technical analysis ppt

1. TECHNICAL ANALYSIS
HARSHARAJ U MELANTA | AKSHAY N S | G THANUSHA | AMARESH PATIL |
K N SANDESH | BIBI HAJEERA

2. What is Technical Analysis?
Technical analysis is a trading discipline employed to evaluate investments and identify trading opportunities
by analyzing statistical trends gathered from trading activity, such as price movement and volume.
Dow Theory:
The Dow theory is a financial theory that says the market is in an upward trend if one of its averages
(i.e. industrials or transportation) advances above a previous important high and is accompanied or followed
by a similar advance in the other average.
• It was developed by Charles H Dow, with Edward Jones and Charles Bergstresser
• Charles Dow died in 1902, and due to his death, he never published his complete theory on the markets

3. Components to the Dow Theory:
 The Market Discounts Everything
 There Are Three Primary Kinds of Market Trends
 Primary Trends Have Three Phases
 Indices Must Confirm Each Other
 Volume Must Confirm the Trend
 Trends Persist Until a Clear Reversal Occurs
Special Considerations:
 Closing Prices and Line Ranges
 Signals and Identification of Trends
 Reversals

4. Types of Charts:
1. Line Chart 2. Bar Chart
3. Candlestick Charts 4. Point and Figure Chart

5. Price Patterns:
1. Continuation Patterns:
• Pennants
• Flags
• Wedges
• Triangles
2. Reversal Patterns:
• Double Tops/ bottoms
• Triple Tops/Bottoms
• Head-and-Shoulders Top/bottom

6. What is a Trendline?
Trendlines are easily recognizable lines that traders draw on charts to connect a series of prices together or
show some data's best fit. The resulting line is then used to give the trader a good idea of the direction in
which an investment's value might move.
Types of Trendlines:
 The Standard Trend Line
 The Parallel Trend Line
 Supplement Trend Lines

7. Advanced Technical Tools:
 On-Balance Volume
 Accumulation/Distribution Line
 Average Directional Index
 Aroon Indicator
 MACD
 Relative Strength Index
 Stochastic Oscillator

8. Capital Market Theory: CAPM
Capital Asset Pricing Model (CAPM), depicts the trade-off between risk and return for efficient portfolios. It
is a theoretical concept that represents all the portfolios that optimally combine the risk-free rate of return
and the market portfolio of risky assets.
CAPM formula:
Ra​=Rrf​+βa∗(Rm​−Rrf​)
where:
Ra​=Expected return on a security
Rrf​=Risk-free rate
Rm​=Expected return of the market
βa​=The beta of the security
(Rm​−Rrf​)=Equity market premium​

9. Capital Market Theory: Arbitrage Pricing Theory
• APT is a multi-factor technical model based on the relationship between a financial asset's expected return
and its risk.
• The model is designed to capture the sensitivity of the asset's returns to changes in certain
macroeconomic variables.
• Investors and financial analysts can use these results to help price securities.
APT Formula:
E(Rp)=Rf+β1f1+β2f2+…+βnfn
where:
E(Rp​)=Expected return
Rf​=Risk-free return
βn​=Sensitivity to the factor of n
fn​=nth factor price​

10. Capital Market Theory: Utility Theory
• It refers to how much benefit investors obtain from portfolio performance.
• Risk and return are trade-offs and follow a linear relationship.
• High-risk investments present a high likelihood of an investor losing all his/her money.
Marginal Utility:
Marginal utility refers to how much incremental u an individual derives from obtaining one additional unit of a
certain good or service.
Types of Utility Curves:
• Type I – Risk Averse
• Type II – Risk Neutral
• Type III – Risk Loving

11. Capital Market Theory: Portfolio Theory
• Portfolio theory is a theory on how risk-averse investors can construct portfolios to maximize expected
return based on a given level of market risk.
• Harry Markowitz pioneered this theory in his paper "Portfolio Selection," which was published in the
Journal of Finance in 1952.
• He was later awarded a Nobel Prize for his work on modern portfolio theory.
• Portfolio theory argues that an investment's risk and return characteristics should not be viewed alone, but
should be evaluated by how the investment affects the overall portfolio's risk and return.
• Portfolio Theory assumes that investors are risk-averse
• The expected return of the portfolio is calculated as a weighted sum of the individual assets' returns.

12. Capital Market Theory: Multi-factor Model
• A multi-factor model is a financial model that employs multiple factors in its calculations to explain market
phenomena and/or equilibrium asset prices.
• A multi-factor model can be used to explain either an individual security or a portfolio of securities.
• Multi-factor models are used to construct portfolios with certain characteristics, such as risk, or to track
indexes
• Models are judged on historical numbers, which might not accurately predict future values.
Multi-factor Model Formula:
Ri = ai + _i(m) * Rm + _i(1) * F1 + _i(2) * F2 +...+_i(N) * FN + ei
Where:
Ri = return of security
Rm = market return
F(1, 2, 3 ... N) = each of the factors used
_ = the beta with respect to each factor including the market (m)
e = error term
a = intercept

13. THANK YOU!