Technical Analysis

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Technical Analysis

  1. 1. Technical Analysis By, Kaushal LEARNING kaushal@thefinancialplanners.in Made Simple
  2. 2. What Is Technical Analysis? LEARNING Made Simple
  3. 3. • Technical analysis is a method of evaluating securities by analyzing the statistics generated by market activity, such as past prices and volume. LEARNING Made Simple
  4. 4. • Technical analysts do not attempt to measure a security's intrinsic value, but instead use charts and other tools to identify patterns that can suggest future activity. LEARNING Made Simple
  5. 5. • The field of technical analysis is based on three assumptions: LEARNING Made Simple
  6. 6. • The market discounts everything. LEARNING Made Simple
  7. 7. • Price moves in trends. LEARNING Made Simple
  8. 8. • History tends to repeat itself. LEARNING Made Simple
  9. 9. Technical Analysis: The Use of Trend LEARNING Made Simple
  10. 10. • One of the most important concepts in technical analysis is that of trend. LEARNING Made Simple
  11. 11. • The meaning in finance isn't all that different from the general definition of the term - a trend is really nothing more than the general direction. LEARNING Made Simple
  12. 12. • A trendline is a simple charting technique that adds a line to a chart to represent the trend in the market or a stock. LEARNING Made Simple
  13. 13. • Drawing a trend line is as simple as drawing a straight line that follows a general trend LEARNING Made Simple
  14. 14. • These lines are used to clearly show the trend and are also used in the identification of trend reversals. LEARNING Made Simple
  15. 15. Types of Trend: LEARNING Made Simple
  16. 16. There are three types of trend: • Uptrends • Downtrends • Sideways/Horizontal Trends LEARNING Made Simple
  17. 17. • As you can see in Figure, an upward trendline is drawn at the lows of an upward trend. LEARNING Made Simple
  18. 18. • This line represents the support the stock has every time it moves from a high to a low. Notice how the price is propped up by this support. LEARNING Made Simple
  19. 19. • This type of trendline helps traders to anticipate the point at which a stock's price will begin moving upwards again. LEARNING Made Simple
  20. 20. • Similarly, a downward trendline is drawn at the highs of the downward trend LEARNING Made Simple
  21. 21. • This line represents the resistance level that a stock faces every time the price moves from a low to a high. LEARNING Made Simple
  22. 22. The Importance of Trend LEARNING Made Simple
  23. 23. • It is important to be able to understand and identify trends so that you can trade with rather than against them. LEARNING Made Simple
  24. 24. • Two important sayings in technical analysis are "the trend is your friend" and "don't buck the trend," illustrating how important trend analysis is for technical traders. LEARNING Made Simple
  25. 25. Technical Analysis: Support And Resistance LEARNING Made Simple
  26. 26. • Once you understand the concept of a trend, the next major concept is that of support and resistance. LEARNING Made Simple
  27. 27. • You'll often hear technical analysts talk about the ongoing battle between the bulls and the bears, or the struggle between buyers (demand) and sellers (supply). LEARNING Made Simple
  28. 28. • This is revealed by the prices a security seldom moves above (resistance) or below (support). LEARNING Made Simple
  29. 29. The Importance of Support and Resistance LEARNING Made Simple
  30. 30. • Support and resistance analysis is an important part of trends because it can be used to make trading decisions and identify when a trend is reversing. LEARNING Made Simple
  31. 31. • For example, if a trader identifies an important level of resistance that has been tested several times but never broken, he or she may decide to take profits as the security moves toward this point because it is unlikely that it will move past this level. LEARNING Made Simple
  32. 32. • Being aware of these important support and resistance points should affect the way that you trade a stock. LEARNING Made Simple
  33. 33. • Traders should avoid placing orders at these major points, as the area around them is usually marked by a lot of volatility. LEARNING Made Simple
  34. 34. • If you feel confident about making a trade near a support or resistance level, it is important that you follow this simple rule: do not place orders directly at the support or resistance level. LEARNING Made Simple
  35. 35. • This is because in many cases, the price never actually reaches the whole number, but flirts with it instead. So if you're bullish on a stock that is moving toward an important support level, do not place the trade at the support level. LEARNING Made Simple
  36. 36. • Instead, place it above the support level, but within a few points. On the other hand, if you are placing stops or short selling, set up your trade price at or below the level of support. LEARNING Made Simple
  37. 37. Technical Analysis: The Importance Of Volume LEARNING Made Simple
  38. 38. What is Volume? LEARNING Made Simple
  39. 39. • Volume is simply the number of shares or contracts that trade over a given period of time, usually a day. LEARNING Made Simple
  40. 40. • The higher the volume, the more active the security. • To determine the movement of the volume (up or down), chartists look at the volume bars that can usually be found at the bottom of any chart. LEARNING Made Simple
  41. 41. • Volume bars illustrate how many shares have traded per period and show trends in the same way that prices do. LEARNING Made Simple
  42. 42. Volume and Chart Patterns • The other use of volume is to confirm chart patterns. LEARNING Made Simple
  43. 43. • Patterns such as head and shoulders, triangles, flags and other price patterns can be confirmed with volume, a process which we'll describe in more detail later in this tutorial. In most chart patterns, there are several pivotal points that are vital to what the chart is able to convey to chartists. LEARNING Made Simple
  44. 44. • Basically, if the volume is not there to confirm the pivotal moments of a chart pattern, the quality of the signal formed by the pattern is weakened. LEARNING Made Simple
  45. 45. Volume Precedes Price • Another important idea in technical analysis is that price is preceded by volume. LEARNING Made Simple
  46. 46. • Volume is closely monitored by technicians and chartists to form ideas on upcoming trend reversals. • If volume is starting to decrease in an uptrend, it is usually a sign that the upward run is about to end. LEARNING Made Simple
  47. 47. LearningMadeSimple TM Learning Made Simple is initiative taken by few people earlier related to the Corporate World whose aim is to provide quality education and training to those who wish to excel in their career path. Learning Made Simple is an association who works on a no profit no loss basis and provide training and development in the era of Financial Planning, Financial Management, AMFI, NCFM, Management Concepts, Soft Skills, Leadership, Personality Development, Goal Setting, Marketing Management, Behavioral Science, NLP and various other segments. You can get in touch with us by sending email on kaushal@thefinancialplanners.in
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