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Technical Analysis
Technical Analysis
Technical Analysis
TECHNICAL ANALYSIS
SHRUTI
ROLL NO. 43
Definitions
A method of market and security analysis that studies investor attitudes and psychology as revealed in charts of stock price movements and trading volumes. This analysis may be used to assess possible future price action. Research and examination of the market and securities as it relates to their supply and demand in the marketplace. The technician uses charts and computer programs to identify and project price trends.
Cont
2. Prices usually always move in trends This theory is based on the fact that markets are efficient and information dissemination occurs instantaneously across the market. In the real world however, this is never entirely achievable because of a varying number of factors and therefore complete randomness in its true form is never absolutely reflected.
Cont
3. History repeats itself over time. The most significant factor to realize is that you are not the only person motivated by profit. All traders tend to react in the same way each time they encounter a situation which is similar.
While it is true that some traders react positively from any mistakes made and learn from them, other participants decide to leave the market and therefore create a balancing pendulum of traders entering and leaving the market. Consequently, the same oversights are made by each generation of traders in the market which infers that history tends to repeat itself as time moves forward
Several ways the technicians thinks and acts : Technicians believe that behind the fundamentals are important factors. Technicians are not committed to a buy and hold policy. Technicians do not separate income from capital gains. Total returns = Realized price (price paid + dividend received) Technicians act more quickly to make commitments and to take profits and losses.
Cont
Technicians recognize that the more experience one has with the technical indicators, the more alert one becomes to pitfalls and failure of investing. Technicians insist that the market always repeats. Technicians believe that breakouts from previous trends are important signals.
Technicians recognize that the securities of strong company are often weak and vice versa.
Technicians use charts to confirm fundamentals.
LINE CHART
In the line chart, only the CLOSING PRICE of the stock is plotted on the chart for each successive day. Many chartists believe that because of the closing price is the most critical price of the trading day, a LINE (or close only) chart is more valid measure for price activity.
LINE CHART
BAR CHART
The daily bar chart has already been acknowledged as most widely used types of charts in Technical analysis. It is called as bar charts because they show each days/months/years range is represented in vertical bars. It shows open ,close, high & lows. The tic of RIGHT SIDE is closing price The tic of LEFT SIDE is opening price
BAR CHART
POINT-AND-FIGURE CHART
This chart shown the same price action but in more compressed formats. Here, To notice the Xs and Os in alternating column. The X column shows RISING IN PRICE while O column shows DECLINING IN PRICES DUE TO MORE FLEXIBLITY, this chart is more easier & precise to spot buying & selling signals than Bar charts.
POINT-AND-FIGURE CHART
CANDELESTICK CHART
Started in Japan in 1700s for RICE TRADE. Theres link between price & supply & demand of rice but theres also EMOTIONS OF TRADERS. Thus, Theres a difference between the price and the value of rice caused by trader emotion. The candlestick chart analysis measures the MARKET EMOTIONS. So, It reflects the SHORT-TERM OUTLOOKS.
CANDELESTICK CHART(types)
a. b. c. a. b. c. d. LONG BODY:Prices of stock was in wide range during trading session. Open near low/high and closed near high/low of the day. Tells us bearish or bullish SMALL BODY:Prices are in variations, Open and closed near the same price. It is neutral or indecisive of market Look @ the trend of market preceding the patterns
CANDELESTICK CHART
Hanging Man
when it is after a rally, it can suggest a beginning of a downward trend. There are also types of various clusters of clusters have their exotic names such as 1. Dark cloud cover 2. Doji star 3. Harmani cross 4. Two day tweezers tops
Hanging MAN Lucent Technologies 3 days of stock price rising Then hanging man Next day, stock price drops over 20%
GAP OF 20%
CANDELESTICK CHART
CANDELESTICK CHART
This chart shown a bars in black candles & white candles augmenting the daily trading range lines. BLACK CANDLES :- IF the opening prices exceeds the closing prices the body of candle is black. WHITE CANDLES:- When the stock is up(the close exceeds the open), represent the stock advances REAL BODY:- THE THICK PORTION OF AN ENTRY WICK:- THE VERTICAL LINES
LIMITATIONS OF CHARTS
Duo to difference in interpretations, we can make as many assumptions as we think. Every chartist following its own method & change frequently its method . Most of them followers are those investors who either know little or nothing about company in which they have invested(i.e. they only follow the chart)
Proposed by CHARLES DOW editor of the wall street journal in U.S.A. Believed in fundamental analysis Provides a time tested method of reading the stock market barometer. Might work only when a long, wide, upward or downward movement is registered in the market
DOW THEORY
THREE TRENDS
Primary/major market trend Secondary intermediate trend Minor trend
THREE AVERAGES
Industrial average Transportation average Utility average
1.revival of confidence
2. improvement in corporate earnings 3. speculation & inflation
1. abandonment of hopes 2. reporting lower profits & lower dividends 3. distress selling
PROBLEMS
Not a theory but an interpretation of knowing data Not explain the averages should be able to forecast future stock prices Not attempt to explain a pattern of the stock price movement It is mostly unsuitable reverse for short & intermediate trend & suitable only primary trend
TREND
MEANING
Trend is the direction of the movement in the share price Share prices do not rise or fall in a straight line
Trend reversal..
