in the market trend and constitutes a trading range during a constitutes a trading range during a pause in the trend. The pattern is pause in the trend. The pattern is

easily identifiable by two highs and two easily identifiable by two highs and two lows, that can be connected by two lows, that can be connected by two parallel lines, thus forming the top and parallel lines, thus forming the top and bottom of a rectangle. Rectangles are bottom of a rectangle. Rectangles are sometimes referred to as trading

sometimes referred to as trading ranges, consolidation zones or ranges, consolidation zones or congestion areas.

congestion areas.

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Chart patterns

z

z Flags and Pennants are short_{Flags and Pennants are short}- -term continuation patterns that

term continuation patterns that

mark a small consolidation before

the previous move resumes.

These patterns are usually

preceded by a sharp advance or

decline with heavy volume, and

mark a mid

mark a mid--point of the move.point of the move.

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Chart patterns

-- The major reversal patternsThe major reversal patterns z

z Head and Shoulders _{Head and Shoulders}

reversal pattern forms

after an uptrend, and its

completion marks a trend

reversal. The pattern

contains three successive

peaks with the middle

peak (head) being the

highest and the two

outside peaks (shoulders)

being low and roughly

equal. The reaction lows

of each peak can be

connected to form

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Chart patterns

-- The major reversal patternsThe major reversal patterns

z

z The Head and Shoulders bottom is The Head and Shoulders bottom is sometimes referred to as "an inverse sometimes referred to as "an inverse head and shoulders". The pattern head and shoulders". The pattern shares many common characteristics shares many common characteristics with the classical H&S formation, but with the classical H&S formation, but relies more on volume patterns for relies more on volume patterns for confirmation.

confirmation.

z

z As a major reversal pattern, the Head As a major reversal pattern, the Head and Shoulders bottom forms after a and Shoulders bottom forms after a downtrend, and its completion marks a downtrend, and its completion marks a change in trend. The pattern contains change in trend. The pattern contains three successive troughs with the three successive troughs with the middle trough (head) being the middle trough (head) being the

deepest and the two outside troughs deepest and the two outside troughs (shoulders) being more shallow. In its (shoulders) being more shallow. In its most classical form, the two shoulders most classical form, the two shoulders should be equal in height and width. should be equal in height and width. The neckline that connects the lows The neckline that connects the lows forms resistance.

forms resistance.

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Chart patterns

-- The major reversal patternsThe major reversal patterns

z

z Although there can be _{Although there can be}

variations, the classic double

bottom usually marks an

intermediate or long

intermediate or long--term term

change in the underlying trend.

Many potential double bottoms

can form along the way down,

but until the key resistance is

broken, a reversal cannot be

confirmed. The double bottom

is a major reversal pattern that

forms after an extended

downtrend. As its name

implies, the pattern is made up

of two consecutive troughs that

are roughly equal, with a

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Chart patterns

z

z The symmetrical triangle, also known as a coil, The symmetrical triangle, also known as a coil, usually forms during a trend as a continuation

usually forms during a trend as a continuation

pattern. The pattern contains at least two lower

highs and two higher lows. When these points are

connected, the lines converge as they are extended

and the symmetrical triangle takes shape.

z

z The ascending triangle is a bullish formation that The ascending triangle is a bullish formation that usually forms during an uptrend as a continuation

usually forms during an uptrend as a continuation

pattern. There are instances when ascending

triangles form as reversal patterns at the end of a

downtrend, but they are typically continuation

patterns. Regardless of where they form, ascending

triangles are bullish patterns that indicate

accumulation.

z

z The descending triangle is a bearish formation that The descending triangle is a bearish formation that usually forms during a downtrend as a continuation

usually forms during a downtrend as a continuation

pattern. There are instances when descending

triangles form as reversal patterns at the end of an

uptrend, but they are typically continuation patterns.

Regardless of where they form, descending

triangles are bearish patterns that indicate

distribution.

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Moving Averages

z

z Trend lines are the basic indicator of trend, _{Trend lines are the basic indicator of trend,}

but they are quite subjective, depending

on the eye of the beholder. So traders use

additional indicators to help determine

trends.

