Bulls Eye Trading Academy

The Basis of Technical Analysis
What Is Technical Analysis?

Technical analysis is a method of evaluating securities by analyzing the statistics generated by

market activity, such as past prices and volume. Technical analysts do not attempt to measure
a security's intrinsic value, but instead use charts and other tools to identify patterns that can
suggest future activity.
There are many different types of technical traders. Some rely on chart patterns, others use
technical indicators and oscillators, and most use some combination of the two. In any case,
technical analysts' exclusive use of historical price and volume data is what separates them
from their fundamental counterparts. Unlike fundamental analysts, technical analysts don't care
whether a stock is undervalued - the only thing that matters is a security's past trading data
and what information this data can provide about where the security might move in the future.
The field of technical analysis is based on three assumptions:
1. Market/Price discounts everything.
2. Price moves in trends (Price Movements Are Not Totally Random).
3. History tends to repeat itself.
And finally…..
"What" is More Important than "Why"
In his book, The Psychology of Technical Analysis, Tony Plummer paraphrases Oscar Wilde by
stating, "A technical analyst knows the price of everything, but the value of nothing".
Technicians, as technical analysts are called, are only concerned with two things:
1. What is the current price?
2. What is the history of the price movement?
The price is the end result of the battle between the forces of supply and demand for the
company's stock. The objective of analysis is to forecast the direction of the future price. By
focusing on price and only price, technical analysis represents a direct approach.
Fundamentalists are concerned with why the price is what it is. For technicians, the why portion
of the equation is too broad and many times the fundamental reasons given are highly suspect.
Technicians believe it is best to concentrate on what and never mind why. Why did the price
go up? It is simple, more buyers (demand) than sellers (supply). After all, the value of any
asset is only what someone is willing to pay for it. Who needs to know why?
General Steps to Technical Evaluation

Many technicians employ a top-down approach that begins with broad-based macro analysis.
The larger parts are then broken down to base the final step on a more focused/micro
perspective. Such an analysis might involve three steps:

1. Broad market analysis through the major indices such as the S&P CNX Nifty and Sensex.
2. Sector analysis to identify the strongest and weakest groups within the broader market.

 
 

3. Individual stock analysis to identify the strongest and weakest stocks within select
groups.

The beauty of technical analysis lies in its versatility. Because the principles of technical analysis
are universally applicable, each of the analysis steps above can be performed using the same
theoretical background. You don't need an economics degree to analyze a market index chart.
You don't need to be a CPA to analyze a stock chart. Charts are charts. It does not matter if the
time frame is 2 days or 2 years. It does not matter if it is a stock, market index or commodity.
The technical principles of support, resistance, trend, trading range and other aspects can be
applied to any chart. While this may sound easy, technical analysis is by no means easy.
Success requires serious study, dedication and an open mind.

Chart Analysis
Technical analysis can be as complex or as simple as you want it. The example below
represents a simplified version. Since we are interested in Positional Trading, the focus will be
on spotting bullish bearish and sideways trend.

Nifty Future – Daily Chart.

 
 

Overall Trend: The first step is to identify the overall trend. This can be accomplished with
trend lines, moving averages or peak/trough analysis. As long as the price remains above its
uptrend line, selected moving averages or previous lows, the trend will be considered bullish.
Support: Areas of congestion or previous lows below the current price mark support levels. A
break below support would be considered bearish.
Resistance: Areas of congestion and previous highs above the current price mark the
resistance levels. A break above resistance would be considered bullish.
Momentum: Momentum is usually measured with an oscillator such as MACD. If MACD is
above its 9-day EMA (exponential moving average) or positive, then momentum will be
considered bullish, or at least improving.
Relative Strength: Measured with an oscillator over a period of time will tell us if the stock /
indice is outperforming (over bought) or underperforming (over sold) the broader market.
The final step is to synthesize the above analysis to ascertain the following:
• Strength of the current trend.
• Maturity or stage of current trend.
• Reward to risk ratio of a new position.
• Potential entry levels for new long position.

Chart Types
There are four main types of charts that are used by investors and traders depending on the
information that they are seeking and their individual skill levels. The chart types are: the line
chart, the bar chart, the candlestick chart and the point and figure chart.
Line Chart
The most basic of the four charts is the line chart because it represents only the closing prices
over a set period of time. The line is formed by connecting the closing prices over the time

frame. Line charts do not provide visual information of the trading range for the individual
points such as the high, low and opening prices. However, the closing price is often considered
to be the most important price in stock data compared to the high and low for the day and this
is why it is the only value used in line charts.

 
 

Bar Charts

High High

Close Open

Open Close

Low Low

The bar chart expands on the line chart by adding several more key pieces of information to
each data point. The chart is made up of a series of vertical lines that represent each data
point.

