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Basics of Technical Analysis

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What are charts

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Peak and Trough Analysis

P3 P1
P4

P2
T3 T1 P2
P4
P3
P1 T2 T2

T5
T3 T4
T1
Falling Market reversed
Rising Market reversed

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Dow Theory

Dow Theory Comprises a study of 2

major averages

•Dow Jones Industrial Average

• Dow Jones Transport Average

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DOW Theory

• Averages Discount everything: Every thing foreseeable and every condition which can
effect the demand and supply for corporate securities.

• There are three trends

• Primary trends : Runs for several years.

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Dow Theory
• The secondary trend : Lasts for 3 weeks to few months.

Secondary trends
against primary trend

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Dow Theory

• The Minor trend : Are those which show day to day or week to week fluctuations. Do not
react to few days of price reaction.

•The 2 averages must confirm each other

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Dow Theory

•Volumes goes with the trend :

• Lines may substitute secondary trend.

• Only closing price used

• A trend should be assumed to continued in effect until such time as its reversal has been
signaled.
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Peak and Trough Confirmations in Currencies

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Peak and Trough Confirmations Commodities

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Assumptions of Technical Analysis
• Price is determined by interaction of supply and demand.

• History in itself repeats itself. Patterns discovered historically are still valid.

• Any freely tradable security , moves in a pattern which has a forecasting value.

• Any news, assumptions is quickly built in the price. Price discounts every thing

• Fractal Theory : All time frames display same characteristics of Movement.

• No news is discounted twice.

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Technical Analysis Vs Fundamental Analysis
Scope of Study
Trading time frame
Methods
Transaction costs
Timing of Trade
Technical Analysis
Considers traded data of
open/High/Low / Close/
volume/ Open Interest
Short term/Long term
Trend following /mean
reverting/ Momentum
based
More
Buy Low/ Sell high
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Fundamental Analysis
Economic Factors, Balance
Sheet, Published Corporate
material
Long term
Based on Profitability , Historic
P.E ratio.
Less
Buy at lower P.E valuation / Sell
at higher P.E valuation
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