The rise or fall in share price cannot go on forever
PRIMARY TREND
Bull market
Each peak is higher than prev. peak . Bottoms are also higher than prev. bottom
CAUSES
Revival encourage investor Improvement in corporate profits further price rise speculation -price advances due to inflation
BEAR MARKET First fall Chance of moving back to prev. high is less. sale of shares.
CAUSES
Lower profit & dividend (-) flow of information in mkt Global mkt effect
MINOR TREND
Daily price fluctuation Corrects the secondary trend movement
SUPPORT LEVEL
If the stk reaches down to a certain level & then rises there exist a support level.
MOVING AVERAGE
Moving avg changes each day Recent day is added & oldest day is dropped Volatile condition
Technicians analyze
Diff between Daily Prices & Moving avg
Stk price is above M.A line, falls & rise again without penetrating moving avg line.
Stk prices falls through M.A lines & turns around only to fall again without penetrating abv. Moving avg line
TECHNICAL INDICATOR
NITA SOLANKI ROLL NO.49
TECHNICAL INDICATORS
Most of the technical indicators make sense when examined individually but when one examines many technical indicators simultaneously, the interpretation of their collective meaning is often contradictory and confusing.
TECHNICAL INDICATORS
There are some major technical indicators described here. The short interest ratio theory Confidence index Spreads Advance-decline Ratio Market Breadth Index
Cont..
The odd-Lot Ratio Insider Transactions Moving Average
Technical indicators
THE SHORT INTEREST RATIO THEORY The short interest ratio is derived by dividing the reported short interest or the number of shares sold short, by the average volume for about 30 days. When short sales increases relative to total volume,the indicator rises. A ratio above 150 per cent is considered bullish, and a ratio below 100 per cent is considered bearish.
Cont.
The logic behind this ratio is that speculators and other investors sell stocks at high prices in anticipation of buying them back at lower prices. The increase short selling- market weakness, Decreasing short selling-market strength.
Cont.
CONFIDENCE INDEX It is the ratio of a group of a lower-grade bonds to a group of higher-grade bonds. According to this theory underlying this index, when the ratio is high, investors confidence is likewise high, as reflected by their purchase of relatively more of the lower-grade securities.
Conti..
When they buy relatively more of the higher grade securities, this is taken as an indication that confidence is low, and is reflected in a low ratio.
Technical indicators
SPREADS Large spreads between yields indicate low confidence and are bearish, the market appears to require a large compensation for business, financial and inflation risks. Small spreads indicate high confidence and are bullish.
Cont.
In short, The large the spreads, the lower the ratio and less the confidence. the smaller the spreads, the greater the ratio, indicating greater confidence.
Technical Indicators
ADVANCE-DECLINE RATIO: The index relating advances to declines is called the advance decline ratio. The Advances persistently outnumber decline- the ratio increase. A bullish condition is said to exist, and vice versa.
Technical indicators
MARKET BREADTH INDEX: The market breadth index is a variant of the advance decline ratio. To compute it we take net difference between the number of stocks rising and the number of stocks falling.
Cont.
Example: If in a given week 600 shares advanced, 200 shares declined, and 200 were unchanged, the breadth would be
2[(600-2000)/200]
Cont.
In short, If the both the stock index and the market breadth index increase, the market is bullish, When the stock index increases but the breadth index does not, the market is bearish.
Technical indicators
THE ODD-LOT RATIO: Odd-lot transactions are measured by odd-lot changes in index. Odd-lots are stock transactions of less than, say, 100 shares. The odd-lot ratio is sometimes referred to as a yardstick of uniformed sentiment or an index of contrary opinion because the odd-lot theory assumes that buyers or sellers are not very bright especially at tops and bottoms when they need to be brightest.
Technical Indicators
INSIDER TRANSACTION: The hypothesis that insider activity may be indicative of future stock prices has received some support in the academic literature. Since insiders may have the best picture of how the firm is faring, some believers of technical analysis feel that these inside transactions offer a clue, to future earnings, dividend and stock price performance.
Cont
If the insiders are selling heavily, it is considered a bearish and vice-versa. Although the presidents reason for selling the stock may not be related to the future growth of the company, it is still considered bearish as investors figure the president, as an insider, must know something bad about the company that they, as outsiders, do not know.
Technical Indicators
MOVING AVERAGE A moving average is a smoothed presentation of underlying historical data. Each data points is the arithmetic average of a portion of the previous data. A 10-day / 20-days /30-days moving avg. measures Avg values over the previous (10/20)days and so on.
Cont.
Regardless of the time period use, each day a new observation is included in the calculation and the oldest is dropped. So a constant number of points are always being averaged.
2. There may be positive investment opportunities even in an efficient market given the diverse strategies and goals (e.g. hedging and risk reduction vs. profit maximization) of different traders.
OSCILLATORS
-NISARG SHUKLA
Oscillators
Signal the change by comparing rate of change in price action. Compare to the past, has it move very far away? Usually signal overbought and oversold Be careful: it might just be the beginning of the trend, only use it in trading in neutral market Examples of oscillators used: -Relative Strength Index (RSI) -Moving Average Convergence Divergence (MACD) -Stochastic
MACD
Stochastic
Theory:
In an uptrend market, closing prices tend to be near the highs In a downtrend market, closing prices tend to be near the lows %K line and %D line
Stochastic
Conclusion
When to use technical analysis: looking for short-term Indicators are only indicators