Basic Technical Analysis


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Overview of the basics of technical analysis

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Basic Technical Analysis

  1. 1. Investing in Shares Introduction to Technical Analysis Australian Shareholders Association Tutorial Resource Library
  2. 2. Disclaimer • The ASA is not licensed to give financial advice. • The content of these presentations is not designed to provide any specific investment advice to any person present. • The ASA does not accept any responsibility to inform you of any matter that subsequently comes to our notice that may affect any of the information discussed. • Anyone wishing to act on any matter discussed should seek independent advice from a licensed financial adviser.
  3. 3. Outline • What is Technical Analysis • What is involved? • Price Charts • Candlesticks & Candlestick Patterns • Trendlines • Support and Resistance • Moving Averages • Chart Patterns
  4. 4. What is Technical Analysis • Technical analysis is the study of the price and volume movements of a stock or market. • It is based on the belief that everything that is known about a stock is reflected in the share price and the volume of shares traded. • Technical analysis can give indicators to investors as to when to buy or sell by providing insights into market sentiment and • Can be used on all timeframes – daily, weekly, monthly • Covers many techniques – pick a few to add to your technical analysis ‘toolkit’.
  5. 5. What’s involved in Technical Analysis? • • • • • • • • • • Price Charts Candlesticks & Candlestick Patterns Support and Resistance Trendlines Moving Averages Chart Patterns Indicators Fibonacci Dow Theory Elliot Wave, W.D Gann Theory, Cycles ...... Plus a whole lot more! This presentation will provide an overview of the first six topics listed here.
  6. 6. Price Charts • Technical analysis uses data based on price and volume – data can be from a daily, weekly, monthly or even shorter timeframe (e.g. hour) – open, low, high, and close prices from the set timeframe e.g. one trading day or one trading week, and volume. • The data is presented in a chart • There are many different types of charts • We will look at 3 types of charts – line charts – bar chart – candlestick charts
  7. 7. Price Charts The three charts on the following three slides are of the same stock over the same time period. 1st is a Line Chart 2nd is a Bar Chart 3rd is a Candlestick Chart Look at the difference in detail in each of the charts
  8. 8. Line Chart Usually, based on the close price, cuts out the ‘noise’
  9. 9. Bar Chart More detail, can see the open, high, low close so investor can get a ‘feel’ for sentiment
  10. 10. Candle Chart More visual, easier for investor to see open, high, low close and sentiment
  11. 11. Types of Charts Key Differences Line Chart - usually, based on the close price, cuts out the ‘noise’ Bar Chart – more detail, can see the open, high, low close so can get a ‘feel’ for sentiment Candlestick Chart – more visual, easier to see open, high, low close and sentiment
  12. 12. Candlestick A candlestick is another way of looking at price data – more visual as filled in bars represent negative sentiment.
  13. 13. Candle Patterns Candles can have names applied to them, however, you don’t need to learn them! It is more important to understand the price action that the candle represents and what it is saying about the buyers and the sellers. You might hear terms describing candles like Doji, Shooting Star, Hammer, Harami, Engulfing, Piercing, Hanging Man, Evening Star. Let’s look at a two examples and see what they mean for supply (sellers) and demand (buyers)
  14. 14. Bullish Candle The candle shown here is a normal bullish candle. The body of the candle is not filled so we know that the price opened at the bottom of the body of the candle and closed at the top of the body. Sometime during the day, price traded to the bottom of the lower ‘wick’ or tail and to the top of the upper ‘wick’. From a supply and demand perspective, this candle is showing positive sentiment, buyers were prepared to pay more for this stock and pushed the price up so that it closed near the highs
  15. 15. Doji Candle The candle shown here is called a Doji candle – this one has a special name, it is called a Gravestone doji. The price opened and closed at the same price so there is no body to this candle. During the trading period, buyers pushed the price up, but sellers came into the market and pushed the price back down so that the trading session closed on its lows. If this candle occurred after an uptrend, this could indicate a potential change in trend. A Gravestone doji is generally a bearish or negative sentiment candle.
