Technical analysis


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Technical analysis

  1. 1. Technical Analysis Presentation by V. Sriram
  2. 2. Limitations of fundamental analysis <ul><li>Recognition of true value of security is difficult </li></ul><ul><li>Involves considerable work and time </li></ul><ul><li>Inadequacy of income statement </li></ul><ul><li>Subjective aspects of earnings </li></ul>
  3. 3. Technical Analysis-Basis <ul><li>Price as a comprehensive outcome of all market forces </li></ul><ul><li>The repetition of market price behaviour </li></ul><ul><li>The tendency of markets to move in trends </li></ul>
  4. 4. Technical Analysis-Benefits <ul><li>Offers clear trading signals </li></ul><ul><li>Easy methods </li></ul><ul><li>Easy to compute </li></ul><ul><li>Increasingly becoming more sophisticated </li></ul><ul><li>Enhances a trader’s confidence </li></ul>
  5. 5. Dow’s Six Principles <ul><li>Market discounts everything </li></ul><ul><li>Market moves in three trends </li></ul><ul><li>Primary trend consists of three phases </li></ul><ul><li>Averages must confirm each other </li></ul><ul><li>Volume must confirm the trend </li></ul><ul><li>Trends exist until their reversal if confirmed </li></ul>
  6. 6. Basic Assumptions underlying Technical Analysis <ul><li>Market value is determined by the interaction of supply and demand </li></ul><ul><li>Supply and demand are governed by numerous factors, both rational and irrational </li></ul><ul><li>Security prices tend to move in trends that persist for an appreciable length of time </li></ul><ul><li>Changes in a trend are caused by the shifts in supply and demand </li></ul><ul><li>Shifts in supply and demand, no matter why they occur, can be detected sooner or later </li></ul><ul><li>Some chart patterns tend to repeat themselves </li></ul>
  7. 7. Three components of trend <ul><li>Primary trend called bear or bull markets </li></ul><ul><li>Secondary trend called correction </li></ul><ul><li>Tertiary moves which are daily fluctuations </li></ul>
  8. 8. Concepts of trend <ul><li>Drawing trend line </li></ul><ul><li>Use of trend line </li></ul><ul><li>Support and resistance </li></ul><ul><li>Reversal of roles </li></ul><ul><li>Psychology of supports and resistances </li></ul><ul><li>Channel line </li></ul><ul><li>3 types of gaps </li></ul>
  9. 9. Basic tools <ul><li>Trend lines </li></ul><ul><li>Fibonacci retracement </li></ul><ul><li>Moving average </li></ul><ul><li>Exponential moving average </li></ul>
  10. 10. Bollinger Bands <ul><li>Two trading bands are placed around a Moving Average with 2 Standard Deviation above an below the moving average which is usually 20 days. </li></ul><ul><li>Prices are considered to be over extended on the upside when they touch the upper band and vice-versa. </li></ul><ul><li>If prices bounce off the lower band and cross above the 20 day average, the upper band becomes the price target. </li></ul>
  11. 11. Oscillators <ul><li>Oscillators are extremely useful in non-trending markets / trading range. </li></ul><ul><li>Oscillators provide with a tool that can enable trader from these periodic sideways and trendless market movements. Used in conjunction with price charts during trending phases, the oscillator becomes an extremely becomes an extremely valuable ally by alerting the traders to short term market extremes. Commonly referred as over bought or over conditions. </li></ul><ul><li>Oscillators can also warn that the trend is loosing momentum and signal that the trend may be nearing completion by displaying certain divergences. </li></ul>
  12. 12. 3 important uses of Oscillators <ul><li>Oscillator is most useful when its value reaches an extreme reading near the upper or lower end of its boundaries. </li></ul><ul><li>A divergence between the oscillators and the price action when the oscillator is in an extreme position, is usually an important warning. </li></ul><ul><li>Crossing of zero line can give important trading signal in the direction of the price trend. </li></ul>
  13. 13. Measuring Momentum <ul><li>Momentum measures the velocity of price changes as opposed to the actual price levels themselves. </li></ul><ul><li>Market momentum is measured by continually taking price differences for a fixed time interval. </li></ul><ul><li>Momentum M= V-Vx, where V is the latest closing price and Vx is the closing price x days ago </li></ul>
