FUNDAMENTAL OF TECHNICAL ANALYSIS

Presented By :
Mohd Fakhrul Asyraq B Mohd Aluwi, MSTA,CFTe
Investment & Technical Analyst
UK Certified Chartist (UK STA)
Full Member for The Society of Technical Analysts

1
Definition of Technical Analysis

 Technical Analysis is study of market action (price, volume and open interest) based on technical chart to
predict future direction

Basic Principle of Technical Analysis

 The Market Discounts Everything

 Price Moves In Trends

 History Repeats Itself

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 Trend Lines

Concept of trend is integral to approach to market analysis. The trend is simply the direction of the market and it is
the direction of those peaks and through that constitutes market trend. There are 3 types of Trend Lines :-

Uptrend
Series of higher highs and higher lows (each
successive peak and trough is higher)

Downtrend
Series of lower lows and lower highs(peaks and
troughs are getting lower)

Sideway/ Horizontal Trend

When there is little movement up or down in the
peaks and troughs (a well-defined trend in either
direction)

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Trend Lengths – Trend Classifications

Major
trend Generally categorized as one lasting longer than a year

Secondary
trend Considered to last between one and three months

Short-term
trend Anything less than a month

4
Example of the 3 degrees of trend

2
B
A C
3
1

Major, secondary and short term. Point 1,2,3 and 4 show the major uptrend. Wave 2-3 represents a
secondary correction within the major uptrend. Each secondary wave in turn divides into short term
trends. For example, secondary wave 2-3 divides into minor term waves A-B-C

Channels / Channel Lines

Is the addition of two parallel trend lines that act as strong areas of support and resistance. The upper
trend line connects a series of highs, while the lower trend line connects a series of lows. A channel can
slope upward, downward or sideways but, regardless of the direction, the interpretation remains the same.
Traders will expect a given security to trade between the two levels of support and resistance until it breaks
beyond one of the levels, in which case traders can expect a sharp move in the direction of the break.
Along with clearly displaying the trend, channels are mainly used to illustrate important areas of support
and resistance.

5
 Support And Resistance

Support

Level of buying pressure overcome selling pressure. If the price of a stock falls towards a support
level it is a test for the stock: the support will either be reconfirmed or wiped out. It will be reconfirmed
if a lot of buyers move into the stock, causing it to rise and move away from the support level. It will be
wiped out if buyers will not enter the stock and the stock falls below the support.

Resistance

Level of selling pressure overcome buying pressure. A chart point or range that caps an increase in the
level of a stock or index over a period of time. An area of resistance or resistance level indicates that
the stock or index is finding it difficult to break through it, and may head lower in the near term. The
more times that the stock or index has tried unsuccessfully to break through the resistance level, the
more formidable that area of resistance becomes.

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 5

resistance 3
Show rising support and resistance levels
in uptrend. Point 2 and 4 are support levels
which are usually previous reaction lows.
support Point 1 and 3 are resistance levels, usually
resistance 1
4 marked by previous peaks

support

2 resistance

support 4 resistance Shows support and resistance level

in a downtrend
1

support

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 Volume

Definition

Volume is simply the number of shares or contracts that trade over a given period of time, usually a
day. The higher the volumes, the more active the security. To determine the movement of the
volume (up or down), chartists look at the volume bars that can usually be found at the bottom of any
chart. Volume bars illustrate how many shares have traded per period and show trends in the same
way that prices do.

Why Is Volume Important

Volume is an important aspect of technical analysis because it is used to confirm trends and chart
patterns. Any price movement up or down with relatively high volume is seen as a stronger, more
relevant move than a similar move with weak volume. Therefore, if you are looking at a large price
movement, you should also examine the volume to see whether it tells the same story.

Volume should move with the trend. If prices are moving in an upward trend, volume should increase
(and vice versa). If the previous relationship between volume and price movements starts to deteriorate,
it is usually a sign of weakness in the trend. For example, if the stock is in an uptrend but the up trading
days are marked with lower volume, it is a sign that the trend is starting to lose its legs and may soon
end.

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Volume and Chart Patterns

The other use of volume is to confirm chart patterns. Patterns such as head and shoulders, triangles,
flags and other price patterns can be confirmed with volume, a process which we'll describe in more detail
later in this tutorial. In most chart patterns, there are several pivotal points that are vital to what the chart
is able to convey to chartists. Basically, if the volume is not there to confirm the pivotal moments of a chart
pattern, the quality of the signal formed by the pattern is weakened.

Volume Precedes Price

Another important idea in technical analysis is that price is preceded by volume. Volume is closely
monitored by technicians and chartists to form ideas on upcoming trend reversals. If volume is starting to
decrease in an uptrend, it is usually a sign that the upward run is about to end.