  16. 16. Candlestick Summary Learning about candles and using them on your charts can be a useful investing tool. Candles and candle patterns provide you with a visual representation of market psychology and sentiment. There are lots more types of candles and combinations of candles to make patterns. Do your own research to learn more!
  17. 17. Candlestick Key Points to Remember • Length of body – long or short, what is it telling you? • Length of tails – or absence of tails, what does it mean? • Can suggest a possible change in trend Candlesticks shouldn’t be used in isolation to make buy and sell decisions BUT used with other ‘western’ technical tools they can add value to your investing ‘toolkit’.
  18. 18. Trend Lines • Perhaps the simplest form of technical analysis • Markets are not random they often move in trends • And these trends can be marked on a chart by the drawing of trend lines
  19. 19. Uptrend A series of higher highs and higher lows
  20. 20. Downtrend, sideways & change of trend Downtrend – a series of lower highs and lower lows Change of trend – when a higher low is made and the previous high is surpassed
  21. 21. Support A support level is the price at which buyers are expected to enter the market in sufficient numbers to take control from sellers. A support line can be horizontal or sloping upward
  22. 22. Resistance A resistance level is the price level at which sellers are expected to enter the market in sufficient numbers to take control from buyers. A resistance line can be horizontal or sloping downward
  23. 23. Support & Resistance In this chart, old resistance becomes new support and a clear break of the support line at the right of the chart was a signal to exit the stock
  24. 24. Moving Averages • Moving Averages (MA’s) are a way of coping with the problem of random information. • MA’s are lagging indicators and are the basis of many other indicators • MA’s take data points and plot them as an average making it easier to discern trends There are many types of moving averages – simple, exponential, weighted
  25. 25. Moving Averages One of the most common MA’s is the 200 Day Simple Moving Average. It is often quoted as providing support or resistance to price action for various stocks and indices. Because it is so widely used, it may be beneficial to become familiar with it.
  26. 26. Simple Moving Average – 200 Day This is a 200 Day simple moving average plotted over BHP.
  27. 27. Multiple Moving Averages Another form of moving averages is the Multiple Moving Averages or MMA’s. • Developed by Australian trader and investor Daryl Guppy they present a very visual representation of the sentiment of traders and investors. • The longer term MMA’s are said to represent the action of investors and the shorter term MMA’s that of traders. • The interaction between the two groups of MMA’s can be used to time entries and exits.
  28. 28. Multiple Moving Averages Guppy Multiple Moving Averages plotted on a daily chart.
  29. 29. Chart Patterns Chart patterns reflect human behaviour in a market and can be seen on all timeframe charts. The following chart patterns offer a high probability of future market movement and can be used to select stocks or to time entries into stocks. Continuation patterns • The triangle • The flag Reversal patterns • Double tops • Head and shoulders
  30. 30. Reversal or Continuation A continuation and reversal pattern ….
  31. 31. Ascending Triangle A series of ascending triangles – examples of continuation patterns
  32. 32. Flag Flag continuation patterns – investors could look for breakouts from the pattern
  33. 33. Reversal Patterns • Reversal patterns can usually be found at the beginning or end of trends. • They can form on any timeframe chart, however, the longer the timeframe the more significant the pattern. • In some cases the height of the pattern can be used to estimate the price targets if price breaks the pattern.
  34. 34. Double Top A Double top on a weekly chart – taking a long time to form, reversing a long term uptrend
  35. 35. Head and Shoulders A Head & Shoulders pattern – the neckline can slope in either direction
  36. 36. Bottom Reversal Patterns A Double Bottom pattern
  37. 37. Bottom Reversal Patterns A Reverse Head and Shoulder pattern
  38. 38. Summary • Technical Analysis does not provide a forecast. • It provides tools to gauge the probability that a future event may occur. • Always be aware of the time frame – look at the longest time frame charts first to get the big picture. • Generally signals in longer time frames are more reliable than those in shorter time frames.
  39. 39. ASA Learning To find out about other learning resources available to investors, explore the ASA’s Investor Education Pathway