This vertical line represents the high and low for the trading period, along with the closing
price. The close and open are represented on the vertical line by a horizontal dash. The opening
price on a bar chart is illustrated by the dash that is located on the left side of the vertical bar.
Conversely, the close is represented by the dash on the right. Generally, if the left dash (open)
is lower than the right dash (close) then the bar will be shaded blue, representing an up period
for the stock, which means it has gained value. A bar that is colored red signals that the stock
has gone down in value over that period. When this is the case, the dash on the right (close) is
lower than the dash on the left (open).

 
 

Candles
stick Charts
s

The canddlestick chartt is similar to

o a bar charrt, but it diffe
ers in the wa
ay that it is visually
v
constructted. Similar to
t the bar ch hart, the can
ndlestick also has a thin vertical line e showing the
period's trading
t rangge.

The differrence comes in i the formatiion of a wide bar on the ve ertical line, which
w illustrate
es the differen
nce
t open and close. And, like bar chartss, candlestickss also rely he
between the eavily on the use
u of colors to t
explain what has happened during the t trading pe eriod. There are
a two color constructs fo or days up and d one
for days that the price falls. When the price of th he stock is up and closes above the ope ening trade, th
he
candlesticck will usually be white or clear.
c If the stock
s has trad
ded down for the period, th hen the candlestick
will usually be red or black,
b dependiing on the sitte. If the stock's price has closed above the previouss
day’s close but below thet day's open, the candlestick will be black
b or filled with the coloor that is used
d to
indicate an up day.

 
 

DOJI
Recognition: The open and close are the same or very close to the same.
Pattern Psychology: The Bulls and the Bears are conflicting. This is an alert to investors to take
heed for possible trend reversal

BULLISH ENGULFING
Recognition: The body of the second day completely engulfs the body of the first day. Shadows
are not a consideration.
Pattern Psychology: This pattern suggests the Bulls are stepping in with force, suggesting prices
will move up.

BEARISH ENGULFING
Recognition: The body of the second day completely engulfs the body of the first day. Shadows
are not a consideration.
Pattern Psychology: This shows the Bears are overwhelming the Bulls, suggesting prices will
move down.

HAMMERS and HANGING-MAN

Recognition: The lower shadow (or tail) should be at least two times the length of the body. The
color of the body is not important although a black body has slightly more Bearish indications and a
white body has slightly more Bullish indications.

Pattern Psychology: This pattern at the bottom of a down trend is called a Hammer. This pattern
at the top of an uptrend is called a Hanging-Man

PIERCING PATTERN
Recognition: A two candle pattern, the body of the first candle is black and the body of the
second candle is white. The white day opens lower, under the trading range of the previous day.
The price closes above the 50% level of the black body.
Pattern Psychology: After a strong downtrend, the atmosphere is Bearish but before the end of
the day the Bulls step in and price closes near the high of the day.

DARK CLOUD
Recognition: A two candle pattern, the body of the first candle is white and the body of the second
candle is black. The black day opens higher, above the trading range of the previous day. The price
closes below the 50% level of the white body.
Pattern Psychology: After a strong uptrend, the atmosphere is Bullish but before the end of the
day the Bears step in and price closes near the low of the day.

 
 

BULLISH HARAMI
Recognition: A two candle pattern forming in a down trending price pattern. The body of the first
candle is the same color as the current trend and should be a long black candle. The body of the
second candle is white and opens and closes within the body of previous day's candle.
Pattern Psychology: After a strong downtrend the Bulls step in and open the price higher than the
previous day's close. This concerns the Bears and the shorts start covering their postions. A strong
day after that would convince everybody that the trend may be in a reversal.

BEARISH HARAMI
Recognition: A two candle pattern forming in an uptrending price pattern. The body of the first
candle is the same color as the current trend and should be a long white candle. The body of the
second candle is black and opens and closes within the body of the previous day's candle.
Pattern Psychology: After a strong uptrend the Bears step in and open the price lower than the
previous day's close. The price finishes lower for the day and the Bulls are concerned..

MORNING STAR
Recognition: A three candle pattern at the bottom of a downtrend.The body of the first candle is
black, confirming the current downtrend. The second candle is an indecisive formation. The third
candle is white and should close at least halfway up the black candle.
Pattern Psychology: After an apparant downtrend the Bulls step in and open the price higher than
the previous day's close. The price finishes higher for the day and the Bears are concerned.

EVENING STAR
Recognition: A three candle pattern at the top of an uptrend. The body of the first candle is white,
confirming the current uptrend. The second candle is an indecisive formation. The third candle is
black and should close at least halfway down the white candle.
Pattern Psychology: After an apparent uptrend the Bears step in and open the price lower than
the previous day's open. The price finishes lower for the day and the Bulls are concerned and begin
selling to take their profits.

