WORKSHOP ON TECHNICAL ANALYSIS
Definition : Technical Analysis
³Technical Analysis is the organized and systematic study of a pictorial representation (chart) of the past price actions of a particular item with a view to ascertaining its expected future behavior´. Three premises on which Technical Analysis builds up: Market Action Discounts Everything Prices Move in Trends History Repeats Itself
Basic Tenets of Dow Theory
Averages Discount Everything Markets has Three(3) Trends (Bull,Bear,Sideways) Volume Must Confirm The Trend A Trend is in Effect until it Gives Definite Signals of Reversal
The X-axis on a chart plots the periods for which prices are plotted and Y-axis plots the value or the price of the share. This could range from hours to years .we can have charts as well as hourly, daily ,weekly quarterly, yearly charts based on the data. Day Traders trade on basis of Intra-Day charts as they are more interested in the immediate movement in stock prices. Ideally Day. There are Three types of Charts which are commonly used by Chartists Line Chart Bar Chart Candlestick Chart
The 4 quotes are Normally in order of (Example) Open (Rs.180)
High High Open Close Close Low CANDLESTICK CHART
Low BAR CHART
.225) Low (Rs. 200) High (Rs.175) Close (Rs.
Hence the best indication of downtrend is the prices making a lower top ±lower bottom . In such situation one should try to sell on every rise.one should wait for a clearcut breakout and not trade in Sideways Trend as there is not much movement. In such situation one should try to buy on every fall Downtrend: The share prices move in downward direction making new lows in the process. Mixed Trend: The share prices move in both directions going upwards as well as downwards more than once in a trading day This type of day usually sees the combination of all the trends and that too more than once
. Sideways Trend: The share prices move in a narrow band .neither going upward nor downward .Trend Analysis
UpTrend: In uptrend the share prices move in upward direction making new highs in the process. Hence the best indication of up trend is the prices making a higher top ±higher bottom .
Sideways to Uptrend
Sideways to Downtrend Sideways Trend
DOUBLE TOPS DOUBLE BOTTOMS
BREAKOUT FOR DOWNTREND
BREAKOUT FOR UPTREND
TRIPLE TOPS &TRIPLE BOTTOM
BREAKOUT FOR DOWN TREND
BREAKOUT FOR UPTREND
ROUNDING BOTTOM/ SAUCER PATTERN
ROUNDING TOP /INVERSE SAUCER PATTERN
SUPPORT AND RESISTANCE
Support line once violated acts as a resistance line for any up move and vice-versa
UPWARD BAR REVERSAL DOWNWARD BAR REVERSAL
SIMPLE PERFECT Higher high Higher high
Close higher than previous day¶s close Lower low
Close higher than previous day¶s close and high Close lower than the Lower low previous day¶s close
Close lower than previous days close and low
Head and Shoulder Pattern
NECKLINE Pull Back
Inverse Head and Shoulder Pattern
Penetration of the Neckline
Ascending or Descending Triangle
Lower trend line is rising and the upper trendline is flat
Lower trend line is flat upper trendline is declining
A moving average is an indicator that shows the average value of a security¶s price over a period of time .In technical analysis it is calculated on a dynamic (day to day basis) and the average value change in the price of security. Commonly used Moving Averages are Simple Moving Average (SMA) Weighted Moving Averages (WMA) Exponential Moving Averages (EMA)
WMA gives move weighted to the latest data EMA has the best of both and covers a larger period of time .It is the most popular as it helps spot early signals.
. 1 hour/3hours/5 hours for intraday in a 1 minute chart.the ideal combination of moving average is 60/180/300 i. The Ideal combination Most traders prefer a combination of 3MA s for confirmation .MOVING AVERAGES
SMA gives equal weightage to all the data.e.
