Technical Analysis
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Technical Analysis

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Introduction to Technical Analysis

Introduction to Technical Analysis

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    Technical Analysis Technical Analysis Presentation Transcript

    • Technical Analysis StockStream LLP
    • Disclaimer
      • Trading carries significant risk of losses and may not be suitable for all investors. Traders should assess these risks either themselves or in consultation with a financial advisor before investing.
      • There is no guarantee that the trading techniques, methods and other information in this presentation will result in profits. The content in this presentation in only intended for educational and informational purposes and not intended as trading recommendation.
      • The content of this presentation is subject to change without notice.
      • Stockstream Financial Advisory Services LLP or mystockstream.com will not take any liability or accountability of losses arising from the use of information in this presentation in any manner.
    • StockStream Education Model
    • Introduction
        • Technical Analysis looks at chart patterns to identify trading opportunities.
        • Technical analysis is not an exact science.
        • Based on the assumption that all current market information is reflected in the prices.
    • Approach
        • The steps to conducting a technical analysis are as follows
          • Identify the market bias. The market may be in one of the following
            • Uptrend
            • Downtrend
            • Range trade
          • Determine your trading strategy based on the market bias.
          • Use one or more of technical indicators to determine entry points
            • Trend lines
            • Moving Averages
            • Fibonacci Analysis
            • Oscillators
            • Bollinger Bands
    • Market Bias-Uptread
        • Markets making a series of higher highs and higher lows are said to be in an uptrend.
        • Look for buying opportunities at supports in uptrends.
        • Supports are identified using technical analysis.
    • Market Bias-Down tread
        • Markets making a series of lower highs and lower lows are said to be in a down trend.
        • Look for selling opportunities at resistance levels in down trends.
        • Resistance levels are identified using technical analysis.
    • Market Bias-Range trade
        • Markets that are not in a uptrend or down trend are said to be in a range.
        • Figure shows one specific range trade scenario where prices are confined between two price levels
        • Look for selling opportunities at resistance and buying opportunities at support.
    • Trading Strategy
        • After determining the market bias the next step is designing your trading strategy.
        • Trading strategy is used to determine the following,
          • Entry levels
          • Stop Loss levels
          • Profit taking (Limit) levels
        • One or multiple technical indicators are used to determine a trading strategy
    • Trading Strategy: Trend lines
        • A trend line is a straight line connecting consecutive higher lows in an uptrend or consecutive lower highs in a downtrend.
        • Test of a trend line offers buying opportunities in an uptrend and selling opportunities in a downtrend.
        • Trend lines are closely watched by number of traders and thus provide good opportunities to enter trades.
    • Example 1: Trend lines
        • Determine the Market Bias: The market is making higher lows and higher highs. It is in a strong uptrend
        • Looking for buying opportunities
        • Use trend lines to identify entry points
    • Example 1: Trend lines
        • Draw a trend line connecting 2 consecutive lows.
        • Buy on a confirmation of bounce after a retest of the trend line.
        • Place a stop below the low from the test of the trend line.
        • Book profits on candle close below the trend line
    • Example 2: Trend lines
        • Determine the Market Bias: The market is making lower lows and lower highs. It is in a strong down trend
        • Looking for selling opportunities
        • Use trend lines to identify entry points
    • Example 2: Trend lines
        • Draw a trend line connecting 2 consecutive lower highs.
        • Sell on a confirmation of failure after a retest of the trend line.
        • Place a stop above the high from the test of the trend line.
        • Book profits on candle close above the trend line
    • Trading Strategy: Psychological Levels
        • Psychological levels are price levels that are considered important by the markets.
        • These are generally round numbers like 10, 20, 50, 100, etc.
        • These levels are important because a number of traders place buy or sell orders at round numbers (depending on the market bias), thus providing support or resistance to price movements.
    • Example: Psychological Levels
        • Determine the Market Bias:
          • The market is making lower lows and lower highs. It is in a strong downtrend
        • Looking for selling opportunities on 4 hr chart
        • Use test of a psychological level to identify entry points
    • Example: Psychological Levels
        • Look to sell on test of psychological levels
        • Place a stop above the high of the candle from a failure of the test at the psychological level.
        • Book profits on test of another psychological level or buy signal generated by another technical indicator.
    • Trading Strategy: RSI
        • RSI stands for Relative Strength Indicator.
