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Techncial AnalysisTechncial Analysis
Demystify Technical Analysis
2 Technical Analysis
Agenda
Orientation Introduction to the course. Rules and Regulations.
Expectation etc.
Introduction to Technical Analysis. What is Fundamental Analysis. What is Technical Analysis, Comparison between Technical and Fundamental Analysis.
Some Basic Concepts. Line Chart Bar Chart Candlestick Chart
Trends Up Trend Down Trend Side Ways Trend
Trend lines and Properties. What is Valid Trend lines and Properties
Trading Technique for Trend lines.
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3 Technical Analysis
Human Emotions
4 Technical Analysis
Your forecasting toolki
Fundamental analysisA method of forecasting based on basic
economic, political and environmental
factorsTechnical AnalysisA method of predicting price
movements and future market trendsby studying charts of past market
action, price, volumes and openinterest.
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5 Technical Analysis
Fundamentally Strong Company Technically Strong Company.
6 Technical Analysis
Fundamentally Strong Company Technically Strong Company.
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7 Technical Analysis
Basics
A good graphics package with good data behind it.
Set aside some time every day to flick through thecharts of what you trade.
Dont get fixated on day-to-day, look at theweekly, monthly and yearly charts.
Dont get so focused on the near-term action that
you lose sight of the bigger picture.
8 Technical Analysis
Principles of Technical analysis
The current pricediscounts everything
Patterns exist
History repeats itself
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9 Technical Analysis
The current price discounts everything
10 Technical Analysis
History repeats itself
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11 Technical Analysis
History repeats itself
12 Technical Analysis
Strengths
Can be used on almost anyinstrument
Can be used to analyse data over a
wide range of time periods There are many charting tools and
techniques
The basic principle of charting iseasy to understand
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15 Technical Analysis
Trends
16 Technical Analysis
Basic Concepts of Trend
There are three trendsUPDOWNSIDEWAYS
There are three decisionsGO LONGGO SHORTSTAY OUT OF THE MARKET
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17 Technical Analysis
Dont buck the trend, because the trend is your friend
18 Technical Analysis
Up Trend
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19 Technical Analysis
Up Trend
20 Technical Analysis
UPTREND
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21 Technical Analysis
Down Trend
22 Technical Analysis
Down Trend
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23 Technical Analysis
Sideways Market
24 Technical Analysis
Sideways Market
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25 Technical Analysis
Short-term and Longer-term trends
A trend has three classificationsMAJORINTERMEDIATENEAR-TERM
Broadly three time horizonsLONGER THAN A YEARONE TO THREE MONTHS
ONE WEEK TO ONE MONTH
26 Technical Analysis
Short-term and Longer-term trends
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27 Technical Analysis
Three Stages of a Trend
Accumulation
Big Move
Excess
Distribution
Big Move
Despair
Bull Market Bear Market
28 Technical Analysis
Basic typesof charts
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29 Technical Analysis
Chart types
Line
Bar
Candlestick
30 Technical Analysis
Line charts
The line chart is the simplest form of chart joining a series of points forinstrument data on the vertical axis (Y-axis) and a timescale on thehorizontal axis (X-axis).
Line charts are not frequently used today.
Typically Bid, Ask, High, Low or Close prices are used for the vertical axisand timescales used can vary from tick (every price plotted consecutively)
to hourly, daily and weekly.
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31 Technical Analysis
Bar Charts
Open
Close
High
Low
32 Technical Analysis
Candlestick
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33 Technical Analysis
Very simple signals
Uptend Downtrend
34 Technical Analysis
Reversal days
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35 Technical Analysis
The two-day reversal
36 Technical Analysis
Properties of Trend Line
The greater the number of touches the more
important the trend line becomes.
The angle of Trendline
Extension of Trend line.
Trendline with Chart patterns
Spacing of the two points
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37 Technical Analysis
Number of Touches
38 Technical Analysis
Extension of Trendline
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39 Technical Analysis
Incorrect Angle
40 Technical Analysis
Trendline with Chart Patterns
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41 Technical Analysis
Spacing between 2 points
42 Technical Analysis
Trading Trendlines
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43 Technical Analysis
Trading the Trendline
44 Technical Analysis
Session 2
Identifying good Support and Resistance Level What is good Support ? What is good Resistance ? Properties of good Support and Resistance .
