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m What is Technical Analysis

m Brief history and underlying theory

m Trends

m Charts

m Technical Indicators
m Technical Analysis ± Interpreting historical price
movement presented in form of a chart to make
predictions about the future movement.

m It¶s a technique that claims to have the ability to


forecast the future direction of prices through the
study of past price movement data.

m Price, Volume, Open Interest are used to identify


whether a market is trending, range bound,
peaking or bottoming. Chartists use these tools to
identify patterns that can suggest future activity.
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m Ignores company¶s performance and other fundamental


details about the company ± Intrinsic value of a firm is
completely ignored

m Assumes that market price has already accounted for


news, performance etc about the company

m Its rather cumbersome to individually analyze the


financial position and performance of large number of
companies

m Typically trading companies employ both chartists as


well as fundamental analyst
a p
m Charles Dow was among the first to popularize technical
analysis and its usefulness among the trading community

m Dow theory is an extract of the research articles written by


Dow

m Many more technical tools and theories have been


postulated in the recent time and Technical Analysis is now
being considered as a respectable and useful tool for
predicting future price movements

m Technical analysis is widely used in Forex markets,


commodity markets, stock markets both cash and F&O
segment
a p
m Three major assumptions:

½ The market discounts everything

½ Prices move in trends

½ History tends to repeat itself


m   a
 
 
½ tock price reflects the fair value since many
traders are willing to buy or sell at that price
½ The price represents collective perception in
terms of fear, optimism, hope etc. of many
traders

m O 
 p 

½ Prices move in trends, not randomly. Once a
trend is established the future movement is
most likely to follow the same trend
m Ô
 p 
   

½ Mainly in terms of price movement or
patterns following an event. Human
psychology does not change.

½ In a bull market, the psychology that


drives the price upwards will be seen
over and over again
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m It helps in timing entries and exits

m Indicates support and resistance for stock prices


that helps in getting better risk-reward trades

m With the help of charts it is possible to identify


periods where one can expect a quick rise or fall in
price in a short span to time

m It helps in gauging the mood and perception of the


traders and possible short term movements
O   

m Charting is the foundation of technical


analysis

m A chart is a pictorial representation of a


stock¶s demand and supply over a
period of time

m Time frames can be minutes, hours,


days, weeks, months or years
m A chart has three parameters ± time, price, and the
resultant pattern

m tudying the time periods of past price cycles and price


actions at a specific time provides an indication of future
price action

m Traders usually concentrate on charts of daily and


intraday data to forecast short term price movements

m hort term charts, however, contain lot of noise like


price gaps, sudden fluctuations, wide high-low ranges
Ô  
   
m The four types of prices which are used in
charting are:
½ ë   ± reflects global cues, early
decisions
½ Ô  ± power of bulls
½ 0   ± strength of bears
½ 
  ± mood of professionals

m ^   Opening price may not be equal to


previous closing day¶s price
p 
  

m The three most popular methods for displaying


price data are:

½ Line charts

½ Bar charts

½ Candlesticks
0  
m The most basic charts is the line chart
because it represents only the closing
prices over a set period of time.
m The line is formed by connecting the closing
prices over the time frame. Line charts do
not provide visual information of the
trading range for the individual points such
as the high, low and opening prices.
m However, the closing price is often
considered to be the most important price
in stock data compared to the high and low
for the day and this is why it is the only
value used in line charts.
  
   
 

 
  
m The bar chart expands on the line chart by adding
several more key pieces of information to each data
point.
m The chart is made up of a series of vertical lines that
represent each data point.
m This vertical line represents the high and low for the
trading period, along with the closing price.
m The close and open are represented on the vertical line
by a horizontal dash.
m The opening price on a bar chart is illustrated by the
dash that is located on the left side of the vertical bar.
Conversely, the close is represented by the dash on the
right.
m Generally, if the left dash (open) is lower than the right
dash (close) then the bar will be shaded black,
representing an up period for the stock, which means it
has gained value. A bar that is colored red signals that
the stock has gone down in value over that period.
When this is the case, the dash on the right (close) is
lower than the dash on the left (open)

 



   O 

m War between the demand for and supply of an


asset gets reflected as patterns ± or formations ±
on price charts

m Chart patterns can be analyzed by looking at


support, resistance and trend lines

m Two categories of chart patterns


½ 
 

½     

m reversal patterns indicate imminent tops in bull


markets and bottoms in bear market i.e. reversal
pattern signals that a prior trend will reverse
upon completion of the pattern.

m Consolidation patterns indicate an indecisive


swing towards either bulls or bears. Volume is
usually low in this period. A continuation pattern,
on the other hand, signals that a trend will
continue once the pattern is complete.
m Chart patterns have high rate of success in trading

m Help in gauging momentum, support, resistance,


and other indications of strength and weakness in a
security

m Provide cues about market direction and for timing


entries and exits

m In all, chart patterns provide a concise picture of all


the buying and selling forces active in the market
p 
p 0

m Prices move in trends ± fundamental assumption of


technical analysis

m Basic building block for successful trading is


determining what the market¶s trend is ± and when it
might change or has changed

m Indicates potential areas of price support and


resistance

m Trend lines are used as a tool for trend identification


and confirmation
m Trend line ± a straight line that connects
two or more price points and then extends
into the future to act as a line of support or
resistance
a  
m Trend line connect a series of high or low price
points in order to define or confirm a trend

m Trend may be up trend or down trend

m At least two relative price highs or lows are needed


to draw a trend line

m Trends lines are used by traders to initiate trading


positions. Penetration of a trend line signals a break
of trend
O    ^  
O 0
m Op-trend line has a positive slope and is formed by
connecting two or more low price points

m The second low must be higher than the first one

m Op-trend line acts as support for the price and


indicate that the power of bulls is increasing

m A rising price combined with high than average


volumes is signal for initiating a long position
Op-trend Line ± CNX Midcap
a  
m Down trend line has negative slope

m Its formed by connecting two or more high price points

m The second price high must be lower than the first one

m Down trend lines act as resistance to the price from


moving higher, and indicate that the net supply of the
security is increasing even as prices fall.

m ^  a      




  
 
 
   
Down-trend line ± CNX Midcap
   
m The more number of times the price touches a
trend line, the more significant and valid that
trend line becomes

m The steeper a trend¶s angle, the less reliable it


becomes

m If price penetrate either trend line its an


indication of trend reversal and positions must
be re-evaluated
p 0

  


 0 

m upport levels are those price levels where there


exist a sufficient number of buyers to arrest any
downfall in the price of a security

m resistance levels are the price levels where there


exist a sufficient number of sellers to halt the
upward movement of a security¶s price

m If the price falls towards support level it is a test for


the line ± the support will either be reconfirmed or
get wiped out
m Opper line is resistance (rs 1350) and the
lower blue line is upport (rs 1630)

m hort term players can trade this sideways


range by shorting near resistance and buying it
near support (along with a stop loss)

m Breach of these levels indicate trend formation


i.e. penetration of price over resistance may
indicate a bull phase and if price falls below the
support it might continue to fall