  14. 14. Divergence <ul><li>Movement of market trends in directions other than those predicted by market indicators. Divergence usually signals the onset of a trend change. </li></ul><ul><li>Use of various oscillators to identify various divergences. </li></ul>
  15. 15. Reversal patterns <ul><li>Pre-requisites for any reversal pattern is the existence of a prior trend. </li></ul><ul><li>The first signal of an impending trend reversal is often the breaking of an important trend line </li></ul><ul><li>The larger the pattern, the greater the subsequent move, volume is generally more important on the upside </li></ul><ul><li>Various patterns- Head and Shoulder, Inverse Head and Shoulder, Triple tops and bottoms, Double tops and bottoms, Saucers and spikes. </li></ul>
  16. 16. Classical patterns <ul><li>Trend reversal </li></ul><ul><li>Head and shoulder and inverse there of </li></ul><ul><li>Double top/ Double bottom </li></ul><ul><li>Rounded top and bottom </li></ul><ul><li>Diamond formation </li></ul><ul><li>Rectangle formation </li></ul><ul><li>Continuation pattern </li></ul><ul><li>Flag formation </li></ul><ul><li>Pennant formation </li></ul><ul><li>Triangle formation </li></ul><ul><li>Wedge formation </li></ul>
  17. 17. Candle stick charting <ul><li>Bullish signal </li></ul><ul><li>Bearish signal </li></ul><ul><li>Reversal signal </li></ul><ul><li>Wait & Watch signal </li></ul>
  18. 18. Elliot Wave Theory <ul><li>Wave 1- It is difficult to identify. It is often shortest of impulse waves </li></ul><ul><li>Wave 2 – It should be easier to identify due to its three-subwave structure </li></ul><ul><li>Wave 3 – Its is not the shortest. Penetration of the high of wave 1 attracts more buyers or more sellers </li></ul><ul><li>Wave 4 – If wave 2 is complex, then wave 4 tends to have a less complexion pattern, and vice versa </li></ul><ul><li>Wave 5 – It can be dynamic and extended </li></ul>
  19. 19. Elliot Wave Theory …..cont’d <ul><li>Wave A – It is difficult to catch through all the euphoria </li></ul><ul><li>Wave B – It may be of different complexities and lengths </li></ul><ul><li>Wave C – It puts the stamp on the end of the trend. Following a bull market, wave C should fall below the bottom of wave A </li></ul>
  20. 20. Essential Rule <ul><li>Second Wave may never retrace more than 100 % of the first wave. </li></ul><ul><li>Third wave is never the shortest wave in a impulse sequence; often it is the longest. </li></ul><ul><li>Wave four can never enter the price range of wave one. </li></ul>
  21. 21. Specific Characteristics – Impulse wave <ul><li>Wave one is difficult to identify as it mimics a correction. </li></ul><ul><li>Wave two is generally easier to identify because of its three sub wave structure. This wave tends to generate a major reversal pattern. </li></ul><ul><li>Wave three tends to be the longest and it is never the shortest. This wave makes good volume, fundamentals tend to support the move and the psychology of the market is positive. </li></ul><ul><li>Wave two is complex than wave four, wave four tends to have less complex pattern and vice-versa. This wave is prone to triangular formation. </li></ul><ul><li>Wave five may be dynamic and extended. Oscillators are helpful in determining when the underlying instruments are over extended. </li></ul>
  22. 22. Specific Characteristics – Corrective waves <ul><li>Wave A is more difficult to identify, fundamental clue comes from its 5 sub wave structure. </li></ul><ul><li>Wave B may be of different complexities and length. </li></ul><ul><li>Wave C signals the end of the trend. Following a bull market, wave C should fall below the bottom of wave A. </li></ul>
  23. 23. Candle Sticks Analysis <ul><li>Various types of Doji. </li></ul><ul><li>Hammer </li></ul><ul><li>Hangman </li></ul><ul><li>Bullish / Bearish engulfing pattern </li></ul><ul><li>Star candle sticks </li></ul><ul><li>Tweezers candle sticks </li></ul><ul><li>Morning / Evening star </li></ul><ul><li>Three River evening star </li></ul><ul><li>Two crows </li></ul><ul><li>Three gaps. </li></ul>
  24. 24. THANK YOU