Technical Analysis - A Business Tool

People take trading in stock or commodity markets without prior

knowledge. They suffer losses and then blame the market. Ignoring the
education part is the biggest mistake traders generally make when venturing
into the market of tradable instruments. I will take you to a journey through
this blog where you will learn what 'trading' really means. Is it something like
wearing costly suits and walking into the broker's office? Does it have any
relation with listening to the stock market shows regularly on the TV ? OR
does it require thorough knowledge of finance ? Does anyone need any
special degree to take up the business of 'trading' ? You will get answers to
all these questions and many more on this blog in a step- by- step manner.
If you have patience and want to start trading in stock and commodity
markets in any part of the world then you will immensely benefit from these
blog.
We will discuss only technical analysis as a tool to profit from the market.
The technical analysis methods explained here are applicable in any
exchange of the world. We will discuss methods which are time tested and
have been successfully applied by numerous traders all over the world. We
will also focus on developing new trading systems with the help of the
conventional methods already known to the trading communities. Creating
new trading systems is an adventure. Testing those systems in actual
market conditions is more adventurous.
We assume that you are from a part of the world where well
managed exchanges for trading stocks and commodities exist and that you
know the basics of opening the trading a/cs for trading stocks and
commodities. However we will be providing different links, from time to time
to show you where you can get more updated information about
stock/commodity/currency trading in different countries. We will show you
examples taken from mainly markets of India, the US, the UK, Germany,
Italy, Brazil etc. However, the technical principle is always applicable in any
part of the world.
Technical analysis is a business-tool because with the help of this you can
take up profitable trading decisions in order to extract profits from the
market i.e. to create wealth.
I have explained the things in simple English in a straight-forward
way. I have not used a single unnecessary word to increase the volume of
your reading material. If you do not understand any concept at the first go,
give it another try. Read the material as many times till you fully understand
the concepts.
So go through the chapters applying your best possible cognitive ability to
learn technical analysis and start making money.
Wish you a happy trading.
Disclaimer: The author of this blog is no way responsible for any loss
made by anybody by taking trading decision based on his/her reading
of the posts. Trading in stock/commodity/currency futures is a very
risky business. One should take the advice of a certified
financial/investment adviser before taking up any trading decision.

Chapter One - What Technical Analysis Is

History of technical analysis

Technical analysis is perhaps the oldest form of analysis of price movement
of tradable instruments i.e. stocks, commodity, future etc. Its origin dates
back to the 17th century Japan where traders used technical charts to
predict price of rice contracts. In United States it has been in use for more
than 100 years. This is a skill which may be developed by anybody with a
zeal for learning new things. It is a skill which once learned can be used and
refined throughout your trading career. You can use it as a money-making
intangible tool in stock or commodity or any other type of market of tradable
instrument.
Technical analysis is a practical subject in which the relative probability of
any particular move in the price of a stock or a commodity is found out. We
find out the probability from the price data available from any financial
newspaper, website or from any other source. We draw graphs or we find
out the values of different indicators to say about the probability of a move
in a particular direction.

What is probability ?
Let us explain it with an example. When we toss a coin the probability of
getting a head is 1/2. Similarly the probability of getting a tail is also 1/2. It
means the certainty with which an event can occur. It is also the uncertainty
with which an event can take place. Mathematically it may be expressed as
a fraction. In our analysis we do not calculate the exact value of the
probability in terms of a fraction. We are just interested to find out that if we
take position in a particular direction, whether the probability of the price to
go in that direction is sufficiently higher than the probability of a reverse
move.
The probability of the move in our favor represents the reward and the
probability of the opposite move represents the risk. We should always
ensure that the risk:reward ratio should be in our favor.
Our main raw material is daily,weekly or monthly open, high, low and
closing prices of stocks or commodities or currencies. With the help of
these price-data we will find out values of different technical indicators and
draw graphs of different types to ascertain the probability of a prospective
profitable trade.
We should also keep in mind the three basic postulates of technical
analysis. These are :

1. Every factor that can affect the price of a stock/commodity or a

currency is discounted in its price.
2. Prices move in trends. Once a trend is in motion, it continues unless
there is a change in trend.
3. History repeats itself. The same price actions repeat after a period of
time.

Some points about technical analysis

Ø ‘Technical-analysis-decision should ignore all external information other
than price information. You should not be influenced by any market noise.
Sometimes it may happen that a very well known analyst says in the TV to
buy a security but your technical analysis of that security suggests a sell. If
you have confidence in your analysis you must do according to your own
calculations. Remember nobody can predict the market with 100% certainty.
It is all about measuring the probability. If you feel that the probability of a
trade is high according to your technical analysis you should go on with that
trade with sufficient loss management (risk management) measure.
Ø Technical analysis is widely used these days. Popular trading systems
are widely used by the traders from all walks of life. Therefore, sometimes
you will see that your decision based on a popular technical indicator has
worked remarkably a number of times and almost immediately.
Ø Technical analysis gives you objective entry and exit point depending
on your trading time frame.
Ø Technical analysis is not scientific. You can not predict the market with
100% accuracy. In technical analysis you can only say about the probability
of happening of a particular event as high or low, but you can not say that
the event will surely take place or surely not take place.
Ø While you are analyzing the market with technical analysis your decision
making should be mechanical. Emotion should not play any role in your
entry or exit decision. Trading is a mental game. You should only follow
your technical signals and nothing else.
Ø In technical analysis you can test your trading plan over a reasonable
amount of past data to ascertain its effectiveness and profitability. This is
called back- testing
-END OF CHAPTER ONE-
Review Questions:
(1) The main data needed in doing technical analysis is
(a) news about the stock from newspapers (b) views expressed by experts
on TV (c) balance sheet and profit and loss data of the company (d) open,
high, low,closing price of the stock.
(2) We can apply technical analysis to trade (a) bond (b) stock (c)
commodity (d) currency (e) all the above.
(3) Choose the appropriate alternative-The probability of our prospective
trade should be higher/less/equal than/to the probability of the trade in the
opposite direction.
(4) Choose the appropriate alternative- The risk should be
lower/higher/equal than/t the reward.
State whether TRUE or FALSE:
(5) All the news, events that influence the price of a stock or commodity is
discounted or factored i.e. reflected in its price. TRUE/FALSE.
(6) Same pattern of price movement in the price-charts never repeats in the
future. TRUE/FALSE.
(7) Stock prices do not move in trends. TRUE/FALSE.
Answers to the questions:
(1) (d) (2) (e) (3) higher than (4) lower than (5) TRUE (6) FALSE (7) FALSE

