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SAPM lecture 6 Technical Analysis


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SAPM lecture 6 Technical Analysis

  1. 1. Technical Analysis Predict the future price of stocks, commodities, futures and other tradable securities based on past prices and performance of those securities.
  2. 2. • Technical analysis evolved from the stock market theories of Charles Henry Dow, founder of the Wall Street Journal and co-founder of Dow Jones and Company.
  3. 3. How to Do Technical Analysis 1. Understand Dow's theories behind technical analysis 2. Look for quick results 3. Read charts to spot price trends 4. Understand the concepts of support and resistance 5. Pay attention to the volume of trades 6. Use moving averages to filter out minor price fluctuations 7. Use indicators and oscillators to support what the price movements are telling you
  4. 4. Understand Dow's theories behind technical analysis. • The Three Trend Market theory (It guides how technical analysts interpret financial markets) 1. The market discounts everything. 2. Price moves in trends. 3. History tends to repeat itself.
  5. 5. • Changes in the price of a security reflect all the available information about that security Don't concern with 1. Price-to-earnings ratio, 2. Shareholder equity, 3. Return on equity or 4. other factors that fundamental analysts consider. • By adjusting the length of time the market is being analyzed, it is possible to spot both short- and long-term trends.
  6. 6. • Technical analysis focuses on periods no longer than a month and sometimes as short as a few minutes. • It is suited to people who seek to make money from securities by repeatedly buying and selling them rather than those who invest for the long term. Look for quick results
  7. 7. Technical analysts use four kinds of charts 1. Line 2. Bar 3. Candlestick 4. Point and figure
  8. 8. Line Chart • it represents only the closing prices over a set period of time. • The line is formed by connecting the closing prices over the time frame. • Line charts do not provide visual information of the trading range for the individual points such as the high, low and opening prices. • However, the closing price is often considered to be the most important price in stock data compared to the high and low for the day and this is why it is the only value used in line charts.
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  10. 10. Bar Chart • The chart is made up of a series of vertical lines that represent each data point. • This vertical line represents the high and low for the trading period, along with the closing price. • The close and open are represented on the vertical line by a horizontal dash. • The opening price on a bar chart is illustrated by the dash that is located on the left side of the vertical bar. • Conversely, the close is represented by the dash on the right. • Generally, if the left dash (open) is lower than the right dash (close) then the bar will be shaded black (blue), representing an up period for the stock, which means it has gained value. • A bar that is colored red signals that the stock has gone down in value over that period. • When this is the case, the dash on the right (close) is lower than the dash on the left (open).
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  13. 13. Candlestick Chart • The candlestick has a thin vertical line showing the period's trading range. • The difference comes in the formation of a wide bar on the vertical line, which illustrates the difference between the open and close. • There are two color constructs for days up and one for days that the price falls. • When the price of the stock is up and closes above the opening trade, the candlestick will usually be white or clear. • If the stock has traded down for the period, then the candlestick will usually be red or black. • If the stock's price has closed above the previous day's close but below the day's open, the candlestick will be black or filled with the color that is used to indicate an up day
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  16. 16. Point and Figure Chart • The Xs represent upward price trends and the Os represent downward price trends. • There are also numbers and letters in the chart; these represent months, and give investors an idea of the date. • Each box on the chart represents the price scale, which adjusts depending on the price of the stock: the higher the stock's price the more each box represents. • The other critical point of a point and figure chart is the reversal criteria. This is usually set at three but it can also be set according to the chartist's discretion. • The reversal criteria set how much the price has to move away from the high or low in the price trend to create a new trend or, in other words, how much the price has to move in order for a column of Xs to become a column of Os, or vice versa. When the price trend has moved from one trend to another, it shifts to the right, signaling a trend change.
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  18. 18. Read charts to spot price trends: Trends are classified by type and duration: • Up trends, characterized by highs and lows that become progressively higher. • Down trends are seen when successive highs and lows are progressively lower. • Horizontal trends in which successive highs and lows fail to change much from previous highs and lows. • Trend lines are drawn to connect successive highs to each other and successive lows to each other. This makes spotting trends easy. Such trend lines are often called channel lines.
  19. 19. Phrases for patterns • Head and shoulders indicates that a trend is about to reverse itself. • A pattern resembling a cup and handle indicates that an upward trend will continue after pausing for a short downward correction. • A rounding bottom, or saucer bottom pattern indicates a long-term bottoming out of a downward trend before an upswing. • A double top or double bottom pattern indicates two failed attempts to exceed a high or low price, which will be followed by a reversal of the trend. • Similarly, a triple top or bottom shows three failed attempts that precede a trend reversal. • Other patterns include triangles, wedges, pennants and flags.
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  28. 28. Understand the concepts of support and resistance • Support refers to the lowest price a security reaches before more buyers come in and drive the price up. • Resistance refers to the highest price a security reaches before owners sell their shares and cause the price to fall again. • These levels are not fixed, but fluctuate. • On a chart depicting channel lines, the bottom line is the support line (floor price for the security), while the top line is the resistance line (ceiling price). • Support and resistance levels are used to confirm the existence of a trend and to identify when the trend reverses itself.
  29. 29. • It is possible for stock prices to rise above resistance levels or fall below support levels. • In such cases, the resistance level may become a support level for a new, higher resistance level; or the support level may become a resistance level for a new, lower support level. • For this to happen, the price has to make a strong, sustained change. Such reversals may be common in the short term.
  30. 30. • Generally, when securities are trading near a support level, technical analysts tend to avoid buying because of concern for price volatility. • They may, however, buy within a few points of that level. • Those who sell short use the support price as their trading point.
  31. 31. Volume of trades • If the trading volume increases substantially even as the price rises substantially, the trend is probably valid. • If the trading volume increases only slightly (or even falls) as the price goes up, the trend is probably due to reverse itself.
  32. 32. Moving averages to filter out minor price fluctuations • Moving averages remove unrepresentative highs and lows, making it easier to see overall trends. • Plotting prices against moving averages, or short-term averages against long-term averages, makes it easier to spot trend reversals.
  33. 33. Indicators and oscillators • Indicators are calculations that support the trend information collected from price movements and add another factor into your decision to buy or sell securities. (The moving averages described above are an example of an indicator.) • Some indicators can have any value, while others are restricted to a particular range of values, such as 0 to 100. The latter indicators are termed oscillators.
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