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Different Kinds of Indicator.

1

Technical Analysis

Demystify Technical Analysis

Leading Indicators Lagging Indicators

Moving Averages .

What is moving averages ? Different Types of Moving Averages. Simple Exponential Properties of good Moving Average Strategies of Moving Average . Weighted.

**Benefits and Drawback of Indicators Lagging Indicators
**

Moving Averages MACD Average Directional Index

Leading Indicators

Relative Strenth Index Stochastic Rate of Change.

Volatility Indicators.

Bollinger Bands

GAPS

Common Gaps Breakout Gaps Runaway Gaps Exhaustion Gaps

Techncial AnalysisManagement Money

Martingale System Anti Martingale System

1

What does a Technical Indicator Offer?

Technical indicator offers a different perspective from which to analyze the price action.

Some, such as moving averages, are derived from simple formulas and the mechanics are relatively easy to understand. Others, such as Stochastics, have complex formulas and require more study to fully understand and appreciate. Regardless of the complexity of the formula, technical indicators can provide unique perspective on the strength and direction of the underlying price action.

A simple moving average is an indicator that calculates the average price of a security

over a specified number of periods. If a security is exceptionally volatile, then a moving average will help to smooth the data. A moving average filters out random noise and offers a smoother perspective of the price action. When is market is in Trading range zone RSI would tell you the condition of the market such as Overbought and Oversold level.

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Technical Analysis

Why Use Indicators?

Indicators serve three broad functions: to alert, to confirm and to predict.

An indicator can act as an alert to study price action a little more closely. If momentum is waning, it may be a signal to watch for a break of support. Or, if there is a large positive divergence building, it may serve as an alert to watch for a resistance breakout.

Indicators can be used to confirm other technical analysis tools. If there is a breakout on the price chart, a corresponding moving average crossover could serve to confirm the breakout. Some investors and traders use indicators to predict the direction of future prices.

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Technical Analysis

2

My Two Friends

Friend 1 : Tells me whatever you do I am with you. Right or

Wrong I am with you and I will follow you. Lagging Indicator : Moving Averages, MACD , ADX

Friend 2 : Tells me Don¶t do this Don¶t do that.

**Leading Indicator : Market is overbought don¶t buy , Market is oversold don¶t sell it . RSI, Stochastic, ROC.
**

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Technical Analysis

Lagging Indicator

As their name implies, lagging indicators follow the price action and are commonly referred to as trend-following indicators. Rarely, if ever, will these indicators lead the price of a security. Trend-following indicators work best when markets or securities develop strong trends. They are designed to get traders in and keep them in as long as the trend is intact. As such, these indicators are not effective in trading or sideways markets. If used in trading markets, trend-following indicators will likely lead to many false signals and whipsaws. Some popular trend-following indicators include moving averages (exponential, simple, weighted, variable) and MACD.

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Technical Analysis

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Lagging Indicators Moving Averages MACD Average Directional Index 7 Technical Analysis What is Moving Averages? A simple moving average is formed by computing the average (mean) price of a security over a specified number of periods. the High. and the Low data points. For example: a 5-day simple moving average is calculated by adding the closing prices for the last 5 days and dividing the total by 5. most moving averages are created using the closing price. While it is possible to create moving averages from the Open. 8 Technical Analysis 4 .

Moving Averages 9 Technical Analysis Different Kinds of Moving Averages Simple Moving Average Weighted Moving Average Exponential Moving Average 10 Technical Analysis 5 .

+403. the High.Simple Moving Average A simple moving average is formed by computing the average (mean) price of a security over a specified number of periods.42. and the Low data points.52.798.S NS X ( 5.760. 70) ¥ ¦ ¦ ¦ 2 500 2 000 20500 20000 9500 9000 8500 8000 7500 7000 6500 6000 5500 5000 4500 4000 3500 4 June 8 25 2 July 9 6 23 30 6 August 3 20 27 3 0 Septem er ¡ 7 24 ¢ 8 cto er ¡ 5 22 29 5 2 Novem er ¡ 9 26 3 0 Decem er ¡ 7 24 3 7 4 2 28 £ 2008 4 e ruary ¡ 8 25 3 ¤ 0 7 24 3 12 Technical Analysis arch 6 . While it is possible to create moving averages from the Open. * S . For example: a 5-day simple moving average is calculated by adding the closing prices for the last 5 days and dividing the total by 5. 11 Technical Analysis Weighted Moving Average A weighted moving average is simply a moving average that is weighted so that more recent values are more heavily weighted than values further in the past.33 . 5.467.39. 5.35. most moving averages are created using the closing price. 5.

