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Technical Analysis

Technical analysis 101

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Technical Analysis

  1. 1. Introduction to Technical Analysis
  2. 2. Contents <ul><li>What’s Technical Analysis? </li></ul><ul><li>Graphs </li></ul><ul><li>Trends </li></ul><ul><li>The Golden Rule </li></ul><ul><li>Trends Lines, Support and Resistance Levels </li></ul><ul><li>Retracements </li></ul><ul><li>Summary </li></ul>
  3. 3. What’s Technical Analysis? <ul><li>A method for estimating the future prices of securities based chiefly on two parameters: </li></ul><ul><li>Price History </li></ul><ul><li>Trade Volumes </li></ul>
  4. 4. <ul><li>Quarterly Reports, Macro/Micro Indicators, Interest Rates, Stock Market Indices, Predictions, Statements, News, Rumors… </li></ul><ul><li>Because *: </li></ul><ul><ul><li>Security prices are ultimately set by market forces – buyers and sellers. </li></ul></ul><ul><ul><li>History repeats itself, so… </li></ul></ul><ul><ul><li>Historic price and volume data is sufficient to assess and predict buyer and seller behavior </li></ul></ul><ul><li>* Per Technical Analysis theory </li></ul>Technical Analysis Does Not Look At…
  5. 5. Candlestick Charts <ul><li>Most popular type of graph to use in Tech Analysis </li></ul>Up Down Opening Price Closing price Low Price of period High Price of period Opening Price Closing Price
  6. 6. Graph Time Resolutions <ul><li>Daily – 1 candle = 1day </li></ul><ul><ul><li>Useful for analyzing short-term trends </li></ul></ul><ul><li>Weekly – 1 candle = 1 week </li></ul><ul><ul><li>Useful for analyzing intermediate trends </li></ul></ul><ul><li>Monthly – 1 candle = 1month </li></ul><ul><ul><li>Useful for long-term analysis </li></ul></ul>
  7. 7. Trend – The Direction of Prices <ul><li>3 Types of Trends: </li></ul>Downtrend Uptrend Sideways Trend
  8. 8. Golden Rule of T. Analysis Trading <ul><li>( The Trend is your Friend) </li></ul><ul><li>In an uptrend – Buy (Long) </li></ul><ul><li>In a downtrend – Sell/Don’t Buy/Short </li></ul><ul><li>In a sideways-trend – Sell/Don’t Buy </li></ul><ul><li>So, how do you recognize a trend? </li></ul>Trade With The Trend
  9. 9. Trend Characteristics - Price <ul><li>Formal Uptrend </li></ul><ul><li>Every peak is higher than the previous peak </li></ul><ul><li>Every trough is higher than the previous trough  </li></ul><ul><li>Formal Downtrend </li></ul><ul><li>Every peak is lower than the previous peak </li></ul><ul><li>Every trough is lower than the previous trough  </li></ul>
  10. 10. Trend Characteristics - Volume <ul><li>Trade volume = amount of securities traded </li></ul><ul><li>In distinct trends volumes typically: </li></ul><ul><ul><li>Are larger than in periods of sideways trends </li></ul></ul><ul><ul><li>Grow with the trend </li></ul></ul>sideways uptrend uptrend growing sideways Small volumes Medium volumes growing
  11. 11. Trend Characteristics – Time Period <ul><li>Trends are limited to a time period : </li></ul><ul><ul><li>Long Term Trend – 1 year or more </li></ul></ul><ul><ul><ul><li>AKA Main Trend </li></ul></ul></ul><ul><ul><ul><li>Use monthly chart to detect </li></ul></ul></ul><ul><ul><li>Intermediate Trend – 2-12 months </li></ul></ul><ul><ul><ul><li>Most investors use it </li></ul></ul></ul><ul><ul><ul><li>Use weekly or daily chart to analyze </li></ul></ul></ul><ul><ul><li>Short term Trend – 1 month or less </li></ul></ul><ul><ul><ul><li>Use daily chart </li></ul></ul></ul><ul><li>Important: Long-term trends will almost always include intermediate and short term trends in the opposite direction </li></ul>
