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Technical Analysis

Technical Analysis



Technical analysis 101

Technical analysis 101



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    Technical Analysis Technical Analysis Presentation Transcript

    • Introduction to Technical Analysis
    • Contents
      • What’s Technical Analysis?
      • Graphs
      • Trends
      • The Golden Rule
      • Trends Lines, Support and Resistance Levels
      • Retracements
      • Summary
    • What’s Technical Analysis?
      • A method for estimating the future prices of securities based chiefly on two parameters:
      • Price History
      • Trade Volumes
      • Quarterly Reports, Macro/Micro Indicators, Interest Rates, Stock Market Indices, Predictions, Statements, News, Rumors…
      • Because *:
        • Security prices are ultimately set by market forces – buyers and sellers.
        • History repeats itself, so…
        • Historic price and volume data is sufficient to assess and predict buyer and seller behavior
      • * Per Technical Analysis theory
      Technical Analysis Does Not Look At…
    • Candlestick Charts
      • Most popular type of graph to use in Tech Analysis
      Up Down Opening Price Closing price Low Price of period High Price of period Opening Price Closing Price
    • Graph Time Resolutions
      • Daily – 1 candle = 1day
        • Useful for analyzing short-term trends
      • Weekly – 1 candle = 1 week
        • Useful for analyzing intermediate trends
      • Monthly – 1 candle = 1month
        • Useful for long-term analysis
    • Trend – The Direction of Prices
      • 3 Types of Trends:
      Downtrend Uptrend Sideways Trend
    • Golden Rule of T. Analysis Trading
      • ( The Trend is your Friend)
      • In an uptrend – Buy (Long)
      • In a downtrend – Sell/Don’t Buy/Short
      • In a sideways-trend – Sell/Don’t Buy
      • So, how do you recognize a trend?
      Trade With The Trend
    • Trend Characteristics - Price
      • Formal Uptrend
      • Every peak is higher than the previous peak
      • Every trough is higher than the previous trough 
      • Formal Downtrend
      • Every peak is lower than the previous peak
      • Every trough is lower than the previous trough 
    • Trend Characteristics - Volume
      • Trade volume = amount of securities traded
      • In distinct trends volumes typically:
        • Are larger than in periods of sideways trends
        • Grow with the trend
      sideways uptrend uptrend growing sideways Small volumes Medium volumes growing
    • Trend Characteristics – Time Period
      • Trends are limited to a time period :
        • Long Term Trend – 1 year or more
          • AKA Main Trend
          • Use monthly chart to detect
        • Intermediate Trend – 2-12 months
          • Most investors use it
          • Use weekly or daily chart to analyze
        • Short term Trend – 1 month or less
          • Use daily chart
      • Important: Long-term trends will almost always include intermediate and short term trends in the opposite direction
    • Trendline
      • Trendline = A line drawn over highs or under lows to show the prevailing direction of price
        • Needs to touch at least 3 peaks or troughs
        • Helps determine future prices, change rates, buy/sell opportunities and more
      Intermediate term trendline Short term trendline
    • Support and Resistance Levels
      • Horizontal trendlines may indicate Support and Resistance levels
        • Support level – The price level which the security has had difficulty falling below. It is thought of as the level at which a lot of buyers tend to enter the stock.
        • Resistance level - The price level which the security has had difficulty rising over. It is thought of as the level at which a lot of sellers tend to offload.
        • Note : Round numbers (100, 800, etc.) tend to create support/resistance levels
      Support Level Resistance Level Breakout
    • Support and Resistance - 2
      • Trendlines may indicate the change in support and resistance levels during a trend
      Resistance line Support line Breakout Example: an uptrending security with parallel support and resistance lines ( price channel ) Note: support and resistance trendlines are not always parallel
    • Support and Resistance Role Reversal
      • When a support level is broken it may turn into a resistance level
      • And vice-versa
      Breakout of support level turns it into a resistance level
    • Retracements
      • Retracement = A temporary reversal in the direction of the price of a security, countering the prevailing trend.
      • Retracements usually occur due to profit-taking
      • Retracements break the distinctiveness of trends
        • In uptrends – create a trough that is lower than the previous trough
        • In downtrends – create a peak that is higher than the previous trough
    • The Risk of Retracements
      • Retracements may fool us into thinking the trend has stopped or reversed
      • Trading based on retracements will cause us to lose or profit less
      Example: in this downtrend there are two retracements. Buying the security at these times will result in loss.
    • Retracement Indicators- Price
      • In theory the change would often correlate with Fibonacci’s ratios: 23.6%, 38.2%, 50%, 61.8%
      • Fibonacci retracements is a popular tool to predict retracement end prices
        • Draw a line between the high and low of the last trend and the tool will show relative Fibonacci levels
      38.2% 1. Price should retrace by no more than 66% of the size of the previous move Uptrend Retracement size 0 % Move size 50% 61.8% Retracement
    • Retracement Indicators - Other
      • Duration - retracements are short-lived
        • No more than 2-3 weeks in intermediate term
      • Usually arrive after strong price moves
        • Inducing profit taking
      • Volumes decline as the retracement progresses
      • Contradicting/Weak strength indicators
        • We’ll discuss those in the next slide deck
      • Invariably followed by a higher/lower peak/trough
    • Summary - Med-Short Trends Example * Note how support and resistance level build at round numbers: 700, 800, 900… Strong down-trend Sideway Trend b/w 630-700 Uptrend Sideways Trend Retracement Starts at 700 and stops at 800 Retracement Uptrend stopped at 900 800 level induces a retracement 700 level breakout Small volumes Volume growth High Volumes 900 level broken Uptrend stopped at 1000 Up
    • How Should We Trade? Hold Buy long Sell Long Buy Short Hold short Sell Short
    • Photo Credits
      • Stopwatch / casey.marshall - http://www.flickr.com/photos/rsdio/3642425935/