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 Chart

What Is A Chart
Intraday charts

Daily charts

Weekly, monthly, quarterly and yearly charts

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 Chart Types

1) Line Chart

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2) Bar Chart

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3) Candlestick Chart

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4 ) Point and Figure Chart

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 Chart Patterns
Definition

A chart pattern is a distinct formation on a stock chart that creates a trading signal, or a sign of future
price movements.
Chartists use these patterns to identify current trends and trend reversals and to trigger buy and sell
signals.

• There are two type of pattern:

• Continuation:
– A continuation pattern, signals that a trend will continue once the pattern is complete
– Stopgap / Consolidation
• Reversal:
– A reversal pattern signals that a prior trend will reverse upon completion of the pattern
– Usually happen at the top or at the bottom

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Types of Chart Patterns

Continuation Reversal

• Ascending Triangle • Double Bottom Chart

• Bull Flag Patterns • Falling Wedge Patterns
• Bullish Pennant Patterns • Head & Shoulders Bottom
• Cup And Handle • Rounding Bottom Chart
• Symmetrical Triangle • Triple Bottom Patterns
• Bear Flag Patterns • Broadening Top Chart
• Bearish Pennant Chart • Diamond Top Patterns
• Descending Triangle • Double Top Chart
• Rectangle Chart Patterns • Head & Shoulders Top
• Rising Wedge Patterns • Island Reversal Patterns
• Price Channel Patterns • One Day Reversal
• Rising Wedge
• Rounding Top
• Triple Top Patterns
Characteristic of Pattern
• The Baseline (TOP or Bottom)

• The Neckline (Breakout Level)

• The Trend (Leading to pattern)

• The Peak and Trough (HIGH and LOW formation)

E.g: Lower High Higher Low (Triangle Pattern)

• The Angle (LINE connecting the low or high)

• The Volume Within (Expending / Contraction of the VOLUME within the formation)

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Continuation Pattern

1) Triangles

A technical analysis pattern created by drawing trendlines along a price range that gets narrower over time
because of lower tops and higher bottoms. Variations of a triangle include ascending and descending triangles.

The symmetrical triangle is a pattern in which two trend lines converge toward each other. This pattern is neutral in
that a breakout to the upside or downside is a confirmation of a trend in that direction. In an ascending triangle, the
upper trend line is flat, while the bottom trend line is upward sloping. This is generally thought of as a bullish pattern
in which chartists look for an upside breakout. In a descending triangle, the lower trend line is flat and the upper
trend line is descending. This is generally seen as a bearish pattern where chartists look for a downside breakout.

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Example of Triangles

 The Baseline Upward

 The Neckline Breakout Upper

Line

 The Trend Uptrend

 The Peak and Trough LH HL

 5. The Angle Converging

 6. The Volume Within High

Upon Breakout

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2) Flag and Pennant
The main difference between these price
movements of flag and pennant can be
seen in the middle section of the chart
pattern. In a pennant, the middle section
is characterized by converging trend
lines, much like what is seen in a
symmetrical triangle. The middle section
on the flag pattern, on the other hand,
shows a channel pattern, with no
convergence between the trend lines. In
both cases, the trend is expected to
continue when the price moves above
the upper trend line.

These two short-term chart patterns are continuation patterns that are formed when there is a sharp price
movement followed by a generally sideways price movement. This pattern is then completed upon another
sharp price movement in the same direction as the move that started the trend. The patterns are generally
thought to last from one to three weeks.

The main difference between these price movements of flag and pennant can be seen in the middle section
of the chart pattern. In a pennant, the middle section is characterized by converging trend lines, much like
what is seen in a symmetrical triangle. The middle section on the flag pattern, on the other hand, shows a
channel pattern, with no convergence between the trend lines. In both cases, the trend is expected to
continue when the price moves above the upper trend line.

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Example of Flag & Pennant

• The Baseline Downward

• The Neckline Breakout the

upper line

• The Trend Uptrend

• The Peak and Trough LH LL

• The Angle Usually 45*

downward

• The Volume Within High

Upon Breakout

A technical charting pattern that

looks like a flag with a mast on
either side. Flags result from price
fluctuations within a narrow range
and mark a consolidation before
the previous move resumes.

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Example of Flag & Pennant

• The Baseline Tightening

• The Neckline Breakout the upper

line

• The Trend Uptrend

• The Peak and Trough LH HL

• The Angle Converging

• The Volume Within High Upon

Breakout
Pennants, which are similar to flags
in terms of structure, have
converging trendlines during their
consolidation period and they last
from one to three weeks. The
volume at each period of the
pennant is also important. The
initial move must be met with large
volume while the pennant should
have weakening volume, followed
by a large increase in volume
during the breakout.

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3) The Rectangle

A pattern formed on a chart where the price of a security is trading within a bounded range in which the levels of
resistance and support are parallel to each other, resembling the shape of a rectangle. This pattern signals that
the price movement, which has stalled during the pattern, will trend in the direction of the price breakout of the
bounded range.

