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Basics of Technical Analysis From J PDF
Basics of Technical Analysis From J PDF
Basic's of Technical
Analysis
©Smart Investor
http://www.jagoinvestor.com
Email : manish.pucsd@gmail.com
These Concepts in themselves do not guarantee any success , there is much more than
Technical Analysis which you need to understand and Learn like Money Managemenet
, Investment or Trading Psychology and Discipline in Stock Markets .
Important Points
● Each Chapter has example's to help reader understand the concepts well.
● You are Free to share the content “provided” you link back to
http://www.jagoinvestor.com and give proper credits to Author ie. Manish
Chauhan .
● If you have any questions or concerns , mail me at manish.pucsd@gmail.com
● Do not Use this ebook or its contents for any commercial Purpose .
Fundamental Analysis and Technical Analysis
But !! , Even though you have picked up some excellent companies for your long
term investments , That's not the end of the story . Now the biggest challenge and
question you have is "When to buy it" ? You should not just go next day and buy the
share , that's not the right approach . There can be a price area where buying is best in
terms of risk/reward .
Technical Analysis is the study of charts , price and volume patterns and other
indicators derived from price and volume . Technical Analysis gives us hint on what
can happen in future , understand that it only gives you chances, not a guarantee . So
everything should be taken with crossed fingers , Decisions taken on basis of TA only
increases your risk/reward scenario .
Fundamental Analysis and Technical Analysis is a personal choice and one may work
for you and other may not work for you . Its you who have to find out what fits your
personality and if you want to use it or not .
Reliance is a very good long term Investment (do your own analysis to find out why,
but it is :) ) .
On Feb 1 2009 , Ajay and Robert want to invest Rs 1 lac in Reliance for long term .
Both of them understand that Reliance is truly long term buy . Ajay invests in
Reliance on Feb 1 , because share is going up and he feels its a good time to enter
other . He buys the stock at Rs 1360 . After some days Stock starts falling and reaches
around Rs 1,150 . Roberts buys the stock at that time . See the Chart Below .
Here you can see that Robert has got the stock at 15% lower price , which means his
profits will always be more than Ajay's by that much . What did Robert do ? Robert
used simple Technical Analysis concepts and entered in the stock with better prices ,
It does not mean it will always happen , but there are good chances for getting better
price .
In the above case of Reliance , there is no significant price difference , but there can
be cases ,where there can be drastic differences , and it would be really worth to use
basic Technical Analysis .
How to use Support and Resistance
Support : Support for a price is a price area
where there are lots of buyers ready to buy the
stocks rather than sellers . At that price point , the
general perception is that its a good buy , and lots
of buyers come to buy it . Hence buyers
outnumber sellers and there is a higher possibility
that prices will bounce back from that point . This
is a point where Buying has less risk . In other
words , at support levels demand is thought to be strong enough to prevent the price
from declining further . Please understand that Support point is not a place from
where it will for sure bounce back , Its only the higher probability that it will bounce
back . Also understand that its not exactly a fixed price which should be considered
as Support , generally its a range like 98-100 or 560-570 ..
Which point is Support point : Every Low made by the price can be considered as
Support Area .
Resistance : Resistance is just opposite of Support , At this price levels there are
more sellers than buyers and with high probability prices reverses from this point . At
this point there are enough sellers in the market to prevent it from rising further .
Resistance point is the High made by a price . All the high's will act as some kind of
resistance points .
Resistance Example 1 : Below is Reliance Charts , You can see that reliance made a
high of Rs 1400 around Dec 2008 , After that you can see how it reversed from that
point 2 times in Jan and Feb 2009 . It was a wise decision to sell at those points
You can also find many examples like this if you investigate yourself . Try to see
other charts if you are interested , you can look at charts at ichart.in or
http://www.bazaartrend.com/index.php , find yourself)
Important Note : When prices are near Support or Resistance levels , you should
be more alert . It does not mean that you just jump onto market and buy or sell , Be
patient to see the actual price reversal , Though you will loose some part , that would
be a better trade . Also there are several other factors which should be considered ,
but for now lets not touch upon them . lets keep it simple for readers .
Break Down : Always remember that when prices dont hold support and break
them and fall further , it tells that buyers are not strong enough and Sellers have taken
over them and prices will make new lows , When support is broken , Sell further .
Example :Below is the chart of RPL , which shows how it broke down its support
point and then made further lows .
Break Out : When prices dont hold resistance points and break them on upside ,
prices then indicate that they are going to make new highs . Better to buy at that point
.
2. Support once broken becomes Resistance for next time , and Resistance once broken
becomes Support point for next time , use this knowledge . See :
http://candlestickmania.blogspot.com/2008/07/resistance-becomes-support.html
3. Many times there are false breakout and breakdown , So it will many times happen that
you get out at important levels and miss the large movement , thats fine , you can always
enter after getting out .
4. This is most important point , Everything I talked about in this article can increase your
chances of making more money in trading , but remember that you are dealing in Markets ,
and if you dont control your GREED and emotions , your failure is guaranteed . Use strict
Stop losses and use Money management techniques (it means not putting all your money at
once , if you have 10 lacs , put only 1 lac , dont be greedy enough , else someday you
markets will punish you badly , then no Technical analysis or any thing will help . have
good amount of cash with you always ).
All technical Analysis and knowledge are of no help if a person cant control his greed
and emotions in Market . TA and your knowledge will contribute not more than 20%
of your success in long run .