SHOOTING STAR
Recognition: One candle pattern appearing in an uptrend. The shadow (or tail) should be at least
two times the length of the body. The color of the body is not important, although a black body has
slightly more Bearish indications.
Pattern Psychology: After a strong uptrend the Bulls appear to still be in control with price opening
higher, but by the end of the day the Bears step in and take the price back down to the lower end of
the trading range. Lower trading the next day reinforces the probability of a pullback.

Inverted Hammer
Recognition: The upper shadow should be at least two times the length of the body. The real
body is at the lower end of the trading range. There should be no /small lower shadow.
Pattern Psychology: After a downtrend has been in effect, the atmosphere is Bearish. The price
opens and trades lower but before the end of the day,

 
 

The Dynamic Doji - A Clear Trend Reversal Signal

The Doji is one of the most revealing signals in Candlestick trading. It clearly indicates that the bulls and the bears
are at an equilibrium, a state of indecision. The Doji, appearing at the end of an extended trend, has significant
implications. The trend may be ending. Just this fact alone creates a multitude of investment programs that produce
inordinate profits. What is the best method for making big trading profits? Knowing the direction of a trading entity
and the strength of that move, Candlestick analysis perfects the trading strategy. Candlestick formations reveal high
probability profitable reversals. Hundreds of years of investing refinement have proven that point.
Candlestick analysis incorporates approximately 50 to 60 Candlestick signals. However, twelve of the signals,
considered the major signals, will produce the vast majority of the trend reversals. Recognizing and understanding
the psychology that formed these major signals will provide completely new insights for investors in understanding
optimal times to buy and sell. Japanese rice traders realized that prices do not move based on fundamentals, they
move based on the investor perception of those fundamentals. The Doji signal is one of the most predominant
reversal indicators. It is very effective in all-time frames, whether using a one-minute, five-minute, or fifteen-minute
chart for day trading or daily, weekly, and monthly charts for the swing trader and long-term investor.
The Japanese say that whenever a Doji appears, always take notice. A well-founded rule of Candlestick followers is
that when a Doji appears at the top of a trend, in an overbought area, sell immediately. Conversely, a Doji seen at
the bottom of an extended downtrend requires buying signals the next day to confirm the reversal. Otherwise, the
weight of the market could take the trend lower.
The Doji signal is composed of one candle. It is formed when they open and the close occurs at the same level or
very close to the same level in a specific timeframe. In Candlestick charting, this essentially creates a “cross”
formation. As the following illustration demonstrates, the horizontal line represents the open and close occurring at
the same level. The vertical line represents the total trading range during that time.

Doji Star
Upon seeing a Doji in an overbought or oversold condition, an extremely high probability reversal situation
becomes evident. Overbought or oversold conditions can be defined using other indicators such as
stochastics, When a Doji appears, it is demonstrating that there is indecision now occurring at an extreme
portion of a trend. This indecision can be portrayed in a few variations of the Doji.
Long-legged Doji
The Long-legged Doji is composed of long upper and lower shadows. Throughout the time period, the price
moved up and down dramatically before it closed at or very near the opening price. This reflects the great
indecision that exists between the bulls and the bears.
Gravestone Doji
The Gravestone Doji is formed when the open and the close occur at the low end of the trading range. The
price opens at the low of the day and rallies from there, but by the close the price is beaten back down to the
opening price. The Japanese analogy is that it represents those who have died in battle. The victories of the
day are all lost by the end of the day. A Gravestone Doji, at the top of the trend, is a specific version of the
Shooting Star. At the bottom, it is a variation of the Inverted Hammer.
Dragonfly Doji
The Dragonfly Doji occurs when trading opens, trades lower, then closes at the open price which
is the high of the day. At the top of the market, it becomes a variation of the Hanging Man. At the
bottom of a trend, it becomes a specific Hammer. An extensively long shadow on a Dragonfly Doji
at the bottom of a trend is very bullish.

 
 

Doji that occure in multi-signal patterns make those signals more convincing reversal signals.

Having the knowledge of what a Doji represents, indecision, allows the Candlestick analyst to take
advantage of reversal moves at the most opportune levels. Regardless of whether you are trading long-
term holds for day trading from the one-minute, five-minute, and fifteen-minute charts, the Doji
illustrates indecision in any time frame.
Chart Patterns

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.In the first section of this tutorial, we talked about the three assumptions of technical
analysis, the third of which was that in technical analysis, history repeats itself. The theory behind chart
patters is based on this assumption. The idea is that certain patterns are seen many times, and that these
patterns signal a certain high probability move in a stock. Based on the historic trend of a chart pattern
setting up a certain price movement, chartists look for these patterns to identify trading opportunities.