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Example of Triangles
• The Baseline Flat

• The Neckline Breakout the upper

line

• The Trend Sideways

• The Peak and Trough Flat

• The Angle Flat

• The Volume Within High Upon

Breakout

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Reversal Pattern

4) The Cup & Handle

A cup and handle chart is a bullish continuation pattern in which the upward trend has paused but will
continue in an upward direction once the pattern is confirmed.

The handle follows the cup formation and is formed by a generally downward/sideways movement in the
security's price. Once the price movement pushes above the resistance lines formed in the handle, the
upward trend can continue. There is a wide ranging time frame for this type of pattern, with the span
ranging from several months to more than a year.

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Example of The Cup & Handle
• The Baseline Curve / Round

• The Neckline Breakout the handle

high

• The Trend Downtrend to Sideway to

Uptrend

• The Peak and Trough Varies

• The Angle Round

• The Volume Within High Upon

Breakout

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5) Rounding Bottoms

A rounding bottom, also referred to as a saucer bottom, is a long-term reversal pattern that signals a shift
from a downward trend to an upward trend. This pattern is traditionally thought to last anywhere from
several months to several years.

A rounding bottom chart pattern looks similar to a cup and handle pattern but without the handle. The long-
term nature of this pattern and the lack of a confirmation trigger, such as the handle in the cup and handle,
make it a difficult pattern to trade.

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Example of Rounding Bottom

• The Baseline Curve / Round

• The Neckline Breakout the previous

high

• The Trend Downtrend to Sideway to

Uptrend

• The Peak and Trough Varies

• The Angle Round

• The Volume Within High Upon

Breakout

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6) Head & Shoulders

Head and shoulders top is shown on the left.

Head and shoulders bottom, or inverse head and shoulders, is on the right.

This is one of the most popular and reliable chart patterns in technical analysis. Head and shoulders is a
reversal chart pattern that when formed, signals that the security is likely to move against the previous
trend. Head and shoulders top (shown on the left) is a chart pattern that is formed at the high of an
upward movement and signals that the upward trend is about to end. Head and shoulders bottom, also
known as inverse head and shoulders (shown on the right) is the lesser known of the two, but is used to
signal a reversal in a downtrend.

Both of these head and shoulders patterns are similar in that there are four main parts: two shoulders, a
head and a neckline. Also, each individual head and shoulder is comprised of a high and a low. The head
and shoulders chart pattern, therefore, illustrates a weakening in a trend by showing the deterioration in
the successive movements of the highs and lows.

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Example of Head & Shoulder
• The Baseline Curve / Round

• The Neckline Breakout the upper

line

• The Trend Sideway to Uptrend

• The Peak and Trough Varies

• The Angle Round

• The Volume Within High Upon

Breakout

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7) Double Tops and Bottoms

This chart pattern is another well-known pattern that signals a trend reversal - it is considered to be one
of the most reliable and is commonly used. These patterns are formed after a sustained trend and
signal to chartists that the trend is about to reverse. The pattern is created when a price movement
tests support or resistance levels twice and is unable to break through. This pattern is often used to
signal intermediate and long-term trend reversals.

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8) Triple Tops And Bottoms

Triple tops and triple bottoms are another type of reversal chart pattern in chart analysis. These are not as
prevalent in charts as head and shoulders and double tops and bottoms, but they act in a similar fashion.
These two chart patterns are formed when the price movement tests a level of support or resistance three
times and is unable to break through; this signals a reversal of the prior trend.

Confusion can form with triple tops and bottoms during the formation of the pattern because they can look
similar to other chart patterns. After the first two support/resistance tests are formed in the price
movement, the pattern will look like a double top or bottom, which could lead a chartist to enter a reversal
position too soon.

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Example of Double &Triple Top/Bottom

• The Baseline Flat / slight tilt upward

• The Neckline Breakout the previous

high

• The Trend Sideway to Uptrend

• The Peak and Trough Flat

• The Angle Flat

• The Volume Within High Upon

Breakout

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Example of Double &Triple Top/Bottom

• The Baseline Flat / slight tilt upward

• The Neckline Breakout the previous

high

• The Trend Sideway to Uptrend

• The Peak and Trough Flat

• The Angle Flat

• The Volume Within High Upon

Breakout

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9) Wedge

The wedge chart pattern can be either a continuation or reversal pattern. It is similar to a symmetrical
triangle except that the wedge pattern slants in an upward or downward direction, while the symmetrical
triangle generally shows a sideways movement. The other difference is that wedges tend to form over
longer periods, usually between three and six months.

The fact that wedges are classified as both continuation and reversal patterns can make reading signals
confusing. However, at the most basic level, a falling wedge is bullish and a rising wedge is bearish. Falling
wedge in which two trendlines are converging in a downward direction. If the price was to rise above the
upper trendline, it would form a continuation pattern, while a move below the lower trendline would signal a
reversal pattern.