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Moving Averages

z

z Moving Averages _{Moving Averages}-- Perhaps the simplest Perhaps the simplest to understand and most widely used

to understand and most widely used

technical indicator is a moving average,

which smoothes past data to illustrate

existing trends or situations where a trend

may be ready to begin or is about to

reverse. A moving average helps you spot

market direction over time rather than

being caught up in short

being caught up in short--term erratic term erratic market fluctuations.

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Moving Averages

There are three main types of moving averages:

z

z SimpleSimple.. Each price point over the specified period of the moving averagEach price point over the specified period of the moving average is e is given an equal weight. You just add the prices and divide by the

given an equal weight. You just add the prices and divide by the number of number of prices to get an average. As each new price becomes available, t

prices to get an average. As each new price becomes available, the oldest he oldest price is dropped from the calculation.

price is dropped from the calculation.

z

z WeightedWeighted. . More weight is given to the latest price, which is regarded as More weight is given to the latest price, which is regarded as more important than older prices. If you used a three

more important than older prices. If you used a three--day weighted moving day weighted moving average, for example, the latest price might be multiplied by 3,

average, for example, the latest price might be multiplied by 3, yesterdayyesterday’’s s price by 2 and the oldest price three days ago by 1. The sum of

price by 2 and the oldest price three days ago by 1. The sum of these these figures is divided by the sum of the weighting factors

figures is divided by the sum of the weighting factors –– 6 in this example. 6 in this example. This makes the moving average more responsive to current price c

This makes the moving average more responsive to current price changes. hanges.

z

z ExponentialExponential. . An exponential moving average (EMA) is another form of a An exponential moving average (EMA) is another form of a weighted moving average that gives more importance to the most r

weighted moving average that gives more importance to the most recent ecent prices. Instead of dropping off the oldest prices in the calcula

prices. Instead of dropping off the oldest prices in the calculation, however, tion, however, all past prices are factored into the current average. The curre

all past prices are factored into the current average. The current EMA is nt EMA is calculated by subtracting yesterday

calculated by subtracting yesterday’’s EMA from todays EMA from today’’s price and then s price and then adding this result to yesterday

adding this result to yesterday’’s EMA to get todays EMA to get today’’s EMA. An EMA generally s EMA. An EMA generally produces a smoother line than other forms of moving averages, wh

produces a smoother line than other forms of moving averages, which can ich can be an important factor in choppy market conditions.

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Using Moving Averages

A number of different time period moving averages are used on this chart to determine the short term & long term direction of price movement.

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Moving Averages

Which Periods To Use

z

z Moving Average time periods depends _{Moving Average time periods depends}

mostly on the trader, the strategy, the time

period used to trade and also on the

commodity and the currency pair traded.

z

z Generally traders will use three to four _{Generally traders will use three to four}

moving average lines with short term and

long term levels in order to determine the

direction of the trend and locations where

the trend is changing.

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Moving Averages

Moving average based trading techniques

z

z Some use combinations such as 5_{Some use combinations such as 5}--day, day, 10

10--day and 20day and 20--day moving averages, day moving averages, taking crossovers of the shorter moving

taking crossovers of the shorter moving

average over the longer moving average

as a trading signal.

z

z Still others use additional, longer_{Still others use additional, longer}--term term

moving average lines as another point of

support or resistance.

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Moving Averages

Moving average based trading techniques

If you were using a moving average cross over you would have entered a short transaction here!

Depending on your trading strategy you may have exited in a few places with a lot of profit.

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Oscillators

–

MACD

(Moving Average Convergence / Divergence)

z

z MACD is a more detailed method of using _{MACD is a more detailed method of using}

moving averages to find trading signals

from price charts. MACD plots the

difference between a longer

difference between a longer--term term

exponential moving average and a shorter

exponential moving average (the chart in

the next slide uses 21 days and 9 days).

Then a 9

Then a 9--day moving average of this day moving average of this

difference is generally used as a trigger

line.