Fibonacci Number and Ratio. Fibonacci Numbers and Ratio Retracement Extension
Identifying Chart Patterns. Double Top
Double Bottom Tripple Top Tripple Bottom Head and Shoulder and Inverted Head and Shoulder Pattern. Triangles (Ascending , Descending Symmetrical Triangles) Cup and Handle Pattern Wedges and Flags and Pennants
Candelstick Patterns Doji Bullish and Bearish Engulfing Hanging Man , Hammer Morning Star evening star The Dark Cloud Cover Island Reversal The Kicker
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45 Technical Analysis
What is Support
Support is the price level at which demand is thought to be strong enough to prevent the pricefrom declining further. The logic dictates that as the price declines towards support and getscheaper, buyers become more inclined to buy and sellers become less inclined to sell. By thetime the price reaches the support level, it is believed that demand will overcome supply andprevent the price from falling below support.
46 Technical Analysis
Looking for Crucial Support
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47 Technical Analysis
Looking for Crucial Support
48 Technical Analysis
What is Resistance
Resistance is the price level at which selling is thought to be strong enough to preventthe price from rising further. The logic dictates that as the price advances towardsresistance, sellers become more inclined to sell and buyers become less inclined tobuy. By the time the price reaches the resistance level, it is believed that supply willovercome demand and prevent the price from rising above resistance.
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49 Technical Analysis
More Example on Resistance
50 Technical Analysis
Properties of Valid Support and Resistance
The Support and Resistance should not be broken for at
least for 1 month period.
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51 Technical Analysis
Number of Touches
The more number of touches the more the Valid Support/Resistance
52 Technical Analysis
Number of Touches
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53 Technical Analysis
Why Resistance becomes support
Trader 1 : Trader is going Short at Crude oil at MCX @
3870-3900 and was having fun seeing the prices fall down.
54 Technical Analysis
Resistance becoming Support
Trader 2 : Very Happy Buying MCX Crude @ 3400-3450 and
selling at 3900
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55 Technical Analysis
Resistance becomes the Support
Now the Market Break out of the Resistance Zone and AS
USUAL TRADERS WILL NOT PUT THEIR STOP LOSSE
IN PLACE and they will be worried and sad to cover their
position. Turns buyer at Break even.
56 Technical Analysis
Resistance becomes the Support
Longs are happy but sad because they did not bought moreso after break out near Previous Resistance they add moreposition
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57 Technical Analysis
Resistance becomes the Support
Then there were Guys like me who were just
waiting for breakout to happen once it is in place
we will try to Buy Market at Near new Support
Level
58 Technical Analysis
Support Becomes Resistance
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59 Technical Analysis
What is Fibonacci number
Na..
60 Technical Analysis
What is Fibonacci Number
The Fibonacci number sequence (1,2,3,5,8,13,21,34,55,89,144,...) is
constructed by adding the first two numbers to arrive at the third.
The ratio of any number to the next number is 61.8 percent, which is a
popular Fibonacci retracement number. The inverse of 61.8 percent is
38.2 percent, also used as a Fibonacci retracement number.
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61 Technical Analysis
Fibonacci Retracement
25%, 38.2% 50% 61.8% 100% are the commonly usedRetracements.
62 Technical Analysis
Fibonacci Retracement
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63 Technical Analysis
Fibbonacci Extension
100%, 138.2%, 161.8% and 261.8% are the commonlyused Extension
64 Technical Analysis
Patterns
Reversal Patterns Head and Shoulder and Inverted Head and
Shoulder.