There are two types of patterns within this area of technical analysis, reversal and continuation. A
reversal pattern signals that a prior trend will reverse upon completion of the pattern. A continuation
pattern, on the other hand, signals that a trend will continue once the pattern is complete. These patterns
can be found over charts of any timeframe. In this section, we will review some of the more popular chart
patterns

Head and Shoulders

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 / Indice is likely to move against the
previous trend. As you can see in Figure the down trend is about to end.

 
 

Head and shoulders bottom, also known as inverse head and shoulders but is used to signal a
reversal in a downtrend. And as seen in the figure the target price of the Indice can be
estimated.
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

Rounding Top / Bottom / Cup and 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

Rounding bottom and cup formation pattern failed Stock -Apil

 
 

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.

Triangles
Triangles are some of the most well-known chart patterns used in technical analysis. The three
types of triangles, which vary in construct and implication, are the symmetrical triangle,
ascending and descending triangle. These chart patterns are considered to last anywhere from
a couple of weeks to several months.

Flag
The middle section on the flag pattern, shows a channel/ Rectangle pattern, with no
convergence between the trendlines . The trend is expected to continue when the price moves
above the upper trendline with almost clear and perfect targets can be predicted.

 
 

And many more patterns are there like Pendant ,Wedge

Moving Averages
The Most commonly used technical term is the Moving Averages (200 DMA /50 DMA /10 DMA..)
Most chart patterns show a lot of variation in price movement. This can make it difficult for traders to get
an idea of a security's overall trend. One simple method traders use to combat this is to apply moving
averages. A moving average is the average price of a security over a set amount of time. By plotting a
security's average price, the price movement is smoothed out. Once the day-to-day fluctuations are
removed, traders are better able to identify the true trend and increase the probability that it will work in
their favor.
Types of Moving Averages

There are a number of different types of moving averages that vary in the way they are calculated, but
how each average is interpreted remains the same. The calculations only differ in regards to the
weighting that they place on the price data, shifting from equal weighting of each price point to more
weight being placed on recent data. The most common types of moving averages are simple, and
exponential.
Simple Moving Average (SMA)
This is the most common method used to calculate the moving average of prices. It simply takes the sum
of all of the past closing prices over the time period and divides the result by the number of prices used
in the calculation.

 
 

Exponential Moving Average (EMA)

This moving average calculation uses a smoothing factor to place a higher weight on recent data points
and is regarded as much more efficient than the linear weighted average. Having an understanding of the
calculation is not generally required for most traders because most charting packages do the calculation
for you.

Major Uses of Moving Averages

Moving averages can be used to quickly identify whether a security is moving in an uptrend or a
downtrend depending on the direction of the moving average. As you can see, when a moving average is
heading upward and the price is above it, the security is in an uptrend. Conversely, a downward sloping
moving average with the price below can be used to signal a downtrend.

Another method of determining momentum is to look at the order of a pair of moving averages. Here we
are comparing 100 Day SMA with 200 Day SMA and when a short-term average is above a longer-term
average, the trend is up. On the other hand, a long-term average above a shorter-term average signals a
downward movement in the trend. Many combination can be used as per the choice and period. Here we
have a 10 Day SMA with 50 Day SMA

 
 

With this above, detail use of Indicators and Oscillators can help in identifying major movements and
trends. Ex.
The moving average convergence divergence (MACD)

The relative strength index (RSI)

The Williams %R

 
 

Pivot Point Trading

Using pivot points as a trading strategy has been around for a long time and was originally used by floor
traders. This was a nice simple way for floor traders to have some idea of where the market was heading
during the course of the day with only a few simple calculations.
The pivot point is the level at which the market direction changes for the day. Using some simple
arithmetic and the previous days high, low and close, a series of points are derived. These points can be
critical support and resistance levels. The pivot level, support and resistance levels calculated from that
are collectively known as pivot levels.
The reason pivot points are so popular is that they are predictive as opposed to lagging. You use the
information of the previous day to calculate potential turning points for the day you are about to trade
(present day).Because so many traders follow pivot points you will often find that the market reacts at
these levels. This give you an opportunity to trade.
As you know just by having the previous days high, low and close you eventually finish up with 7 points,
3 resistance levels, 3 support levels and the actual pivot point.
If the market opens above the pivot point then the bias for the day is long trades. If the market opens
below the pivot point then the bias for the day is for short trades. The three most important pivot points
are R1, S1 and the actual pivot point.
The general idea behind trading pivot points are to look for a reversal or break of R1 or S1. By the time
the market reaches R2,R3 or S2,S3 the market will already be overbought or oversold and these levels
should be used for exits rather than entries. A perfect set would be for the market to open above the
pivot level and then stall slightly at R1 then go on to R2. You would enter on a break of R1 with a target
of R2 and if the market was really strong close half at R2 and target R3 with the remainder of your
position.
Unfortunately life is not that simple and we have to deal with each trading day the best way we can.

Thanks..Vijay Chothani..