The formula for an exponential moving average is: EMA(current) = ( (Price(current) . technicians often use exponential moving averages (also called exponentially weighted moving averages). The shorter the EMA's period.Exponential Moving Average In order to reduce the lag in simple moving averages.18%) 13 Technical Analysis Which one is better ? 14 Technical Analysis 7 . the more weight that will be applied to the most recent price. EMA's reduce the lag by applying more weight to recent prices relative to older prices.EMA(prev) ) x Multiplier) + EMA(prev) (2 / (Time periods + 1) ) = (2 / (10 + 1) ) = 0. The weighting applied to the most recent price depends on the specified period of the moving average.1818 (18.

Properties of Good moving Average Moving averages are portable trendline . So good moving average should act as good Support levels. 15 Technical Analysis Properties of Good moving Average 16 Technical Analysis 8 .

Properties of Good moving Average 17 Technical Analysis Properties of Moving Averages 18 Technical Analysis 9 .

Moving Averages When two moving averages are used the longer is for trend identification and the shorter for timing It is the interplay between the two which gives you the timing Classics are 5 and 20 day and 10 and 40 day On stocks. 7 and 21 work well 19 Technical Analysis Right Moving Average Period 20 Technical Analysis 1 .

e 5 Day ) crosses Long Term Moving Average (i. Its Death Cross 21 Technical Analysis 2 Moving Average Cross over 22 Technical Analysis 11 . It·s a Golden Coress Bearish ² When short term moving Average (i.e 20 Day ) and goes Down .2 Moving Average Cross over Market signal Bullish ² When short term moving Average ( i.e 20 Day ) and goes up .e 5 Day ) crosses Long term Moving Average (i.

2 Moving Average Cross over 23 Technical Analysis Guppy Moving Averages 24 Technical Analysis 12 .

Moving Average Convergence/Divergence (MACD) is one of the simplest and most reliable indicators available.Benefits and Drawbacks of Moving Averages Benefits : moves when it come along. the 12-day EMA is the faster and the 26-day EMA is the slower. All the lagging indicator gives many whipsaws when it comes to side Some time there is significant amount of money is left on the table as it gives late signals. These lagging indicators are turned into a momentum oscillator by subtracting the longer moving average from the shorter moving average. to include some trend-following characteristics. Closing prices are used to form the moving averages. A bullish crossover occurs when MACD moves above its 9-day EMA and a bearish crossover occurs when MACD moves below its 9-day EMA 26 Technical Analysis 13 . MACD Formula The most popular formula for the "standard" MACD is the difference between a security's 26-day and 12-day exponential moving averages. As it is a lagging indicator you will always be able to capture the big It act as a good support and Resistance . Usually. Of the two moving averages that make up MACD. less prone to whipsaws. Although some lag can be removed by using Exponential MA 25 Technical Analysis Moving Average Convergence Divergence Introduction Developed by Gerald Appel. Using shorter moving averages will produce a quicker. which are lagging indicators. MACD uses moving averages. while using longer moving averages will produce a slower indicator. a 9-day EMA of MACD is plotted along side to act as a trigger line. more responsive indicator. It also shows the underlying Trend Drawback : ways market.

Calculation of MACD 27 Technical Analysis MACD Signals MACD generates bullish or Bearish signals from three main sources: Positive divergence Bullish moving average crossover Bullish centerline crossover 28 Technical Analysis 14 .

30 Technical Analysis 15 .Bullish Divergence When Prices are falling on remain same but the Indicator moves up then it is called Bullish Divergence 29 Technical Analysis What is Positive Divergence and egative Divergence When Prices are going up or remaining same but Indicator is coming down is called egative Divergence.