        • It is a technical indicator that falls under the category of oscillators.
        • RSI can take values between 0 to 100.
          • Values from 0 to 30: Oversold markets
          • Values from 70 to 100: Overbought markets
        • Markets can remain overbought or oversold for extended periods. So place trades on a confirmed move out of the extended conditions
    • Example: RSI
        • Determine the Market Bias:
          • If you are trading on a 4 hr chart look at a daily chart to determine trend.
          • The market is making lower lows and lower highs. It is in a strong downtrend
        • Looking for selling opportunities on 4 hr chart
        • Use RSI to identify entry points
    • Example: RSI
        • Prepare to sell once RSI moves above 70 in a downtrend.
        • Sell when the RSI moves back below 70 on a closing basis.
        • Place a stop above the high of the candle from a test of the overbought levels.
        • Book profits when the RSI touches oversold levels.
    • Trading Strategy: Moving Averages
        • A moving average is calculated by averaging the closing prices of the market over a specified period of time.
        • A simple moving average (SMA) places equal weight on every price point within the period while an exponential moving average (EMA) places a higher weight on more recent price points.
        • Commonly looked at moving averages are,
          • 200 day SMA: Defines market bias. Price above this SMA implies an uptread and vice versa
          • 100 day, 21 day and 55 day SMA: Faster Moving Averages. More sensitive to price movements.
          • 10 day EMA: Strong trends are supported at this EMA.
    • Example: Moving Averages
        • Determine the Market Bias:
          • The market is making higher lows and higher highs. It is in a strong uptrend
        • Looking for buying opportunities at supports
        • Use moving averages to identify entry points
    • Example: Moving Averages
        • Buy on a confirmation of bounce after a retest of the 10 DMA.
        • Place a stop below the low from the test of the 10 DMA.
        • Book profits on candle close below the 10 DMA.
    • Trading Strategy: Bollinger Bands
        • Bollinger band uses a simple moving average of the price and standard deviation around that moving average to generate trading signals.
        • At the default settings Bollinger bands use a 20 period moving average and a 2 standard deviation (σ) band around the moving average.
        • Trading signals are generated on a test and failure at the upper (+2σ) or the lower (-2σ) band depending on the market conditions.
    • Example: Bollinger Bands
        • Determine the Market Bias:
          • If you are trading on a daily chart look at a weekly chart to determine trend.
          • The market is making lower lows and lower highs. It is in a strong downtrend
        • Looking for selling opportunities on daily chart
        • Use Bollinger bands to identify entry points
    • Example: Bollinger Bands
        • Sell on a failure at the upper Bollinger band
        • Place a stop above the high of the candle from the failure at the upper Bollinger band.
        • Book profits when prices confirms a bounce from the lower Bollinger band.
    • Trading Strategy: MACD
        • MACD stands for Moving Average Convergence Divergence.
        • MACD uses a combination of moving averages to generate trading signals.
        • MACD calculates a difference to 2 moving averages and compares it with an EMA of the difference to generate trading signals.
        • At the default setting MACD plots the difference of a 12 period and 24 period EMA called the MACD line. It then calculates a 9 period EMA of the MACD line called the signal line.
        • Crossovers of the MACD and Signal lines generates trading signals.
    • Example: MACD
        • Determine the Market Bias:
          • If you are trading on a daily chart look at a weekly chart to determine trend.
          • The market is making lower lows and lower highs. It is in a strong downtrend
        • Looking for selling opportunities on daily chart
        • Use MACD to identify entry points
    • Example: MACD
        • Sell on a crossover of the MACD and signal line. Also indicated through negative values on the histogram.
        • Place a stop above the high of the reversal point.
        • Book profits when the MACD and signal line crossover to the upside. Also indicated through positive values of the histogram
    • Trading Strategy: Stochastic
        • It is a technical indicator that falls under the category of oscillators.
        • Stochastic can take values between 0 to 100.
          • Values from 0 to 20: Oversold markets
          • Values from 80 to 100: Overbought markets
        • There are 2 types of Stochastic
          • Fast: Generates more trading opportunities but is less accurate.
          • Slow: Generates fewer trading opportunities but is more accurate compared to Fast Stochastic. This will be used in further analysis.
        • Crossovers of the stochastic lines in overbought or oversold conditions generates trading signals.
    • Example: Stochastic
        • Determine the Market Bias:
          • The market is making higher lows and higher highs. It is in a strong uptrend
        • Looking for buying opportunities at supports
        • Use stochastic to identify entry points
    • Example: Stochastic
        • Buy on a crossover of the stochastic lines in the oversold region.
        • Place a stop below the low of the reversal candle.
        • Book profits when the stochastic lines crossover to the downside.
    • Questions
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