Chapter Two - Fundamental Vs. Technical

Taking trading decision based on the company performance as reflected in

their balance sheet, income statement and other financial parameters is
known as fundamental analysis. Fundamental analysis also includes
analysis at the macro level economy. The analysis of the country's broad
financial parameters like inflation, movement of cargo, employemnt
statistics, balance of payments, local currency comes under its purview. In
fundamental analysis different economic parameters like money supply,
government policy, economic trends, taxation, GDP, GNP, different financial
ratios are alao studied, Mainly some economic data and statistics are
analyzed. Rainfall, agricultural production, favorable political situation,
industrial growth, central bank’s (in case of India it is ‘Reserve Bank of
India’, in case of the US it is the Federal Reserve) monetary policy etc. are
studied. World economic statistics is also taken into account. Like, an
increase in crude inventory may lead to increase in price of crude oil futures.
But such assumption is not believed in technical analysis. According to
technical analysis all fundamental news or events are always factored into
the price actions of the stocks or commodities, even in advance. Chart
patterns and technical indicators predict the probability of price movement in
advance.
The fundamental factors do indeed influence the price movement. You can
not apply fundamental analysis in short term trading because of the
following reasons:
Fundamental analysis requires analysis of huge volume of data. It requires
huge infrastructure and manpower. Some of the information may not be
accessible to common individual traders. Even if you can do a reasonable
degree of fundamental analysis and arrive at a decision to buy or sell some
stocks, you will find that those fundamental factors have already been
discounted in price of the stock. This is because market never waits for
anybody. There are numerous kinds of participants (Traders) in the market
from all walks of life ranging from individual investors to institutional ones.
Market does not have the luxury to wait for an individual trader like you to
take decision after you complete your fundamental analysis.Market does
not give the traders the time to analyze the news obtained from TV,
newspapers or any other media.
Another drawback of fundamental analysis is, it only says that you should
buy because the things are looking brighter or you must sell because things
are not that good. But it does not say that at what time or at what level you
can expect a move with high degree of probability in your favor. The
problem of ‘timing’ is there in case of fundamental analysis.To overcome the
above difficulties, a small, individual trader with moderate means must try to
analyze market with technical analysis.
It often, happens you take a trading based on your technical analysis of
certain stock and later see that something happens which supports your
decision. So fundamental factors follow the technical signals with
reasonable degree of probability.
Therefore, you should concentrate on doing your technical analysis
correctly and do not go by the news or other people's opinions. .
-END OF CHAPTER TWO-
Review questions:
(1) Fundamental and technical analysis are same thing. TRUE/FALSE
(2) Balance sheet is considered in technical analysis. TRUE/FALSE
(3) Price action is considered in fundamental analysis. TRUE/FALSE
(4) Increase in crude inventory in America always causes decrease in price
of crude futures in India. TRUE/FALSE.
(5) Weak dollar always implies an increase in the price of gold.
TRUE/FALSE
(6) An increase in the price of silver always means that there will be an
increase in the price of gold.
(7) Ordinary investor/trader can do fundamental analysis easily.
TRUE/FALSE

Answers to questions.
(1) FALSE(2) FALSE (3) FALSE (4) FALSE(5) FALSE(6)FALSE (7) FALSE

Chapter Three - Construction of Charts/Graphs

We have already discussed that our approach to stock market will be based
on the analysis of price and price patterns. In technical analysis we will
analyze the market with the help of some technical indicators. Technical
indicators are some mathematical formulae from which we can draw certain
conclusion about the probability of a particular direction of the market.
These technical indicators are generally derived by putting the price
information in some formulae. The value/result of the formulae gives the
probability of the direction in which the market is going to head. Another way
of analyzing the market is with the help of charts of the price. Prices when
charted often give meaningful patterns from which we can say about the
future direction of the market. From charts we can say the high probability
points at which prices have the tendency to go up or down. You can find out
important trading levels with the help of charts. In this chapter we will learn
about drawing different type of charts.
There are three types of charts with which we deal in share market. These
are:
· Line chart
· Bar chart and
· Candlestick charts
Let us learn how these charts are drawn.
Daily price information on different stocks is available from business
newspapers. Generally day’s open, day’s high, day’s low and day’s closing
price are available from these papers. From this price information you can
draw very useful charts on graph paper.

Steps for drawing line chart

· Draw two axes (two straight lines which are perpendicular to each other)
on the graph paper.
· Graduate the vertical axis with suitable units of Rupees so that you can put
the daily closing price as ‘points’ comfortably
· Time or date is plotted along the horizontal axis.
· Now the price points are joined to get the line chart of the stock. Your chart
will look like as follows:

Above graph represents a line chart. Here a, b, c, d, and e are the closing
prices on 5 successive trading days. These points are joined by lines to get
a line chart.
You can get free line charts of different indian stocks from
www.in.finance.yahoo.com/ web site.
You may get charts of indian companies from http://icharts.com/
You can get free charts of different stocks of different countries from the
finance section of the following Yahoo sites.
http://usfinance.yahoo.com/ (the US) http://ca.finance.yahoo.com
( Canada)
http://uk.finance.yahoo.com (the UK) http://de.finance.yahoo.com
( Germany)
http://fr.finance.yahoo.com (France) http://it.finance.yahoo.com (Italy)
http://au.finance.yahoo.com (Australia) http://br.finance.yahoo.com
(Brazil)
Steps for drawing bar charts

· In this type of chart each day’s price range is presented as a bar in the
chart space. On putting bars corresponding to different days’ prices we get
an arrangement of bars which is called the bar chart.
· At first, axes are properly chosen and graduated.
· You are having daily open/high/low and closing price information for a
definite period to draw the graph.
· Put the high and low of the first day on the graph and join them. You get
the first bar. The open and close are indicated by horizontal projections from
the bar on left and right hand sides respectively.
· Plot all the daily price data to get all the bars.
· You will get a particular arrangement of bars and this will be your bar chart.
The bar chart will look like as follows:

There is another type of charting called 'candlestick charts'. We will discuss

this charts in a separate chapter under a separate post.
Drawing charts with Excel
You can draw very good chart with the help of MS Excel on your computer.
Method of drawing chart in MS Excel :
1. Obtain the Open/High/low/closing price data of any stock from the
Internet. Paste those data in an Excel worksheet.
2. Select the data range in the worksheet
3. Now click on ‘Insert’ menu
4. Click on ‘Chart’
5. Select ‘Stock’
6. Now you can select ‘high-low-close’ or ‘open-high-low-close’.
7. Now click on ‘OK’ and you get your chart.
8. In step 6 you can also select ‘volume-high-low-close’ or ‘volume-open-
high-low-close’, but in that case you were to get and include in the selection
the volume data along with your open/high/low/close data in steps 1 and 2.
The method may be somewhat different in different versions of Excel.
Do some research with the different options available in the chart menu of
Excel and try to customize your chart according to your need as much as
possible.
In this material many charts are drawn with the help of MS Excel 2007
version. Try to draw such charts yourself. Drawing charts with MS Excel will
greatly help in your trading.
-END OF CHAPTER THREE-

Chapter Four - Trend

We have already discussed that prices move in trends and once a trend is
there it continues unless there is a ‘reversal of trend.’ This is the single most
important aspect in technical analysis. Your main task throughout your
trading career will be to identify trend and entering that trend with sound
capital and risk management.
Trend means continuous price movement in a particular direction. Price may
go upwards or downwards. If price goes upwards, you will see successive
higher highs and higher lows are formed in the chart. If the price goes
downwards you will see successive lower highs and lower lows are formed
in the chart.
A third type of price movement is there in which price does not conclusively
go upwards or downwards. It hovers within a range in a lateral fashion. This
type of movement is known as range-bound movement. Within that range
you may see a number of short uptrend or downtrend.
The market is sometimes divided into two types depending upon the nature
of its trend. If there is an uptrend or a downtrend of prices, then the market
is called a ‘trending market’. Whereas, a range-bound market is called a
‘trading market’
Remember that ‘the trend is your friend’. Therefore, determination of trend is
the single most important aspect in the trading business, because whenever
you trade with the trend your chance of getting a favorable trade increases.
The main task is to determine the trend of the market during your time frame
of trading. If you are trading intraday, you are to determine the intraday
trend. If you are trading for even an hour your aim is to look up for the very
short term trend during those hours. While trading for a week, you are to
look for the short term trend.
There are different methods of determining trend.
Trend determination by visual examination of chart
This is the most easy and reliable method of determining the trend of a
stock price or trend of the whole market i.e. market index. Doing business is
actually applying common sense to the greatest possible way. Simpler and
easier things always work well in stock market. Just by seeing a chart you
can tell that, market is going up or going down. If the market is in a
sideways lateral movement, it is also highly discernable by simple visual
inspection of the chart.
Trend determination with moving average:
Moving average is a technical indicator with the help of which, you can
determine the trend. You will know details about moving average in the
respective chapter dedicated to it. For the purpose of determination of trend
let us briefly know what a moving average is.
Divide your trading time frame into equal-duration intervals. Say you are
trading with a perspective of 2-4 weeks. Now divide this time frame into
equal duration-intervals. Here it is, say, one trading session. Now let us
collect the closing price of each trading day during the past (say) 15 days.
Add the 15 closing prices. Then divide the sum by 15. The quotient is the 15
day moving average at the end of the 15th day. Daily moving average may
by calculated using the above method. Similarly weekly moving average is
calculated by taking weekly closing prices, summing them and then by
dividing the sum by the number of closings taken. In intraday trading,
sometimes, 20 minute moving average is calculated. It is calculated by
adding price at the end of each minute during that 20 minute period, and
then dividing the sum by 20.
However, we were at the discussion of how moving average is used to find
out the trend.
The rule:
If you are trading for short term (more than one day to several weeks) then,
if the price is hovering above the stock’s 200 day moving average, then the
stock is considered to be in up trend.
Similarly, if the price of the share is moving below its 200 day moving
average, then it is said to be in a down trend.
This method of determining the trend is highly mechanical. Sometimes you
may see that from visual inspection a stock appears to be in an up trend but
from moving average data the stock price is below its 200 day moving
average. Here the uptrend, in most of the time, is a very short term uptrend
or may be making a part of the trend reversal.
Many traders follow trend determination by moving average method though
sometimes it seems irrational. Moving average is a mechanical method and
mechanical methods work best in the market.
Determination of the strength of the trend
After the determination of the trend you are to determine the strength of the
trend. You will use a technical indicator called ‘ADX’ (Average Directional
Index) to measure the strength of a prevailing trend. ADX value is measured
on a scale from 0 to 100.
Rule:
ADX value below 20 indicates weak trend whereas an ADX value above 40
indicates strong trend.
You must remember that ADX is used to measure the strength of the trend
and it is not used to determine the trend itself.
ADX is derived from two other technical indicators called directional
momentum indicators (+DI and –DI). When –DI is sloping upwards it means
that the strength of the downtrend is increasing and when it is going
downwards, this means the strength of the downtrend is decreasing.
Similarly, when the +DI is going upwards the strength of the uptrend is
increasing and when +DI is going down the strength of the up trend is
decreasing. +DI and –DI are components of ADX. +DI and –DI are always
plotted against ADX.
You need not know how ADX is calculated. However, you should always
use the above rule to determine the strength of the prevailing trend with the
help of ADX.
All good technical software includes ADX, +DI and –DI indicators. These
days the cost of technical software has been coming down. You can log on
to www.icharts.in/ to get technical charts of stocks with ADX indicators.
Real market chart of different securities are given below for better
understanding of identification of trend in the actual charts of the securities:
In the above chart of HDIL we can see that the price is gradually falling from
A to B. So, during this phase the market may be said to be in a down trend.
After forming the bottom at B the price is moving upwards. So, in this phase
the market may be considered to be in an uptrend. During this trend the
price crosses 50 DMA from below and resides above it for considerable
period of time.
You can see that within these broad trends prices sometimes hover in
sideways fashion.