Sell : When MACD Crosses below its Average.MACD Cross Over Buy : When MACD Crosses above its Average . 31 Technical Analysis Centerline Crossover 32 Technical Analysis 16 .

it will not be wrong for very long. weekly or monthly charts. any combination of moving averages can be used. each individual can set MACD to suit his or her own trading style. any combination of moving averages can be used. o matter what the characteristics of the underlying security. For volatile stocks. The standard setting for MACD is the difference between the 12 and 26-period EMA. a faster set of moving averages may be appropriate. a faster set of moving averages may be appropriate. The use of moving averages ensures that the indicator will eventually follow the movements of the underlying security. o matter what the characteristics of the underlying security. 33 Technical Analysis MACD Drwaback Can Be Applied on Any Time Frame : MACD can be applied to daily. § Can not be applied to see historical levels : MACD calculates the absolute difference between two moving averages and not the percentage difference. slower moving averages may be needed to help smooth the data. objectives and risk tolerance. MACD represents the convergence and divergence of two moving averages. For volatile stocks. objectives and risk tolerance. 34 Technical Analysis 17 . The standard setting for MACD is the difference between the 12 and 26-period EMA. slower moving averages may be needed to help smooth the data. For weekly charts. MACD is calculated by subtracting one moving average from the other. As a security increases in price. the difference (both positive and negative) between the two moving averages is destined to grow. weekly or monthly charts. As a trend-following indicator. The set of moving averages used in MACD can be tailored for each individual security. MACD can be applied to daily. However. each individual can set MACD to suit his or her own trading style. This makes its difficult to compare MACD levels over a long period of time. However.MACD Benefits One of the primary benefits of MACD is that it incorporates aspects of both momentum and trend in one indicator. The set of moving averages used in MACD can be tailored for each individual security. especially for stocks that have grown exponentially. MACD represents the convergence and divergence of two moving averages. For weekly charts.

Average Directional Index Wells Wilder introduced this revolutionary concept in ew Concept in Technical Trading System . If ±DI is greater than DI DI then add to ±DI and deduct that amount from ± 35 Technical Analysis Trading using DI and ±DI Buy : When DI crosses above ± DI DI Sell : When ± DI crosses above 36 Technical Analysis 18 . DI is greater then ±DI add that Amount to DI and Deduct the same amount from ± DI .

When ADX is above 25 it is considered to be Trending Market . When it is below 25 it is considered Trading . Commodity to Security ) .Is the Market is Trading or Trending ??????????????? Average Directional Index is nothing but the Absolute difference between DI ¨ and ± DI . ( ote : Threshold value may vary from © 37 Technical Analysis Trending and Trading Market 38 Technical Analysis 19 .

By the time a moving average crossover occurs. Another drawback of trend-following indicators is that signals tend to be late. trend-following indicators can be enormously profitable and easy to use. 40 Technical Analysis 20 . Provided the market or security in question develops a sustained move.Average Directional Index (ADX) 39 Technical Analysis Benefits and Drawbacks of Lagging Indicators One of the main benefits of trend-following indicators is the ability to catch a move and remain in a move. the fewer the signals and less trading involved. The benefits of trend-following indicators are lost when a security moves in a trading range. The longer the trend. a significant portion of the move has already occurred.

The faster the security rises (the greater the period-over-period price change). Generally speaking. As the price of a security rises. As a security begins to trade flat. declining momentum in the face of sideways trading is not always a bearish signal. However. momentum starts to actually decline from previous high levels. 41 Technical Analysis Leading Indicator Relative Strenth Index ( RSI ) Stochastic Rate of Change 42 Technical Analysis 21 . momentum will also slow. momentum measures the rate-of-change of a security's price.Leading Indicator Many leading indicators come in the form of momentum oscillators. Once this rise begins to slow. It simply means that momentum is returning to a more median level. the larger the increase in momentum. price momentum increases.

Downmove is weakening. It takes a single parameter. 44 Technical Analysis 22 . Bullish Divergence Upmove is weakening.Relative Strength Index Developed by J. . Wilder recommends using 14 periods. the Relative Strength Index (RSI) is an extremely useful and popular momentum oscillator. New Concepts in Technical Trading Systems.when prices are making higher highs but the indicator is making lower highs.when prices are making lower lows but the indicator is making higher lows. In his book. The RSI compares the magnitude of a stock's recent gains to the magnitude of its recent losses and turns that information into a number that ranges from 0 to 100. Welles Wilder and introduced in his 1978 book. the number of time periods to use in the calculation. 43 Technical Analysis Divergence Bearish Divergence .

RSI Bullish/Bearish Divergence 45 Technical Analysis RSI Bearish Divergence 46 Technical Analysis 23 .