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Example of Falling Wedge

• The Baseline Downward

• The Neckline Breakout the upper

line

• The Trend Downtrend to sideway to

Uptrend

• The Peak and Trough LH LL

• The Angle Downward

• The Volume Within High Upon

Breakout

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Example of Rising Wedge

• The Baseline Upward

• The Neckline Breakout the lower

line

• The Trend Uptrend to sideway to

Downtrend

• The Peak and Trough HH HL

• The Angle Upward

• The Volume Within High Upon

Breakout

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 Definition
Fundamental
Analysis
-VS-
Calculates stock value using economic
Technical
Analysis

Uses price movement of security to

factors, known as fundamentals. predict future price movements

Data
Financial statements Charts
gathered
from

Stock When price falls below intrinsic value When trader believes they can sell it on
bought for a higher price

Time horizon Long-term approach Short-term approach

Investing Trade
Function

Concepts Return on Equity (ROE) and Return Dow Theory, Price Data
used on Assets (ROA)

Data
Gathered Looks backward as well as forward Looks backward
From
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Indicators & Oscillators

38
There are also two types of indicator constructions: those that fall in a bounded range and
those that do not. The ones that are bound within a range are called oscillators - these
are the most common type of indicators. Oscillator indicators have a range, for example
between zero and 100, and signal periods where the security is overbought (near 100) or
oversold (near zero). Non-bounded indicators still form buy and sell signals along with
displaying strength or weakness, but they vary in the way they do this.

The two main ways that indicators are used to form buy and sell signals in technical
analysis is through crossovers and divergence. Crossovers are the most popular and are
reflected when either the price moves through the moving average, or when two different
moving averages cross over each other. The second way indicators are used is through
divergence, which happens when the direction of the price trend and the direction of the
indicator trend are moving in the opposite direction. This signals to indicator users that the
direction of the price trend is weakening.

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Moving Averages

 The moving average is one of the most versatile and widely used of all technical
 indicators
 Because of the way it is constructed and the fact that it can be so easily quantified
and tested, it is the basis for many mechanical trend following systems in use today
 Chart analysis is largely subjective and difficult to test. As a result, chart analysis
does not lend itself that well to computerization
 Moving average rules, by contrast can easily be programmed into a computer, which
then generates specific buy and sell signals
 While two technical analyst may disagree as to whether a given price pattern is a
triangle or wedge, or whether the volume pattern favors the bull or bear side, moving
average trend signals are precise and not open to debate
 Moving average is as the second word implies, it is an average of a certain body of
data

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Moving Averages

• The moving average is essentially a trend following device

• It is purpose to identify or signal that a new trend has begun or that an old trend has
ended or reversed
• Its purpose is to track the progress of the trend
• It might be viewed as a curving trendline
• It does not, however predict market action in the same sense that standard chart
analysis attempts to do

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Moving Averages

• The moving averages is a follower, not a leader

• It never anticipates, it only reacts
• The moving is a smoothing device
• By averaging the price data, a smoother line is produced, making it much easier to
view the underlying trend
• By its very nature, however the moving average line also lag the market action
• A shorter moving average, such as a 20 day average, would hug the price action
more closely than a 200 day average
• The time lag is reduced with the shorter averages, but can never be completely
eliminated
• Shorter term averages are less sensitive
• In certain types of markets, it is more advantageous to use a shorter average and at
other times a longer and less sensitive average proves more useful

42
How to use two average to generate signals

• This technique is called the double crossover method

• This means that a buy signal is produced when the shorter average crosses above
the longer
• For example, two popular combinations are the 5 and 20 day averages and the 10
and 50 day averages
• In the former, a buy signal occurs when the 5 day average crosses above the 20, and
a sell signal when the 5 day moves below the 20
• In the latter example, the 10 day crossing above the 50 signals an uptrend and a
downtrend takes place with the 10 slipping under the 50
• This technique of using two averages together lags the market a bit more than the
use of a single but produces fewer whipsaws

43
Simple Moving Average (SMA)

•A simple moving average is formed by computing the

average price of a security over a specific number of
periods.

•Most moving averages are based on closing prices. A 5-

day simple moving average is the five day sum of
closing prices divided by five. As its name implies, a
moving average is an average that moves.

•Old data is dropped as new data comes available. This

causes the average to move along the time scale.

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Simple Moving Average (SMA) Calculation

DATE CLOSING
PRICE (RM)
Jan 18 2.00
Jan 19 2.10
Jan 20 1.90
Jan 21 1.95
Jan 22 2.00
A 5-period moving average, based on the prices above, would be
calculated using the following formula:
(P1+P2+P3+P4+P5)/5
P = Period
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Simple Moving Average (SMA) Calculation

(2.00 + 2.10 + 1.90 + 1.95 + 2.00) / 5

=1.99

Based on the equation above, the average price over the period listed
above was RM1.99. Using moving averages is an effective method for
eliminating strong price fluctuations. The key limitation is that data points
from older data are not weighted any differently than data points near the
beginning of the data set. This is where weighted moving averages come
into play.