Double and Tripple Top
Double Bottom and Triple Bottom
Cup and Handle
Continuation Patterns Traingles ( Ascending, Descending and
Symmetrical )
Flag and Pole
Wadges
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65 Technical Analysis
Head and Shoulder
66 Technical Analysis
Inverted Head and Shoulder
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67 Technical Analysis
Triple Top
68 Technical Analysis
Triple Bottom
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69 Technical Analysis
Double Top
ecember 2007 February March April May June July August September October November December 2008 February March
50
Stochastic Oscillator (25.9664)
0.92
0.93
0.94
0.95
0.96
0.97
0.98
0.99
1.00
1.01
1.02
1.03
1.04
1.05
1.06
1.07
1.08
1.09
12Double Top
AUDCHF (0.96250, 0.96830, 0.95890, 0.96750, +0.00500)
70 Technical Analysis
Double Bottom
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71 Technical Analysis
Double bottom (Contd)
72 Technical Analysis
Cup and Handle
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73 Technical Analysis
Cup and Handle (Contd)
74 Technical Analysis
Triangles
Symmetrical Triangle
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75 Technical Analysis
Ascending Triangle
76 Technical Analysis
Descending Triangle
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77 Technical Analysis
CandelSticks
78 Technical Analysis
Doji
A doji represents an equilibrium between supply and demand, a tug ofwar that neither the bulls nor bears are winning.
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79 Technical Analysis
Doji Star
80 Technical Analysis
Doji Star
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81 Technical Analysis
Gravestone Doji
82 Technical Analysis
Identify Long Legged Doji
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83 Technical Analysis
Identify Long Legged Doji
84 Technical Analysis
Bullish and Bearish Engulfing
Bullish Engulfing : A chart pattern that forms when a small black candlestick is followedby a large white candlestick that completely engulfs" the previous day's candlestick.The shadows or tails of the small candlestick are short, which enables the body of thelarge candlestick to cover the entire candlestick from the previous day.
Bearish Engulfing : A chart pattern that consists of a small white candlestick withshort shadows or tails followed by a large black candlestick that eclipses or "engulfs" thesmall white one.
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85 Technical Analysis
Bullish Engulfing
86 Technical Analysis
Bearish Engulfing Pattern
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87 Technical Analysis
Hammer and Hanging Man
Hammer : A price pattern in candlestick charting that occurs when a security trades significantly lowerthan its opening, but rallies later in the day to close either above or close to its opening price. Thispattern forms a hammer-shaped candlestick.
Hanging man :A bearish candlestick pattern that forms at the end of an uptrend. It is created whenthere is a significant sell-off near the market open, but buyers are able to push this stock back up sothat it closes at or near the opening price. Generally the large sell-off is seen as an early indicationthat the bulls (buyers) are losing control and demand for the asset is waning.
88 Technical Analysis
Hanging Man
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89 Technical Analysis
Hammer
90 Technical Analysis
Morning Star and Evening Star
Morning Star : bullish candlestick pattern that consists of three candles that have demonstrated the followingcharacteristics:
1. The first bar is a large red candlestick located within a defined downtrend.2. The second bar is a small-bodied candle (either red or white) that closes below the first red bar.3. The last bar is a large white candle that opens above the middle candle and closes near the center of the first bar'sbody.
Evening Star : A bearish candlestick pattern consisting of three candles that have demonstrated the followingcharacteristics:
1. The first bar is a large white candlesticklocated within an uptrend.2. The middle bar is a small-bodied candle (red or white) that closes above the first white bar.3. The last bar is a large red candle that opens below the middle candle and closes near the center of the first bar's body.
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91 Technical Analysis
92 Technical Analysis
Kicker
Bullish Kicker : Previous days candle opens and regains its negative momentum in thesame direction of the market. After the Announcement, the alter its direction , openingat the same level as the previous days open range or with Gap and moving up.
Bearish Kicker : Previous days candle opens and regains its momentum in the samedirection of the market. After the Announcement, the alter its direction , opening at thesame level as the previous days opening range and sliding down
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93 Technical Analysis
Bullish Kicker
94 Technical Analysis
Bullish Kicker
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95 Technical Analysis
Bearish KKicker
96 Technical Analysis
Session 3
Different Kinds of Indicator. Leading Indicators Lagging Indicators
Moving Averages . What is moving averages ? Different Types of Moving Averages. Simple Exponential Weighted. Properties of good Moving Average Strategies of Moving Average .
Benefits and Drawback of Indicators
Lagging Indicators
Moving Averages MACD Average Directional Index
Leading Indicators Relative Strenth Index Stochastic Rate of Change.
Volatility Indicators. Bollinger Bands
GAPS- Common Gaps- Breakout Gaps- Runaway Gaps- Exhaustion Gaps
Money Management- Martingale System- Anti Martingale System
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97 Technical Analysis
What does a Technical Indicator Offer?