EMBED Word.Picture.8

In the daily chart of ABB you can see that the price is forming successive
lower highs and lower lows. So, ABB is in a downtrend. The fall is very
gradual. Therefore, the downtrend may be prolonged till the market is
reversed.
40 day moving average line is plotted on the chart. You can see that the
price reaches the moving average line, a number of times and then goes
down.
In a downtrend moving average lines are resistance levels.

In the
daily chart of GMR Infrastructure, we see that, after the fall from A to B, the
price moves in a sideways fashion. There is no discernable up or down
trend since 1st February, 2008.
A 40 day moving average line is also plotted on the chart.
We see that the price hovers around this line and does not conclusively
goes below or above the line.

Reliance Capital is in a clear down trend. Some intermediate sideways

movement is there, but overall it is in a down trend.
The stock price is also moving below its 30 and 50 DMAs.
Therefore, moving average data also confirm the downtrend.
Near 19 February, the stock price touched the 30 day moving average and
then fell further. This is actually what happens in a downtrend. Stock price
faces resistance at the moving average levels, in a downtrend, and goes
further down.

In the above chart of Reliance it can not be conclusively said that there is a
clear up or down trend. No discernable trend is there in this chart.
Prices are rather hovering around a band.
The 40 day moving average is also plotted on the chart. And it is visible that
the price crosses or touches the moving average line a number of times and
hovering around it.
Thus the chart of Reliance represents a trading market rather than a
trending market.

Chapter Five - Trendline Method

A trendline is a line obtained by joining three non-consecutive highs or lows

and projected in the future, in the price chart of a stock.
Price is likely to start going up whenever it reaches near the trendline during
a correction in an uptrend. Similarly price is likely to go down when it
reaches the trendline during a correction in a down trend.
You may also draw trendline by joining any two lows or any two highs in the
stock chart. But the significance of this trendline will be much less than that
drawn through the non-consecutive highs and lows or any trendline drawn
through more number of lows or highs (3, 4 or more). The higher number of
time a trendline is tested, the greater will be its significance. In other words
the higher the length of the trendline, higher will be its significance.
Rules for trading:
Buy when the price reaches the trendline in an uptrend and sell whenever
the price reaches the trendline in a downtrend.
When the price goes beyond the trend line during a correction then the
trendline is said to be penetrated. Generally 2-3% movement beyond the
trendline is regarded as a valid penetration of the trendline and change of
trend.
Very steep trendline is easy to get penetrated by the sideways movement of
the prices. Ideal, tradable trendlines are slowly sloping and gradually
forming over a period of time.
You can draw a trend channel by joining the lows by a straight line and also
joining the highs by another straight line. The high-joining line will indicate
the resistance line and the low-joining line will indicate the support line. Both
lines are projected in the future. Here the rule for trading is – buy at the
support line and sell at the resistance line. When the price goes beyond the
either line by 2-3% then the price is considered to have liberated from the
trend channel in that particular direction. If the price penetrates beyond the
higher side of the channel, then this side may now become the support line
for the new channel to be developed. On the other hand if the price
penetrates below the lower side of the channel then this side may become
the resistance line in the newly developed channel.

Examples of trendlines:
In the following two examples different trendlines are drawn. Study these
diagrams carefully.
Chapter Six - Support and Resistance

Prices move in trends. Once an up move is there, there should be decline

and then the up move starts again. The level at which the price halts
declining before it starts to rise again in its original up move is called
‘support’.
Similarly in a down trend, after the price has gone down its starts to recover
somewhat up to a level, then it again starts to fall and the original down
trend continues. The level up to which the price recovers is called
resistance.
In a sideways trend also, price moves between two levels. The upper level
is called resistance and the lower level is called support.

The tendency of the price to go down in an uptrend is called ‘correction’.

The tendency of the price to go up in a down trend is also called ‘correction’.
That is, the tendency of the price to go against the main trend is called
‘correction’.

The idea of trend, correction, support, resistance comes from the works of
the legendary author Charles Dow. He propounded a theory which is
popularly known as ‘Dow Theory’. He expressed his views through the
editorials of Wall Street Journal from 1900. These editorials continued till
1902. He could not conclude his works due to his death in 1902. However,
several noted authors continued this series of writings and contributed
valuable articles in those editorials and ultimately gave completeness to
‘Dow Theory’.
Modern day technical analysis can well be considered to have its origin in
Dow Theory.
Modern day technical analysis share the same premises as Dow
propounded 100 years ago.
The first assumption of Dow Theory says that market itself discounts every
past, present and future aspects.

Dow propounded the concept of three-trend–market. He said that there are

three types of trend in the market. These are primary trend, secondary or
intermediate trend and the third is minor trend.
He said that market would go in particular direction but not in a straight line.
In an up trend, market will go up and then go down to an extent not below
the previous low and then go up, again it will go down up to a level higher
than the previous low and this process continues. Similar is with the case of
a down trend.
The main trend is called the ‘primary trend’. The intermediate trend opposite
to the primary trend is called the ‘secondary’ or ‘intermediate trend’. This
secondary trend is a correction in the primary or the major trend. A third
trend called ‘minor trend’ may also be seen in the market. A minor trend is a
trend within the secondary trend. It is generally a correction in the
secondary trend i.e. it is generally a move opposite to secondary trend.
Therefore, we see that the concepts of support, resistance, correction, trend
etc. have all their roots in the Dow Theory which was published around 100
years back.
We know that stock price discounts everything. It also reflects its demand-
supply position. Support is actually the point where the supply of the stock is
overcome by the demand for that stock. As a result the price halts to fall
further, and starts to go up. Similarly resistance is a point where the demand
for the stock is exceeded by the supply of the stock and the price stops to
go further up and starts to go down. This demand-supply equilibrium is
reflected at the support/resistance level.
Support represents an oversold level and resistance represents an
overbought level.
The primary trend is determined in longer time frame i.e. in one to three
years or more. Secondary trend lasts for a period between 3 weeks to 3
months. Minor trend lasts for less than 3 weeks. The above durations are
not fixed. These durations vary to vast extent depending on the market
conditions because we now understand that nothing can be predicted surely
about the market. It is an uncertain game and those time limits of different
types of markets are also based on the researches made by Dow and his
following researchers. Now a day’s market has become very fast paced and
though Dow Theory still holds very well in these days’ markets, but we
should use it with necessary modifications as and when required.
For a short term trader market remains mostly in a range. We should keep
in mind that market will remain range bound as far as our trading time frame
is concerned (intraday to several weeks). Therefore, short term support /
resistance levels offer very good opportunity to take high probability trading
decisions.
Trading rule:
· Buy at the support in an up trend
· Sell at the resistance in a downtrend
You are always better to go with the trend. But sometimes short term
support or resistance levels are profitable to buy or sell respectively even
against the major trend of the market, especially in the intraday trading.
Let us now illustrate support and resistance by some charts.
In the above chart demand for the stock is exhausted at levels ‘A’ and ‘B’.
So these levels represent the resistance line. These are the levels where
you should sell.
At the levels marked by ‘C’ and ‘D’ the price ceases to fall i.e. supply is
exhausted and demand for the stock increases. These are the levels
representing support levels. At these levels you are to buy the stock.