Oversold : RSI when enters 0 level the market is considered to be oversold Important point :Only trade when trade when they are exiting Overbought and Oversold levels. 48 Technical Analysis 24 . Fibonacci Retracement or Projection etc«.RSI Overbought and Oversold Overbought : RSI when enters 70 level the market is considered to be overbought . 47 Technical Analysis Properties of RSI Normal Technical Analysis can aslo be applied to RSI like Trendline.

NSE50 .00.566.746. Lane in the late 1950s. Closing levels that are consistently near the top of the range indicate accumulation (buying pressure) and those near the bottom of the range indicate distribution (selling pressure). 49 Technical Analysis Stochastic Buying and Selling . the Stochastic Oscillator is a momentum indicator that shows the location of the current close relative to the high/low range over a set number of periods. 4. 4.566.3942) 5700 5600 5500 5400 5300 5200 5100 5000 4900 4800 4700 4600 4500 4400 4300 100 90 80 70 60 50 40 30 20 10 17 24 31 O 17 24 1 8 October 15 22 29 5 12 November 19 26 3 10 December 17 24 31 7 2008 14 21 28 4 11 February O 18 25 3 10 March O 50 Technical Analysis 25 . 4.759.00.650) 6400 6300 6200 6100 6000 5900 5800 P P P O O O Stochastic Oscillator (39.Stochastic Developed by George C.00. 149.1 MONTH (4.95.

Trendline Violations The trendlines on the ROC chart are broken sooner than those on the price chart. ROC. because it is a leading indicator (ROC changes direction before the underlying price). but do not represent actual buy or sell signals. Zero-line crossings Although the long-term price trend is still the overriding consideration. It is essential to wait for a confirmation from the price itself that the overall trend has reversed. a sell signal. a crossing upward through the zero line can confirm a buy signal and a crossing downward through the zero line. Divergences Divergences can provide warnings or alerts of weaknesses in market trends. Rate of Change. 52 Technical Analysis 26 . making it a leading indicator.Stochastic strategy 51 Technical Analysis Rate of Change ROC is a momentum indicator that measures velocity and also leads the price action. can be very useful. The value of the momentum indicators is that it turns sooner than the market itself.

the best use is to help identify oversold conditions for buying opportunities. These indicators can be used in trending markets.00. 1.100.163. 1. leading indicators can help identify overbought situations for selling opportunities. More signals and earlier signals mean that the chances of false signals and whipsaws increase.Rate of Change ( ROC ) TATA O R CO (1. 1. Whipsaws can generate commissions that can eat away profits and test trading stamina.45.10010) 1650 1600 1550 1500 1450 1400 O O O 1350 1300 1250 1200 1150 1100 1050 1000 rice ROC (-195. False signals will increase the potential for losses. but usually with the major trend. Leading indicators generate more signals and allow more opportunities to trade. In a market trending up. Early signaling for entry and exit is the main benefit. not against it. Because they generate more signals.50.160. With early signals comes the prospect of higher returns and with higher returns comes the reality of greater risk. Early signals can also act to forewarn against a potential strength or weakness. leading indicators are best used in trading markets.600) O O O 400 350 300 250 200 150 100 50 0 -50 -100 -150 -200 -250 -300 -350 -400 -450 -500 -550 -600 3 arch 26 3 Dece 0 7 24 3 7 14 21 28 er 2008 4 e r ary 11 18 25 10 17 24 31 53 Technical Analysis Benefits and Drawbacks of Leading Indicators There are clearly many benefits to using leading indicators. -3.00.188. In a market that is trending down. 54 Technical Analysis 27 .

55 Technical Analysis Formula 56 Technical Analysis 28 . Bollinger Bands are an indicator that allows users to compare volatility and relative price levels over a period time. and hence volatility. Sharp price increases (or decreases). will lead to a widening of the bands. A simple moving average in the middle An upper band (SMA plus 2 standard deviations) A lower band (SMA minus 2 standard deviations) Standard deviation is a statistical term that provides a good indication of volatility. Using the standard deviation ensures that the bands will react quickly to price movements and reflect periods of high and low volatility. The indicator consists of three bands designed to encompass the majority of a security's price action.Bollinger Bands Introduction Developed by John Bollinger.