Technical indicator offers a different perspective from which to analyze the price action.Some, such as moving averages, are derived from simple formulas and the mechanicsare relatively easy to understand. Others, such as Stochastics, have complex formulasand require more study to fully understand and appreciate. Regardless of the complexityof the formula, technical indicators can provide unique perspective on the strength anddirection of the underlying price action.
A simple moving average is an indicator that calculates the average price of a securityover a specified number of periods. If a security is exceptionally volatile, then a movingaverage will help to smooth the data. A moving average filters out random noise and
offers a smoother perspective of the price action. When is market is in Trading rangezone RSI would tell you the condition of the market such as Overbought and Oversoldlevel.
98 Technical Analysis
Why Use Indicators?
Indicators serve three broad functions: to alert, to confirm and topredict.
An indicator can act as an alert to study price action a little moreclosely. If momentum is waning, it may be a signal to watch for a
break of support. Or, if there is a large positive divergence building, itmay serve as an alert to watch for a resistance breakout.
Indicators can be used to confirm other technical analysis tools. Ifthere is a breakout on the price chart, a corresponding movingaverage crossover could serve to confirm the breakout. Someinvestors and traders use indicators to predict the direction of futureprices.
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99 Technical Analysis
My Two Friends
Friend 1 : Tells me whatever you do I am with you. Right or
Wrong I am with you and I will follow you.
Lagging Indicator : Moving Averages, MACD , ADX
Friend 2 : Tells me Dont do this Dont do that.
Leading Indicator : Market is overbought dont buy , Market is
oversold dont sell it . RSI, Stochastic, ROC.
100 Technical Analysis
Lagging Indicator
As their name implies, lagging indicators follow the price action and are commonlyreferred to as trend-following indicators. Rarely, if ever, will these indicators lead theprice of a security. Trend-following indicators work best when markets or securitiesdevelop strong trends. They are designed to get traders in and keep them in as longas the trend is intact. As such, these indicators are not effective in trading orsideways markets. If used in trading markets, trend-following indicators will likely
lead to many false signals and whipsaws. Some popular trend-following indicatorsinclude moving averages (exponential, simple, weighted, variable) and MACD.
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101 Technical Analysis
Lagging Indicators
Moving Averages
MACD
Average Directional Index
102 Technical Analysis
What is Moving Averages?
A simple moving average is formed by computing the average (mean) price of a security over a specifiednumber of periods. While it is possible to create moving averages from the Open, the High, and the Lowdata points, most moving averages are created using the closing price. For example: a 5-day simple movingaverage is calculated by adding the closing prices for the last 5 days and dividing the total by 5.
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103 Technical Analysis
Moving Averages
104 Technical Analysis
Different Kinds of Moving Averages
Simple Moving Average
Weighted Moving Average
Exponential Moving Average
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105 Technical Analysis
Simple Moving Average
A simple moving average is formed by computing the average (mean) price of a security over a specifiednumber of periods. While it is possible to create moving averages from the Open, the High, and the Lowdata points, most moving averages are created using the closing price. For example: a 5-day simple movingaverage is calculated by adding the closing prices for the last 5 days and dividing the total by 5.
106 Technical Analysis
Weighted Moving Average
A weighted moving average is simply a moving average that is
weighted so that more recent values are more heavily weighted
than values further in the past.
ne
11 18 25 2
July
9 16 23 30 6
August
13 20 27 3 10 17
September
24 1 8
October
15 22 29 5 12
November
19 26 3 10 17
December
24 31 7
2008
14 21 28 4 11
February
18 25 3 10
March
17 24 3
13500
14000
14500
15000
15500
16000
16500
17000
17500
18000
18500
19000
19500
20000
20500
21000
21500
* BSE - SENSEX (15,467.39, 15,798.42, 15,331.35, 15,760.52, +403.170)
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107 Technical Analysis
Exponential Moving Average
In order to reduce the lag in simple moving averages, technicians
often use exponential moving averages (also called exponentially
weighted moving averages). EMA's reduce the lag by applying more
weight to recent prices relative to older prices. The weighting applied
to the most recent price depends on the specified period of the
moving average. The shorter the EMA's period, the more weight that
will be applied to the most recent price.
