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movements. Technical analysis is not astrology for predicting prices. Technical analysis is based on analyzing current demand-supply of commodities, stocks, indices, futures or any tradable instrument. Technical analysis involve putting stock information like prices, volumes and open interest on a chart and applying various patterns and indicators to it in order to assess the future price movements. The time frame in which technical analysis is applied may range from intraday (1-minute, 5-minutes, 10-minutes, 15-minutes, 30-minutes or hourly), daily, weekly or monthly price data to many years. There are essentially two methods of analyzing investment opportunities in the security market viz fundamental analysis and technical analysis. You can use fundamental information like financial and non-financial aspects of the company or technical information which ignores fundamentals and focuses on actual price movements. The basis of Technical Analysis What makes Technical Analysis an effective tool to analyze price behavior is explained by Following theories given by Charles Dow: • • Price discounts everything Price movements are not totally random
1)Price discounts everything Each price represents a momentary consensus of value of all market participants - large commercial interests and small speculators, fundamental researchers, technicians and gamblers- at the moment of transaction" - Dr Alexander Elder Technical analysts believe that the current price fully reﬂects all the possible material information which could affect the price. The market price reﬂects the sum knowledge of all participants, including traders, investors, portfolio managers, buy-side analysts, sell-side analysts, market strategist, technical analysts, fundamental analysts and many others. It would be folly to disagree with the price set by such an impressive array of people with impeccable credentials. Technical analysis looks at the price and what it has done in the past and assumes it will perform similarly in future under similar circumstances. Technical
analysis would proceed to a selection of sector charts. With a selection of 10-20 stock charts from each industry. a selection of 3-5 most promising stocks in each group can be made. it is possible to spot both short-term and long-term trends. If prices were always random. Because technical analysis can be applied to many different time frames. an investor would analyze long-term and short-term charts. It's a graphical method of showing where stock prices have been in the past. we would be left with 9-12 stocks from which to choose. Those sectors that show the most promise would be selected for individual stock analysis. Most technicians acknowledge that hundreds of years of price charts have shown us one basic truth . Line chart is particularly useful for providing a clear visual . A technician believes that it is possible to identify a trend. If the broader market were considered to be in bullish mode. For each stock. individual stock selection can begin. Line charts: "Line charts" are formed by connecting the closing prices of a specific stock or market over a given period of time. Types of price charts: 1. most probably the index. Once the sector list is narrowed to 3-5 industry groups. These stocks could even be broken down further to find 3-4 best amongst the rest in the lot. Under this scenario. Top-down Technical Analysis Technical analysis uses top-down approach for investing. it would be extremely difficult to make money using technical analysis. First of all you will consider the overall market.analysis looks at the price and assumes that it will perform in the same way as done in the past under similar circumstances in future. invest or trade based on the trend and make money as the trend unfolds. Chart Charts are the working tools of technical analysts.prices move in trends. How many stocks or industry groups make the final cut will depend on the strictness of the criteria set forth. 2) Price movements are not totally random Technical analysis is a trend following system. They use charts to plot the price movements of a stock over specific time frames.
but in a manner that extenuates the relationship between the opening and closing prices..illustration of the trend of a stock's price or a market's movement. Bar chart: Bar chart is the most popular method traders use to see price action in a stock over a given period of time. 3. Such visual representation of price activity helps in spotting trends and patterns. A technical indicator is a series of data points derived by applying a formula to the price data of a security. low or close over a period of time. Candlesticks don't involve any calculations. A candlestick displays the open. It is an extremely valuable analytical tool which has been used by traders for past many years. Candlesticks: Candlestick charts provide visual insight to current market psychology. and closing prices in a format similar to a modern-day bar-chart. Some . Support &Resistance Support and resistance represent key junctures where the forces of supply and demand meet. Indicator A Technical indicator is a mathematical formula applied to the security's price. These lines appear as thresholds to price patterns.g. Price data includes any combination of the open. volume or open interest. They are the respective lines which stops the prices from decreasing or increasing. high. high. low. The result is a value that is used to anticipate future changes in prices. Each candlestick represents one period (e. 2. day) of data.
The price data is entered into the formula and a data point is produced. Likewise.RSI A technical momentum indicator that compares the magnitude of recent gains to recent losses in an attempt to determine overbought and oversold conditions of an asset.100/(1 + RS*) *Where RS = Average of x days' up closes / Average of x days' down closes. but three basic uses stand out: • • • Trend identification/confirmation Support and resistance level identification/confirmation Trading systems Type of indicator 1)Relative Strength Index .indicators may use only the closing prices. while others incorporate volume and open interest into their formulas. it is an indication that the asset may be getting oversold and therefore likely to become undervalued. An asset is deemed to be overbought once the RSI approaches the 70 level. . It is calculated using the following formula: RSI = 100 . if the RSI approaches 30. meaning that it may be getting overvalued and is a good candidate for a pullback. As you can see from the chart. the RSI ranges from 0 to 100. Uses of indicator There are many uses for moving averages.
2)Moving Average Convergence Divergence . The MACD is calculated by subtracting the 26-day exponential moving average (EMA) from the 12-day EMA. The RSI is best used as a valuable complement to other stock-picking tools.As shown in the chart above. called the "signal line". functioning as a trigger for buy and sell signals. A nine-day EMA of the MACD. which suggests that the price of the asset is likely to experience upward momentum. Conversely. as shown by the first arrow. it is a bearish signal. is then plotted on top of the MACD. which indicates that it may be time to sell. Crossovers .A trader using RSI should be aware that large surges and drops in the price of an asset will affect the RSI by creating false buy or sell signals. when the MACD falls below the signal line. when the MACD rises above the signal line. There are three common methods used to interpret the MACD: 1. .MACD A trend-following momentum indicator that shows the relationship between two moving averages of prices. Many traders wait for a confirmed cross above the signal line before entering into a position to avoid getting getting "faked out" or entering into a position too early. the indicator gives a bullish signal.
As you can see from the chart above. Keep in mind that equal weighting is given to each daily price. short-term averages (e. Dramatic rise . As shown in the chart above. In other words.When the security price diverges from the MACD. the zero line often acts as an area of support and resistance for the indicator. Traders also watch for a move above or below the zero line because this signals the position of the short-term average relative to the long-term average. or arithmetic.When the MACD rises dramatically . Simple Moving Average . many traders watch for short-term averages to cross above longer-term averages to signal the beginning of an uptrend. Short-term averages respond quickly to changes in the price of the underlying. while long-term averages are slow to react.it is a signal that the security is overbought and will soon return to normal levels. As shown by the blue arrows. 15-period SMA) act as levels of .that is. which signals upward momentum. moving average that is calculated by adding the closing price of the security for a number of time periods and then dividing this total by the number of time periods. the short-term average is above the long-term average. When the MACD is above zero. this is the average stock price over a certain period of time. It signals the end of the current trend. Divergence .g. the shorter moving average pulls away from the longer-term moving average . 3.2. The opposite is true when the MACD is below zero.SMA A simple.
Generally. when you hear the term "moving average". especially when comparing to an exponential moving average (EMA). This can be important. . it is in reference to a simple moving average. Support levels become stronger and more significant as the number of time periods used in the calculations increases.support when the price experiences a pullback.