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Oscillators

–

MACD

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Oscillators

–

MACD

The MACD indicator is used in three ways:

z

z Crossover signals._{Crossover signals.} When the MACD line crosses below the trigger When the MACD line crosses below the trigger line, it is a bearish signal; when it crosses above it, it's a b

line, it is a bearish signal; when it crosses above it, it's a bullish ullish

signal. Another crossover signal occurs when MACD crosses above

or below the zero line.

z

z Overbought_Overbought--oversold. oversold. If the shorter moving average pulls away If the shorter moving average pulls away from the longer moving average dramatically, it indicates the ma

from the longer moving average dramatically, it indicates the market rket may be coming over

may be coming over--extended and is due for a correction to bring extended and is due for a correction to bring the averages back together.

the averages back together.

z

z Divergence._Divergence. As with other studies, traders look at MACD to provide As with other studies, traders look at MACD to provide early signals or divergences between market prices and a technic

early signals or divergences between market prices and a technical al indicator. If the MACD turns positive and makes higher lows whil

indicator. If the MACD turns positive and makes higher lows while e prices are still going side ways, this could be a strong buy sig

prices are still going side ways, this could be a strong buy signal. nal. Conversely, if the MACD makes lower highs while prices are makin

Conversely, if the MACD makes lower highs while prices are making g new highs, this could be a strong bearish divergence and a sell

new highs, this could be a strong bearish divergence and a sell

signal.

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Oscillators

–

RSI

(Relative Strength Index)

z

z The main purpose of the Relative Strength Index (RSI ) is to _{The main purpose of the Relative Strength Index (RSI ) is to}

measure the market's strength or weakness.

z

z A high RSI reading, above 70, suggests an overbought or _{A high RSI reading, above 70, suggests an overbought or}

weakening bull market. Conversely, a low RSI number, below 30,

implies an oversold market or dying bear market. However, blindl

implies an oversold market or dying bear market. However, blindly y selling when the RSI is above 70 or buying when the RSI is below

selling when the RSI is above 70 or buying when the RSI is below

30 can be an expensive trading system. A move to those levels is

30 can be an expensive trading system. A move to those levels is a a signal that market conditions are ripe for a market top or botto

signal that market conditions are ripe for a market top or bottom, but m, but it does not, in itself, indicate a top or a bottom.

it does not, in itself, indicate a top or a bottom.

z

z Although you can use the RSI as an overbought and oversold _{Although you can use the RSI as an overbought and oversold}

indicator, like many indicators, it works best when a failure sw

indicator, like many indicators, it works best when a failure swing ing occurs between the RSI and market prices. For example, the marke

occurs between the RSI and market prices. For example, the market t makes new highs after a bull market setback but the RSI fails to

makes new highs after a bull market setback but the RSI fails to

exceed its previous highs

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Oscillators

–

RSI

(Relative Strength Index)

Note how the RSI is indicating a drop in price. You can catch these moves often with RSI.

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Oscillators

–

RSI

(Stochastics)

z

z The basic premise of the stochastic indicator _{The basic premise of the stochastic indicator}

revolves around the position of the close relative

to the high or low of the day. During periods of

price decreases, daily closes tend to accumulate

near the extreme lows of the day. During periods

of price increases, closes tend to accumulate

near the extreme highs of the day. The

stochastic study is an oscillator designed to

indicate oversold and overbought market

conditions.

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Oscillators

–

RSI

(Stochastics)

Note how the stochastic levels are showing the places where prices are turning the other way.

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E-Book Technical Analysis

Technical Analysis

Technical Analysis

A Basic Introduction

A Basic Introduction

Contents

Contents

Technical Analysis

Technical Analysis

–

–

Why?

Why?

Technical Analysis Limitations

Technical Analysis Limitations

Charts & Chart Types

Charts & Chart Types

Charts & Chart Types

Charts & Chart Types

Most Common Chart Types

Most Common Chart Types

--

Candle Bar Charts

Candle Bar Charts

Most Common Chart Types

Most Common Chart Types

Most Common Chart Types

Most Common Chart Types

Using Charts

Using Charts

Support & Resistance

Support & Resistance

Trend Lines

Trend Lines

Chart patterns

Chart patterns

Chart patterns

Chart patterns

Chart patterns

Chart patterns

Chart patterns

Chart patterns

Chart patterns

Chart patterns

Chart patterns

Chart patterns

Chart patterns

Chart patterns

Moving Averages

Moving Averages

Moving Averages

Moving Averages

Moving Averages

Moving Averages

Using Moving Averages

Using Moving Averages

Moving Averages

Moving Averages

Moving Averages

Moving Averages

Moving Averages

Moving Averages

Oscillators

Oscillators

–

–

MACD

MACD

Oscillators

Oscillators

–

–

MACD

MACD

Oscillators

Oscillators

–

–

MACD

MACD