The formula for an exponential moving average is:
EMA(current) = ( (Price(current) - EMA(prev) ) x Multiplier) +
EMA(prev)
(2 / (Time periods + 1) ) = (2 / (10 + 1) ) = 0.1818 (18.18%)
108 Technical Analysis
Which one is better ?
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109 Technical Analysis
Properties of Good moving Average
Moving averages are portable trendline , So good
moving average should act as good Support levels.
110 Technical Analysis
Properties of Good moving Average
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111 Technical Analysis
Properties of Good moving Average
112 Technical Analysis
Properties of Moving Averages
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113 Technical Analysis
Moving Averages
When two moving averages are used the longer is fortrend identification and the shorter for timing
It is the interplay between the two which gives you thetiming
Classics are 5 and 20 day and 10 and 40 day
On stocks, 7 and 21 work well
114 Technical Analysis
Right Moving Average Period
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115 Technical Analysis
2 Moving Average Cross over
Market signalBullish When short term moving Average ( i.e 5 Day
) crosses Long term Moving Average (i.e 20 Day ) andgoes up . Its a Golden Coress
Bearish When short term moving Average (i.e 5 Day )crosses Long Term Moving Average (i.e 20 Day ) and
goes Down . Its Death Cross
116 Technical Analysis
2 Moving Average Cross over
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117 Technical Analysis
2 Moving Average Cross over
118 Technical Analysis
Guppy Moving Averages
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119 Technical Analysis
Benefits and Drawbacks of Moving Averages
Benefits :
As it is a lagging indicator you will always be able to capture the bigmoves when it come along.
It act as a good support and Resistance .
It also shows the underlying Trend
Drawback :
All the lagging indicator gives many whipsaws when it comes to sideways market.
Some time there is significant amount of money is left on the tableas it gives late signals. Although some lag can be removed by usingExponential MA
120 Technical Analysis
Moving Average Convergence Divergence
IntroductionDeveloped by Gerald Appel, Moving Average Convergence/Divergence (MACD) isone of the simplest and most reliable indicators available. MACD uses movingaverages, which are lagging indicators, to include some trend-followingcharacteristics. These lagging indicators are turned into a momentum oscillatorby subtracting the longer moving average from the shorter moving average.
MACD Formula The most popular formula for the "standard" MACD is the
difference between a security's 26-day and 12-day exponentialmoving averages. Using shorter moving averages will produce aquicker, more responsive indicator, while using longer movingaverages will produce a slower indicator, less prone to whipsaws.Of the two moving averages that make up MACD, the 12-day EMAis the faster and the 26-day EMA is the slower. Closing prices areused to form the moving averages. Usually, a 9-day EMA of MACDis plotted along side to act as a trigger line. A bullish crossoveroccurs when MACD moves above its 9-day EMA and a bearishcrossover occurs when MACD moves below its 9-day EMA
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121 Technical Analysis
Calculation of MACD
122 Technical Analysis
MACD Signals
MACD generates bullish or Bearish signals from three
main sources:
Positive divergence
Bullish moving average crossover
Bullish centerline crossover
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123 Technical Analysis
Bullish Divergence
When Prices are falling on remain same but the Indicatormoves up then it is called Bullish Divergence
124 Technical Analysis
What is Positive Divergence and Negative Divergence
When Prices are going up or remaining same but
Indicator is coming down is called Negative Divergence.
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125 Technical Analysis
MACD Cross Over
Buy : When MACD Crosses above its Average .
Sell : When MACD Crosses below its Average.
126 Technical Analysis
Centerline Crossover
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127 Technical Analysis
MACD Benefits
One of the primary benefits of MACD is that it incorporates aspects ofboth momentum and trend in one indicator. As a trend-followingindicator, it will not be wrong for very long. The use of moving averagesensures that the indicator will eventually follow the movements of theunderlying security.
