Hello I’m Jason and today I’m going to present to you on the importance of Technical Analysis and how it can help you make better investment decisions.
First of all, by looking at this chart you can see how market timing can benefit your returns between a buy and hold strategy made by long term investors and a swing strategy made by short term investors and that’s where technical analysis comes in to make the difference between your yields and how much your money grows into.
Technical Analysis is basically forecasting the future price movement using historical prices. Like weather forecasting, technical analysis does not necessarily result in absolute predictions about the future. But, it can help investors anticipate what is &quot;likely&quot; going to happen to prices over time. Technical analysis uses a wide variety of charts that show prices over time to determine future trends.
This is an OHLC chart. Each vertical line on the chart shows the price range over one unit of time. Tick marks on the left side show the opening price and on the right the closing price for that time period.
So here are some of the basic technical tools we’ll look at to determine which way the stock is headed.
There are three basic kinds of trends: An Up trend where prices are generally increasing. A Down trend where prices are generally decreasing. A Trading Range where the trend isn’t moving. A technical analyst would try to find these trends to determine where the stock is headed.
The H&S formation is one of the most common price patterns which is characterized by two small peaks with a larger peak in-between. The bottom shows a reversal pattern, meaning that it signifies a change in the trend.
Here’s an example through AMD. You can see the shoulder, head and then the shoulder followed by a change in the trend.
Another indicator is the double tops and double bottoms and it is similar to the H&S formation without the head.
Double bottom followed by a change in the trend
Triangles fall under the category of continuation patterns. As you can see the ascending triangle is used to make bullish calls and vice versa. You also have the symmetrical triangles where the support or resistance level is slanted.
Based on what we’ve covered so far when and what could you have predicted about the Dow Jones between 2000 & 01?
You could see a trading range from November 2000 to March 2001 and you know it’s going to break out one way or the other and in this case, it broke out to the downside meaning a bearish signal. A double bottom formation in mid-March to early April which gives a buy signal especially when the second bottom is higher than the previous bottom. Some investors wait until the price breaks out of the previous support level for a double confirmation before entering the trade. A Descending Triangles between May and June and July-August which gives a bearish signal.
There are, literally, hundreds of technical indicators used to generate buy and sell signals and here is just some of them that I use. For today, we will be focusing on the most commonly used indicator, the MACD.
The MACD shows the relationship between two moving averages and it is calculated by subtracting the 26-day EMA from the 12-day EMA. There’s also a nine-day EMA, called the &quot;signal line&quot;, which is plotted on top of the MACD, functioning as a trigger for buy and sell signals.
As shown in the chart, when the MACD falls below the signal line, it is a bearish signal, which indicates that it may be time to sell. On the other hand, when the MACD rises above the signal line, the indicator gives a bullish signal, which suggests that the price of the asset is likely to experience upward momentum.
As noted, there are literally hundreds of indicators and thousands of trading systems you can use to make these trades. As we have covered today, you as an investor can use technical analysis to make better decisions as to where the markets are headed and when to make your buy/sell signals. However, it is highly recommended that you use a virtual account to practice before investing with real money.
Technical Analysis Presentation
Technical Analysis 101 Jason Park October 1, 2009 Decision Support Analysis
The Potential Rewards <ul><li>This chart, from Norman Fosbeck, shows how market timing can benefit your returns. The only problem is that you have to be very good at it. </li></ul>Source: Norman Fosbeck
Technical Analysis <ul><li>Technical Analysis is a great tool used for forecasting future prices and trends for short term investors. </li></ul><ul><li>Technical analysis is the attempt to forecast stock prices on the basis of market-derived data. </li></ul><ul><li>They are looking for trends and patterns in the data that indicate future price movements. </li></ul>
Chart: OHLC Chart <ul><li>This is a bar (open, high, low, close or OHLC) chart of AMAT from July to October 2001. </li></ul>Source: www.stockcharts.com
Trend Lines <ul><li>An Up trend </li></ul><ul><li>A Down trend </li></ul><ul><li>A Trading Range </li></ul>Source: www.investopedia.com
Head and Shoulders <ul><li>This formation is characterized by two small peaks on either side of a larger peak. </li></ul><ul><li>This is a reversal pattern: H&S Bottom </li></ul>Source: www.investopedia.com
Head & Shoulders Example Sell Signal Source: www.stockcharts.com
Double Tops and Bottoms <ul><li>Similar to the H&S formations, but there is no head. </li></ul>Source: www.investopedia.com
Double Bottom Example Source: www.stockcharts.com
Triangles <ul><li>Triangles are continuation formations. </li></ul><ul><li>Three flavors: </li></ul><ul><ul><li>Ascending </li></ul></ul><ul><ul><li>Descending </li></ul></ul><ul><ul><li>Symmetrical </li></ul></ul>Source: www.investopedia.com Resistance Level Support Level
DJIA Oct 2000 to Oct 2001 Example What could you have known, and when could you have known it? Source: www.stockcharts.com
DJIA Oct 2000 to Oct 2001 Example Double bottom Nov to Mar Trading range Descending triangles Source: www.stockcharts.com Support Level
Technical Indicators <ul><li>Accumulation/distribution index </li></ul><ul><li>Advance decline line </li></ul><ul><li>Average Directional Index </li></ul><ul><li>Commodity Channel Index </li></ul><ul><li>MACD </li></ul><ul><li>Parabolic SAR </li></ul><ul><li>Relative Strength Index (RSI) </li></ul><ul><li>Stochastic oscillator </li></ul><ul><li>Trix </li></ul><ul><li>Money Flow </li></ul><ul><li>On-balance volume </li></ul><ul><li>PAC charts </li></ul>Source: www.investopedia.com
MACD <ul><li>MACD is the difference between the 12-day and 26-day moving average. A 9-day moving average of this difference is used to generate signals. </li></ul><ul><li>When this signal line goes from negative to positive, a buy signal is generated. </li></ul><ul><li>When the signal line goes from positive to negative, a sell signal is generated. </li></ul>Source: www.investopedia.com
MACD Example Chart Sell Signal Buy Signal Bearish Bullish Diff. Btw MACD and 9 EMA Source: www.stockcharts.com MACD=26EMA-12EMA
Conclusion <ul><li>There are literally hundreds of indicators and thousands of trading systems. </li></ul><ul><li>Technical Analysis can help you make timely investment decisions! </li></ul><ul><li>Practice makes perfect. </li></ul>
Any Questions? H&S Bottom We are out of the bear market?