46
Weighted Moving Average (WMA) Calculation

((2.00*(5/15))+(1.95*(4/15))+(1.90*(3/15))+(2.10*(2/15
))+(2.00*(1/15))) = 1.98

The weighted average is calculate by multiplying the given price by its

associated weighting and then summing the values. In the example above,
the weighted 5-day moving average would be RM1.98.

In this example, the recent data point was given the highest weighting out of
an arbitrary 15 points. The lower value from the weighted average above
relative to the simple average suggests the recent selling pressure could be
more significant than some traders anticipate. For most traders, the most
popular choice when using weighted moving averages is to use a higher
weighting for recent values.

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Exponential Moving Average (EMA)

Exponential moving averages reduce the lag by applying more weight to

recent prices. The weighting applied to the most recent price depends on
the number of periods in the moving average.

There are three steps to calculating an exponential moving average. First,

calculate the simple moving average. An exponential moving average
(EMA) has to start somewhere so a simple moving average is used as the
previous period's EMA in the first calculation. Second, calculate the
weighting multiplier. Third, calculate the exponential moving average.

48
Exponential Moving Average (EMA)

The formula below is for EMA calculation:

When using the formula to calculate the first point of the EMA, you may
notice that there is no value available to use as the previous EMA. This
small problem can be solved by starting the calculation with a simple
moving average and continuing on with the above formula from there.

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The differences between SMA & EMA

SMA EMA
PROS Displays a smooth chart Quick Moving and is
which eliminates most good at showing
fakeouts. recent price swings.

CONS Slow moving, which may More prone to cause

cause a a lag in buying and fakeouts and give
selling signals errant signals.

50
The use of Moving Average

- Some of the primary functions of a moving average are to identify trends

and reversals measure the strength of an asset's momentum and determine
potential areas where an asset will find support or resistance.
- Trend
Identifying trends is one of the key functions of moving averages, which are
used by most traders who seek to "make the trend their friend".

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The use of Moving Average

- Momentum
One of the best methods to determine the strength and direction of an
asset's momentum is to place three moving averages onto a chart and then
pay close attention to how they stack up in relation to one another. The
three moving averages that are generally used have varying time frames in
an attempt to represent short-term, medium-term and long-term price
movements.

52
The use of Moving Average

- Support
Another common use of moving averages is in determining potential price
supports. It does not take much experience in dealing with moving averages
to notice that the falling price of an asset will often stop and reverse
direction at the same level as an important average.

53
The use of Moving Average

- Resistance
Once the price of an asset falls below an influential level of support, such as
the 200-day moving average, it is not uncommon to see the average act as
a strong barrier that prevents investors from pushing the price back above
that average.

54
The use of Moving Average
- Stop-Losses
The support and resistance characteristics of moving averages make them
a great tool for managing risk. The ability of moving averages to identify
strategic places to set stop-loss order allows traders to cut off losing
positions before they can grow any larger

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Bollinger Band

• This technique was developed by John Bollinger

• Two trading bands are placed around a moving average to the envelope technique
• Except that Bollinger Bands are placed two standard deviations above and below the
moving average, which is usually 20 days
• Standard deviation is a statistical concept that describes how prices are dispersed
around an average value

56
Using Bollinger Band as a target

• The simplest way to use Bollinger Bands is to use the upper and lower bands as price
targets
• In other words, if prices bounce off the lower band and cross above the 20 day
average, the upper band becomes the upper price target
• A crossing below the 20 day average would identify the lower band as the downside
target
• In a strong uptrend, prices will usually fluctuate between the upper band and the 20
day average
• In that case, a crossing below the 20 day average warns of a trend reversal to the
downside

57
Band with measures volatility

• There is a tendency for the bands to alternate between expansion and contraction
• When the bands are unusually far apart, that is often a sign that the current trend
may be ending
• When the distance between two bands has narrowed too far, that is often a sign that
a market may be about to initiate a new trend
• Bollinger Bands can also be applied to weekly and monthly price charts by using 20
weeks and 20 months instead of 20 days
• Bollinger Bands work best when combined with overbought/oversold oscillators that
are explained in the next chapter

58
Relative Strength Index (RSI)

• Is a price momentum indicator developed by Welles Wilder

• RSI is frequently confused with relative strength analysis, which compares
the performance of two items such as one stock with another or one stock
with an overall market index

59
Relative Strength Index (RSI)

• RSI was intentionally designed to address three flaws often associated with
oscillators
• Oscillators move erratically due to the drop off old data in their calculation
• For example, if one has a 10-day oscillator and 10 days ago the price of the security
moved up or down dramatically
• The current oscillator reading will be misleading low or high reading