MACD can be applied to daily, weekly or monthly charts. MACDrepresents the convergence and divergence of two moving averages.The standard setting for MACD is the difference between the 12 and26-period EMA. However, any combination of moving averages can beused. The set of moving averages used in MACD can be tailored foreach individual security. For weekly charts, a faster set of movingaverages may be appropriate. For volatile stocks, slower moving
averages may be needed to help smooth the data. No matter what thecharacteristics of the underlying security, each individual can set MACDto suit his or her own trading style, objectives and risk tolerance.
128 Technical Analysis
MACD Drwaback
Can Be Applied on Any Time Frame : MACD can be applied to daily, weekly or monthlycharts. MACD represents the convergence and divergence of two moving averages. Thestandard setting for MACD is the difference between the 12 and 26-period EMA. However,any combination of moving averages can be used. The set of moving averages used inMACD can be tailored for each individual security. For weekly charts, a faster set ofmoving averages may be appropriate. For volatile stocks, slower moving averages may beneeded to help smooth the data. No matter what the characteristics of the underlyingsecurity, each individual can set MACD to suit his or her own trading style, objectives and
risk tolerance.
Can not be applied to see historical levels : MACD calculates the absolute differencebetween two moving averages and not the percentage difference. MACD is calculated bysubtracting one moving average from the other. As a security increases in price, thedifference (both positive and negative) between the two moving averages is destined togrow. This makes its difficult to compare MACD levels over a long period of time,especially for stocks that have grown exponentially.
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129 Technical Analysis
Average Directional Index
Wells Wilder introduced this revolutionary concept in New Concept inTechnical Trading System .
+ DI is greater then DI add that Amount to +DI and Deduct the sameamount from DI ,
If DI is greater than + DI then add to DI and deduct that amount from DI
130 Technical Analysis
Trading using +DI and DI
Buy : When + DI crosses above DI
Sell : When DI crosses above + DI
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131 Technical Analysis
Is the Market is Trading or Trending ???????????????
Average Directional Index is nothing but the Absolute difference between + DIand DI .
When ADX is above 25 it is considered to be Trending Market . When it is below25 it is considered Trading . ( Note : Threshold value may vary fromCommodity to Security ) .
132 Technical Analysis
Trending and Trading Market
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133 Technical Analysis
Average Directional Index (ADX)
134 Technical Analysis
Benefits and Drawbacks of Lagging Indicators
One of the main benefits of trend-following indicators is the ability to catch amove and remain in a move. Provided the market or security in questiondevelops a sustained move, trend-following indicators can be enormouslyprofitable and easy to use. The longer the trend, the fewer the signals and lesstrading involved.
The benefits of trend-following indicators are lost when a security moves in atrading range. Another drawback of trend-following indicators is that signals tendto be late. By the time a moving average crossover occurs, a significant portionof the move has already occurred.
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135 Technical Analysis
Leading Indicator
Many leading indicators come in the form of momentum oscillators. Generallyspeaking, momentum measures the rate-of-change of a security's price. As theprice of a security rises, price momentum increases. The faster the securityrises (the greater the period-over-period price change), the larger the increasein momentum. Once this rise begins to slow, momentum will also slow. As asecurity begins to trade flat, momentum starts to actually decline from previoushigh levels. However, declining momentum in the face of sideways trading is notalways a bearish signal. It simply means that momentum is returning to a moremedian level.
136 Technical Analysis
Leading Indicator
Relative Strenth Index ( RSI )
Stochastic
Rate of Change
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137 Technical Analysis
Relative Strength Index
Developed by J. Welles Wilder and introduced in his 1978 book, NewConcepts in Technical Trading Systems, the Relative Strength Index
(RSI) is an extremely useful and popular momentum oscillator. The RSI
compares the magnitude of a stock's recent gains to the magnitude of its
recent losses and turns that information into a number that ranges from 0
to 100. It takes a single parameter, the number of time periods to use in
the calculation. In his book, Wilder recommends using 14 periods.
138 Technical Analysis
Divergence
Bearish Divergence- when prices are making higher highs but the indicatoris making lower highs. Upmove is weakening.
Bullish Divergence- when prices are making lower lows but the indicator ismaking higher lows. Downmove is weakening.
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139 Technical Analysis
RSI Bullish/Bearish Divergence
140 Technical Analysis
RSI Bearish Divergence
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141 Technical Analysis
RSI Overbought and Oversold
Overbought : RSI when enters 70 level the market is considered to beoverbought .