USING MOVING AVERAGES
Identifying trend reversal by price and Moving Average crossover. Short period M A Early entry or exit from the trend BUT more whipsaws and higher incidence of false loss making trades . More transaction costs . Long period MA Late entry and exit from the trend BUT lesser whipsaws and lower transaction costs
. Identifying trends by crossover of two Moving Averages.
the second as medium /long term)
. Time gap between the periods should be sufficiently large (enough to represent one as short term .MOVING AVERAGES
Two different MA¶s of two different periods are used and signals are generated by crossovers/supports /resistances between them.
e. lowest at the bottom and highest at the top The first signal to buy is when the Short term MA line cuts the Medium term MA line from the bottom The rise in the prices in this area should be accompanied by the substantial rise in volumes The second signal to buy (confirmatory )is when the Short term MA cuts the Long term MA which confirms that the trend is going to continue. One should stay long in the stock till the Short term MA line is above the long term MA line and book profits based on the momentum of the stock as well as the overall market situation
.BASIC SIGNALS IN RESPECT OF MOVING AVERAGES (FOR BUY SIGNAL)
3 MA should be almost parallel and equidistance and turning upwards The 3 MA should be in ascending order i.
BUY II 300 Minutes EMA 180 Minutes EMA 60 Minutes EMA BUY I
lowest at the bottom and highest at the top The first signal to sell is when the Short term MA line cuts the Medium term MA line from the top The second signal to sell (confirmatory )is when the Short term MA cuts the Long term MA which confirms that the trend is going to continue.e. One should stay short in the stock till the Short term MA line is below the long term MA line and book profits based on the momentum of the stock as well as the overall market situation
.BASIC SIGNALS IN RESPECT OF MOVING AVERAGES (FOR SELL SIGNAL)
3 MA¶s should be almost parallel and equidistance and turning downwards The 3 MA¶s should be in descending order i.
60 Minutes SELL I
180 Minutes 300 Minutes SELL II
TWO TYPES MOMEMTUM : Uses the principle of divergence and confirmation OSCILLATORS : Uses the principle of over bought and over sold signals
Indicators only read the underlying power and velocity in the trend not the trend.
Commonly used Indicators
Rate of Change(ROC)12E9 Moving Average Convergence And Divergence (MACD) 9 24 E 9
Relative Strength Index (RSI) 14E9 STOCHASTICS (% K5.%D3 E3)
(%K5 .E3)(IN 15 /30 MINS CHART)
BUY OSCILLATOR LINE
Price chart making HIGHER TOP Oscillator making a LOWER TOP Price Chart and Oscillator diverging AWAY from each other at a significant high.
Price chart making LOWER BOTTOM Oscillator making a HIGHER BOTTOM Price Chart and Oscillator converging INTO each other at a significant bottom.
BUY in the overbought zone when the oscillator line first cuts the trigger line from below Oscillators gives early signals but it also gives many whipsaws (false signal). To avoid this it should be used along with patterns and other indicators and not in isolation.SIGNALS BASED ON OSCILLATORS
SELL the overbought zone when there is negative divergence between the price and the oscillator
SELL in the overbought zone when the oscillator line first cuts the trigger line from above BUY the oversold zone when there is positive divergence between the price and the oscillator.
Price Breakout indicate sharp Price Movement with a Great Momentum at That Point Of Time It Happens Due To Sudden Change In Demand And Supply Situation at a Particular Level Breakout have to be supported by high volumes and are normally good indication of the direction as well as the speed at which the price moves Breakout implies that the demand and supply situation at that a given point of time changes drastically and the demand increases incase of an upper breakout and supply increases in case of downward breakout In a trended market the breakout indicate continuation of a move as well as a reversal of a move depending on where they occur.
Bull trap is a situation when lot of buying comes In and the market looks very strong and poised to take off further in upward direction.
A bear trap's a situation where in a lot of bear become active on sensing a further fall and before they realize they are swept off their feet by bulls they do not get a chance to exit their short position .
In case a day Trader fails to spot a change of trend .a small stop loss can save him from big loss Stop loss is the life line for day trader .
.STOP LOSS AND ITS IMPORTANCE
Stop loss means that one should cutoff or square off the deal if it goes against him .and for trader to be successful in day trading timely execution of stop loss is a must A day trader who has a long position has to keep his stop ±loss at a price below the purchase price and the trader having a short position should have a stop loss above a price higher than his sell price.