60
Moving Average Convergence Divergence (MACD)

• MACD is a price momentum indicator that was developed by Gerald Appell

• It is an oscillator based on the point spread difference between two exponential
moving averages of the closing price a slower one and a faster one
• The difference is further smoothed by an even faster exponential moving average
which is called the signal line

61
Moving Average Convergence Divergence (MACD)

• As with many technical indicators, extreme MACD readings identify overbought and
oversold conditions, thereby signaling the likelihood of tops or bottoms
• When MACD is extremely high, a top in prices is likely conversely an extremely low
MACD reading suggests a high probability of a bottom being made
• When the MACD line crosses from below to above the signal line, it is considered
bullish
• It is viewed as bearish when the MACD line crosses from above to below the signal
line
• The crossover signal should not be used in isolation but as confirmation of bullish and
bearish evidence provided by examining MACD for divergences from price action and
extreme readings

62
Average Directional Movement Index (DMI)

• The average directional movement index (ADX )was developed in 1978 by J.Welles
Wilder as an indicator of trend strength in a series of prices of a financial instrument .
ADX has become a widely used indicator for technical analysts, and is provided as a
standard in collections of indicators offered by various trading platforms.

•The ADX does not indicate trend direction, only trend strength. It is a lagging indicator;
that is, a trend must have established itself before the ADX will generate a signal that a
trend is underway. ADX will range between 0 and 100. Generally, ADX readings below 20
indicate trend weakness, and readings above 40 indicate trend strength. A next remedy
strong trend is indicated by readings above 50.

•ADX gaining strength once it cross above 20, to confirmed it +DI/-DI will cross to indicate
buying or selling.

63
Average Directional Movement Index (DMI)

First confirmation is to look for crossover between +DI and –DI, if +DI above –DI get
ready to BUY/LONG but if –DI above +DI get ready to SELL/SHORT.

64
Stochastic

 The stochastic oscillator is one of the most recognized momentum indicators used in
technical analysis.
 The idea behind this indicator is that in an uptrend, the price should be closing near
the highs of the trading range, signaling upward momentum in the security.
 In downtrends, the price should be closing near the lows of the trading range,
signaling downward momentum

65
Stochastic

 The stochastic oscillator is plotted within a range of zero and 100 and signals
overbought conditions above 80 and oversold conditions below 20.
 The stochastic oscillator contains two lines. The first line is the %K, which is
essentially the raw measure used to formulate the idea of momentum behind the
oscillator. The second line is the %D, which is simply a moving average of the %K.
The %D line is considered to be the more important of the two lines as it is seen to
produce better signals.
 The stochastic oscillator generally uses the past 14 trading periods in its calculation
but can be adjusted to meet the needs of the user

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Ichimoku Kinko-Hyo

Ichimoku Kinko Hyo is a purpose-built trend trading charting

system that has been successfully used in nearly every tradable
market. It is unique in many ways, but its primary strength is its
use of multiple data points to give the trader a deeper, more
comprehensive view into price action. This deeper view, and the
fact that Ichimoku is a very visual system, enables the trader to
quickly discern and filter "at a glance" the low-probability trading
setups from those of higher probability.

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History of Ichimoku Kinko-Hyo

• The charting system of Ichimoku Kinko Hyo was developed by a Japanese

newspaper man named Goichi Hosoda.

• He began developing this system before World War II with the help of
numerous students that he hired to run through the optimum formulas and
scenarios - analogous to how we would use computer simulated back testing
today to test a trading system.

• Ichimoku Kinko Hyo has been used extensively in Asian trading rooms since
Hosoda published his book and has been used successfully to trade
currencies, commodities, futures, and stocks.

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Ichimoku Kinko-Hyo Component

The Ichimoku chart is composed of five separate indicator lines. These lines
work together to form the complete "Ichimoku picture". A summary of how
each line is calculated is outlined below:

Japanese Name English Name Formula

(HIGHEST HIGH + LOWEST LOW) /

TENKAN SEN Turning line
2 for the past 9 periods
(HIGHEST HIGH + LOWEST LOW) /
KIJUN SEN Standard line
2 for the past 26 periods
CURRENT CLOSING PRICE time
CHIKOU SPAN Lagging line shifted backwards (into the past) 26
periods
(TENKAN SEN + KIJUN SEN) / 2
SENKOU SPAN A 1st leading line time shifted forwards (into the future)
26 periods

(HIGHEST HIGH + LOWEST LOW) /

SENKOU SPAN B 2nd leading line 2 for the past 52 periods, time shifted
forwards (into the future) 26 periods

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Ichimoku Kinko-Hyo Component

The Senkou span A and B deserve special mention here as they, together, form
the Ichimoku “kumo” or cloud. We cover the kumo and its myriad functions in
more detail in the kumo section”.