Oversold : RSI when enters 0 level the market is considered to be oversold
Important point :Only trade when trade when they are exiting Overbought andOversold levels.
142 Technical Analysis
Properties of RSI
Normal Technical Analysis can aslo be applied to RSI like Trendline,
Fibonacci Retracement or Projection etc.
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143 Technical Analysis
Stochastic
Developed by George C. Lane in the late 1950s, the Stochastic Oscillator is amomentum indicator that shows the location of the current close relative to thehigh/low range over a set number of periods. Closing levels that are consistentlynear the top of the range indicate accumulation (buying pressure) and those nearthe bottom of the range indicate distribution (selling pressure).
144 Technical Analysis
Stochastic Buying and Selling
17 24 1 8
October
15 22 29 5 12
November
19 26 3 10
December
17 24 31
2008
7 14 21 28 4
February
11 18 25 3 10
March
17 24
10
20
30
40
50
60
70
80
90
100
O O
Stochastic Oscillator (39.3942)
4300
4400
4500
4600
4700
4800
4900
5000
5100
5200
5300
5400
5500
5600
5700
5800
5900
6000
6100
6200
6300
6400
O
O
O
P
P
P
- NSE50 - 1 MONTH (4,566.00, 4,759.00, 4,566.00, 4,746.95, +149.650)
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145 Technical Analysis
Stochastic strategy
146 Technical Analysis
Rate of Change
ROC is a momentum indicator that measures velocity and also leads the price action.
Rate of Change, ROC, can be very useful, because it is a leading indicator (ROC changes directionbefore the underlying price).
Divergences
Divergences can provide warnings or alerts of weaknesses in market trends, but do notrepresent actual buy or sell signals. It is essential to wait for a confirmation from the price
itself that the overall trend has reversed.Zero-line crossings
Although the long-term price trend is still the overriding consideration, a crossing upwardthrough the zero line can confirm a buy signal and a crossing downward through the zero
line, a sell signal.
Trendline Violations
The trendlines on the ROC chart are broken sooner than those on the price chart. Thevalue of the momentum indicators is that it turns sooner than the market itself, making it a
leading indicator.
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147 Technical Analysis
Rate of Change ( ROC )
6 3
December
10 17 24 31
2008
7 14 21 28 4
February
11 18 25 3
March
10 17 24 3
-600-550-500-450-400-350-300-250-200
-150-100-50
050
100150200250300350400
O O O
P
Price ROC (-195.600)
1000
1050
1100
1150
1200
1250
1300
1350
1400
1450
1500
1550
1600
1650
OO
O
P
PP
TATA POW ER COMP (1,163.00, 1,188.00, 1,100.50, 1,160.45, -3.10010)
148 Technical Analysis
Benefits and Drawbacks of Leading Indicators
There are clearly many benefits to using leading indicators. Earlysignaling for entry and exit is the main benefit. Leading indicatorsgenerate more signals and allow more opportunities to trade. Earlysignals can also act to forewarn against a potential strength orweakness. Because they generate more signals, leading indicatorsare best used in trading markets. These indicators can be used intrending markets, but usually with the major trend, not against it. In a
market trending up, the best use is to help identify oversold conditionsfor buying opportunities. In a market that is trending down, leadingindicators can help identify overbought situations for sellingopportunities.
With early signals comes the prospect of higher returns and withhigher returns comes the reality of greater risk. More signals andearlier signals mean that the chances of false signals and whipsawsincrease. False signals will increase the potential for losses.Whipsaws can generate commissions that can eat away profits andtest trading stamina.
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149 Technical Analysis
Bollinger Bands
Introduction
Developed by John Bollinger, Bollinger Bands are an indicator that allows users to compare volatility andrelative price levels over a period time. The indicator consists of three bands designed to encompass themajority of a security's price action.
A simple moving average in the middle
An upper band (SMA plus 2 standard deviations)
A lower band (SMA minus 2 standard deviations)
Standard deviation is a statistical term that provides a good indication of volatility. Using the standard
deviation ensures that the bands will react quickly to price movements and reflect periods of high andlow volatility. Sharp price increases (or decreases), and hence volatility, will lead to a widening of thebands.