In the above chart of Financial Technologies you can see that level ‘B’
represents the support. Demand has overcome the supply at this level and
the price starts to go up.
On the other hand at level ‘A’ price has experienced a resistance because
the demand for the stock has been absorbed by the supply and the price
falls from this point.
You should, therefore, make a strategy to buy at level ‘B’ and sell at level ‘A’
In the above chart of Air Deccan levels ‘A’, ‘B’ and ‘C’ represent resistance
levels. Demand for the stock is exhausted at these levels and these highs
are formed. Supply overcome demand at these levels.
On the other hand at levels ‘D’, ‘E’, ‘F’ and ‘G’ price ceases to fall further
and lows have formed at these levels. These levels, therefore, represent
support levels.
You should buy at the support levels and sell at the resistance levels.
 Candlestick Charting

History
Candlestick Terms
Candle
Long and Short Bodies
Doji's
Engulfing
Hammer/Hanging Man
Gaps
charts on the Web
Candle Glossaries
Reccomended Reading

History
Candlestick charting can be traced back to the 1700's as a tool used for rice trading.
One of the great rice traders of the 1800's, Homma is widely credited for developing
the candlestick charting basics used today. In the west, Candlestick Charting has
grown in popularity and use, thanks to the efforts of Steve Nisson and Greg Morris.
Candlestick charts are visually appealing and can be a valuable tool in the
technicians toolbox as it gives insight into current investor sentiment, allowing for
the determination of short term tops and bottoms.
Candlestick Terms
Candle

The candle is comprised of two parts, the body and the shadows. The body
encompasses the open and closing price for the period. The candle body is black if
the security closed below the open, and white if the close was higher than the open
for the period. The candlestick shadow encompasses the intraperiod high and low.
(Note: In candlestick charting the following periods are often used; 5 min, 15 min, 1
hour, daily and weekly).
Long shadows, show that the trading extended well beyond the opening and/or
closing price, while short shadows, show that trading was confined closely to the
open and/or closing price.
Long, and Short Bodies; Marubozo and Spinning Tops

A long body, is a candlestick with a very long body when compared with other
recent candles. White bodies show intense buying pressure, where as black bodies
show intense selling pressures. Long white candles are generally bullish, but are
also found at blowout tops, so they must be interpreted with surrounding candles.
Similar long black candles are generally bearish, but are also found at capitulation
bottoms. Long bodies with no upper and lower shadows are called Marubozo's.
Marubozo's are more powerful than long candles as they show a steady advance (or
decline if black)throughout the trading period. A short candle is the opposite of a
long candle and usually implies consolidation, as the stock traded in a narrow range
during the period. Short candles with long upper and lower shadows are called
spinning tops, and are potential reversal signs, as it shows that despite trading in a
wide range, the security closed close to the open. A spinning top becomes a doji as
the closing price approaches the open price.
Doji's

Doji's are powerful reversal indicating candlesticks and are formed when the
security opens and closes at the same level, implying indecision in the stock price.
Depending on the location and length of the shadows, doji's can be categorized into
the following formations: doji, long legged-doji, butterfly doji, gravestone doji, 4
price doji, etc. Doji's become more significant when seen after an extended rally of
long bodied candles (bullish or bearish) and are confirmed with an engulfing.( a
long candlestick formed over the next period which engulfs the doji body).

A long legged-doji is formed when the stock opens at a level, trades in a

considerable trading range only to close at the same level as it opened. Long
legged-doji's become more powerful when preceded by small candles, as a sudden
burst of volatility in a relative unvolatile stock, can imply a trend change is coming.

Dragonfly Doji's are doji's that opened at the high of a session, had a considerable
interperiod decline, then find support to rally back to close at the same level as the
open. Dragonfly Doji's are often seen after a moderate decline, and are bottom
reversal indicators when confirmed with a bullish engulfing.

Gravestone Doji's are the opposite of the Dragonfly Doji and are top reversal
indicators when confirmed with bearish engulfings. As the name implies,
gravestone doji's look like a gravestone, and could signal impending doom for a
stock.
4 price doji's occur when the stock opens, trades and closes at virtually the same
level for the period. These are very rare, except with thinly traded securities.
Engulfings

An engulfing occurs when the candle body engulfs the previous candles body.
White engulfing candles are bullish engulfings, where as black engulfing candles
are bearish engulfings. Bullish engulfings are commonly found at short term
bottoms, where as bearish engulfings at tops. Many candlesticks, such as dojis,
hammers, hanging mans need confirmation of a trend change with an engulfing
(bullish engulfing at bottoms, bearish engulfings at tops).