The chart below provides a visual representation of each of these five

components:

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BUY Signals

(3)Tenkan Sen

(1) Lowest Kumo cloud (senkou span B)

1) Price is above the lowest line of the Kumo cloud (bullish bias)
2) Price moves below the Kijun Sen (pullback)
(2) Kijun Sen 3) Price moves above the Tenkan Sen (up turn)

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SELL Signals

(1) Highest Kumo cloud (Senkou span B)

(2) Kijun Sen

(3) Tenkan Sen

1) Price is below the highest line of the Kumo cloud (bearish bias)
2) Price moves around the Kijun Sen (bounce)
3) Price Moves below the Tenkan Sen (down turn)

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JAPANESE CANDLESTICK & TRADING SYSTEM

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Japanese Candlestick
 Introduction

The Japanese began using technical analysis to trade rice in the 17th century. While this early version of
technical analysis was different from the US version initiated by Charles Dow around 1900, many of the
guiding principles were very similar:
The “what” (price action) is more important than the “why” (news, earnings, and so on).
All known information is reflected in the price.
Buyers and sellers move markets based on expectations and emotions (fear and greed).
Markets fluctuate.
The actual price may not reflect the underlying value.

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 Introduction

According to Steve Nison, candlestick charting first appeared sometime

after 1850. Much of the credit for candlestick development and charting
goes to a legendary rice trader named Homma from the town of Sakata.
It is likely that his original ideas were modified and refined over many
years of trading eventually resulting in the system of candlestick
charting that we use today.

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 Japanese Candlestick Formation

In order to create a candlestick chart, you must have a data set that contains open, high,
low and close values for each time period you want to display. The hollow or filled portion of
the candlestick is called “the body” (also referred to as “the real body”). The long thin lines
above and below the body represent the high/low range and are called “shadows” (also
referred to as “wicks” and “tails”). The high is marked by the top of the upper shadow and the
low by the bottom of the lower shadow. If the stock closes higher than its opening price, a
hollow candlestick is drawn with the bottom of the body representing the opening price and
the top of the body representing the closing price. If the stock closes lower than its opening
price, a filled candlestick is drawn with the top of the body representing the opening price
and the bottom of the body representing the closing price.

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 Japanese Candlestick Pattern

The candle patterns listed below comprise the library that is used to identify candlestick signals. The
number in parentheses at the end of each name represents the number of candles that are used to
define that particular pattern. The bullish and bearish patterns are divided into two groups signifying
either reversal or continuation patterns.

Bullish Continuation Bearish Continuation

• Separating Lines • Separating Lines

• Rising Three Methods • Falling Three Methods
• Upside Tasuki Gap • Downside Tasuki Gap
• Side by Side White Lines • Side by Side White Lines
• Three Line Strike • Three Line Strike
• Upside Gap Three Methods • Downside Gap Three
• On Neck Line Methods
• In Neck Line • On Neck Line
• In Neck Line

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 Bullish Reversals
 Long White Body
 Hammer
 Inverted Hammer
 Belt Hold
 Engulfing Pattern
 Harami Cross
 Piercing Line
 Doji Star
 Meeting Lines
 Three White Soldiers
 Morning Star
 Morning Doji Star
 Abandoned Baby
 Tri-Star
 Breakaway
 Three Outside Up
 Kicking
 Unique Three Rivers
Bottom
 Three Stars In The South
 Concealing Swallow
 Stick Sandwich
 Homing Pigeon
 Ladder Bottom
 Matching Low
Bearish Reversals
 Long Black Body
 Hanging Man
 Shooting Star
 Belt Hold
 Engulfing Pattern
 Harami
 Harami Cross
 Dark Cloud Cover
 Doji Star
 Meeting Lines
 Three Black Crow
 Evening Star
 Evening Doji Star
 Abandoned Baby
 Tri-Star
 Three Outside Down
 Kicking
 Latter Top
 Matching High
 Upside Gap Two Crows
 Identical Three Crow
 Deliberation
 Advance Block
 Two Crows
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80
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83
Important Candlestick :-

There are 3 groups of Candlestick : WIN, LOSE or INDECISION candlestick, mostly candlestick is
used as a reversal signal (winning candle as a reversal sign from a downtrend and vice versa,
indecision candle is also as a reversal, but need to wait for next candle in order to make any decision
in the market)
Bulls vs Bear
1. Long white candlesticks indicate that
the Bulls controlled the ball (trading) for most of the
game.

2. Long black candlesticks indicate that

the Bears controlled the ball (trading) for most of
the game.

3. Small candlesticks indicate that neither team could

move the ball and prices finished about where they
started.

4. A long lower shadow indicates that

the Bears controlled the ball for part of the game,
but lost control by the end and the Bulls made an
impressive comeback.

5. A long upper shadow indicates that

the Bulls controlled the ball for part of the game, but
lost control by the end and the Bears made an
impressive comeback.