  12. 12. Trendline <ul><li>Trendline = A line drawn over highs or under lows to show the prevailing direction of price </li></ul><ul><ul><li>Needs to touch at least 3 peaks or troughs </li></ul></ul><ul><ul><li>Helps determine future prices, change rates, buy/sell opportunities and more </li></ul></ul>Intermediate term trendline Short term trendline
  13. 13. Support and Resistance Levels <ul><li>Horizontal trendlines may indicate Support and Resistance levels </li></ul><ul><ul><li>Support level – The price level which the security has had difficulty falling below. It is thought of as the level at which a lot of buyers tend to enter the stock. </li></ul></ul><ul><ul><li>Resistance level - The price level which the security has had difficulty rising over. It is thought of as the level at which a lot of sellers tend to offload. </li></ul></ul><ul><ul><li>Note : Round numbers (100, 800, etc.) tend to create support/resistance levels </li></ul></ul>Support Level Resistance Level Breakout
  14. 14. Support and Resistance - 2 <ul><li>Trendlines may indicate the change in support and resistance levels during a trend </li></ul>Resistance line Support line Breakout Example: an uptrending security with parallel support and resistance lines ( price channel ) Note: support and resistance trendlines are not always parallel
  15. 15. Support and Resistance Role Reversal <ul><li>When a support level is broken it may turn into a resistance level </li></ul><ul><li>And vice-versa </li></ul>Breakout of support level turns it into a resistance level
  16. 16. Retracements <ul><li>Retracement = A temporary reversal in the direction of the price of a security, countering the prevailing trend. </li></ul><ul><li>Retracements usually occur due to profit-taking </li></ul><ul><li>Retracements break the distinctiveness of trends </li></ul><ul><ul><li>In uptrends – create a trough that is lower than the previous trough </li></ul></ul><ul><ul><li>In downtrends – create a peak that is higher than the previous trough </li></ul></ul>
  17. 17. The Risk of Retracements <ul><li>Retracements may fool us into thinking the trend has stopped or reversed </li></ul><ul><li>Trading based on retracements will cause us to lose or profit less </li></ul>Example: in this downtrend there are two retracements. Buying the security at these times will result in loss.
  18. 18. Retracement Indicators- Price <ul><li>In theory the change would often correlate with Fibonacci’s ratios: 23.6%, 38.2%, 50%, 61.8% </li></ul><ul><li>Fibonacci retracements is a popular tool to predict retracement end prices </li></ul><ul><ul><li>Draw a line between the high and low of the last trend and the tool will show relative Fibonacci levels </li></ul></ul>38.2% 1. Price should retrace by no more than 66% of the size of the previous move Uptrend Retracement size 0 % Move size 50% 61.8% Retracement
  19. 19. Retracement Indicators - Other <ul><li>Duration - retracements are short-lived </li></ul><ul><ul><li>No more than 2-3 weeks in intermediate term </li></ul></ul><ul><li>Usually arrive after strong price moves </li></ul><ul><ul><li>Inducing profit taking </li></ul></ul><ul><li>Volumes decline as the retracement progresses </li></ul><ul><li>Contradicting/Weak strength indicators </li></ul><ul><ul><li>We’ll discuss those in the next slide deck </li></ul></ul><ul><li>Invariably followed by a higher/lower peak/trough </li></ul>
  20. 20. Summary - Med-Short Trends Example * Note how support and resistance level build at round numbers: 700, 800, 900… Strong down-trend Sideway Trend b/w 630-700 Uptrend Sideways Trend Retracement Starts at 700 and stops at 800 Retracement Uptrend stopped at 900 800 level induces a retracement 700 level breakout Small volumes Volume growth High Volumes 900 level broken Uptrend stopped at 1000 Up
  21. 21. How Should We Trade? Hold Buy long Sell Long Buy Short Hold short Sell Short
  22. 22. Photo Credits <ul><li>Stopwatch / casey.marshall - </li></ul>