Hammers/ Hanging Man

Hammers and hanging man's are short body candle's with little or no upper shadow,
and a lower shadow at lease twice as long as the candle body. Hammers are formed
after declines, and hanging man's after advances. When confirmed they become
powerful reversal signals, especially the hammer. The expression "hammers out a
bottom" refers to when after the open, the downtrend in a stock continues, until at
some point, enough buying interest is generated, to bring prices close to where they
open. Confirmation comes from a bullish engulfing, showing the trader that the up
trend is established. The color of the hanging man/hammer is unimportant, but
some consider white hammers and black hanging man's more potent reversal
signals.
Gaps

A gap occurs when a candlestick body doesn't fall within the range of the previous
candlestick body, a more loosely interpreted definition of a gap, requires no overlap
between the shadows, making it obvious on a bar chart as well. You will often hear
"All Gaps Get Filled", which is untrue. While the vast majority of gaps do get filled,
you can find some charts, where a gap has never filled. Depending on how you
define a gap, should base your definition of a gap fill. For instance I consider a gap
when 2 bodies don't overlap, so I wait for a body fill to call the gap close. If one
was using the criteria of shadow overlap, a gap fill would occur with a shadow fill.
Gaps are typically continuation patterns, and sometimes mark the 50% point of a
move. They become more significant as the stock approaches the level of the gap as
it often acts as a magnet. During a gap fill, it is considered bearish closing below
the bottom of the gap and bullish closing above it. Once formed gap's will often
serve as strong support/resistance levels even after being closed for some time.
Exhaustion gaps signify the end of market bottoms and tops, where initially
overwhelming buying pressure, is soon consumed by selling pressure (and vice
versa for bottoms). Exhaustion gaps have significant volume associated with them,
and are often closed within 3 trading days. Sometimes an exhaustion gap will be
followed by another gap at the same levels, some examples are shooting stars, doji
stars, abandoned baby, etc. These 2 gap formation are powerful reversal signal's.
Three Gap Play occurs when a stock gaps in the direction of the trend for close to
3 consecutive periods, with the final gap is an exhaustion gap that is larger then the
previous gaps with respect to size and volume. After the exhaustion gap, the trend
changes all of the gaps immediately get filled. After the final gap is filled, the stock
turns and continues well beyond the initial exhaustion gap. Although pretty rare,
they can be very profitable if recognized early and swing traded.

Technical analysis tutorial simplified with candlestick signals

Technical analysis tutorial easy learning with candlestick signals

What is the best technical analysis tutorial? Learning a technical trading

method that is very easy to comprehend. Candlestick signals provide
visually simple reversal patterns. The most profitable technical analysis
tutorial should be learning the basic premise for investing. Learning when to
buy at the bottom and sell at the top. Candlestick signals simplify any
technical analysis tutorial. The information built into each signal provides a
format for investors to understand why a reversal is occurring.
Most technical analysis tutorial training involves learning where price
reversals 'might' occur. Candlestick signals illustrate where investor
sentiment is actually changing. Applying this information to other technical
analysis methods greatly enhances the results. Utilizing the information
provided in each candlestick signal becomes a valuable tool for better
understanding what a technical analysis tutorial is trying to convey. Use the
candlestick signals to pinpoint why and where a reversal is occurring in a
trend. Use other commonly used technical analysis indicators to further
confirm those reversals.

The candlestick signals produce an optimal analysis format. The statistical

information resulting from a candlestick reversal signal, with hundreds of
years of actual utilization, produces an extremely high probability result.
Having an understanding of what each individual signal reveals creates a
huge investment advantage. The investor that is serious about improving
their trading results should take the time to learn the 12 major candlestick
reversal signals and become from familiar with the rest of the signals. There
are approximately 60 candlestick signals in the Japanese candlestick
universe. For complete technical analysis tutorial click here for our training
videos.

This week's featured Candlestick Pattern -

Downside Tasuki Gap

Description

The Downside Tasuki Gap is found during a declining trend. A black candle
forms after gapping down from the previous black candle. The next day
opens higher and closes higher than the previous day's open. If the gap is
not filled, the bears have maintained control. If the gap was filled, then the
bearish momentum has come to an end. If the gap is not filled, it is time to
go short. You will find the Tasuki pattern more often in the Upside pattern
than the Downside pattern.

Criteria

1. A downtrend is in progress. A gap occurs between two candles of the

same color.
2. The color of the first two candles is the same as the prevailing trend.
3. The third day, an opposite color candlestick opens within the previous
candle, and closes below the previous open.
4. The third day close does not fill the gap between the two candles.
5. The last two candles, opposite colors, are usually about the same size.

Pattern Psychology

Just the opposite as the Upward Tasuki, explaining the Tasuki gap is
simple. The Japanese put significance into gaps. When one appears in the
middle of the trend and is not able to fill itself on strength the next day, the
momentum is still in the downtrend. The bounceup day should be construed
as being a short-covering day. After the short covering disappears, the
selling continues.

Fibonacci Numbers
Overview
Use in Trading
ABC's
Confluence
Trading Strategies
Links (Elliot Wave Tutorials)
Fibonacci numbers are the result of work by Leonardo Fibonacci in the early 1200's
while studying the Great Pyramid of Gizeh. The fibonacci series is a numerical
sequence comprised of adding the previous numbers together, i.e.,

(1,2,3,5,8,13,21,34,55,89,144,233 etc..)

An interesting property of these numbers is that as the series proceeds, any given
number is 1.618 times the preceding number and 0.618% of the next number.

(34/55 = 55/89 = 144/233 =0.618) (55/34 =89/55 =233/144 =1.618), and 1.618
=1/0.618.

This properties of the fibonacci series occur throughout nature, science and math
and is the number 0.618 is often referred to as the "golden ratio" as it is the root of
the following polynomial x^2+x-1=0 which can be rearranged to x= 1/(1+x).

So that's were the fib # 0.618 comes from. The other fibs 0.382 and 0.5 commonly
used in technical analysis have a less impressive background but are just as
powerful in Technical analysis.

0.382=(1-.618)=(0.618*0.618)

and 0.5 is the mean of the two numbers.

Other neat fib facts (0.618*(1+0.618)=1 and (0.382*(1+.618))=0.618.

Use of Fibonacci #'s in Technical Analysis

Fibonacci numbers are commonly used in Technical Analysis with or without a
knowledge of Elliot wave analysis to determine potential support, resistance, and
price objectives. 38.2% retracements usually imply that the prior trend will
continue, 61.8% retracements imply a new trend is establishing itself. A 50%
retracement implies indecision. 38.2% retracements are considered nautral
retracements in a healthy trend.
ABC's
Price objectives for a natural retracement (38.2%) can be determined by
adding (or subtracting in a downtrend) the magnitude of the previous trend to
the 38.2% retracement. After the 38.2% retracement the stock should break
through the previous swing point(B) on heavier volume. If the volume isn't
there the magnitude of the move will usually be diminished, especially on
very low volume.