ABOVE THE TOP OR BELOW THE BOTTOM OF A MOVE
STOP LOSS SELL
BUY STOP LOSS
ABOVE OR BELOW THE TRENDLINE IN CASE OF A BREAKOUT
STOP LOSS SELL
CONCEPT OF TRAILING STOPLOSSES(IN AN UPWARD MOVE)
4th Trailing S-L 3rd Trailing S-L 2nd Trailing S-L
1st Trailing S-L
CONCEPT OF TRAILING STOPLOSSES(IN AN DOWNWARD MOVE)
Original S-L 1st Trailing S-L 2ndTrailing S-L 3rd Trailing S-L 4th Trailing S-L
If one is long in a bullish market and if lot of selling pressure comes and if one is convinced that this may be change of a trend .one should not only square the existing long position but should go short.STOP AND REVERSE TECHNIQUE (SAR)
This Technique is Highly useful when in a trended market. there is a change of trend and one is currently against the trend. In a bearish market if one is short and a lot of buying pressure comes and if one is convinced that this may be change of a trend .one should not only square of the existing short position but should go long Normally market tops and bottoms act as good Resistance and Support level and on breach of support and resistance one needs to use SAR technique immediately
CONCEPT OF AVERAGING
The idea of averaging is to bring down the purchase price in case of long position and pull up the sale price in case of a short position One should average from long or short position only upto around 75% to 80% of the stop loss levels in order to get the benefit of zigzag movements of the share prices One way to average is to buy or sell equal quantity on every fall or rise The other way is to start with a small quantity and double on every fall or rise This helps to get the average price higher in case of short position and lower in case of long position Under no circumstances one should average in case the stoploss levels have been reached (its better to get the stop loss triggered)
JAPNESE CANDLESTICKS ANALYSIS CANDLE STICK CHARTS VERSUS BAR CHART STANDARD BAR CHARTS CANDLESTICKS CHARTS
TYPES OF DAYS
BIG DAYS SMALL DAYS
TYPES OF DAYS
SHAVEN HEADS OPEN MORUBOZU CLOSING MORUBOZU
TYPES OF DAYS
Spinning Tops (koma)
Grave Stone Doji (hakaishi)
Construction: long upper shadow closing is same as opening Psychology: it reflects that the bulls dominated the session after the opening but in mid session the bears became active and pushed the prices down Implication: Bearish if appears after the rally
Dragon Fly Doji (tonbo)
Construction: no upper shadow long lower shadow closing is same as opening Psychology: it reflects sellers (bears) dominated the market initially but after mid session the bulls forced the prices up and ultimately closed at the opening level
Long Legged Doji (hakaishi)
Constriction: long upper shadow long lower shadow closing is same as opening Psychology: It reflects indecision amongst buyers (bulls) sellers (bears)
Scenarios and Psychology: The market has been in a downtrend and there is a bearish sentiment all around somehow the sell off does not take place .the bears feel it uneasy as the recovery is swift and by the end of the session the prices recover to close near the opening levels if the candle is bullish it is better confirmation is required with an open higher and higher close would be ideal .
But weakness seeps in.HANGING MAN (kubitsuri)
Scenarios and Psychology The market has been in an up trend and there is a bullish sentiment all around .
. Prices are pushed to lower levels by the end of the session the prices recover to close near the opening levels if the candle is bearish it is better .bulls feel uneasy and profit booking takes. Prices do not remain firm .
if the next day prices remain lower a reversal has occurred
.Emotionally the up trend is damaged .Engulfing Bearish Pattern (tsutsumi)
Scenarios & Psychology After a sustained up-trend a white body appears with low volumes The next day prices open at new high and there is a sell off with high volumes and finally the day ends with prices ending below the previous days close .
Engulfing Bullish Pattern (tsutsumi)
A down trend is in place when a small black body occurs and prices remain subdued and close at a lower end with low volumes .At close the prices are above the previous days high if the next day the prices are firm the trend can reverse
.The next day prices open with a downward gap and huge buying emerges pushing the price up This makes the bears nervous and they book profits fuelling a rally .
taken by surprise cut their shorts causing the price to rise further .Bullish Harami (harami)
Down trend is in place for sometime A long black candle with average volumes is formed The next day the prices open higher with a gap .Volume is high which suggest short covering Confirmation of reversal on the next day will be proof the trend reversal
.Some bears .
The next day the prices open lower and stay in a smaller range closing lower but within the previous days real body.
.Bearish Harami (harami)
An uptrend is in place for sometime with long white candle and huge volumes . This is the first signal for traders to be watchful specially if the volumes are low as it appears that the trend is about to change.