57 Technical Analysis Bollinger Bands Sideways consolidation Breakouts. 58 Technical Analysis 29 .Signaling System Buy : After Prolonged Selling the Candel gives closing outside the band and next candel is inside band than amove above highes high is Buying signal . Sell : After Prolonged Buying spree candelstick move above BB and Next Daxt Day candel comes in BB then A move below Lowest Low of Candel is your Short Signal.

Bollinger Band Breakout 59 Technical Analysis Band Envelop and Bollinger Bands 60 Technical Analysis 30 .

Upside Gap : when Today¶s low is higher than previous Days High . moving averages and retracements. Down Side Gap : When Today¶s High is Lower than Previous Day¶s Low . As stated above. Being able to identify a period of low volatility can serve as an alert to monitor the price action of a security. and possibly unsustainable. such as momentum. securities can fluctuate between periods of high volatility and low volatility. levels. 62 Technical Analysis 31 .Conclusion To identify periods of high and low volatility To identify periods when prices are at extreme. Other aspects of technical analysis. can then be employed to help determine the direction of the potential breakout 61 Technical Analysis GAPS Gaps are nothing but the vacuum left by the Prices.

(often filled) Runaway gap ² occur in moderate volume during a trend. (sometimes filled but be careful) Breakaway gap ² occur in heavy volume when trendlines break or patterns complete.Mind the Gap Common gap ² occur in low volume caused by lack of interest. (pretty much always filled) 63 Technical Analysis Mind the Gap 64 Technical Analysis 32 . (generally filled and will provide support on reversal) Exhaustion gap ² occurs in heavy volume near the end of a market move.

Last Tra e [ / /L/ 5 6 7 8 9 ar] Daily 11Fe 05 . i/ o/Cl ar MS 19Jan01 2841.08Feb01 Pr SD 3100 4 3 N N AS AS/N C MPSI E.39 6763. ast rade.38 ! " # " ( # 0 3000 2900 2800 2700 2600 2500 2400 2300 21N ov00 28N ov 05D ec 12D ec 19D ec 26D ec 02Jan 09Jan 16Jan 23Jan 30Jan 06Feb . / /L/ ar 01J n05 6729.06 2770. Last Tra e.N N AS AS/N C MPSI E MS . ! " t r " [ i/ /Cl ( # ) r] il 2 # $ % $ & ' 0 $ 1 $ 6N ov00 .30J n05 C D Z @ 5 A .83 5 6 7 8 9 @ 5 D r IN G B 6900 6850 6800 6750 6700 6650 6600 6550 6500 6450 6400 6350 6300 6250 6200 66 11Fe 05 18Fe C C Technical Analysis 25Fe C 6150 B 6 6 6 04 ar E 11M ar 18M ar 25M ar 01A r F 08A r F 15A r F 22A r F 29A r F 06M ay 13M ay 20M ay 27M ay 03J n D 10J n D 17J n D 24J n D 33 .22 6745. S SN.28 6721. S SN .25 2752.

Gaps 67 Technical Analysis Money Management The most Important part of your Trading Career. Two Types of Money Management Systems Martingle System Anti Martingle System Martingale System Anti Martingale System 68 Technical Analysis 34 .

Your next bet is Rs. If you lose: Your next bet is Rs 160. If you lose again you double your bet. You keep doing this until you win and then go back to your original bet. If you lose: If you win you will get back 320 so net inflow is your original Rs 5 Is it a Good bet.TABLE OF TRADES No of Lossing Trades 10 9 8 7 H Amt of Lossing Trades (10) (9) (8) (7) ( ) H No of Winning Trades 0 1 2 3 4 5 H Amt of Winning Trades 0 2 4 H Total Inflow/ Outflow (10) (7) (4) (1) 2 5 8 11 14 17 20 8 10 12 14 1 H 5 4 3 2 1 0 69 (5) (4) (3) (2) (1) 0 7 8 9 10 18 20 Technical Analysis Martingale System You make a bet and if you lose you double your bet. You bet Rs 5 and you lose. 70 Technical Analysis 35 . If you lose: Your next bet is Rs 40. 10. If you lose: Your next bet is Rs 80. If you lose: Your next bet is Rs 20.

Anti Martinalge System Anti Martingale System tells to Invest double in a winning streak and either slow down or remain constant on your bets during the losing periods.mehta@reuters.com 72 Technical Analysis 36 . 71 Technical Analysis Your Valuable Feedback vishal.

Food Time 73 Technical Analysis 37 .

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