A-B =C-D when B-C =38.2% of A-B

61.8% retracements are warning signs of a potential trend changes. For a more
detailed explanation of Fibonacci price projections and price wave theory I
highly recommend the Elliot Wave Principle links below.
Confluence Confluence occurs when you take fibonacci projections off of
multiple trends and get the same number and strengthens when it corresponds
with other technical advents such as gaps, swing high/lows, chart indicators
crossovers (MACD, RSI, Stochastics, etc.), trading congestion, etc. The more
confluence, the more significant the level. I really take notice when I get two
or more fib #s (say a 38.2% and 61.8%) to correspond with a gap in the chart
or a swing high. Confluence is very powerful as it combines multiple
technical analysis techniques to arrive at the same conclusion, and should be
relied on accordingly IMHO
 Trading Strageties JMHO

Once a new swing point is established in an equity, a new set of fibonacci

numbers should be calculated, and confluence checked to determine potential
support/resistance levels and trading strategies. (let the Fibonacci Calculator
do most of the work for you). For instance:

If a stock is trending up, one may watch it until it forms a top then
calculate the fibs. If she retraces 38.2% and turns with confluence, one
could bite with an automatic stop under the 50% retracement and
objective of the ABC. The Risk/Reward ratio for that trade is 0.118. (If
you got stopped out 8 times and hit once you would have a 5.6% profit).

If she's trending down, you could bite at the 38.2% bounce with a stop at
the 50% and get the same risk/reward ratio. With both strategies it is
critical for the volume to be heavier on the swing point breakout.

If a position is going with you and you're looking for an exit point,
calculate the 38.2% fib once a top is clear and put a stop below it. Won't
get you out at the top but you may not miss that monster rally either.

Think a stock is a dog but it's trading at it's high wait for a 61.8%
retracement from the last trend and sell it, with the stop below the 50%
retracement.

The belief is that after two drops in the stock price the jittery
investors
are out and long-term investors are still holding on.
Click Here for an example of the double bottom pattern.
Conclusion
There have been entire volumes of textbooks written on technical
analysis, this
tutorial just scratches the surface. Technical analysis is one of
those fields where
everyone has a different theory on what works and what doesn't.
If we can leave you
with one last tip, it is to back test whatever strategy you decide to
pursue. Back
testing means looking back at several years’ worth of charts to
see how a particular
stock reacts. Different stocks do different things, do your
homework first.
Here are a couple points to remember about technical analysis:
• Technical analysis is a method of evaluating securities by
analyzing statistics
generated by market activity, past prices, and volume.
• The advantage of using a bar chart over a straight-line graph is
that it shows
the high, low, open and close for each particular day.
• One of the most basic and easy to use TA indicators is the
moving average,
which shows the average value of a security's price over a period
of time. The
most commonly used moving averages are the 20, 30, 50, 100,
and 200 day.
• Support and resistance levels are price levels at which
movement should stop
and reverse direction. Think of Support/Resistance (S/R) as levels
that act as
a floor or a ceiling to future price movements.
• There are literally 100s of different price patterns and indicators
out there.
• In our humble opinion, technical analysis is a terrific tool, but
much more
effective when combined with fundamental analysis.

Using the Moving Average

One of the easiest indicators to understand, the moving average shows the average
value of a security's price over a period of time. To find the 50-day moving average,
you would add up the closing prices (but not always, we'll explain later) from the
past 50 days and divide them by 50. Because prices are constantly changing, the
moving average will move as well. It should also be noted that moving averages are
most often used when compared or used in conjunction with other indicators such as
MACD and EMA.
The most commonly used moving averages are of 20, 30, 50, 100, and 200 days.
Each moving average provides a different interpretation on what the stock will do,
there is not one right time frame. The longer the time span, the less sensitive the
moving average will be to daily price changes. Moving averages are used to
emphasize the direction of a trend and smooth out price and volume fluctuations (or
"noise") that can confuse interpretation.
Here is a visual example using the stock price of AT&T:

This

Notice back in September when the stock price dropped well below its 50-day
average (the green line). There has been a steady downward trend since then and
no real strong divergence, until the end of December where it rose above its 50-day
average and continued to rise for several weeks.
Typically, when a stock price moves below its moving average it is a bad sign
because the stock is moving on a negative trend. The opposite is true for stocks that
protrude their moving average - in this case, hold on for the ride.
If you'd like to learn more, check out our moving average tutorial.
Using the Relative Strength Index
When talking about the strength of a stock there are a few different interpretations,
one of which is the Relative Strength Index (RSI). The RSI is a comparison between
the days that a stock finishes up against the days it finishes down. This indicator is a
big tool in momentum trading.
The RSI is a reasonably simple model that anyone can use. It is calculated with the
following formula. (Don't worry, most likely, you will never have to do this
manually).
RSI = 100 - [100/(1 + RS)]
where:
RS = (Avg. of n-day up closes)/(Avg. of n-day down closes)
n= days (most analysts use 9 - 15 day RSI)
The RSI ranges from 0 to 100. A stock is considered overbought around the 70 level
and you should consider selling. This number is not written in stone, in a bull market
some believe that 80 is a better level to indicate an overbought stock since stocks
often trade at higher valuations during bull markets. Likewise, if the RSI approaches
30 a stock is considered oversold and you should consider buying. Again, make the
adjustment to 20 in a bear market.
The shorter number of days used, the more volatile the RSI is and the more often it
will hit extremes. A longer term RSI is more rolling, fluctuating a lot less. Different
sectors and industries have varying threshold levels when it come s to the RSI.
Stocks in some industries will go as high as 75-80 before dropping back and others
have a tough time breaking past 70. A good rule is to watch the RSI over the long
term (1 year or more) to determine what level the historical RSI has traded at and
how the stock reacted when it reached those levels.
This