How to use Trendlines to find Support and Resistance
What is a TrendLine ?
A trend line is a straight line that connects two or more price points and then extends
into the future to act as a line of support or resistance. In the Uptrend , we join two
low prices points and in Downtrend we join two high prices and extend it further .
Next time when prices approach them , it should probably act as Support or resistance
point . Let us see one example of each of them.
You can see in the chart how Two high prices were joined and the line acted as Strong
Resistance in future , 3 times prices touched it and broke down again , These are
good price area where either one can go Short (sell) , or book there profits . You can
see that now prices are again Approaching to this Resistance line ,so once prices
reach this point , it may provide a good opportunity to sell .
What will happen exactly , better not to predict and let market decide .
Understand that we are not saying that prices has to necessarily touch the Resistance
line and then go back down , the trend line only provides Resistance , it may again go
back much before touching it .
Example of trend line UPTREND
Below if the 2 yrs chart of HIND LEVER , Let us try to make a trend line which acts
as support .
If you see the chart , i have connected two low prices and extended it in future , you
can clearly see how it acted as support area and prices went back up from there , At
the end , you can see how prices are again approaching this support area , most
probably this will again hold and it should be a good BUY :)
Let us see one more example for Trend lines . This example will show us following
things :
Also you can see a small trendline , which was made joining the low points . you can
see how prices bounced up as this support line held the prices . So , we have seen
some examples of Trend lines and how they can act as Resistance or Support lines (as
per situation) .
● Its more of an art to make a trendline , it depends how you make
them using HIGH PRICE , CLOSE PRICE etc .
● You can make Trendline for any time frame.
● Its not necessary for prices to touch trendlines , you should not expect
it .
● Its a wise decision to BUY OR SELL using trendlines . If trade goes
in your favor , let your profits run , if it fails, cut your losses short
and accept it . there is no problem with being wrong . even the best in
Industry fail .
● Trendlines will be of no help unless you control your GREED in
markets . dont put all your money in a single trade . Keep adequate
cash for bad times .
● Once trendlines are broken , take it seriously , it has happened for a
reason :) .
● Make sure that the two points used to make trendline are not very
near , there should be some time gap between them to believe in
them .
● More times trendline is touched by the price stronger it becomes , And
stronger is the break out from that trendline .
Practise Question for you
Below is a chart , and I have drawn several trendlines in different time frames , I have
marked some points with 1,2,3,4,5 , please tell me what are each of them and
comments on each point . please do it individually . Let me see who comments
correctly on each of them . Also tell me if there is any other trendline which could
have been made , but i have left it ?
Conclusion :
So we end this Article here , We saw Importance of Support and Resistance and how
to make trendlines and use them . In the next part (last part) , we will see how we can
use some of the Indicators from technical Analysis to make decision better .
Also , we can see that even by visual inspection we can get some idea about which
area is support and resistance area .
For people interested in learning these things in detail , I would recommend a book
"How to make money trading with Charts" by Ashwini Gujral .
How to use Oscillators to BUY an SELL
What are Oscillators : Oscillators are the indicators which move from overbought to
oversold area , generally from 0 to 100 . when they are nearing 100 it means stocks
are overbought and "expected" to go down now . when they are nearing 0 , it means ,
stocks are in oversold area and fresh buying can come and move the stock up .
I will discuss just 2 oscillators which Investors can use to make better BUY AND
SELL decisions .
Let take a time frame of 6 months and see how indicators gave signals of buy and sell
. We will see 2 indicators here RSI and Slow Stocastics (SS) (Read what is RSI and
What is Slow Stocastic ) .
Rules
When its overbought , we SELL the share .
When its oversold , we BUY the share .
SS BUY signal = when blue color line crosses down the Red line .
SS SELL signal = when blue color line crosses above the Red line .
RSI BUY signal = when RSI has moved below 30 and starts moving up .
RSI SELL signal = when RSI has moved above 70 and starts falling down .
To make signals more stronger , we will use both the indicators signal and take BUY
or SELL only when both shows same kind of signal .
Note
- Uptrend
- Downtrend
- Side ways Movement
Understand that these signals work best in range bound market , like we had for last 6
months . When market were moving in range of 3100-2600 . If markets are in strong
Uptrend or Downtrend , these indicators will generate many false signals .
Uptrend Market : IN Uptrend , you should avoid selling the stock , when there is
small correction , Indicators can fast move in oversold region , that is the time you
should BUY . But not SELL when prices are in over bought market .
Downtrend Market : In Downtrend , you should avoid Buying the stock , only SELL
when the indicators are in overbought region .
Sideways Market : In this market , you can buy and sell both .
Lets see some examples for last 6 months . This was a Sideways market (but still
downward bias was there , so be careful with BUY , you can take SELL easily) .
DLF
ICICI BANK
RELIANCE CAPITAL
Some Important things to NOTE (very important)
Oscillators should not be used in Isolation alone , You should also confirm it with
other things like Support and resistance to make your BUY or SELL more stronger .
For example : If prices are near the Overbought , but you see that prices have broken
the resistance point , its tells you that you should not BUY . because Oscillators are
secondary thing , prices are primary .
Also , If prices are near support and not breaking it , and oscillator are in over sold
area , then its safe to BUY . Never rely just on Oscillators , they are only helping
tools used with other signals .
Thanks
Thanks for reading the ebook . I hope you have learned some thing which can
help you . To read more articles like these visit http://www.jagoinvestor.com
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