An open the next day with a downward gap heightens the bearish scenario but the market rallies all day and closes above the midpoint of the previous days real body (ideal > 60%) with high volumes .This market action causes nervousness amongst the bears and a reversal is around the corner.Piercing Line (kirikomi)
Scenario: A long black body is formed in a downtrend which maintains bearish sentiments .
the bears move into action to join the party
.Dark Cloud Cover
Scenario A long white candlestick is formed in an up trend the next day prices open with an upside gap indicating a strong opening Prices may or may not go higher but at a certain level nervousness steeps in followed by profit booking This leads to prices closing well into the real body of the previous day A reversal is on the cards If prices open below the close and remain that way for the rest of the day .
Psychology behind harami cross is the same as harami pattern a trend is in place for sometime and all of sudden the prices are confined within the limits of the previous days real body .To make the matters worse the prices close at the same level as the opening volume is dry (low) reflecting indecision amongst both the bulls and the bears reversal is on the cards
Scenario A downtrend has been in place confirming the power of the bears who are in total control leaving no doubt that this action may continue further .The bulls gear into action seeing the opportunity. The third day sees prices open with an upper gap and close higher .trade within the small range and closes near the open (this signals a weakening bear grip).
.The next day prices gap lower on the open .
The next day prices gap higher and move in narrow range only to close near the opening level .this small body shows the nervousness amongst the bulls and their inability to drive the prices up further .This also reflects indecision among the players The next day prices are pushed further down
An up trend is in place which is assisted by a long white candle There is little doubt about the up trend to continue .
Morning Doji Star
Scenario: A down trending market is in place with a long black candle followed by doji grapping downward This shows indecision and a status quo between the bulls and the bears the next day prices open with a upward gap and maintain the upward trend signaling the shift of the power from the hands of the bears to the bulls
This shows indecision and status quo between the bulls and the bears.Evening Doji Star
Scenario An up trending market is in place with long white candle followed by doji grapping upward . The next day prices open with a downward gap and maintain the downward trend signaling the shift of the power from the hands of the bulls to the bears
Upside gap two crows
Scenario: A white body occurs in an up trend The second day prices open with an upward gap and decline to close below the open to form the black day but higher than the first days High/close This is followed by a higher open and then drop to a close lower then the previous days close though this close may be higher than the first day open the bullish sentiment has definitely taken a hit
TOOLS FOR DAY TRADING TECHNICAL SYSTEM
Support/Resistance based on Trendlines\Significant highs and lows. Breakouts supported by strong Volumes A signal based on moving Averages A signal based on oscillator Daily Trend as well as Intra-Day Trend of stock as well as overall Trend of the market
FINANCIAL ASPECT IN DAY TRADING Execution Of A Trade Stock To Choose Quantity To Trade Risk To Reward Ratio Total Traded Volume In Stock Volatility Of A Stock Maximum Loss Per Day Minimum Loss Per Day
MENTAL ASPECTS IN DAY TRADING
GREED FEAR BOREDOM OVERCONFIDENCE HERD MENTALITY MONOTONY CHANGE EGOISM ANGER FATIGUE FREEZ MENTALITY HOPE
COMPULSIVE TRADING FREEZ MENTALITY EGO CLASHES MENTAL FATIGUE
CONDITIONING THE MIND TO OVERCOME MIND TRAPS
Sit In A Totally Relaxed Posture Close Your Eyes And Relax Your Whole Body Go In A Deeper State Of Relaxation Give Auto Suggestions To Overcome Mind Traps
Jack Schwager ³A Good Trader Watches His Capital As Carefully as a professional scuba driver watches his Air supply´ .Edvin Lefevre
.EXPRIENCES AND QUOTES OF SOME TRADERS
³Being a successful Trader And Winning in the stock market is a matter of skill & discipline and not luck alone´ .Dr.Dr. Alexander Elder ³The desire for Constant Action is responsible for most of the losses in the stock market´ .
Sooner Of Later You Will Take The Mother Of All The Losses´ .Jack Schwager ³It Makes Better Sense To Make Mistakes On Your Own In Trading Rather Than Pay For Someone¶s Else µs «At Least You Get To Learn Something´ .Burton Malkiel
³If You Can¶t Take A Small Loss .EXPRIENCES AND QUOTES OF SOME TRADERS
Trader Must Create A System Or Be Enslaved By Another Man¶s System´ .
GOLDEN RULES OF DAY TRADING
Trend is your Friend Ride on Profits & Cut Losses Do not be too Greedy Take Trading decisions yourself Always be Flexible Do not be Compulsive Trader Make use of all Trading Tools
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