6. A long upper and lower shadow indicates that the

both the Bears and the Bulls had their moments
during the game, but neither could put the other
away, resulting in a standoff.
Trading System
The Classic 123 Formation

• To define the patterns and how to trade from it.

• Concentrate on patterns in an oversold/overbought markets.
• Trade in Higher Volume stocks.
• Pure Stock Traders – To use the 1-2-3 Pattern to determine changes on
major indices and try to spot them on stocks.
• Futures Traders - To adapt this 1-2-3 pattern into your trading system.

1-2-3
PATTERN

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 Trading System (Indicators + 123 Pattern)

Trading System (Bollinger Bands)

Combination of 1-2-3 Pattern and Bollinger Bands :-

Bollinger Bands is a technical analysis tool invented by John Bollinger in the 1980s, and a
term trademarked by him in 2011.

The purpose of Bollinger Bands is to provide a relative definition of high and low. By definition, prices are
high at the upper band and low at the lower band. This definition can aid in rigorous pattern recognition and is
useful in comparing price action to the action of indicators to arrive at systematic trading decisions

Middle Bollinger Bands are based from Simple Moving Average 20.

Confirm the price is at the middle Bollinger line or slightly above it. Wait for 1-2-3 pattern set-up formed. Buy
or Sell upon violation (breakout) of point 2 with profit target, and stop loss the same as to what I have
mentioned earlier in this module, or set profit target or cut losses once the price is at the middle of the
Bollinger line.
Trading System (Bollinger Bands) - EQUITY
Trading System – Exponential Moving Average (EMA)

Combination of 1-2-3 Pattern and Exponential Moving Average (EMA) :-

• Confirmed that the EMA has already made a Golden Cross or Black Cross.

• In this set-up EMA6 and EMA9 set-up is used.

• Wait for the 1-2-3 pattern set-up is formed, Buy or Sell upon violation (breakout) of point 2, with profit target
and stop loss the same as what I had mentioned earlier in this module, or lock your profit / cut losses once
both lines crosses each other again.
Trading Simplified (EMA) - EQUITY
Trading System – Moving Average Convergence Divergence (MACD)

Combination of 1-2-3 Pattern with Moving Average Convergence Divergence (MACD) :-

• MACD is a technical analysis indicator created by Gerald Appel in the late 1970s.

• It is used to spot changes in the strength, direction, momentum and duration of a trend in a stocks price.

• Confirmed fast MACD already cross above (Buy) or under (Sell) the slow line, the movement is even more
stronger if there is a divergence pattern (bullish/bearish) prior to the crossing. This indicates that the price is
making higher high or lower low, but it is not confirmed by MACD.

• Wait for 1-2-3 pattern set-up formed, Buy or Sell upon violation (breakout) of point 2 with profit target and
stop loss, the same as what I have mentioned earlier in this module. Lock your profit or cut losses once both
MACD lines crosses each other again.
Trading System (MACD) – EQUITY
Trading System– Relative Strength Index (RSI)

Combination of 1-2-3 Pattern with Relative Strength Index (RSI) :-

• The Relative Strength Index was developed by J. Welles Wilder and published in a 1978 book, New Concepts
in Technical Trading Systems, and in Commodities magazine (now Futures magazine) in the June 1978
issue. It has become one of the most popular oscillator indices.

• The RSI is classified as a momentum oscillator, measuring the velocity and magnitude of directional price
movements.

• Make sure RSI is at point 50 (or above it) to confirm the strength of the stocks or index. (70 overbought dan
30 oversold, extreme point).

• Wait for 1-2-3 pattern set-up formed, buy or sell upon violation (breakout) of point 2 with profit target and stop
loss the same as what mention earlier in this module, lock your profit or cut losses once RSI is at extreme
point (overbought/oversold condition).
Trading System – Average Directional Movement Index (ADX)

Combination of 1-2-3 Pattern with Average Directional Movement Index (+DI / -DI) :-

• The average directional movement index (ADX) was developed in 1978 by J. Welles
Wilder as an indicator of trend strength in a series of prices of a financial instrument. ADX has become a
widely used indicator for technical analysts, and is provided as a standard in collections of indicators offered
by various trading platforms.

• The ADX does not indicate trend direction, only trend strength. It is a lagging indicator; that is, a trend must
have established itself before the ADX will generate a signal that a trend is under way. ADX will range
between 0 and 100. Generally, ADX readings below 20 indicate trend weakness, and readings above 40
indicate trend strength. An extremely strong trend is indicated by readings above 50.

• ADX gaining strength once it cross above 20, to confirmed it +DI/-DI will cross to indicate buying or selling.

• Wait for 1-2-3 pattern set-up to formed, buy or sell upon violation (breakout) of point 2 with profit target and
stop loss the same as what mention earlier in this module, lock your profit or cut losses once +DI/-DI crosses
back again.
Trading System (DMI) – EQUITY
“Big money are made by the sitting and
not the thinking”
- Jesse Livermore

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