150 Technical Analysis
Formula
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Signaling System
Buy : After Prolonged Selling the Candel gives closing outside the band and next candel isinside band than amove above highes high is Buying signal .
Sell : After Prolonged Buying spree candelstick move above BB and Next Daxt Day candelcomes in BB then A move below Lowest Low of Candel is your Short Signal.
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Bollinger Bands
Sideways consolidation Breakouts.
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153 Technical Analysis
Bollinger Band Breakout
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Band Envelop and Bollinger Bands
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155 Technical Analysis
Conclusion
To identify periods of high and low volatility
To identify periods when prices are at extreme,and possibly unsustainable, levels.
As stated above, securities can fluctuatebetween periods of high volatility and lowvolatility. Being able to identify a period of lowvolatility can serve as an alert to monitor theprice action of a security. Other aspects oftechnical analysis, such as momentum, movingaverages and retracements, can then be
employed to help determine the direction of thepotential breakout
156 Technical Analysis
GAPS
Gaps are nothing but the vacuum left by the Prices.
Upside Gap : when Todays low is higher than previous Days High .
Down Side Gap : When Todays High is Lower than Previous Days
Low .
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157 Technical Analysis
Mind the Gap
Common gap occur in low volume caused by lack ofinterest. (sometimes filled but be careful)
Breakaway gap occur in heavy volume when trendlinesbreak or patterns complete. (often filled)
Runaway gap occur in moderate volume during a trend.(generally filled and will provide support on reversal)
Exhaustion gap occurs in heavy volume near the end of
a market move. (pretty much always filled)
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Mind the Gap
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NAS NAS/NMS COMPSITE, Last Trade [Hi/Lo/Cl Bar] Daily
16Nov00 - 08Feb01
21Nov00 28Nov 05Dec 12Dec 19Dec 26Dec 02Jan 09Jan 16Jan 23Jan 30Jan 06Feb
Pr
USD
2300
2400
2500
2600
2700
2800
2900
3000
3100
NAS NAS/NMS COMPSITE, Last Trade, Hi/Lo/Cl Bar
19Jan01 2841.25 2752.06 2770.38
160 Technical Analysis
.BSESN, Last Trade [O/H/L/C Bar] Daily FREEZE
11Feb05 - 30Jun05
11Feb05 18Feb 25Feb 04Mar 11Mar 18Mar 25Mar 01Apr 08Apr 15Apr 22Apr 29Apr 06May 13May 20May 27May 03Jun 10Jun 17Jun 24Jun
Pr
INR
6150
6200
6250
6300
6350
6400
6450
6500
6550
6600
6650
6700
6750
6800
6850
6900
.BSESN , Last Trade, O/H/L/C Bar
01Jun05 6729.39 6763.28 6721.22 6745.83
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161 Technical Analysis
Gaps
162 Technical Analysis
Money Management
The most Important part of your Trading Career.
Two Types of Money Management Systems Martingle System
Anti Martingle System
Martingale System
Anti Martingale System
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163 Technical Analysis
TABLE OF TRADES
No of Lossing
Trades
Amt of Lossing
Trades
No of Winning
Trades
Amt of
Winning
Trades
Total Inflow/
Outflow
10 (10) 0 0 (10)
9 (9) 1 2 (7)
8 (8) 2 4 (4)
7 (7) 3 6 (1)
6 (6) 4 8 2
5 (5) 5 10 5
4 (4) 6 12 8
3 (3) 7 14 112 (2) 8 16 14
1 (1) 9 18 17
0 0 10 20 20
164 Technical Analysis
Martingale System
You make a bet and if you lose you double your bet. If you lose again
you double your bet. You keep doing this until you win and then go back
to your original bet.
You bet Rs 5 and you lose.
Your next bet is Rs. 10. If you lose:
Your next bet is Rs 20. If you lose:Your next bet is Rs 40. If you lose:
Your next bet is Rs 80. If you lose:
Your next bet is Rs 160. If you lose:
If you win you will get back 320 so net inflow is your original Rs 5
Is it a Good bet.
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Anti Martinalge System
Anti Martingale System tells to Invest double in a winning
streak and either slow down or remain constant on your
bets during the losing periods.
End of Session