Here, we have an RSI chart for AT&T. The RSI is the green line, its scale is the
numbers on the right hand side that go from 0 to 100. Notice the RSI was
approaching the 60-70 levels in December and January and then the stock (blue line)
sold off. Also, notice around October when the RSI dropped to 25 the stock climbed
up nearly 30% in just a couple weeks.
Using the moving averages, trend lines, divergence, support, and resistance lines
along with the RSI chart can be very useful. Rising bottoms on the RSI chart can
produce the same positive trend results as it would on the stock chart. Should the
general trend of the stock price tangent from the RSI, it might spark a warning, the
stock is either over/under bought.
The RSI is a great little indicator that can help you make some serious money.
Beware that big surges and drops in stocks will dramatically affect the RSI, resulting
in false buy or sell signals. Most investors agree that the RSI is most effective in
"backing up" or increasing confidence before making an investment decision, don't
invest simply based on the RSI numbers.
The Money Flow Index
Now that we've taken a look at the Relative Strength Index (RSI), let's take a look at
a more stringent momentum indicator. The Money Flow Index measures the strength
of money flowing into and out of a stock. The difference between the RSI and Money
Flow is that where RSI only looks at prices, the Money Flow Index also takes volume
into account.
Calculating Money Flow is a bit more difficult than the RSI:
First we need the average price for the day:
Day High + Day Low + Close
Average Price =__________________________
3
Now we need the Money Flow:
Money Flow = Average Price x Day's Volume
Now, to calculate the money flow ratio you need to separate the
money flows for a period into positive and negative. If the price
was up in a particular day, this is considered to be "Positive Money
Flow". If the price closed down it is considered to be "Negative
Money Flow".

Money Flow Positive Money Flow

Ratio = ________________________________
Negative Money Flow
It is the Money Flow Ratio that is used to calculate the Money Flow
The Money Flow ranges from 0 to 100. Just like the RSI, a stock is considered
overbought in the 70- 80 range and oversold in the 20-30 range.
The shorter number of days you use, the more volatile the Money Flow is. For the
example below we will use a 14-day average.

The chart above is for Home Depot (HD); the green line identifies the Money Flow
index. Notice that each time the Money Flow dropped below 30, the stock began to
rally. Furthermore, each time the money flow rose above 70, the stock started to sell
off.
Like any indicator, this is not correct 100% of the time. Back in early October when
the stock price dropped from around $55 down to $37 the Money Flow didn't detect a
thing. Just remember that money flow is useful to detect momentum, but it can't
predict unsystematic risk.

Using Bollinger Bands

There are three lines used for the Bollinger band indicator: the upper, lower, and the
simple moving average that is between the two. These upper/lower bands are
plotted two standard deviations away from a simple moving average. Standard
deviation is a measure of volatility; therefore Bollinger Bands adjust themselves to
the market conditions. When the markets become more volatile, the bands widen
and they contract during less volatile periods.
The closer the prices move to the upper band, the more overbought the stock is. The
closer the prices move to the lower band, the more oversold the stock is. Below is an
example using General Electric (GE). Bollinger bands are blue for the lower, green
for the average, and red for the upper band:
We have circled three key points on this chart. The blue circle is where the stock
price started to create a "base" on the lower band, it appeared that the stock was
over sold. Buying at this point would have been a wise choice, as the stock
proceeded to jump 20% or more in the next few weeks.
The two red circles are areas where the stock price was touching or breaking through
the upper red band. This is usually an indication that the stock is over bought. In
both instances, the stock dropped substantially in following weeks.
The Bollinger bands are a good tool to use, but as we've been preaching all along,
never invest solely based on what just one indicator says. Notice there were
instances when the stock touched the upper or lower band and did not react. Rather
than basing their investment decisions on Bollinger, many investors use this indicator
mainly to solidify a decision they are about to make.
Resistance and Support
Support and resistance are price levels at which movement should stop and reverse
direction. Think of Support/Resistance (S/R) as levels that act as a floor or a ceiling
to future price movements.
Support - is a price level below the current market price, at which buying interest
should be able to overcome selling pressure and thus keep the price from going any
lower.
Resistance - is a price level above the current market price, at which selling
pressure should be strong enough to overcome buying pressure and thus keep the
price from going any higher.
One of two things can happen when a stock price approaches a support/resistance
level. The first is, it can act as a reversal point, in other words, when a stock price
drops to a support level, it will go back up. The other possibility is that S/R levels
reverse roles once they are penetrated. For example, when the market price falls
below a support level, that former support level will then become a resistance level
when the market later trades back up to that level.
The chart above shows an excellent example of support and resistance levels for
General Electric (GE). Notice that once the stock price penetrated below the support
level in December, it became the resistance level.
Another characteristic you should understand is that S/R levels vary in strength,
leading to certain price levels being designated as major or minor S/R levels. For
example, a 5-year high on a bar chart would be a much more significant and useful
resistance level than a 1-month resistance level.

Popular Charting Patterns

Many believe that history repeats itself. Using successful and proven price patterns
from great stocks is a widely used method by technical analysts. Let's take a look at
a few examples:
• Cup and Handle - This is a pattern on a bar chart that can be as short
as 7 weeks and as long as 65 weeks. The cup is in the shape of a U. The
handle has a slight downward drift. The right hand side of the pattern
has low trading volume. As the stock comes up to test the old highs, the
stock will incur selling pressure by the people who bought at or near the
old high. This selling pressure will make the stock price trade sideways
with a tendency towards a downtrend for 4 days to 4 weeks, then it
takes off.
It looks like a pot with handle. Investors have made a lot of money using
this pattern, which is one of the easier to detect.
Click here for an example of a cup and handle chart.
• Head and Shoulders - A chart formation that resembles an "M" in which
a stock's price:
- rises to a peak and then declines, then
- rises above the former peak and again declines, and then
- rises again but not to the second peak and again declines.
The first and third peaks are shoulders, and the second peak forms the
head. This pattern is considered a very bearish indicator.
Click here for an example of the head and shoulder pattern.
• Double Bottom - Occurs when a stock price drops to a similar price
level twice within a few weeks or months, the double-bottom pattern
resembles a “W". You should buy when the price passes the highest point
in the handle. In a perfect double bottom, the second decline should
normally go slightly lower than the first decline to create a shakeout of
jittery investors. The middle point of the “W” should not go into new high
ground. This is a very bullish indicator.