Technical Analysis

● Technical analysis is a method used in finance to evaluate and forecast the future price
movements of assets, such as stocks, commodities, and currencies, by analyzing past
market data, primarily price and volume
● Technical analysis involves identifying trends and when trends shift, and understanding
price behavior
● Trend Reversal Patterns
○ Includes head and shoulder patterns, double top pattern, double down pattern,
etc

● Continuation Patterns
○ A continuation pattern in the financial markets is an indication that the price of a
stock or other asset will continue to move in the same direction even after the
continuation pattern completes.
○ Continuation patterns occur mid-trend and are a pause in the price action (the
pattern of how the price of a security behaves, typically in the short run) of
varying durations.
○ Common continuation patterns include triangles, flags, pennants, and rectangles
● Triangles
○ Symmetrical: A symmetrical triangle can be simply defined as a downward
sloping upper bound and an upward sloping lower bound in price
○ Ascending: An ascending triangle can be defined as a horizontal upper bound
and upward sloping lower bound

○ Descending: A descending triangle can be defined as a downward sloping upper

bound and horizontal lower bound.
● Flags
○ Flags are a pause in the trend, where the price becomes confined in a small price
range between parallel lines
○ Flags are generally short in duration, lasting several bars, and do not contain
price swings back and forth as a trading range or trend channel would
● Pennants
○ Pennants are similar to a triangle, yet smaller; pennants are generally created by
only several bars.
○ The pattern is created as prices converge, covering a relatively small price range
mid-trend; this gives the pattern a pennant appearance.
● Rectangle
○ Often there will be pauses in a trend in which the price action moves sideways,
bound between parallel support and resistance lines
○ Rectangles, also known as trading ranges, can last for short periods or many
years.
○ This pattern is very common and can be seen often intra-day, as well as on
longer-term time frames.
Tools
● Exponential Moving Average (EMA), Simple Moving Average (SMA)
○ The SMA is calculated by adding up the closing prices of a security over a
specified number of periods (e.g., days) and then dividing by the number of
periods.
○ The EMA also calculates the average price over a specified number of periods,
but it applies a greater weight to the most recent data points. It uses an
exponential weighting multiplier that gives more importance to recent prices.
○ EMA will follow prices more closely than a corresponding SMA.

● VWAP (Volume Weighted Average Price)

○ calculates the average price of a security over a specified period, weighted by
trading volume ( refers to the total number of shares or contracts of a security
that are traded during a specific period of time ) at each price level
○ Trading volume reflects the level of activity and interest in a particular security.
Higher volume suggests increased market interest or participation, while lower
volume may indicate reduced interest or quiet trading conditions.
○ VWAP typically is most useful to short-term traders.
● Bollinger Bands
○ helps gauge the volatility of stocks and other securities to determine if they are
over- or undervalued
○ Volatility refers to the variation or fluctuations in price. If the price of asset moves
a lot and very fast, it has high volatility
○ The bands appear on stock charts as three lines that move with the price
○ The center line is the stock price's 20-day simple moving average (SMA).
○ The upper and lower bands are set at a certain number of standard deviations,
usually two, above and below the middle line.
 ○ The bands widen when a stock's price becomes more volatile and contract when
it is more stable
○ One use is for trend analysis. The direction of the middle band can indicate a
trend's strength: when the middle band is heading upward, this suggests an
uptrend, and the converse when heading downward
○ Narrow bands indicate less volatility, which means a significant price move could
be imminent, known as a "squeeze." Conversely, wide bands indicate more
volatility
○ Also used to see if an asset is overbought or oversold.
■ As the price touches or moves outside the upper band, it could be
overbought, suggesting a potential selling or short opportunity. Similarly, if
the price touches or falls outside the lower band, the asset may be
oversold, indicating a possible buying opportunity.

● RSI (Relative Strength Index)

○ RSI measures the speed and magnitude of a security's recent price changes to
evaluate overvalued or undervalued conditions in the price of that security.
○ If the RSI is above 70, it may indicate that the asset is becoming overbought and
could be due for a price correction
○ If the RSI is below 30, it may signal that the asset is becoming oversold and
could be due for a price increase.
● ATR (Average True Range)
○ ATR, is a technical analysis indicator that measures market volatility
○ Average true range values are generally calculated based on 14 periods. The
period can be monthly, weekly, daily, or even intraday.
○ A high value of average true range implies high volatility of the market price of
the assets and a low value implies low price variations.
○ Example:
■ Suppose that the trading range for a stock is 1.40, and the stock’s moved
up 40% above the average. In such a case, an investor will get a buy
signal.
■ the price of the stock’s already risen above the average; hence it is not
advisable to assume that the price will rise further. As the stock price is
significantly higher than the average, there is a high possibility that the
price will fall